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Bernard's Top 10: When will the central banks have to cancel the bonds they bought?; Labour swaps Keynes for Piketty; The negative yields fallout; John Oliver; Clarke and Dawe; Dilbert

Bernard's Top 10: When will the central banks have to cancel the bonds they bought?; Labour swaps Keynes for Piketty; The negative yields fallout; John Oliver; Clarke and Dawe; 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 is #7 on the meaning of the new age of machines.

1. High debts + ageing populations = slow growth - That's the conclusion of the IMF in a recent report highlighted by the always excellent Ambrose Evans Pritchard at the Telegraph.

He wraps in the implications for the Greek crisis, which is symptomatic in many ways of the worst outcome of those two trends.

He then talks about the risk of a 'super taper tantrum' when (or is that if) the Federal Reserve finally starts putting up interest rates.

His conclusion is a little concerning.

What if the debt was never repaid, he asks.

I can see a debate in decades to come about how central banks will have to cancel or forgive all these Government bonds they bought.

Here's Ambrose:

A baby boom and surging work-force enabled us to grow out of debt in the 1950s and 1960s without noticing it. No such outcome looks plausible today. The IMF's World Economic Outlook describes a prostrate planet caught in a low-growth trap as the population ages across the Northern Hemisphere, and productivity splutters. Nor is this malaise confined to the West. The fertility rate has collapsed across the Far East. China's work-force is shrinking by three million a year.

The whole world has been drawn deeper into a Faustian Pact. Total public and private debt levels have reached a record 275pc of GDP in rich countries, and 175pc in emerging markets. Both are up 30 points since the Lehman crisis.

Nobody knows for sure whether this is benign, or how it will end. The haunting fear for the lords of global finance at IMF headquarters this year is that it may never be repaid. Caveat Creditor.

The report warned of a “persistent reduction” in the global growth rate since the Great Recession of 2008-2009, with no sign yet of a return to normal. “Lower potential growth will make it more difficult to reduce high public and private debt ratios,” it said.

2. Out with Keynes and in with Piketty - John Cassidy's preview of the British general election on May 7 is well worth a read. He highlights the Labour Party's apparent poll success by targeting the rich with higher taxes, particularly on mansions, but also its pledge for fiscal balance.

In signalling its break with Keynes, the Labour Party has not undergone a big shift to the right, and it would also be a mistake to conclude that its progressive tax-and-spend policies have been discredited. To the contrary, in eschewing the free lunches (or cheap lunches) that deficit financing might offer, Miliband and Labour have nonetheless adopted an explicitly redistributive policy agenda.

They propose to tax the rich in order to pay for initiatives like expanding day care, reducing university-tuition fees, and hiring tens of thousands more doctors and nurses for the N.H.S. While Keynes was being unceremoniously booted out the front door of Labour’s headquarters, Thomas Piketty was being ushered in through the side entrance.

3. Megacities galore - Bloomberg reports on a fresh OECD study showing there's actually 15 'mega-cities' in China with more than 10 million people each, not the six previously thought. That's good news on the whole for New Zealand.

China is urbanizing at a staggering rate—in 35 years, it has added more than 500 million people to its cities. As a result, it looks like the world has vastly underestimated the size and scope of growth in China's megacities, defined as those with more than 10 million people, according to a new report by the Paris-based Organization for Economic Cooperation & Development.

The research used analysis based on functional urban areas, rather than cities defined by administrative borders. Besides such better-known places as Shanghai, Guangzhou, and Beijing, the new list includes Harbin, a northeast city with a renowned annual ice and snow sculpture festival, and Nanjing, a former capital city that sits on the Yangtze River. 

4. Why CEO reform failed - The New Yorker's James Surowiecki takes a look at why attempts to reform CEO pay in the United States failed. See #8 below for the contrast.

Executive compensation dipped during the financial crisis, but it has risen briskly since, and is now higher than it’s ever been. Median C.E.O. pay among companies in the S. & P. 500 was $10.5 million in 2013; total compensation is up more than seven hundred per cent since the late seventies.

There’s little doubt that the data for 2014, once compiled, will show that C.E.O. compensation has risen yet again. And shareholders, it turns out, rather than balking at big pay packages, approve most of them by margins that would satisfy your average tinpot dictator. Last year, all but two per cent of compensation packages got majority approval, and seventy-four per cent of them received more than ninety per cent approval.

5. US$229 billion - Someone needs to do a cost-benefit analysis of America's gun laws. Mother Jones reckons the cost of permissive gun laws is is US$226 billion.

I can never work out why New Zealand doesn't promote itself more as a relatively gun-free destination for tourists and migrants.

6. What negative yields actually mean - The WSJ has had a useful look at how Europe's negative yields are affecting banks and insurers in the long run. It's not good.

Tumbling interest rates in Europe have put some banks in an inconceivable position: owing money on loans to borrowers. At least one Spanish bank, Bankinter SA, the country’s seventh-largest lender by market value, has been paying some customers interest on mortgages by deducting that amount from the principal the borrower owes.

