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 from Goldman Sachs' former chief economist on the widening gap between profits and wages. It's the sort of thing Karl Marx would point to.
1. Show us the inflation - Matthew O'Brien does a nice job at The Atlantic of wondering why there is very little inflation in the world's biggest economy despite massive money printing.
This is the central question of our age.
Where is the inflation?
My view is there is a giant DAMPENING of inflationary pressures going on. They include D for deleveraging, A for ageing, M for the middle income squeeze, P for the profit share rise, E for Equality erosion, N for new productive capacity in Asia and from high technology, and G for globalisation's drive down on unit costs.
But here's O'Brien with a good chat about the lack of inflation. He thinks government austerity is a factor too. It's certainly a factor here, as the Reserve Bank pointed out yesterday. The government sector is expected to subtract 0.6% of GDP from the New Zealand economy for each of the next three years.
That giant sucking sound you hear is the government taking demand out of the economy. As you can see on the left axis below, total government spending -- that is, federal plus state and local -- as a percent of potential GDP has been on a steady downward trend since 2010. It's a three-act story of bad policy. First, the stimulus peaked, and then reversed prematurely; then, state and local governments began slashing budgets to balance them as they are required; and now, the federal government is cutting spending in the dumbest way Congress could come up with -- the sequester.
Now, QE2 did manage to increase inflation despite some austerity, but there's more of it this time around. The chart above only shows total spending through January 2013; it doesn't include the sequester, or, for that matter, the tax side of austerity. Between the spending cuts and the expiring payroll tax cut, the fiscal contraction the past six months has probably overwhelmed any "money-printing".
2. What about default? - Perhaps Japan would be better off defaulting, suggests Noah Smith. Eventually, I suspect he thinks better of this suggestion.
A default would constitute a roll of the dice - a dramatic gamble that a collapse in the old order would be followed by a repeat of the kind of explosion of positive dynamism seen in the post-WW2 economic miracle or the Meiji Restoration. If the gamble failed, however, the consequence could be the end of the beautiful, peaceful, relatively free Japan that many of us have come to know and love.
In a stinging indictment of the American search engine giant’s financial affairs, the House of Commons Public Accounts Committee (PAC) accused the company of “aggressive tax avoidance” and said it should pay “its fair share of tax” in the country where it earns profits.
The committee, chaired by Margaret Hodge MP, dismissed Google’s defence that it pays so little tax in the UK – a total of $16m (£10.2m) between 2006 and 2011 despite generating revenues of $18bn – because its sales are actually conducted in the Republic of Ireland, claiming its argument was “deeply unconvincing.”
The comments, in a PAC report, come a month after Ms Hodge told Google’s northern Europe vice-president Matt Brittin that his company’s behaviour was “devious, calculated and… unethical.”
4. It's happening in Seattle too - There's obviously something very attractive to Chinese investors about modern, westernised cities with harbours on the Pacific.
The Seattle Times reports on a surge of cash-buying of properties in the West Coast city from Chinese investors.
China’s superrich, who have historically been drawn to San Francisco, Los Angeles and Vancouver, B.C., are investing in Seattle-area real estate in growing numbers, buying multimillion-dollar homes, rent-producing properties and land for commercial development.
In the process, they are accelerating the real-estate market’s recovery, sometimes edging out other buyers with all-cash offers, and deepening ties between Seattle and China.
While exact numbers are hard to obtain, local real-estate agents, bankers and China experts say there’s been a definite increase over the past year of rich Chinese nationals shopping for homes here, mostly on the Eastside.
5. A legal battle over the euro - Ambrose Evans Prtichard paints a dramatic picture at the Telegraph of the battle in the German constitutional court over the European Central Bank's euro-saving tactic of promising to buy all the bonds in Europe.
The two-day hearings at the constitutional court in Karlsruhe will investigate the legality of the OMT, the “game-changer” that defused the EMU debt crisis last July and has been so successful that no country has yet needed to use it. The case stems from complaints by 37,000 citizens, including the Left Party, More Democracy and eurosceptic professors, most arguing that the ECB is financing bankrupt states.
