Here's my Top 10 links from around the Internet this week. 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 on how New Zealand is number 3 in the world for housing market over-valuation. We may well become the first in the OECD to raise our rates.
1. 'The rent is too damn high' - There's a lot of scratching of heads around the developed world right now about why economies just aren't firing into action as they should after years of near 0% interest rates and money printing.
One theory is that lower to middle income groups, who were the engine room of consumer spending in the likes of America and Europe through the 1950s, 60s, 70s and 1980s, are unable to ramp up their spending because their real incomes have been flat to falling and they have run out of borrowing room.
Without certainty that there will be buyers for products and services, those at the top of the scale making the investment decisions are sitting on their cash piles or putting it into unproductive places such as high art, pink diamonds, super yachts and beachfront property in Auckland.
The noise is building about redistributing income to those lower to middle income groups to get consumer spending going again, and therefore creating the buyers for products and services so investment can get started with some certainty. Various measures are touted, including Guaranteed Minimum Incomes, Living Wages and higher minimum wages.
Adding some fuel to that theory is this piece in Bloomberg BusinessWeek about incomes and rents for those in America towards the bottom of the scale. It says after paying rents the poor have even less money left over to buy stuff. It cites a study by the Joint Center for Housing Studies of Harvard University.
The chart below tells the story well.
“In 1960, about one in four renters paid more than 30 percent of income for housing. Today, one in two are cost burdened,” according to the study, America’s Rental Housing.
“Cost-burdened” means you’re paying more than 30 percent of income for housing and “severely cost-burdened” means you’re paying more than half. “By 2011, 28 percent of renters paid more than half their incomes for housing, bringing the number with severe cost burdens up by 2.5 million in just four years, to 11.3 million,” according to the Harvard study, which was conducted with partial funding from the MacArthur Foundation.
2. Progressive Capitalism - The billionaire former chair of Sainsbury, Lord David Sainsbury, has written an interesting book about how capitalism needs to adjust to become sustainable.
I agree with David Chaston's assessment in Monday's Top 10 (4) that capitalism is the best system, as long as it is based on a democratic system with regulation. I'd also add that capitalism's tendency to inexorably shift income to the top is self-defeating in the long run and has to be softened with a good dose of income redistribution and investment in public infrastructure such as health and education to ensure the poorest don't get stuck in poverty traps.
It's good to see many of the great and the good are questioning the neo-liberal economists' view that dominated between the mid 1980s and 2008.
Here's BusinessWeek again on the debate focused around lifting the minimum wage.
Raising the minimum wage is neither as wonderful as its advocates claim nor as dangerous as its detractors warn. On the upside, it would increase pay for millions of Americans, not only those earning the minimum but also those at fixed increments above it. These are people who could really use a raise. Contrary to what generations of students were taught in freshman econ, new research finds that minimum-wage increases at the state level have caused little, if any, harm to employment.
“Outside of the simple Econ 101-type environment, increasing workers’ pay can improve the functioning of the low-wage labor market,” Arindrajit Dube, a University of Massachusetts economist, testified before Congress in March.
3. A new centre ground - More of the detail in Sainsbury's plan is in this New Statesman piece.
It is a powerful and cogent critique. Sainsbury was an effective science minister under Tony Blair who greatly increased state support for science. However, he writes: “It was only after I left government . . . that I began to question fundamentally the neoliberal political economy which had dominated governments in the western world for the last 35 years.”
Partly this was because of the 2008 crash and a growing conviction that competitiveness required a “race to the top” – not neo - liberalism’s “race to the bottom” – with state support for employment, innovation and skills. But there was also a telling personal dimension: the private equity takeover bid for his family firm, Sainsbury’s, in the summer of 2007. “There was not the slightest pretence of trying to improve the performance of the company,” he claims. The bidders proposed “to sell off all the properties and replace them with massive debts. Then they would put the company back on the market . . . and walk away with £1bn of profit.” The City was wildly keen, salivating at the £100m in fees the investment banks stood to earn: “a perfect example of wealth appropriation as opposed to wealth creation”.
4. The 'Welfare Queens at Walmart and McDonalds - Here's Barry Ritholz at Bloomberg railing against those big companies that pay low wages, thanks largely to effective government subsidies.
You could say the same for Working for Families in New Zealand and how it is helping to support very low wages in areas such as fast food and residential care.
Ritholz suggests raising the minimum wage or charging back the subsidies to companies in the form of an extra tax. He also suggests a Swiss-style Guaranteed Minimum Income.
The new welfare queens are even bigger, richer and less deserving of taxpayer support. The two biggest welfare queens in America today are Wal-Mart and McDonald's.
