Here's my Top 10 links from around the Internet at 1 pm 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 #6 from Chrystia Freeland on a new type of Capitalism -- the B Corp.
1. The death of high inflation - Paul Krugman does a nice job in this New York Times piece declaring the death of inflation.
He's right, of course.
No amount of gold bugs and hysterical warnings about money printing are going to change the facts.
Inflation all around the world is low and falling.
Huge production capacity in Asia, depressions in Southern Europe, ageing populations, global deleveraging and income-poor consumers in developed countries are combining to deliver the coup-de-grace.
We may have asset bubbles, but it's not filtering through into consumer price inflation.
The structural and global forces are just too strong.
Here's a chart via Krugman showing the number of countries with double digit inflation and his comments:
There are, I think, a couple of morals here. One is that economics textbooks probably talk too much about high inflation; it’s a nice pedagogical set-piece, but not something that’s a real issue in today’s world. Another is that high inflation doesn’t happen just because a country’s rulers are spendthrifts or don’t know about the Emperor Diocletian or something; it is always associated with severe political and social disruption. To stand Milton Friedman on his head, high inflation is never and nowhere a merely monetary phenomenon.
2. Here come the reforms - I've said it before, but it bears repeating. The change of leadership in China this year to Xi Jingping and Li Keqiang was far more important to New Zealand than any election result in Britain, America or Australia combined over the last couple of years. Remember, every 1% fall in China's growth rate will reduce NZ's growth rate by 0.2-0.3%, Treasury research shows.
Here's more detail and quotes via Xinhua from Xi Jingping about his determination to really reform China's economy, which for us means a slowdown in Chinese growth.
"China must break the barriers from entrenched interest groups to further free up social productivity and invigorate creativity," Xi urged, while hailing reform and opening up as the source of China's progress in recent decades. "There is no way out if we stay still or head backward," he said.
The areas Xi pointed to as needing more thorough research include the fostering of a more market-oriented mechanism, enhancing government efficiencies, boosting social harmony and innovation, safeguarding social justice, as well as improving the Communist Party's governance.
Since taking office in March, China's new leaders have repeatedly pledged to upgrade the economy through deeper reforms, including delegating administrative power to lower levels and easing controls in the financial sector.
3. Like I said - This sounds huge. Reuters reports China has just ordered the suspension of building of new official buildings in a move to cut down on corruption and excess by officials... The picture below is of the local government offices in Anhui Province. It's bigger than the Pentagon.
Some structures built in violation of regulations had tainted the image of the Communist Party and stirred vehement public disapproval, the agency said.
"The directive called on all party and government bodies to be frugal and ensure that government spending goes toward developing the economy and boosting people's wellbeing," it added.
The ban also covered "glitzy structures" built as training centers, hotels or government motels, it said.
4. Speaking of which - The Daily Mail reports the Sheraton has opened a new resort near Shanghai. It has all the bells and whistles. Click through for some amazing pictures. Architects all over the world must wish they were in China right now. Money, history and taste are no restraints.
5. Rage against the machine - Robert Shapiro writes here at The Daily Beast about the rise of the robot and how it's slowing what should be a fast jobs rebound.
U.S. businesses now respond to economic growth by creating fewer jobs than they used to. Technological advances, of course, are one of the driving forces at play here. The countless applications of information technologies (IT) across every industry and economic activity have created considerable wealth, but they also displace more jobs than they create. The U.S. manufacturing workforce, which contracted nearly 28 percent over the last two decades, fell from 16,480,000 positions in 1992 to 11,951,000 in 2012.
The latest threat to jobs, according to many technologists, is coming from robotics, the application of information technologies to new forms of kinetic hardware. Today businesses worldwide employ some 1.4 million industrial robots, mainly in automobile and electronics assembly. Those numbers appear to be rising quickly. For example, FOXCONN, the Taiwan-based giant that assembles 40 percent of the world’s consumer electronics—and employs 1.2 million workers around the world—has announced plans to purchase 1 million new robots over the next three years.
6. Time for a 'B-Corp' - Chrystia Freeland from Reuters writes here at NYT about a move by Delaware to create a new type of corporation that doesn't always have to chase short term profits for shareholders.
