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 #3 on the problems China faces restructuring its economy while engineering a soft landing. It's the economic equivalent of walking, chewing gum and juggling chainsaws at the same time. Messy.
1. Detroit bankrupt - The big news in America this morning is the city of Detroit filing for Chapter 9 bankruptcy protection.
This is the largest ever municipal bankruptcy filing in US history.
It's hard to believe this city was once called the 'Arsenal of Democracy' because it built many of the tanks and planes that helped the Allies win the war, and was the centre of America's once-dominant motor industry (not to mentin.
It almost went bankrupt a few years ago.
About 1.1 million people have left the city since 1950 and it has 78,000 empty buildings.
Here's the Reuters article on the news, including how city workers' pension funds are likely to be among the biggest losers as creditors get their hair cut.
And Here's a useful backgrounder from WaPo's Wonkblog on why it happened.
2. Keep an eye on Greece - The problems are brewing there again after a year or so of relative calm. Germany's Finance Minister has just visited and told the Greeks to stop whingeing and pay up. This did not go down well, as Reuters reports.
Wolfgang Schaeuble's motorcade drove through empty streets cordoned off by thousands of riot policemen and devoid of any protesters. It was his first trip to Greece since its debt problems kindled the euro zone crisis four years ago.
Unlike during German Chancellor Angela Merkel's visit last October when thousands defied a similar ban on protests, there were virtually no demonstrators to greet Schaeuble apart from a group of about eight women who shouted "Nazi, Nazi" and "Raus!" (out!) outside the finance ministry.
What we’ve seen recently appears to be the beginnings of the undoings of the most important current tool for both driving growth and creating imbalance — liquidity and credit. To explain why, let’s go back to the beginning of the imbalance/slowdown argument.
For this, we at FT AV (and increasingly, everyone else too) like to use Michael Pettis’ analysis, which is based around the economy’s ratio of investment and consumption. The investment share of China’s GDP jumped from a extremely high 42 per cent in 2007 to an absolutely amazing 48 per cent in 2010. To understand why this is an amazing, and extremely precarious, level, read Martin’s column or see Pettis himself here and here. In short, it’s unprecedented and unsustainable.
4. 500 protests a day - You hardly ever hear about them, but there are around 500 protests a day inside China. What happens when an economic downturn puts even more pressure on its political environment?
Here's the Atlantic with its thoughts, albeit from a few months ago.
It's difficult to say how many of China's demonstrations are "within-system" like those in Liaoyang or Wukan, and it's impossible to say whether 2012's protests will keep the trend or if they will turn against the Party. But many of the factors likely preventing protests from going further -- perceived legitimacy of the Communist Party for the breakneck economic growth they help create, the continued availability of enough jobs and opportunities to keep individuals wary of risking too much for lofty ideals, and the ability of CCP leadership to keep its officials working generally within the public interest -- could be at risk if growth stalls.
Right now, the economic interests of the Party leadership, local officials and industry cronies, and Chinese citizenry generally line up. It's far from equitable, but it's enough to keep the three groups working in something close enough to unison to maintain political stability. But as the Chinese economy changes, so might that three-party balance.
As the national leadership knows, it will have to begin shifting the Chinese economy from exports to domestic consumption -- in other words, it will have to retool its economy to sell to Chinese as well as to wealthier foreigners. That could pit the Communist Party against some of the Chinese firms and individuals who have been enriched (and have entrenched their influence accordingly) by three decades of export-led growth. It's not clear whether CCP will be able to take on these Chinese economic interests. Some economists, such as Nouriel Roubini, are warning that China's leadership may not be politically capable of making the necessary economic changes, and that their failure could drastically slow the country's growth. If that happens, there's no telling whether China's "within-system" protests would stay that way.
5. 'Shockingly complacent' - Ambrose Evans Pritchard has lobbed another incendiary into the mix on China's growth slowdown and a warning from the IMF about China's credit growth. The chart below is downright scary.
If you think China's Communist Party fully understands the mess it has created by ramping credit to 200pc of GDP and running the greatest investment bubble know to man, read its shockingly complacent response to warnings from the International Monetary Fund.The deeper thrust of the IMF report is that the growth model of the past 30 years is exhausted. The low-hanging fruit has been picked. If the Communist Party fails to take radical action, it will soon be caught in the middle income trap.
Charlene Chu at Fitch has a slightly higher credit ratio because she includes a broader range of shadow banking, but the IMF paints much the same picture. Loans have jumped from $9 trillion to $23 trillion since 2008, a faster pace of debt build-up than in any major episode of the past century.
6. Here's the actual IMF report on China - Just for balance's sake. The bolding is mine.
Citing the rapid expansion of credit, the report cautions that while the development of nontraditional finance in the form of trust and securities companies marks a shift to more market-based intermediation, the migration of activity to less regulated parts of the system poses risks to financial stability. Banks remain closely linked to the development of nontraditional finance. The report noted that any worsening of credit quality related to the boom in nontraditional finance could potentially lead to a credit crunch and a large fiscal burden.
“While the size of augmented government debt and overall government resources suggests that fiscal challenges are currently manageable, further rapid growth of financial sector exposures to LGFVs would increase the risk of an eventual disorderly adjustment,” said Markus Rodlauer, the IMF’s mission chief for China.
7. Exporting to Australia? - BNZ's economists are forecasting the New Zealand dollar will rise to 88.5 Australian cents by the end of the year. Just a heads up to exporters, and holiday planners ;)
Relative interest rates – the most important driver of the cross – continue to swing in the NZD’s favour. NZ-AU 2- year swap differentials have moved from -35bps in April to +35bps. We expect the yawning contrast between the respective policy outlooks of the RBA and RBNZ to produce further widening over the coming months. Our interest rate strategists expect the 2-year spread to be closer to +60bps by year end. Historically, spreads at these levels have tended to coincide with a NZD/AUD somewhere in the 0.8600-0.8800 range.
8. A long term fiscal calculator - Victoria University have come up with a great interactive tool that allows you to 'choose' the tax rates, NZ Super rates and social spending you want for New Zealand in the decades to come to close the current Long Term Fiscal gap, and then see what happens.
I had a play with it and chose to extend the retirement age to 67, impose a 1% land tax, disconnect NZ Super from the current 66% level of average wages level by just indexing it to average wage and price inflation, and allow fiscal drag to keep happening for income tax. That closed the gap without too much drama. No reduction in NZ Super payments, no crunch on education or health spending, and no increase in income tax rates.
Politically easy peasy. So why won't our baby-boomer politicians do it?
9. Inside Elon Musk's hyperloop - Theverge reports the man behind Tesla wants to create a 'hyper-loop' that would allow commuters to travel in a apparently frictionless vacuum-type tube at 600 mph from San Francisco to Los Angeles in 30 minutes. Cool. And Sucky at the same time.
The problem could be solved by sucking all the air out of the tube and leaving the cars to travel through a vacuum. "If you have a vacuum in a tube, then you have zero drag," says George Maise, fluid dynamics expert at Maglev 2000. "There's no limit on the speed, really." Musk is on record saying that the Hyperloop isn't a vacuum, but keeping a column of air traveling at nearly supersonic speeds would require a huge amount of energy to maintain — unlikely, for the kind of lightweight, solar-powered transport Musk has described. It's a puzzle, and one we're unlikely to have any firm answers for before August.
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