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Bernard's Top 10: Britain is now 'Landlord Nation' (NZ too?); Piketty compared to Marx and Smith; 'Abandon the defunct economists' models'; 'Build it and they will come'; Jon Stewart; Game of thrones; Dilbert

Bernard's Top 10: Britain is now 'Landlord Nation' (NZ too?); Piketty compared to Marx and Smith; 'Abandon the defunct economists' models'; 'Build it and they will come'; Jon Stewart; Game of thrones; Dilbert

Here's my Top 10 items from around the Internet over the last week or so. 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 #8 from Anatole Kaletsky.

 

1. Who would have thunk it? - A dry, wonky book about incomes and economic history from a French economist few had heard a year ago is currently the best selling book on Amazon.

Globally.

That shows what sort of impact "Capital in the 21st Century" by Thomas Piketty (which I haven't read yet), is having.

It's been reviewed by the FT's Martin Wolf here and by Paul Krugman here and New Zealand's very own Matt Nolan at TVHE here (spoiler it's only 20 pages long) Here's a more accessible version from Matt.

Piketty just finished a victory lap around Washington last week talking to advise the US Treasury, the UN and the IMF.

The book is even being compared to Adam Smith's 'The Wealth of Nations' and Karl Marx's 'Das Kapital'. Those are big 'raps' as an Australian rugby league commentator might say. ;)

Wolf has a thoughtful take on the book, which he described as extraordinarily important.

The most convincing argument against the ongoing rise in economic inequality is that it is incompatible with true equality as citizens. If, as the ancient Athenians believed, participation in public life is a fundamental aspect of human self-realisation, huge inequalities cannot but destroy it. In a society dominated by wealth, money will buy power. Inequality cannot be eliminated. It is inevitable and to a degree even desirable. But, as the Greeks argued, there needs to be moderation in all things. We are not seeing moderate rises in inequality. We should take notice.

2. Here's French Economist and Thomas Piketty in the flesh (or at least in video form).

 

3. Has the West fallen prey to crony capitalism? - That's the question Jeremy Warner from the Telegraph asks in this piece.

HT David via email.

Remember, this is a columnist for the business section of a very capitalist newspaper in a City that is the home of the world's bankers.

Around my area in north-west London, the housing market is again red-hot. The only stuff that doesn’t sell is the obviously undesirable or grossly overvalued. But here’s the more interesting thing about the latest boom: the vast majority of these sales, to judge by the “to let” signs that instantly go up as the “for sale” billboards are taken down, is for investment purposes – “buy-to-let” landlords, in other words.

If evidence were needed of the emergence of a new “rentier” class, London is surely it. Every man and his dog seem to be getting in on the act. By simply remortgaging an existing property and using the proceeds to buy the vacated flat down the road, you get yourself an apparently guaranteed source of income and capital growth.

In any case, growing rentier activity in the housing sector has become symbolic of a much wider complaint about the nature of modern capitalism, with wealth and income seeming to be ever more concentrated in the hands of a relatively small, privileged minority.

Without help from the “Bank of Mum and Dad”, it’s much harder to climb aboard the property ladder – traditionally the main source of wealth accumulation for most people – than it was, even allowing for present, ludicrously low mortgage costs.

Although his solution will be welcomed by the arch-capitalists who want to see a the 'too big to fail' subsidies removed and the supply side worked on. Fair enough.

If capital is taking an ever greater share of output, it is because of restrictions in supply, leading to excessive returns. The solution is not redistribution by government diktat, but a supply-side revolution.

4. Tightening credit home and abroad - China unleashed massive lending in 2009 and early 2013 to arrest slides in GDP growth, but as the chart below shows the credit growth was much faster than the resulting GDP growth, which is a recipe for rising debt/GDP ratios and a sign of inefficient (and bubbly) investment.

Now China is tightening both internally and for lending on projects overseas through the China Development Bank and the China Import/Export Bank, the FT's Henry Sender points out.
 

While speculation about credit tapering continues in the US, it is already happening in China – big time. And the consequences for parts of the rest of the world will be painful.

It used to be that one external adviser to China Development Bank would visit the bank almost every week to review up to half a dozen international projects. He would travel overseas in the entourage of the bank’s former head, Chen Yuan, until last year, receiving red carpet treatment everywhere. No longer. “The volume of international lending has dropped as much as 50 per cent,” this adviser calculates in reference to CDB.

There are other signs of the tightening. For example, a banker at one of the French banks in Hong Kong says the Chinese banks are asking foreign banks to play a greater role in financing Chinese exports, since they lack the liquidity to do so (although the Chinese banks would supply a guarantee to the foreign banks for the transaction). But many foreign banks are not keen to do that because they are nervous about increasing their counterparty risk to Chinese financial institutions, especially those below the level of the big state-owned banks.