Marx didn’t just get communism wrong — he was also profoundly mistaken about capitalism, which turns out to be the best prosperity-creating system humanity has come up with so far.
But that doesn’t mean it doesn’t need to evolve. The high-tech, globalized capitalism of the 21st century is very different from the postwar version of capitalism that performed so magnificently for the middle classes of the western world.
That’s why a lot of people, including many hard-driving capitalists, are trying to figure out how to retool the institutions of capitalism for our time. This week, the state of Delaware, which has made corporate governance its regional cuisine, approved a new form of incorporation, the B-corp, or benefit corporation. These are companies explicitly charged with a dual mission: to earn profits for shareholders, the traditional business goal, and also to pursue the social good in other ways, ranging from protecting employees to safeguarding the environment — even if these goals come at the cost of short-term financial gain.
7. 'Why the Right's Supply-Side dogma is wrong' - The Atlantic writes here about a new push by Barack Obama to try to fix America's problems of growing inequality and the hollowing out of the middle class.
Once upon a time, in the middle of the last century, America had a thriving economy in which the middle class was at the center and everyone -- poor and rich alike -- did better. But then, starting in the late 1970s, a group of self-serving rich people began to sell a promise that if we took better care of them, their wealth would trickle down, and that would help everyone else prosper. The country bought that line. And for three decades both parties yielded to it. The results were great for the very rich -- and disastrous for everyone else. Wages stagnated. Inequality became extreme. Mobility slowed.
By 2008, things were so upside down and we had so lost our way that the economy collapsed. Out of that ruin, many began to remember the old ways: the truth that lasting growth and shared prosperity come from the middle out and not the top down. Now we are joined in a battle of ideas to see whether middle-out economics can dethrone trickle-down.
8. The ageing drag - Here's an interesting chart (via Zerohedge) from Citigroup about the headwinds from ageing populations all around the developed word. It's one of a series of 10 'headwind' charts.
Our view is economic activity in the decades ahead is likely to be shaped by ongoing challenges posed by aging demographics. Aging can weigh on growth through a number of channels. First, accelerated aging means rising elderly dependency ratios and likely a declining share of workers relative to the overall population. Second, aging also means that the average worker who remains in the labor force is older than was the case a decade or two before, and older workers have typically chosen to work fewer hours than their younger counterparts. Third, meeting the needs of aging populations is already exerting stresses on government budgets and raising concerns about medium-term debt sustainability.
9. Got some money? - It seems China's banks will need to raise US$100 billion in fresh capital in the next two years to make up for the easy profits that are about to be lost because of the liberalisation of interest rates announced a few days ago, WSJ reports.
Assuming a 10% decline in net interest income—or the difference between what banks charge on loans and pay on deposits—and a 15% increase in assets, Chinese banks would have to raise between $50 billion and $100 billion in the next two years to maintain their current capital-adequacy levels, according to an analysis by ChinaScope Financial, a Shanghai-based research and data firm partly owned by Moody's. Chinese banks have raised about $50 billion in capital through equity sales in the last three years.
The study, to be released Monday, is based on an examination of some 140 Chinese banks. It found that city-level commercial banks would have the biggest need for capital, while the country's big banks would have relatively small needs.
10. Totally the Daily Show's John Oliver on Her Majesty's Secret Cervix.
19 Comments
#1 Outside of the MSM Krugman's prognostications aren't held with as much awe. -John Williams over at Shadow Stats calculates CPI based on the method used in the 1980's and comes up with an alternative viewpoint on inflation. John's interviews are worth watching as well to understand his rationales.
http://www.shadowstats.com/alternate_data/inflation-charts
On number 8 and the effects of ageing, the presumably very large effects of the burdens of paying extra pensions and healthcare costs had seemed persuasive. The next generation would have to work their socks off to keep the elderly in the lifestyle to which they had become accustomed. I had though seen the positive that there would be plenty of work for young people, and with luck that still may come about.
The reality in Europe, and to a lesser extent Japan, where baby boomers started to retire in mumbers in say 2007, has sadly been different. Youth unemployment in Europe has of course been vast.
So I wonder if one of the main problems with ageing and retiring populations is in fact that those with money, the elderly, stop consuming by large percentages; not that their consumption overwhelms everyone else. Maybe the healthcare hit is still to come; and by this hypothesis, that could perversely be a good thing.
