Thursday's Top 10: Larry Summers on pulling govt spending forward; Michael Lewis reports from a financial disaster tour of Califorinia; The IMF's Greek multipliers booboo; The inflation dog didn't bark; Dilbert

Here's my Top 10 links from around the Internet at 10 am today.

As always, we welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz.

See all previous Top 10s here.

My must read today is #9 on tax avoidance from John Kay.

1. Is this the big bond market selloff? - The surge in US bond yields in recent weeks is freaking out a few people. It's also driving the big US dollar strength that has forced the NZ$ sharply lower.

Investors and traders are asking: Is this just like the big bond market selloff of 1994 that caused so much carnage?

Gavyn Davies writes in his blog at FT.com that some are saying a rise in bond yields to 4-5% from closer to 2% just a month ago is likely.

Davies, a former Goldman Sachs bigwig, points out that shift could create carnage again, which is why he thinks central banks will act to slow the rise down.

That's why he thinks the central banks will just keep printing to stop the market carnage.

Now the market is too big to fail, as well as the banks.

Here's Davies:

The journey to that destination (4-5%) would certainly not be an easy one for bond investors. Fortunately for them, the return to economic normality is not likely to be at all rapid. If the great bull market in bonds has now ended, which it probably has, it may be followed by a long and grinding bear market, rather than anything more dramatic.

One reason for this is that the central banks probably do not want bond yields to rise much further at present. It would not make much sense for the Fed to be buying $85 billion of long duration debt each month if they really wanted bond yields to rise. The Bank of Japan has clearly become alarmed by the recent rise in JGB yields, and has promised action to bring them down again. JPMorgan economists estimate that the G4 central banks are likely to purchase around $2 trillion of assets in the next 18 months to add to the $10 trillion they already own.

This is about the same pace of buying as that seen since 2009. Since almost all of these assets will be government bonds, there will continue to be a powerful official force offsetting any bond selling by the private sector. That does not mean that a debacle in the bond market is impossible, but it does make it less likely, at least while inflation is under control. The behaviour of JGB yields in coming months is likely to be the “canary in the coalmine” in this debate.

2. California or Bust - Michael Lewis is back with another one of his famous pieces of financial disaster tourism journalism for Vanity Fair. This time he's closer to home in California

3. The ideal fiscal policies - Larry Summer is one of the favourites to become the next US Federal Reserve Chairman. Here he is at the WSJ in full Keynesian mode.

The ideal fiscal policies are measures which pull subsequent expenditures forward.

The example I always like to use is Kennedy Airport is going to be repaired. It is going to be repaired at some point. Potholes in roads are going to be filled. The question is whether we’re going to fill them now, when we can borrow to fill them at zero in real terms, and when construction unemployment is near double digits, or whether we’re going to do that years from now, when there will no longer be any multiplier benefits to those expenditures and when the deficit problem will be a more serious problem.

So it seems to me that we need to recognize that burdening future generations is a crucial issue, but that you burden future generations when you accumulate debt; you also burden future generations when you defer maintenance; you also burden future generations when you underfund pensions or you undercompensate the civil service or you underinvest in research and development and education or public institutions.

4. Brazil drops some of its currency controls - A slump in the real has forced the change.

Brazil on Tuesday cut the financial transactions tax on overseas investments in domestic bonds from 6 percent to zero, a surprise move that could help stop a sharp depreciation of the real that threatens to stoke already high inflation in Latin America's largest economy.

The removal of the tax, known as the IOF, will take effect from Wednesday and removes a key defence measure Brazil had put up in late 2009 to prevent a surge in hot money inflows after developed nations loosened their monetary policies to stimulate their economies.

5. China's crunch moment - We need to watch what's happening in China very closely. Here's CNN:

Growing domestic tensions and internal economic imbalances are forcing Chinese leaders to overhaul the very economic model that has served them so well for the past decade.

“China’s economic policy makers are facing a crunch moment in the next few years,” said Mark Williams, at Chief Asia Economist at Capital Economics. The new blueprint for the world’s second largest economy – just now taking shape – promises to transform China’s relations with U.S. and the rest of the world.

6. Tit for Tat - BBC reports China has hit back at the EU over its solar panel anti-dumping tariffs with its own anti-dumping probe into French wine exports to China. Hope this isn't the Smoot-Hawley moment of our time.

7. 'We stuffed up' - The Guardian reports the IMF has admitted it imposed too much austerity on Greece. Something about underestimating the multipliers. 

8. 'The dog that didn't bark' - Alan Kohler has a nice piece here at BusinessSpectator on the major story of the last couple of years: the lack of inflation.

All those dire warnings that the epic money printing going on the US and more recently Japan would lead to an inflationary breakout have turned out to be completely wrong. Far from rising, inflation is falling.
 
The fear-mongers have had to switch to warning about deflation, but with bond yields rising – moderately, not spiking - this lacks conviction. Although deflationary forces are at work in Europe, global growth has stabilised after two years of slowing down, and is now picking up.
 
And while it’s true that central banks would prefer inflation of 2 per cent, they are no doubt feeling pretty comfortable now after a couple of scares in the past few years when prices increased at the same time as growth slowed; in 2013 the opposite has occurred.
 
What’s causing this? There is still a huge overhang in the global labour market suppressing wages, credit multipliers remain broken after the credit crisis, banks are still wary and the fracking revolution in the United States is cutting energy prices there. These factors have now been joined by weak demand in China and Europe suppressing commodity prices.

9. Tax avoidance as a duty? - John Kay writes at the FT about the governance issue around tax avoidance by large companies.

British law might have said that the duty of directors is simply to promote the interests of the company’s members. But it doesn’t – and that is no accident. The present formulation – sometimes described as enlightened shareholder value – intentionally struck a middle course between those who argued that the law should simply say that the job of directors was to make lots of money for shareholders, and those who favoured a broader – stakeholder – view of the role of the corporation.

The compromise adopted imposes the duty to promote the success of the company, for the benefit of the members. The obligation of the board is to the company, and if its duties to the company are faithfully discharged the members of the company will profit from the success of the company. In reality, that is how most directors, and almost all directors of successful businesses, think about their roles. They aim to make the company prosper and grow, chiefly for the benefit of its members.