This issue has become more known as we learn just how far some companies have gone in putting their employees on public assistance. According to one study, American fast food workers receive more than $7 billion dollars in public assistance. As it turns out, McDonald's has a “McResource” line that helps employees and their families enroll in various state and local assistance programs. It exploded into the public when a recording of the McResource lineadvocated that full-time employees sign up for food stamps and welfare.
The most radical idea is bit of pure fantasy: Guarantee every person in America a minimum salary. That is a proposal under discussion today in Switzerland. Its hard to even imagine such a concept gaining traction in the U.S. outside of the Great Depression era.
My politics are pretty middle-of-the-road, and I find myself offended by subsidizing profitable companies this way. As a taxpayer, there are much better things I would like to see my monies go towards. Some rule changes are needed to end this wasteful spending.
5. 'My country is a horror show' - Fans of the TV series called 'The Wire' may have heard of David Simon, the writer of the show. Here's a good old rant he's published about his own country. Simon is nostalgic for the American economy of the 1960s, 1970s and early 1980s.
Labour doesn’t get to win all its arguments, capital doesn’t get to. But it’s in the tension, it’s in the actual fight between the two, that capitalism actually becomes functional, that it becomes something that every stratum in society has a stake in, that they all share.
The unions actually mattered. The unions were part of the equation. It didn’t matter that they won all the time, it didn’t matter that they lost all the time, it just mattered that they had to win some of the time and they had to put up a fight and they had to argue for the demand and the equation and for the idea that workers were not worth less, they were worth more.
Ultimately we abandoned that and believed in the idea of trickle-down and the idea of the market economy and the market knows best, to the point where now libertarianism in my country is actually being taken seriously as an intelligent mode of political thought. It’s astonishing to me. But it is. People are saying I don’t need anything but my own ability to earn a profit. I’m not connected to society. I don’t care how the road got built, I don’t care where the firefighter comes from, I don’t care who educates the kids other than my kids. I am me. It’s the triumph of the self. I am me, hear me roar.
6. Third best/worst in the world - WSJ reports on this Deutsche Bank analysis showing New Zealand's housing market is the third most over-valued in the world, just behind Canada and Belgium.
These data also underscore the dilemmas central banks face in various countries. Canada’s, for example, is grappling with a slowdown in its economy and a worrying stagnation in consumer prices that’s raising the risk of deflation. But sky-high house valuations make it difficult for the Bank of Canada to cut rates to spur aggregate demand. A similar problem exists in Australia, where the Reserve Bank of Australia would probably love to cut rates in order to drive down what it believes to be an overvalued Aussie dollar but must instead keep a wary eye on home prices.
7. At the end of the world - The OECD has published a research paper on how 'global' the supply chains are in various countries. It looks at how much of a product sold in a country includes bits and pieces sources from lots of countries.
It turns out New Zealand has the lowest 'intensity' of globalisation in our 'global value chain' or GVC of any in the OECD. Somehow, the European Union (but not individual European countries) is worse.
8. The deflationary genie - Everyone, in New Zealand at least, is focused on inflation and the risks of it returning.
“Most significantly, there has been an unusually wide divergence just recently,” he continued. “Whereas the closely watched core PCE deflator has risen by 0.1% in each of the last four months, the market-based measure of core PCE deflator was flat in both October and September. Now we are dealing with very small numbers here, but that still means an annualised rate of inflation was 0.5% rather than 1% (see chart below).”
“If the market had any idea that we were starting to register zeros on this measure, I think there would be panic aplenty,” said Edwards.
9. The rise of Blackrock and the junk bond kings - Prior to the 2008 crisis it was the global investment banks shunting money around the world that caused so much grief.
Now it is the big fund managers such as Blackrock and Pimco. It also explains the Septaper Tantrum, says Martin Wolf at FT.com.
The purchasers of these bonds search for yield in a low-yield world by lending longer and riskier. Borrowers take advantage of the lower cost of foreign-currency bonds. But in the process, they assume a currency mismatch: foreign currency debt against domestic currency assets. These borrowers are speculating on their domestic currencies. Students of the Asian financial crisis of 1997-98 will find this disturbingly familiar. Non-financial companies have taken on a “carry trade”, by financing local assets with apparently cheap dollars.
When funding conditions turn, such trades can become lethal. As the Fed is expected to tighten, the dollar will rise, prices of dollar bonds will fall and dollar funding will reverse. As the bonds they issued lose value, borrowers will be forced to post more domestic currency as collateral. That will squeeze their cash flows and trigger a downturn in corporate spending. A fall in the exchange rate will exacerbate the squeeze upon them. Highly indebted non-financial corporations may even go bankrupt, imperilling domestic creditors, including the banks.
The Mangere-Otahuhu local board area has seen its median income drop from $19,900 to 19,700 between 2006 and 2013. When adjusted for inflation over the same period, the median income for the board dropped by 16 per cent.
The same comparison in the neighbouring Otara-Papatoetoe and Manurewa local boards reveals a decrease of 17 per cent each.