In my view the slowing China story, the robotics story, and ageing, are all interlinked to some extent. I can still see a happyish ending when unemployment levels out, youth incomes revive and give them the ability and confidence to consume; with the parallel need for employment to provide the consumption.
Have avoided peak fossil fuels in the thought for now. If they have a real effect, then future consumption will be less fossil fuel based. There need not be less consumption as measured financially. If peak fossil fuels were already the main problem, fuel prices would be much greater than they are.
I also can see that at some stage a burst of inflation (or debt forgiveness) in some key parts of the world may help the transition, but that is another aside.
The CPI has been doctored in many countries to hide the fact that the private managers of entirely private loan based financed economies have failed to deliver upon their contracted promise of price stability - without inflation - deflation - boom - bust - bankruptcy - cycles - as is made very evident in the communication below - and the private financial service sector are now deferring blame for the housing bubble away to anyone but them - and it seems its working - as they remain the 'untouchables';
20 February 2012 Deirdre Kent put this Official Information Act question to New Zealand Minister of Statistics;
- Despite the fact that section prices tripled in fifteen years to 2007, land is not now included in the Consumer Price Index. This means that the official measure of inflation is unreliable as it is far lower than the actual figure.
and received this reply;
Today I received a letter back from the Minister of Statistics, Hon Maurice Williamson. I had heard that land went out of the CPI but couldn’t remember when or why so I sent in an Official Information request. The Minister dates the letter 14 Mar 2012 and says
Dear Ms Kent
Thank you for your letter of 20 February regarding the exclusion of the price of land from the Consumers Price Index (CPI) basket of goods.
I am advised by Statistics New Zealand that land (i.e. residential section) was included in the CPI until the June 1999 quarter. Following a review of the CPI in 1997 land was excluded, taking effect from the September 1999 quarter.
The 1997 review by an external advisory committee confirmed the CPI’s main purpose as being informing monetary policy setting, and that the CPI should be focussed on the concept of acquisition. The reason given for excluding land from the CPI from 1999 was that it was considered to represent the investment component of home ownership (with dwellings representing the shelter component).
The September 1999 quarter CPI information release explained it as follows: A dwelling provides shelter over a long period of time. Over time land is not consumed and so can be considered to represent the investment component of home ownership. As investment expenses are outside the scope of the CPI the rebased CPI excludes expenditure on residential sections.
Information on the sale of land is available from QV (www.qv.co.nz) and the Real Estate Insititute of New Zealand (www.reinz.co.nz).
I trust this information meets your needs and thank you again for taking the time to write.
Yours sincerely
Hon Maurice Williamson
Minister of Statistics.
I disagree. I think they made the correct call to remove house prices and land from the CPI.
The CPI is a basket of goods to represent what most people buy on a regular basis, living costs. Land or house purchases are not 'consumer' items if purchased regularly, and if purchased just a few times in a lifetime are also not regular 'consumer' items.
The CPI does still include the regular costs of accommodation, such as rates, insurance, rent, heating, water and maintenance.
A house or land purchase is a capital transaction, not appropriate for a quarterly consumer price index. The items in the index need to be things people buy regularly.
There are some issues with the makeup of the CPI basket, but they are minor and have nothing to do with land or houses. We are tracking grocery costs weekly and that broadly confirms the CPI reported. We will be releasing our weekly grocery cost tracking again soon. It confirms low levels of price increases.
How do you try to change someones thinking without offending? It is probably impossible. But maybe a few questions you could ask yourself.
1. What does the RB use a CPI measure at all?
2. What is the role of the RB, is it really to keep the CPI in a 0-3 percent band?
3. Should the RB be responsible for the weather- price of vegetables, meat, dairy
4. Should the RB be responsible for the efficiencies of Flat Screen TV plants in Korea?
5. Should the RB be responsible for the store of value of represented by NZDs
If you think that 5 is there responsibility then maybe you could say that our banks ability to type NZDs into existence through the creation of debt is the responsibility of the RB.
