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Thursday's Top 10 at 10: What happens when the money printing stops?; Why haven't the masses revolted against income inequality?; Europe's looming deleveraging; Dilbert

Posted in Opinion
This daily collection of links and comment was previously sponsored by NZ Mint. We'd welcome a new sponsor.

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

See all previous Top 10s here.

My must read today is #1 on whether the current green shoots are sustainable. 

1. What happens when QE ends? - Financial markets and many economic indicators are fairly buoyant around much of the developed world right now as very low interest rates and plenty of money printing or Quantitative Easing (QE) begins to work its way through the system. Asset prices are up, which means some people feel wealthier and are beginning to borrow more to spend that wealth. 

We're seeing our own version of this in New Zealand where record low interest rates for five years have encouraged a new generation of borrowers to leverage up and bet on on a property boom. Just look at yesterday's retail sales volumes up 4.4% in the June quarter, the strongest growth since the end of 2006.

But what happens when the money printing stops and interest rates rise?

That will be the real test. 

It will depend largely on whether any growth in household disposable income will allow those households to sustain and keep growing their debt as those interest rates rise.

This reproduced email exchange from Economist Richard Duncan and a correspondent is a nice debate framing this issue. It's well worth a read.

Duncan is in the camp that says the global economy will struggle as soon as the printing stops because household income growth is so weak. HT scarfie in yesterday's very long and active comment stream.

Here's Duncan's conversation:

Regarding your question: “Can an economy sustain itself short term with QE, withdraw it, and see it replaced with bank lending growth, corporate debt, private debt etc….. Is that possible?”

Answer: We just don’t know. We have never been in a situation where the Federal Funds Rate was cut to zero and the Fed was also creating a trillion dollars of paper money a year and injecting it into a 16 trillion dollar economy (GDP). That it an incredible and unprecedented (at least since WW II) amount of stimulus.

QE can definitely create a boom and even a very big boom. By buying $1 trillion a year of assets, that will definitely push up stock prices and property prices. The question is about sustainability. If home prices go up, then people will have to take out larger mortgages to finance them. That will cause Total Credit to grow. That hasn’t happened yet. Total mortgage debt is still contracting slightly. But, it could happen.

But, what then? Will the people be able to pay the interest on their higher mortgage debt? They couldn’t in 2008. So it comes down to the growth in Real Disposable Income. Here’s the problem. During the first half of 2013 it only rose 0.5% compared with the first half of 2012. Disposable income is not growing because globalization is putting very strong downward pressure on wages.

2. Why don't we vote for equality? - The stunning rise in inequality over the last 30 years in many democracies is forcing some to ask why there hasn't been a naked political response by the masses to vote in governments that stop this rise. When will the backlash come? And what form might it take?

Here's a useful academic paper that addresses the issue:

In this paper, we explore five possible reasons why the US political system has failed to counterbalance rising inequality. First, both Republicans and many Democrats have experienced an ideological shift toward acceptance of a form of free market capitalism that offers less support for government provision of transfers, lower marginal tax rates for those with high incomes, and deregulation of a number of industries.

Second, immigration and low turnout of the poor have combined to make the distribution of voters more weighted to high incomes than is the distribution of households. Third, rising real income and wealth has made a larger fraction of the population less attracted to turning to government for social insurance. Fourth, the rich have been able to use their resources to influence electoral, legislative, and regulatory processes through campaign contributions, lobbying, and revolving door employment of politicians and bureaucrats.

Fifth, the political process is distorted by institutions that reduce the accountability of elected officials to the majority and hampered by institutions that combine with political polarization to create policy gridlock

3. The problem with money printing - Literally. America's money printing factories are having real problems getting the printing right for the new US$100 bill, which was supposed to be released in 2011. They're very keen to make it difficult to counterfeit because it is the choice of drug dealers and money launderers all around the world. The trouble it's also very difficult to print...

Here's the New Yorker with the details. No wonder there's so much Quantitative Easing going on. It's so much easier to create money with spreadsheets than actually printing it in a factory onto paper.

For the past few years, the Federal Reserve has been preparing to introduce a redesigned hundred-dollar bill into circulation. It will have a Liberty Bell that changes color, a new hidden message on Ben Franklin’s collar, and tiny 3-D images that move when you tilt the bill this way or that. But delay has followed delay. And now again: The New Yorker has learned that another production snafu has taken place at one of the country’s two currency factories, according to a document from the Bureau of Engraving and Printing.