But Orakei, which includes Remuera, Mission Bay and St Heliers, has the highest median income of $42,700 among the local boards created after the 2010 Supercity elections.
24 Comments
#2. " I agree with David Chaston's assessment in Monday's Top 10 (4) that capitalism is the best system, as long as it is based on a democratic system with regulation."
Yes. Then David, Bernard and me agree.
Re; #9, Borrowers take advantage of the lower cost of foreign-currency bonds. But in the process, they assume a currency mismatch: foreign currency debt against domestic currency assets. These borrowers are speculating on their domestic currencies.
Not our banks and corporations - large chunks of NZ's foreign borrowings are hedged with currency swaps.
New Zealand’s foreign-currency-denominated external debt was $98.1 billion (92.6 percent of which was hedged). Read more
#6. Yes, NZ has one of the highest House prices in the world...whether No 3 or not is not important.
This is widely recognied and even the Goverment and our Central Bank agrees, Unfortunately our Central Bank governor does not have the courage to do anything about it. He gave up even before even trying.....!! Sigh...
#7. The answer is because we are mostly a primary product producer...Milk, Diary Meat Lumber, Wool etc requires very little external imputs.....
NZ plays by the rules and everyone else cheats. The major economies create vast sums of money, whether privately (banking) or via government (fiscal deficits) or central banks (quantitative easing and depressed interest rates). They get to use this money first, before it has devalued. This is important and is the essence of the cheat. Once the money has flowed out around the world it causes a revaluation of everything, from Auckland houses to milk. The process is uneven.
When do we wake up to this and figure out a crafty, practical dodge to level the playing field? I like Steve Keen's idea of a debt jubilee payment to everyone. Just need a way to dress it up in respectable clothing. The silly Greens idea of printing money for the government to spend on the Christchurch rebuild was flawed because it gave the money to the plonkers not the people. Give the money to everyone to use as they think best, not to a favoured bunch who are at the front of the queue.
http://www.zerohedge.com/news/2013-12-11/matter-stunning-perspective-ch…
Not at all like Weimar Germany in the 1920s when Germany was loaded with excessive debt as it changed from being an absolute monarchy to a republic via chaos. No gradual transition.
The point is we have a problem of an overpriced currency. You are worrying about an underpriced currency. You are not alone in this, so are the RBNZ. Their whole thought process is geared towards dealing with a weak currency. This is not the problem we have. The RBNZ have no thought process about how to deal with an overly strong currency.
It is analogous to thinking about how to stop a cavalry charge when you are faced with tanks. They are fighting the last war in monetary terms. They really do not have a clue as to how to think about the problems we are facing and have admitted as much publically. They have figured out how to combat inflation so that is what they keep doing. We need some crafty dodges, at the moment we are being outwitted and outmanouvered.
I guess the main point I was trying to make is that actually giving the newly printed folded stuff to as many as possible just must be better than giving it to a favoured few. Inflation is quite lumpy - a lot of the reported cpi inflation in recent years has been due to huge increases in rates, moderate increases in taxes on fags and putting GST up. The present RBNZ ultra low interest rate policy takes money from those with savings (predominately retirees) and gives it to central and local government and borrowers (mortgagees with jobs). Sort of like a perverted Robin Hood - Take from the Weak and Give to the Strong. You couldn't make this stuff up. It's not the RBNZ's fault, the forces are outside their control, but surely we can do better than this. Since they do understand the issues it would be nice if they could come up with some useful ideas instead of letting others structure the debate for them.
Yes, I know the idea of handing out dosh freely is wacky, but it gives a place to start. New ideas are subtle delicate things that often start out that way. We need a new way of looking at things and maybe this can help.
I guess it depends on how much you print, say you give everyone $100, that's not going to cause lots of inflation but it's also not going to make people richer. Say you hand out $10,000 each, that's going to significantly improve most peoples balance sheets, but will cause inflation. I wonder how much the Americans have printed per head of pop?
I'd be all for printing to build infrastructure, especially Auckland roads and public transport.
I suppose we could test it, print $100 each, watch inflation, if no major change, next month print $200 and so on.
""You could say the same for Working for Families in New Zealand and how it is helping to support very low wages in areas such as fast food and residential care."
Why don't we start looking at WFF and Top Ups in a different way, why don't we acknowledge who are the true beneficiaries of this welfare. It is employers who cannot/will not pay livable wages, it is landlords (often non resident foreigners) who ask far too much of someone's income for the roof over their heads, it is banks, (almost all foreign). Imagine a Belarussian applying to WINZ for the DPB, from Belarus! Let's look at it like that, for once and maybe we might be a bit more motivated to do something about it"It is employers who cannot/will not pay livable wages, it is landlords (often non resident foreigners) who ask far too much of someone's income for the roof over their heads, it is banks..."
