Wednesday's Top 10 at 10: How a low base makes small rate hikes much bigger; How big should a Basic Income Guarantee be?; The semiotics of the Taper; John Oliver is back; 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 China's Wealth Management Products. South Canterbury Finance ain't got nuthin' on these suckers.

1. The problem of the low base - Independent economist Rodney Dickens has written another one of his excellent 'ravings' that looks at the implications of what happens when very low interest rates start to rise.

He puts the crisis response into a good context and explains well why any recovery might be more subdued than some are expecting.

Few people are looking at the impact of the sharp rise in US mortgage rates in recent weeks.

Dickens is right to focus on how this might affect the world's largest economy. (See more on this at CNBC)

This is all about the problem of deleveraging. America's households have at least deleveraged quite a bit, albeit largely through bankruptcies and wipeouts.

New Zealand's households have hardly deleveraged at all and are actually in the throes of increasing their leverage again.

Here's Dickens at SRA:

Part of the lesson from the financial crisis is that even close to zero official interest rates in the crisis countries have done little to stimulate economic growth. This can lead to the conclusion that when interest rates are very low they have little impact. This is correct in terms of low interest rates greatly limiting the scope for central banks to stimulate economic growth via cutting interest rates further. But it is not the case in terms of the negative impact of increases in interest rates on housing markets and economic growth. Helped by quantitative easing in the US the average 30-year fixed mortgage interest rate fell to a low of 3.3% late last year, which played a significant part in driving the strength in US housing indicators this year and contributed to the Fed’s decision to start talking about scaling down quantitative easing.

But as a result of the Fed talking about scaling down quantitative easing the average 30-year fixed mortgage rate is now 4.5%. A 1.2% or 1.2 percentage point increase may not seem much, but it represents a 36% increase in borrowing costs. By contrast, if the average 30-year mortgage interest rate had increased 1.2% from the historical average rate of 8.6% experienced since January 1970, it would represent only a 14% increase in borrowing costs. The implication is that the US housing market faces more downside risk over the next 6-8 months than would normally be expected on the back of a 1.2% increase in the 30-year fixed mortgage interest rate because the increase in mortgage interest rates is starting from a low base.

2. Watch the GSK case - Jonathan Kaimann well writes for the Guardian in Beijing about what the GlaxoSmithKline bribery allegations mean for multinationals operating in China. Remember, Fonterra is already cooperating with an inquiry into price fixing in baby formula.

We all in New Zealand tend to forget that national interests are very important for China and Chinese companies. The idea of a level playing field is a quaint Western idea.

China-based divisions of international firms have found themselves in the sights of government investigations. Last month the National Development and Reform Commission announced an investigation into 60 pharmaceutical companies operating in China, including six internationals, among them the US-based Merck, Japan's Astellas and Britain's GSK. The moves come as China attempts to shift economic gear from an export-focused economy to one driven by domestic consumption.

GSK is alleged to have used a network of more than 700 middlemen and travel agencies in China to bribe doctors and lawyers. The Chinese investigation stretches back to 2007 and involves deals worth 3bn yuan (£320m).

The European food packaging group Tetra Pak became the subject of an anti-trust investigation last Friday. Earlier this month Beijing announced a pricing inquiry into firms that make powdered infant formula. Western food conglomerates Nestlé, Abbot and Mead Johnson agreed to reduce their formula prices by up to 20% soon after the investigations were announced.

3.  How big should a Basic Income Guarantee be? - L Randall Wray writes some more here at Economonitor about the thinking around a Basic Income Guarantee (BIG), which is similar to the Universal Basic Income idea raised in New Zealand by Gareth Morgan in his 'Big Kahuna' programme of capital taxes and welfare reforms.

Wray is also interested in the idea of a Job Guarantee and Employer of Last Resort (JG-ELR)

Proponents of income and job guarantee schemes agree on two things. The first is that both the market economy and the modern welfare state have failed many members of society by increasing the precariousness of the labor market, reducing safety nets, and leaving many without the basic resources for a decent living.  Poverty, income inequality and unemployment are pervasive features of capitalism and modern welfare often takes the form of punitive measures aiming to discipline the “undeserving” poor or the unemployed.  The second is that to begin addressing these problems, public policy needs to provide some form of universal guarantees to all citizens. It is the nature of these guarantees that represents the sharp division in policy recommendations.