The cause of the latest blunder is something known as “mashing,” according to Darlene Anderson, a spokeswoman for the bureau. When too much ink is applied to the paper, the lines of the artwork aren’t as crisp as they should be, like when a kid tries to carefully color inside the lines—using watercolors and a fat paintbrush.

4. A Baby boomer wave - Here's what America's baby boom looks like in a gif. HT Calculated Risk.

5. 'China can afford to write off its bad debts...just' - Gavyn Davies writes at this blog about how much of China's bad debts can be absorbed by its government. He reckons it's do-able, but it's not as comfortable as some of the China bulls think.

So could the public sector absorb the costs of a prolonged work-out regime for the financial sector, amounting to 20 per cent of GDP or more? On some estimates, this would take the public debt ratio close to 100 per cent of GDP, which is roughly the same as it is in the US and Europe. However, this would still be clearly sustainable, assuming that the gap between nominal GDP growth and interest rates remains where it is now, and the primary deficit is held at no worse than current levels.

Furthermore, do not forget the asset side of the balance sheet. China owns about $3.5 trillion of foreign exchange reserves, and holds net assets overseas worth 30 per cent of GDP. In the last financial sector work-out, these reserves were used to recapitalise the banking system, and the same could happen again.

Overall, then, there is still time to fix the credit bubble without allowing bad debts in the corporate and financial sectors to take the public sector balance sheet down with them. But public debt ratios are deteriorating fast. Action must start now, and with that action will come a prolonged period of much lower GDP growth.

6. Europe's deleveraging - Here's FTAlphaville looking at the massive scale of deleveraging that still has to happen in Europe. They still have to shed 5.1 trillion euro worth of assets...

Eurozone banks are still 3.2x the size of their domestic economies, on average, much more than other developed countries like Canada, Australia or Japan, where the ratio averages around 2x, and larger than the US, where capital markets are more developed and banks are smaller than the economy.

The prognosis in terms of economic effects seems rather grim, with Gallo and colleagues writing that public support programmes can only partially offset a fall in lending, while the expansion of bond markets “will take a very long time – and perhaps bonds will never really offset banks, in Europe”.

7. Toddler tests - FT reports some New Yorkers are so desperate to get their kids into good schools they will pay US$450 an hour for a tutor that teaches toddlers how to play together on play dates to help them get into the best schools.

Suzanne Rheault, chief executive of Aristotle Circle, which began offering play date experts three years ago, says that some schools “have a 5 per cent acceptance rate, below Harvard at 6.9 per cent. It’s like a bloodbath getting into these schools.”

Parents are desperate for advice to help their children get into the schools that are seen as a ticket to an Ivy League university. “There’s a perfect storm – a lot of money, a lot of immigrants with a focus on education [and] a lot of educated parents keen on getting their child into the best school,” she says. “Parents are shameless – they want it so badly.”

8. First home buyer subsidies - This Council of Australian Governments report on housing affordability last year concluded that first home buyer subsidies simply push up prices in markets where there are supply shortages. The chart below (courtesty of bond vigilante) shows Australia's first home buyer subsidy programmes seemed to coincide with surges in prices. 

Yet our government has just announced increased subsidies for first home buyers in reaction to a surge in house prices caused by (apparently) not enough supply...

Here's the COAG report:

The HSAR Working Party investigated the impact of the FHOG on the Western Australian and Tasmanian housing markets using econometric modelling. The modelling outcomes indicate that the state funded and administered FHOG and the time-limited First Home Owners Boost (the FHOB – introduced by the Commonwealth during 2001 and 2008) tend to increase house prices in both the short and long term. This price increase is more marked in the short term when supply is constrained.

9. Going against the trend - Here's Saxo's Steen Jakobsen arguing that interest rates globally have actually peaked.

"We've seen the high", he says, "and we'll probably even see a new low in terms of interest rates next year based on very low, almost recession like growth".

Jakobsen maintains that interest rates are not the solution to creating growth. They can be supportive but if they really were the answer, the global financial crisis would have been solved some years ago.  He argues that the focus has to be on nurturing the small and medium sized enterprises if we're going to see a real change in global fortunes.  