Hi David - with all due respect - although you would be lucky to hear of it in New Zealand -back in 2011 the who is who of international high finance - held a conference that was almost entirely about the failure of Interest Rate Inflation Targeting and - the main consensus upon that failure was lack of accurate reflection of house price inflation in the methodology =
http://www.imf.org/external/np/seminars/eng/2011/res/index.htm
The fact is that land is the productive base of everything consumerable - you cant build a house without land - if you pump land full of created credit in the pursuit of short-term profit - without any due consideration of accurate income producing compacity of that land and - what the market can bare has been distorted by all you can eat consumer credit from the very same institutions - you - imho - end up with a credit fueled ponzi pyramid scheme.
Using a cost of private issued credit solution to a quantity of private credit issued cause - only favours the lender and whipsaws off at the kneees those with existing loans.
http://www2.stats.govt.nz/domino/external/omni/omni.nsf/outputs/consumers+price+index
grr, reply lost again...DavidC you really need to fix yr server, maybe amazon cloud....pretty cheap.
CPI isnt there to hide bubbles its there to measure consumption. Land isnt consumed its and investment. What you can do is take CPI as a base line and say land was a good investment.
Ive lived in my house 1%+years, the utility of the land has not changed, its still there all 100% of it....
Or say CPI is the base or average so rates rising at say 6% when CPI is 2% is wrong and why is it happening...
The 1997 review by an external advisory committee confirmed the CPI’s main purpose as being informing monetary policy setting, and that the CPI should be focussed on the concept of acquisition.
Why should the CPI inform Monetary policy settings..???
Why on earth should the Reserve Bank be interested in Consumer prices...and disinterested in asset prices ...or non tradables.
Why do they have a disdain for wage rate inflation..... yet not for land price inflation..???
What the Reserve Bank is trying to control ..????
Is it simply about the prices of a basket of comsumer goods..???
OR... is it about maintaining the "store of value" component of money.
People might not think there is a difference ...but there is....Big time.
My view is that the world is in such a mess because Central Banks allowed Money Supply to grow at insane rates over the last 40 yrs.
It is no surprise that M3 money has grown at about 6%/yr since the mid 1980s .... and House prices have also grown by about 6%/yr since then.... ( Wage rates HAVE NOT... which is a problem no one talks about.. ie. people are getting poorer in real terms )
In terms of Monetary policy... there is nothing magical about the CPI...
In a global world... if u increase the money supply rapidly it is more likely that we would simply import greater quanties of goods... rather than the prices of those goods rising...
I do notice that since the GFC.... we do hear the the Reserve Bank now talking about the rates of credit growth... so that is a step. ( Before the GFC they were allowing 15% /yr credit growth..... madness)
I personally think the CPI is somewhat meaningless... by itself.
I think there should be a broader range of measures that track the effects of money supply growth entering the economy.
Rampant money supply growth simply leads to a division of wealth.... You won't hear the Reserve bank talking about that..!!!!!
just my view.
Ben Bernanke Asset-Price "Bubbles" and Monetary Policy speech from 2002 which, in retrospect, is a sublime epitaph to the concept of free markets and perfectly summarizes the joke that modern "price discovery" has become, having been replaced with one simple task: create the biggest asset bubble ever.
I worry about the effects on the long-run stability and efficiency of our financial system if the Fed attempts to substitute its judgments for those of the market. Such a regime would only increase the unhealthy tendency of investors to pay more attention to rumors about policymakers' attitudes than to the economic fundamentals that by rights should determine the allocation of capital. Read article
Yeah right! and that extends to Wheeler
Exactly right Roelof
The RB uses a measure to determine the rate of inflation. The only reason that it has anything to do with the RB is that they are supposed to be the custodians of the purchasing power of our curency. Our money is a means of exchange and a store of value. The government insures that it is a means of exchange as it is how we pay our taxes- in NZD. The government uses the RB as an arms lenght body that is supposed to ensure the currency is a reliable store of value.
The RB has since 1999 been allowed to abrogate its responsibility to ensure the NZD is a reliable store of value. The explaination they give is actually laughable. It makes no sense at all.
Most people take on a mortgage when buying their house, then pay for it on a regular basis for many years. The payments and the house purchase price are very much linked. So, how are mortgage payments not part of regularly incurred living costs?
Excluding house prices from inflation indexing is nonsense.
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