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 #2 looking at the risks around foreign borrowing by companies and banks in China.
1. The coming climate crash - This op-ed in the New York Times by former US Treasury Secretary Henry Paulson (also a senior Republican and big time Goldman Sachs big wig) is fascinating.
Contrary to his mostly denialist Republican colleagues, Paulson has called on America to finally take climate change seriously.
He compares the 'carbon bubble' with the 'credit bubble' that built up to such an extent that it eventually caused the Global Financial Crisis.
This is where Paulson has some experience.
He was the crisis manager in charge of the US economy (along with Ben Bernanke) in those hours and days and months when the global financial system came perilously close to collapse.
He's now saying that climate change presents the same type of risk and it's time for a carbon tax.
It's an interesting new twist and will hopefully make a few Americans (and maybe even a few Australians) face up to reality.
When the credit bubble burst in 2008, the damage was devastating. Millions suffered. Many still do.
We’re making the same mistake today with climate change. We’re staring down a climate bubble that poses enormous risks to both our environment and economy. The warning signs are clear and growing more urgent as the risks go unchecked.
This is a crisis we can’t afford to ignore. I feel as if I’m watching as we fly in slow motion on a collision course toward a giant mountain. We can see the crash coming, and yet we’re sitting on our hands rather than altering course.
2. Keep an eye on China's US dollar borrowings - The broad consensus is that China is less vulnerable to a Thai or South Korean style financial crisis because its banks and companies haven't borrowed much from the rest of the world and China has over US$4 trillion worth of foreign reserves.
But Gwynn Guilford points out via Quartz that is changing rapidly and the Peoples Bank of China doesn't have nearly the same amount of control over China's capital account that it did a couple of years ago.
China’s external debt is exploding. The $38 billion in foreign-currency loans that Chinese companies had borrowed from US, European and Japanese banks in the fourth quarter of 2012 had multiplied to nine times that amount by that same quarter in 2013—to more than $349 billion, according to the most recent data from the Bank for International Settlement (BIS). Counting claims by Hong Kong banks, those debts now easily exceed $1 trillion (pdf, p.5).
This is scary-sounding stuff. Just the phrase “external debt” evokes Argentine sovereign debt default, a Thai-style currency crisis or the litany of other catastrophes that occur when emerging-market economies borrow too much abroad.
But many argue that, thanks to its $3.95 trillion in foreign-exchange reserves and its closed capital account, China needn’t worry about such problems.
Those arguments make sense. Unlike other emerging-market countries, China doesn’t need those foreign currencies to finance trade or overseas investment. It borrows because those foreign loans are an easy source of the money that China’s financial system needs to keep banks lending to each other, preventing unprofitable Chinese companies from defaulting—and thereby allowing China’s leaders to promise 7.5% GDP growth this year.
But just as China’s relationship with external debt is different from other emerging-market countries, so too are its risks.
While rising torrents of foreign borrowing keep its system liquid, they have also left China’s central bank with less control over the financial system than it had just two years ago. And that reliance on foreign borrowing makes the country much more vulnerable to a liquidity seize-up than many—including China’s leaders—realize.
3. Here comes Unionpay? - This BusinessSpectator profile of UnionPay's expansion plans in Australia is a useful primer. Unionpay is the Chinese state-owned company competing with Visa and Mastercard.
4. Youth and inequality - This OECD report out this week was a fascinating look at who have been the winners and losers out of the Global Financial Crisis.
The young lost the most. The elderly did best, particularly in New Zealand, as the OECD pointed out (in bold).
Over the four years since the onset of the crisis, young people (aged 18 to 25) suffered the most severe income losses, while elderly people (over 65) were largely shielded from the worse effects of the crisis (Figure 7).
Across the OECD countries, average household disposable income fell in real terms by around 1% per year among youth and by 0.7% among prime-age adults (i.e. those aged 26 to 65). Meanwhile, among the elderly (i.e. those aged over 65) real household disposable income increased by 0.9% per year, on average. Significant income losses among the youth took place in Greece, Iceland and Ireland, with large declines also recorded in Spain, Estonia, Portugal, Hungary and the Netherlands.
Elderly people benefitted from significant income gains in both New Zealand and the Slovak Republic (around 4% per year).
5. Boomerang kids - This New York Magazine piece on kids who come home to live is an interesting sign'of'the times piece from the United States.
One in five people in their 20s and early 30s is currently living with his or her parents. And 60 percent of all young adults receive financial support from them. That’s a significant increase from a generation ago, when only one in 10 young adults moved back home and few received financial support.
The common explanation for the shift is that people born in the late 1980s and early 1990s came of age amid several unfortunate and overlapping economic trends. Those who graduated college as the housing market and financial system were imploding faced the highest debt burden of any graduating class in history.
6. Political polarisation and inequality - Rajashri Chakrabarti and Matt Mazewski write about their research linking income inequality to political polarisation in this piece in Liberty Street Economics.
The chart below includes a measure of polarisation (the red line) and the income share of the 1%.
In this post, we present evidence that political polarization—or the trend toward more ideologically distinct and internally homogeneous parties—is not a recent development in the United States, although it has reached unprecedented levels in the last several years. We also show that polarization is strongly correlated with the extent of income inequality, but only weakly associated with the rate of economic growth.
Another possible channel by which polarization might drive inequality involves financial regulation. Asymmetric polarization associated with a shift of the political center of gravity to the right can lead to lighter regulation of finance, which in turn may lead to rising incomes for individuals in the upper tail of the income distribution.
The subject of income inequality has gotten a great deal of attention in the media over the past several months, and polarization and gridlock have been features of the American political landscape for years. We can confirm that polarization has increased over the past thirty-five to forty years, and that it has done so in an asymmetric way, with Republicans moving further from the center than Democrats. And while we find that polarization is only weakly associated with growth, we find a robust association between a widening ideological gap and income inequality.
7. Regulation, technology and inequality - Dean Baker muses here at CEPR about the unfairness of Uber and Lyft essentially using their regulatory freedoms to make money at the expense of the regulated.
It's a good challenge to the overwhelming sympathy for the likes of Uber and Airbnb.
It is worth considering this issue in light of the larger issue of the growing inequality we have seen over the last three decades. Uber, like Amazon, has allowed a small number of people to become extremely rich by evading regulations and/or taxes that apply to their middle class competitors. Amazon and other Internet-based retailers have used their tax advantage to put tens of thousands brick and mortar stores out of business.
This is a pretty simple story. In a country where rules are enforced or not enforced to benefit the rich and screw the middle class, you will have increasing inequality and a middle class that is seeing few of the benefits of economic growth.
10. Totally a parody video about Frozen. My daughter is right into it. It's the memories I dread...
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