10. Totally an American football coach trying to coach Tottenham Hotspur. I laughed. 

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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Inequality will be voted

Inequality will be voted against when someone actually puts up some policies to deal with it and then the huge number of people who feel govts do nothing to improve their lot and that their vote won't make any differene anyway, will get off their collectives and vote

I posted yesterday on the

I posted yesterday on the rise of the extremist right and left in the UK and Netherlands because the mainstrem / central parties all are pushing the same "fix"  so voters had no one moderate to vote for.
Here I wonder if the rise of the Green party in the last election (from 7~10% to 14%) is mostly because the lefties/poor who used to vote Labour have deserted labour (because they had no other choice in who to vote for on the left) rather than ppl discovering themselves as Green.  When I look at the grass roots "helpers" I see ex-alliance ppl, at that point I know leaving the Green's was for me the right thing.

.. the gap between the uber

.. the gap between the uber rich and the rest  of you poor peasants ... oooopsy , ahhhh .... I mean that inequality will continue to widen so long as well meaning but economically ignorant politicians from the left try to fix it ......
The more the Cullens and Swans of the world fiddle and tweak to redress the balance , the more ( quite ironically ) they make it widen further ...
Only decent free market economics will allow the average person to improve their lot , should they choose to do so ....

Said as only a true uber rich

Said as only a true uber rich could!

... if you've hung around

... if you've hung around here as long as some of us , you'd realise by now that Bernard frequently trots out the " inequality " articles , or the " inter-generational warfare " twaddle ....
It's easy stuff , and bound to raise a few hackles ...
... conveniently forgetting that people of modest means today live lives of far greater leisure and comfort than many of the rich folk of a century ago ... we got whitegoods , quick international travel , the internet , ample information and live sporting entertainment , modern  medicines and hip-replacements ....
And all we had to forgo to realise these wonders is the household servants , horse crap covering the streets , and leeches ...
These are the best of times ! .... Moneypenny didn't even exist 100 years ago .... have fun , friend ...

Gummy Cheers. Yes, much

Cheers. Yes, much better than a century ago.
Better than a couple of decades ago?
Check out this article about the workers at Ranfurly rest home in Auckland being told to accept a NZ$100/week pay cut to NZ$30,000 a year or leave.
I could also quote a bunch of child poverty figures at you but...
Things are better than they were, but they could be so much better than they are, particularly for the young. Old buggers like you and me are fine, Gummy. It's the young and the poor who really are struggling.

. conveniently forgetting

. conveniently forgetting that people of modest means today live lives of far greater leisure and comfort than many of the rich folk of a century ago ... we got whitegoods , quick international travel , the internet , ample information and live sporting entertainment , modern  medicines and hip-replacements ....
you're forgetting evolutionary psychology GBH - it wont go away:
In fact the amazing thing is that of all the children held for over a year, they all came to much prefer the Indian way of life, and none of them willingly chose to return to their white families.  They were forcibly reunited with their families, after varying periods of time, as they were finally located, and as a result of various negotiations with the Indians.
Those who were returned had been “Indianized.”  Traumatic as it had been to be abducted, it was even more traumatic to be returned to their white families.  They all had difficult adjustments, and retained many Indian characteristics for the rest of their lives.  Many of them slept outdoors for years, and made their own bows and arrows and hunted a great deal thereafter.
The higher up the food chain you are the freer you are in todays society but that feedom comes at the expence of those lower down who are herded into smaller living spaces.

Yet, just the evidence from

Yet, just the evidence from the experiemnt of the last 30 years proves otherwise.
I'll vote you "poor" GBH, hello 70% tax rates for you if the market collapse doesnt do it to you first of course.

"decent free market

"decent free market economics"
Which means carefully regulated capitalism not the neo liberal  casino capitalism of the last 30 years pushed by both "Right" and "Left".

GBH if you are referring to

GBH if you are referring to the laissez faire type of free market economics  I think you may need to do a wee study of it. One of the first things the philosophy acknowledges is that inequality is an inevitable downside of it. It offers nothing more than a shoulder shrug as a solution.
In order to have have winners you have to have..............................? And everyone in society is not necessarily geared for or wants a massive bunfight to succeed, not everyone sees money as a measure of success, thank god for that, you would be short of a service or two if they did. Take wiping your bottom when you are senile and in need of assistance. 
The only reason there are people like John Key in the world is because there are plenty of others who are not, and never will be, with the best will in the world, it does not mean they are not able to "succeed"
A totally free market economy is just as bad for a society as a totally socialist one, a mixture it is for me and will be as long as my rear points to the ground, which it does more and more each day.