The problem is just one of many challenges caused by interest rates falling below zero, known as a negative interest rate. All over Europe, banks are being compelled to rebuild computer programs, update legal documents and redo spreadsheets to account for negative rates.

7. The robots are coming - The commentary around the effects of new technology on jobs and wages is heating up in Europe and the United States. It's not all positive, as this New York Times piece shows.

But computers do not just replace humans in the workplace. They shift the balance of power even more in favor of employers. Our normal response to technological innovation that threatens jobs is to encourage workers to acquire more skills, or to trust that the nuances of the human mind or human attention will always be superior in crucial ways. But when machines of this capacity enter the equation, employers have even more leverage, and our standard response is not sufficient for the looming crisis.

Machines aren’t used because they perform some tasks that much better than humans, but because, in many cases, they do a “good enough” job while also being cheaper, more predictable and easier to control than quirky, pesky humans. Technology in the workplace is as much about power and control as it is about productivity and efficiency.

8. Peak wages - Yet again the US economy seems to be under-performing all the grand expectations of a strong bounce back this year.

Maybe the fact that wages for most workers remain well below their early 1970s levels in real terms is the reason, the WSJ reports.

By one measure, wages for most U.S. workers peaked more than four decades ago.

Adjusted for inflation, average weekly earnings for production and nonsupervisory employees–the bulk of the workforce–topped out in October 1972, according to the Labor Department. In today’s dollar, that weekly paycheck was the equivalent of about $811, compared with just under $703 a week last month.

Data released Friday showed real average hourly earnings for production and nonsupervisory employees fell a seasonally adjusted 0.1% from February to March, and real average weekly earnings decreased by 0.4%, underscoring soft wage gains during this recovery.

9. Totally Clarke and Dawe on Australia's Budget dramas.

10. Totally John Oliver poking fun at America's IRS.

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25 Comments

Good selection Bernard. Now test your personality change here

Test Your Personality Based On Your Facebook Posts
http://www.huffingtonpost.com/2014/06/12/facebook-five-labs_n_5485489.h…

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Re 1 Funny how the IMF daren't say the blindingly obvious. If, for example, Japan has a very large government debt in its own currency and owed to its own citizens paying 0% interest, that is exactly the same financially as just buying the debt and cancelling it. Surely that is obvious to anyone with any accounting or bookeeping ability.

Oh, sorry I forgot, the idiots at the IMF are economists who have no accounting knowledge whatsoever, that's why they think balance sheets don't matter. The key criterion dividing those who saw the GFC coming and those who did not was that those who understood balance sheets knew that they mattered, a lot.

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Well obviously anyone who thinks that infinite growth is possible on a finite planet has the forecasting ability of a yeast bacteria, so I no longer expect much.

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Oye Interest.co.nz team - what happened to the interest charts sections? Can no longer view me favourite selection of swap and mortgage rates and i miss them. Thanks!

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"IMF's World Economic Outlook describes a prostrate planet caught in a low-growth trap as the population ages across the Northern Hemisphere, and productivity splutters. Nor is this malaise confined to the West. The fertility rate has collapsed across the Far East. China's work-force is shrinking by three million a year."

The introduction of robots may in fact be a boon to the aging societies of Europe and Japan, because the workers displaced by industrial robots will be freed up to work in the burgeoning "industry" of aged care. Problem being is that the vast majority of global "savings" are held by multinational financial institutions who will continue to demand their "pound of flesh" from the prostrate governments still slavishly devoted to phony, neoliberal bureaucratic Capitalism.

Because of the beggar thy neighbour economic policies perpetuated by financial elites, which have been designed to undermine the labour share of GDP, only the Upper Middle Classes have the wherewithal to provide for their own retirement.

This is why economic commentators are campaigning to raise the retirement age, because they hope we'll all die before we're entitled to withdraw money from our retirement accounts (SuperFund/Kiwisaver)

When retirees withdraw start liquidating money from their accounts, the financial institutions will have to liquidate their investment positions in the markets. The problem isn't lack of money, its financial interests who are disgruntled at how the retirement of the babyboomers will be disruptive of the financial markets.

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It's never about the stock (amount of money) its always about the flow.

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This Is Nuts——$5.3 Trillion Of Government Bonds Now Have Negative Yields

http://davidstockmanscontracorner.com/this-is-nuts-5-3-trillion-of-gove…

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Andrewj, financial markets don't care about yield anymore, its all about valuation and capital gain. Even a infinitesimal gain is a massive payoff purely because of the tremendous volume of assets they have under management. What? You think they are managing the funds in the interests of their investors? Haha. As long as they get their lavish bonuses and the value of their stock options rise because of QE they are grinning like John Key er. a well fed Cheshire cat

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Re: 7
Disturbing doco about robots taking over:

https://www.youtube.com/watch?v=7Pq-S557XQU

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Disturbing and utterly crazy, who will buy the products the robots make? The robots?