Income guarantee supporters champion the provision of an adequate standard of living by affording sufficient resources to all member of society. They argue that this objective can be achieved by guaranteeing a minimum income to all (a basic income guarantee, or BIG hereafter). Job creation proponents want to guarantee access to a job that could provide a decent income to the economically active population (and their dependents). They believe that adequate resources can be provided by guaranteeing a job to all, usually through programs as the Employer of Last Resort (ELR). The key distinction between the two is that basic income advocates want to decouple the income-work relationship observed in modern economies on the basis that economic justice and freedom require that resources are provided to individuals without the compulsion to work. Job guarantee supporters, on the other hand, want to directly address the unemployment problem, arguing that there are many people who want to work but cannot find employment. Once that problem is resolved, then we provide income support to those who cannot or do not want to work.

4. Could Carney end the British money printing? - Bloomberg reckons its possible. We''ll find out more tomorrow when minutes from his first decision are released. It seems promises of low to zero rates into the never never could be a substitute for money printing. 

5. Twist and Taper - Satyajit Das is back at Economonitor with his latest musings on the Great Taper debate. He's always worth a read. He's big on semiotics.

 ‘Taper’ lived up to at least one of its meanings: a long wick for use in lighting a fire.

Despite the confusion about meaning, the statements had a significant impact on prices and rates, leading to large real changes in wealth. The large amount of collateral damage confirms the observation of J.D. Salinger in The Catcher in the Rye: “All you have to do is say something nobody understands and they’ll do practically anything you want them to.”

6. Demographics and global growth - Leith van Onselen does a nice job at Macrobusiness of putting the issue of dependency ratios into the economic growth outlook. 

7. But dementia rates are falling... - This is good news, as reported by the NYT from British research. It might help address the issue above, but allowing more people to work for longer.

8. Downside risks to Chinese growth - IMF Chief Economist Olivier Blanchard has a nice summary here of the economic outlook.

After a very large increase in investment since the beginning of the crisis—an increase largely financed through the shadow banking system–Chinese policy makers face a difficult choice:

Either letting investment remain high, at the risk of increasingly unproductive investment and building credit risks; or tightening credit and slowing investment and risking a decrease in growth, since consumption is unlikely to increase fast enough to compensate.   Thus, we see downside risks to growth in China.

9. 'Weapons of Mass Ponzi' - Bloomberg has a nice backgrounder on China's Wealth Management Products, the high interest rate savings vehicles launched by China's banks. 

The priced as if they are not government guaranteed, but savers think they are. How might this end? Often new WMPs are opened to ensure the old ones roll over... Now what does that sound like. China's chief financial regulator has used the Ponzi word. Sigh.

WMPs look like time deposits to investors, except that about 70 percent of them don’t have their principal guaranteed by banks. About half invest in low-risk deposits, bonds and money markets. The rest venture into riskier areas including stocks, derivatives and loans to local governments and property developers, according the China Banking Regulatory Commission, which requires banks to register all WMPs they sell.

The investments are popular because they provide rates of return higher than savings deposits, which are set at 3 percent annually, below this year’s government targeted inflation rate of 3.5 percent.

As investors pile in, financial firms need more inflows of cash to pay off maturing products, resulting in mounting risks that prompted China Securities Regulatory Commission Chairman Xiao Gang to call them a “Ponzi scheme” even before the latest record purchases. Issuance of new products and borrowing from the interbank market are among the most common ways banks pay out maturing WMPs, according to Fitch.

“This is crazy, but where else can I put my money without losing sleep these days?” said Zhang, 61, a retired engineer who has been moving cash out of his savings accounts into such investments for more than a year. “The return is fairly decent, and more importantly, I know my money is safe at a government-owned bank. Even if the bank runs out of the money, the government won’t.”

10. Totally John Oliver is back with the latest on that baby and some ugly television graphics. Asiana Airlines is suing the television station...