If you are saying that

If you are saying that inequality comes about because we are not all the same in terms of our abilities and what we want out of life, then I completely agree.
It would still be the case that we are all different in ability and aspiration, under any economic or political system.   Why then do you refer to inequality as a downside of laissez faire free market economics? 
Or is your case that we should all end up in the same position even though we are all different to start with?  That would require treating people differently - holding back those who want to strive and do well, pushing forward others beyond their ability and inclination.  Would you see that as equality?

Its nice to see the usual

Its nice to see the usual straw man arguments trotted out, in a not-nice-at-all kind of way. Arguing for less inequality is a far cry from arguing for NO inequality.
I'm pretty sure if both sides of this argument put their actual number forwards instead of arguing in hand waving terms, they'd quickly find how similar their preferences are.

If you are not saying that

If you are not saying that zero is the only acceptable level of inequality, then you accept that there comes a point when less inequality is not better; and also that if a society is below that point, more inequality would be better.   So - just as you say - it depends on the actual numbers.
OK, here are some numbers.  The Gini coefficient, the most common measure of income inequality, for New Zealand in 2010 was 0.52 for market income (ie gross salary) and 0.36 for disposable income (once taxes and benefits - ie Government redistribution - have been taken into account).  
The coefficient for disposable income ranges between 0.24 and 0.49 in OECD countries, so NZ is about in the middle of that pack.
The NZ figure reduces again, to 0.33, if you also count the value of public services, which tend to be used more by lower income people.  Presumably that would also be the case for other OECD economies, but I haven't found that data.
All NZ figures were higher in 2007, and lower in 1998 and 1988.    But the difference between market and disposable income - ie, the impact of Government intervention on income inequality - was greater in 2007 and 2010 than it was in 1998 or 1988.
Are these numbers bad?  What would you like them to be?

The really interesting

The really interesting thought for me is how much inequality and corresponding loss of freedom are the majority willing to stand.
CUT THE CABLE! Let the North Island go its own way and let freedom reign in the South!
That way we can keep our electricity and those in the North can have as many snapper as they are allowed. A good deal all round I think.

I am all for more freedom and

I am all for more freedom and being a South Islander can see some benefits for being independent of the North. But it is just not practical.
The best bet for us Joe average types getting more freedom is small but practical steps using existing institutional structures.
For instance let more of our taxes stay in the South Island i.e stronger local government. And because we have the choice of where to live this gives us more freedom in what sort of public amentities we want from those taxes.
Put some checks on our dictatorial PMs. Say the Speaker being elected by unanamous vote not a party vote directed by the PM would be a good start.
Important public servants be appointed by the Speaker. So instead of the chief spy being an old mate of PM, allowing all sorts of underhanded freedom denying behaviour we have an independent agency doing its job as legislated. Same argument could go for the Reserve Bank Governor, Head of the Commerce Commission etc.

It would be silly to cut it,

It would be silly to cut it, you just sell it...
Apart from that, frankly I think the south Island would descend into a "dark ages" ie I dont think there would be enough left for the island to be economically viable long lacks the scale.

Thanks MdM, this is a lot

Thanks MdM, this is a lot easier to engage with.
It strikes me that the huge gap between the market income Gini and the disposable income Gini is pretty undesirable. That's far from a trival matter to address of course...
Personally I'm not sure if inequality is one of the important issues to address for New Zealand as a country right now. As you rightly point out, we're around the middle of the OECD pack. I'm most concerned about the still high levles of unemployment and underemployment, particularly as it has been leading to long-term unemployment. If I could find a good solution to that, I'd be a happy man.

No that is not my case Ms D

No that is not my case Ms D it is the case of the very philosophy itself. We now have people doing perffectly good work unable to live unassisted on the money they earn. 
No we should not all end up the same that is where people like you get it wrong, very, very wrong. If you had read what I said you would have seen that I do not adocate that at all, but it would seem to me that you would be ok with people living in the streets or in barrios. 
Society is now far too unequal, and it is a bad thing

Meaning "if they're

Meaning "if they're small-mindedly selfish enough to choose to do so".

Only decent free market

Only decent free market economics will allow the average person to improve their lot , should they choose to do so ....
Last time I checked the uber rich had rather a better grasp of this than you do Gummy. The best strategy is have the economically ignorant politicians work for you, and to let the market work on everybody else. That way everybody else is equal, and you come out on top!
I suspect the non-uber rich also have a better grasp of this than you do as well.
Its not the tweeking and fiddling which is a problem but the bailouts, back room deals, exemptions from taxation, special priveleges, secret negotiations, secret laws and legal exemptions which keep the system working on everybody else and the large and wealthy ahead of the game.