While the court has no jurisdiction over the ECB, it could prohibit the Bundesbank from taking part in bond purchases. This amounts to the same thing, since the OMT would collapse if Germany stepped aside.
6. China's middle class - Here's a useful study from McKinsey of the growth of China's middle class, which New Zealand has bet its future on.
One message from this for New Zealand exporters and tourism operators: have you built a website that Chinese consumers can read on their smartphones?
Our latest research suggests that within the burgeoning middle class, the upper middle class is poised to become the principal engine of consumer spending over the next decade.
As that happens, a new, more globally minded generation of Chinese will exercise disproportionate influence in the market. Middle-class growth will be stronger in smaller, inland cities than in the urban strongholds of the eastern seaboard. And the Internet’s consumer impact will continue to expand. Already, 68 percent of the middle class has access to it, compared with 57 percent of the total urban population.
Along with affluent and ultrawealthy consumers, upper-middle-class ones are stimulating rapid growth in luxury-goods consumption, which has surged at rates of 16 to 20 percent per annum for the past four years. By 2015, barring unforeseen events, more than one-third of the money spent around the world on high-end bags, shoes, watches, jewelry, and ready-to-wear clothing will come from Chinese consumers in the domestic market or outside the mainland.
7. Inside China's debt bubble - WSJ reports here on audit reports from inside some of China's local government debt mountains.
It's not a pretty picture.
While local governments can’t borrow funds themselves, they typically get around those restrictions by having government backed investment platforms – called local government financing vehicles – or quasi-government agencies borrow instead. The local government is still indirectly responsible for the debts, however.
The audit found that the 36 governments had taken on debt totaling 3.85 trillion yuan ($624.6 billion) as of the end of last year, up 12.9% from the end of 2010. The last such audit measured local government debt as of the end of 2010. The audit office said there had been some improvements since the end of 2010, with 24 governments having posted a reduction in their debt levels relative to their total fiscal resources. But it also said that the outstanding debt of nine provincial capitals at the end of 2012 was greater than their fiscal resources, with the level of one city reaching almost 190%, a level that rises to 220% if you take into account promises the government had made to guarantee the debts of other institutions.
The report also said that the interest and principal on loans that needed to be repaid at the end of last year by 13 provincial capitals – out of 15 in the sample – was equivalent to 20% of their fiscal resources, with the level reaching as high as nearly 68% for one unnamed city. Analysts say that in recent years, revenue for many local governments haven’t been enough to cover ordinary expenses such as wages and services, let alone debt repayments.
8. Money multipliers - We were all taught that that the stock of money times the money multiplier equalled economic activity. The trouble is the stock of money may have risen sharply in the last five years of heavy money printing, but it's not circulating as fast.
Here's Izabella Kaminska at FTAlphaville with a discussion and a juicy chart on the conundrum.
Markets and the financial press continue to be consumed by speculation about the Fed’s next QE3 step. But while the Fed has pumped nearly $2 trillion into the economy since 2008 through its asset purchase programs, broader measures of the money supply have not risen anywhere near as much. Indeed, as the Chart of the day shows, both the M1 and M2 money multipliers collapsed with the financial crisis and have since trended mostly lower.
Indeed, at 0.8, the money multiplier for M1 is arguably really a divisor. Since late last year — with the launch of QE3 — the multipliers have started declining again, with the M2 multiplier reaching its lowest value ever in mid-May.
9. Marx was right - About some things. Even the former chief economist of Goldman Sachs, Gavyn Davies, is worried in this FT blog about the rise in the share of income now going to profits and the mirror image fall in the wage share.
The gross profit share in the advanced economies has risen by about 10 percentage points of GDP over three decades, and the wage share has fallen by the same amount (see this analysis just published by the International Labour Organisation, well summarised by Timothy Taylorhere).
This is an enormous upheaval in the distribution of income in the global economy, and it has happened in an almost continuous straight line over the entire period. It seems to have been impervious to every kind of shock, including the decline in inflation, the technology bubble, the arrival of the BRICs, the collapse in the global financial system and two successive Ashes victories for England against Australia.
10. Totally Clarke and Dawe on the apparently obvious result of the September election.
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