 

5. Maybe there's actually plenty of Chinese consumption - Peter Cai writes at BusinessSpectator that China's consumption share may not be as low as some worry.

We should not be too surprised by China’s growing consumption as a share of GDP. China has been enjoying the strongest growth in consumer spending for at least the last few years compared to other major economies on double digits -- and this is according to IMF data.

So what is behind this increasing consumption share of GDP? The answer is actually quite simple: rising household incomes. This should come as no surprise to our readers, since we are seeing first hand the growing legions of Chinese tourists and students coming to Australia. They have the highest consumption per head of any group visiting our country.

6.  Don't hold your breath - Andy Xie is a breath of independent air on the subject of China. He's not confident that a big stimulus is coming.

Xie said many government officials were corrupt and only interested in advancing their own careers, so they propped up struggling businesses while banks let bankrupt companies continue.“Rich people usually get rich in China for doing something illegal,” he said.

He said steel inventories were way up, with overcapacity of up to 300 million tonnes.“The demand is coming from building more steel mills!” Xie said.“From what I can see, factories have been in trouble for a year.”Xie cautioned that the official economic figures coming out of China could not be trusted as correct, particularly when it came to the property market.He said China was facing a major property bubble, particularly in “tier three” cities of 2-3 million people where prices had doubled and tripled against no population growth.“It’s the biggest overbuilding we could ever imagine,” Xie said.

7. Build it and they will come - Larry Summers is continuing on with his warning about secular stagnation and the need for heavy government investment in infrastructure to get things going in this Boston Globe editorial.

The country that brought the world the Internet and continues to lead the globe in information technology has an air traffic control system that relies on vacuum tubes and where sticky pieces of paper are moved around on bulletin boards to track flights. Even leaving aside the safety risks, the costs in extra fuel consumption and unneeded delays are measured well into the tens of billions of dollars. Can it possibly make sense to wait until every repair person capable of working with vacuum tubes has died off to complete the renovation of this antiquated system?

I travel constantly. Calls to my office on my iPhone are less likely to drop driving from Beijing to its airport or from Almaty in Kazakhstan to its airport than driving from the airport into Boston, New York, or Washington. I know I’m not alone in experiencing such problems. Surely, at a time when US companies are holding close to $2 trillion in cash, earning next to nothing for balance sheets, we should be investing in improving this frustrating deficiency.

8. 'Stop following defunct policies' - Anatole Kaletsky writes at Reuters about the need for policy makers to throw off the chains of defunct economists.

As John Maynard Keynes observed in 1936, when he challenged the economic orthodoxies that were aggravating the Great Depression: “The ideas of economists, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.”

This remark is as relevant today as in 1936. Joseph E. Stiglitz, the Nobel laureate, asked rhetorically in Toronto: “Why are central banks and governments still trying to predict the effects of their policies with an economic model that is manifestly absurd?”

His answer was that the economic models studied in universities and published in leading academic journals are still largely based on a simplifying concept, known as the Representative Agent, which effectively assumes that “everyone in the economy is the same.”  So these models have nothing to say about lending or borrowing, ignore the existence of banks and treat bankruptcies as unimportant because “when the borrower does not repay, he only defaults on himself.”

Amazingly, these economic models with no banks are still the main analytical tool used by most central banks. Peeling away further layers of the theoretical onion reveals something even more bizarre: an inbuilt assumption that the economy is self-stabilizing. This means that virtually any policies the central bank may choose to follow will lead automatically to full employment — in the forecasts, if not in the real world.

9. Totally Jon Stewart on America's standoff with a farmers' militia. It is one nutty place.

 

10. Totally irrelevant made-up trailer for Game of Thrones. I laughed out loud a lot. Forgive me father, I am a Game of Thrones fan.

 

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3 Comments

#6

I am picking - indeed, hoping - that China will show us how to manage a crash.

Just let it reset.

Let the "greater suckers" learn the hard way.

Jail the guilty people in the rentier sector.

Let property become systemically affordable permanently, imposing new land taxes to replace the planning-gain-inflated land sales revenue that has been a principal source of government revenue.

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#3

Supply side solutions?

How about this one?  Just reduce the amount of interest expense available as a tax write down and this starts to even up the playing field in that match between investor and home hopeful. Only once that benefit reaches zero is there a balance. The question is where we will find politicians strong enough to action the balanced scenario.

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As a separate comment, note that the landlord with no financing (100% equity) is no worse off than now and it saves the taxpayer any cost of subsidising mortgages for home buyers which is the alternative balancing act. Applying this also to land banks, it would shift holdings into use and there may not even be a need for CGT as property prices would not rise much more than inflation.

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