Steven, the problem is that

Steven, the problem is that everyone thinks that democracy can save them.
Democracy is only a system of elections. It sets out when and how we vote, then we all pat ourselves on the back and say "WE are democratic". We then vote in dictators.
But never mind it is our democratic right to vote them out next time. And so we go, election after election voting them out.
The problem is that democracy on its own does not work. You have to have Democracy AND FREEDOM.
To get freedom we need an independant Judiciary. Totally independant of the government. Helen Clarke set up our Supreme Court and stopped the Privy Council. How independant is that?
The we need our Human Rights ensrined in a constitution
At the moment our human rights are an act of our parliament and the government claims sovereignty over them. That is, our Human rights are at the pleasure of our government.
Egypt got democracy without freedom and look at the mess

Yeah I want to vote for a

Yeah I want to vote for a party that gives back power. Freedom to the people I say.
Unfortunately no sign of that party, so my vote goes....

"Democracy is only a system

"Democracy is only a system of elections."
Its alot more than that. I think John Ralston Saul said it best:
"Democracy is not intended to be efficient, linear, logical, cheap, the source of absolute truth, manned by angels, saints or virgins, profitable, the justification for any particular economic system, a simple matter of majority rules or for that matter a simple matter of majorities. Nor is it an administrative procedure, patriotic, a reflection of tribalism, a passive servant of either law or regulation, elegant or particularly charming.
Democracy is the only system capable of reflecting the Humanist premise of equilibrium or balance. The key to its secret is the involvement of the citizen."

#1... Richard Duncan I agree

#1... Richard Duncan
I agree with him...   The nature of economic growth thru credit expansion is that it pulls what might be tomorrows spending into today.
On an ongoing basis simply leads to malinvestment and overcapacity, since the increase in aggregate demand does not really reflect what you could call the.."true intrinsic demand"
this creates a "gap"..  between credit demand vs intrinsic demand
You will find that if NZs' economy is growing will be because Credit is growing.. ie. Govt + private sector is borrowing.
So... I think Richard Duncan is on to it.
The world has made a mess of the chance to deleverage... so lets hope for one more Global credit induced growth phase.... and then the chickens might come home to roost.

A debt bubble that started

A debt bubble that started deflating only to be reinflated by even more debt.
The psychopaths on Wall Street and  London City will get even richer.
The rest of us and our children are being transformed into Debt Serfs under constant survelliance by PRISM etc - much to Gummy Bear Hero's delight.

Great cartoon. Made me think

Great cartoon. Made me think what lengths JK will go to spy on us. LOL

Meanwhile, more New

Meanwhile, more New Zealanders and their communities are being sent to WINZ. 
I feel like boycotting Genesis energy for their greed.. how much money does one actually need at the expense of others? Once again, our soon-to-be "privatised" power company will be raking in more profit. I wonder if the govt will boost their coffers with a $30m "incentive" payment prior to their share float?



Inequality. To fix it we

To fix it we would have to agree on where it was we ought to be.  But we have yet to agree what it even means.

Ralph That's simply not true.

That's simply not true. The globally accepted measure is the Gini coefficient. 
Here's the latest MSD report on NZ household incomes showing a dramatic worsening in NZ's Gini between the mid 1980s and 2000.
NZ's Gini has stabilised since then, due in large part to Working for Families, interest free loans and a heaping helping of fresh debt.
"Redistribution through the tax and transfer system reduces income inequality very significantly compared with what it would otherwise be. An example is that single-earner two-child families with income less than around $60,000 from wages pay no net income tax.  They receive more from Working for Families tax credits than they pay in income tax and ACC."

Sheeeeeesh , Ralph ... how

Sheeeeeesh , Ralph ... how could you forget her , in that hot little middle-eastern outfit ...
....."  I dream of Gini " ...... a nice set of global coefficients .... oooooh yeah ....

Hi Bernard, I might have to

Hi Bernard,
I might have to beg to differ slightly on two counts.
First, this reduces the wider principle of equality to a single facet, that of economics (money) alone and ignores all other quality of life issues.  Whilst this is ONE measure it is not the *only* measure and neither is is proven to be the most important for a happy life.  Economists should be congratulated for their efforts in their field.
Second, this is a measure of result.  That assumes the outcome must be guaranteed rather than the opportunity of outcome.  I am not sure all would agree equality must guarantee an outcome.

#4 is one brilliant graphic

#4 is one brilliant graphic