You mean employers who create jobs...
You mean landlords who provide roofs over your heads...
You mean banks who's services you can choose, or not choose, to use...
Where would you be without those employers, landlords and banks... Penniless, homeless and without those shiny new toys you enjoy. How about you show some gratitude, if us employers are so bad why don't you start your own business and buy your won house.
That’s the problem with you ultra far left wing radicals; you want communism but you forget what an utter failure it was. Or you try and dress it up in another name. Employees get paid what they’re worth, if they work hard, up skill or get educated they are paid more. This is because they’ve earned it, key word being earned.
And yes, capitalism is a great thing, so long as it does not morph into corporatism as it is inclined to do
Once that process is at its max, for the general populace, the living is no better than big socialism as all the little fellah has to look forward to is working for the man, as and when the man says he will employ him/her
And in a system where small capitalism means that people can proceed in the manner of their choosing, so too can some band together in a socialist, cooperative way to do the same, in a small way, at the same time, maybe even next door to each other
Big is the enemy
#6 Hoose prices.
There is a Gordian knot here: a myriad of interlocking and mutually reinforcing factors. No use tackling any one alone.
- Zoning which by prescribing allowable uses, immediately causes price differentials either side of a squiggle on a map.
- TLA's benefit (with a time lag) in their revenue streams, as those squiggle-caused prices work their way into valuations. So are disclined to look any closer, let alone kill the Golden Goose which lays Rising Valuations.
- Any price rise anywhere (an outlier sale, a zoning change etc) immediately propogates to the locality: suburb, area, city, province in a diminishing ring of value effect as the circle gets wider.
- Any householder with suitably structured credit lines can cash up some increment of these value gains. Many do (ATM-bolted-to-house effect).
- Banks encourage this: more collateral = more credit availability = greater interest revenue streams.
- Land agents encourage the general rise in values: being commission-based, generally 2-5%, This promptly reinforces any general rise by cementing in recent-sales actual figures, on which everyone else in the loop relies.
- Builders benefit from higher prices for existing homes, as it allows them to build to the high end of the market. There's no profit in a 90-squares kit erection, compared to a 300 squares architect-designed mansion.
- Architects, now we mention them, are another Mr/Ms x% deal: the higher the general price level, the better their incomes get.
- Building suppliers, that cosy duopoly, benefit from the revamps, the new builds, and the ATM-on-house syndrome. New bathroom? Just draw down that revolving credit line and spend 'er at the nearest duopolist.
- ComCom is asleep at the switch, so there ain't no cavalry to ride in and Save anyone.
- Building regulation ( codes tightening, LBP's needed for practically everything, Elfin Safety up the wazoo on sites- it's a Very long list) all has Good Intentions, but a few grand here, a few grand there, pretty soon, it adds up to Real Munny. From the end customer's pocket, of course. That's what that there Credit Line is for.
- TLA's again, just to complete the loop (they, arguably, have set this whole mad shambles a-trundlin' down the track) clip the ticket to the tune of $75K per house/land package (Mike Greer, Press coupla years ago, Google it yer lazy sods). DC's fees, levies, consents, inspections. Nice racket.
- And all this is, of course wonderfully rounded off by the rise on average incomes which supports it all. Or not, as the case may be.
But when yez stands back and looks at the whole sorry picture, and asks oneself - Where ter Start? - well, it has to be said, there's no one action, no one sequence, and certainly no painless way to do much about any of it. And zero political will - there's too many voters would get badly burned - many of them the working class. After all, who puts up the scaff, staffs the duopolies, swings them hammers, transports stuff, induces hapless bank customers to extend their indebtedness, mines the steel, etc? S'not the 1%.
We'll just haveta let this runaway train hit the buffers at the end of the track.,
Because all tracks (Thomas excepted, perhaps) have Ends.
Ah, but When? (i did have a few ideas, but that was when I was optimistic...)
#9
If the world population is 6 billion, and say one third of them live in countries with a super fund, that is 2 billion people.
If 10% of the 2 billion people join a super fund that is 200 million people contributing, world wide, to a super fund. 200 million people paying money in week after week regardless of the state of the global economy.
If those 200 million people each pay an average of $1,000 per annum then that is 200 billion dollars going into the global supper funds annually.
After only 10 years you have a fund of 2 trillion dollars. But supper funds have been going much longer than that.
Add to this that they are all chasing bigger returns and what do you get?
A big fat ponzie scheme
#4 - Which came first, low wages or 'subsidies' such as WFF? Not arguing with the effects, but I imagine the sequence of events were:
1) Low wages
2) WFF introduced
3) WFF subsidation allows low wages to continue
In absence of WFF would we be any worse off? Remembering that prices charged (for rent, food etc) tend to the maximum that people can afford... I suspect without WFF we'd be earning less, but things would cost less too.
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