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I'm not %100 sure this view of the future will be true. Remember we were all supposed to be living on the moon by now! I wonder what will happen when the first automated car made by Toyota corporation crashes killing a crossing full of school children how long it will take for the novelty to wear off. Machines allways break down, wear out, need upgrades.
Companies need to get back to valuing people, or we will be creating economies that eat themselves.

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#5 We are not a relatively gun free country, around 1.2 million firearms have been sold into nz. We have a different culture around their use that is all.

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regarding 1. Low interest rates have created a world where risk is not correctly valued, and speculative investment has taken over from investing in real businesses.
regarding 7. Robots don't have disposable income to purchase the goods they produce. i.e. if robots create high unemployment, then less people will be able to buy the goods they produce. Will there be a future backlash against technology?

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Will there be a future backlash against technology?

Yes, indeed. The wonders of modern technology have enabled a bureaucratic burden of truly Byzantine complexity. Great civilisations die of strangulation in just this way. For instance, a friend was quoted $65000 to create two sections from one large one on an industrial estate. Surely in 1915 it would have cost the equivalent of $75 to draw a line on a map.

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#5. I am working with an American in regards to my technology at the moment and he frames the firearms situation in a different light, closer to what the writers of their constitution envisaged. He says the USA firearms owners are the largest standing army in the world and they keep them are protection from oppression from their own government.

Can you use this for something Bernard? https://soundcloud.com/user697294118/radio-ad-investment-in-nz

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Being anti-gun is just one of those dogmas of the loonie-left religion. They like to forbid, ban, punish. There is no actual thinking behind it, just a profoundly negative view of the world and other humans.

Of course the US constitution provides the right to bear arms as a last ditch guarantee of individual freedom. Having lived through the armed oppession by the Britsh government exercised in the years before independence, Americans have since distrusted state authorities. NZ on the other hand has a nanny state tradition.

In much of the rest of the world, only criminals carry arms, yes. And you and I can wait for the cops to show up in case we need to defend ourselves. Good joke, isnt it?

@BH: NZ has one of the highest murder rates in the world. Do you want to promote that, too? People kill people, not guns.

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Frankly guns in the hand of the in-competent, lazy and mentally un-stable is a BAD idea and frightening. If nanny state means less inequality, then yes I am all for it, I want to live in a society that all ppl feel they have a share in and I dont have to pack a dangerous item every time I go out.

Murder rates you appear to be talking utter rubbish, NB- 10,000+ odd Americans die each year from guns that should tell you something about too easy access is bad idea. and no NZ does not have one of the highest murder rates it has one of the lowest, 0.9 out of 100,000 and 197th out of 218. We are also less than Australia yet they have far tighter gun laws.
http://en.wikipedia.org/wiki/List_of_countries_by_intentional_homicide_…

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and there is a large % of Americans who frankly wouldnt get a FAL in NZ as they are mentally unstable!

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No offense, but this comment reads a bit disturbed, too. How many Americans do you even know?

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reading the forums, like gunboards.com, ar15.com etc. Personally I'd class anyone who's prepared to shoot the police as they were coming for his guns of dubious sanity myself.

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Well how you deal with the mentally unstable is quite a separate issue to access to firearms. You don't want them getting access to any weapon. But I guess the other way to deal with them is sign them up, give them a uniform, give them a gun and train them how to use it so they become a tool of the real psychopaths, the politicians :-P

Actually the issue is more one of the portability and ability to conceal of hand guns. If you separated the deaths out into firearm type you will get a new perspective on the issue. One of the big changes to New Zealand firearms protocols is that you must demonstrate the ability to lock them away when not in use to obtain a license. There are two reasons for this. Firstly the time taken to unlock and then load up a firearm gives a person time to reflect on their behaviour and less prone to a rash decision. Second is if they do elect to use it then it shows a clear case of intent, much easier to prove the homicide was culpable rather than non culpable homicide(manslaughter).

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LOL....

I think there is a window, something like 2minutes? before "panic" or anger is superseded by rational thought. Ergo taking several minutes to get at your gun, its ammo and the bolt/mag exceeds that window.

As a parent Ive used this technique. When my teenage kids get OTT I walk away for 2+minutes so we both cool down enough to be rational.

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"What if the debt was never repaid, he asks."

In the UK this discussion started already years ago i.e. for the so-called government to simply not pay back the money the BoE borrowed it and which in turn had been printed out of thin air.

Ireland is supposed to pay back principal on its EU bail-out starting in 2050 or so. This is also a form of effective debt forgiveness. Inflation muches away the principal and come 2050 nobody will even dream of asking for the money.

Greece, last but not least, already got debt forgiveness to the tune of an unimaginable 200 billion Euros, and the politicos and banksters of the EU will find ways to gift them more.

All of a sudden investing in a property in AKL does not look so "irrational", does it? Among the blind, the one-eyed ...

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Investing in Auckland is still irrational when there are much better investments out there, Auckland is not the only place in NZ, nor is NZ the only place in the world.

In the land of the blind, the blindest man is king, nobody wants to listen to the one eyed man telling about things they can't even see. In fact the one eyed man will be lucky if they don't kill him out of pure rage and jealousy.

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Fine, so what do you suggest?

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