Top 10 at 10: 'Key's conservatism blocks reform'; US debt 'just like Pearl Harbour'; Dilbert

Here are my Top 10 links from around the Internet at 10am. I welcome your additions and comments below or please send suggestions for Friday's Top 10 at 10 to bernard.hickey@interest.co.nz 1. The forces of conservatism - Brian Fallow at the NZHerald hits the nail on the head with his column this morning on the government's fiscal position and John Key's apparent desire not to reform the economy.

The Prime Minister's statement leaves no doubt that his is a profoundly conservative Government and that what it is chiefly interested in conserving is its popularity. The changes outlined on Tuesday are fine as far as they go, but that is not very far. What is in prospect is a shift in the tax mix from income to consumption tax and an elimination of the top 38 per cent personal tax rate funded by a routine exercise in tax base maintenance around property investment. What is entirely missing is a substantial broadening of the tax base needed to fund deep cuts in tax rates, that is, to rates starting with a "2".

Fallow also points out why ringfencing of property losses is unlikely to make it into the May 20 budget.

This is not an option recommended by the Tax Working Group. And it was give short shrift by officials when they looked at it in 2006 when the search was on to find "mates" for monetary policy and take pressure off interest rates and the dollar. Ring-fencing would reduce the attractiveness of residential property investment, particularly for highly leveraged investors chasing capital gain, they said. But it would discriminate in an arbitrary way against a particular form of investment and depart from the sound principle that losses incurred in one activity can be offset against income from other activities in calculating a person's or firm's total income for tax purposes. And it would be too easy, especially for sophisticated investors, to find ways of burrowing under or pole-vaulting over the fence.

Fallow's final volley is telling.

"Some people want the perfect, shiny tax system," Finance Minister Bill English says. "We are dealing with the messy business of reality." There is no point in making tax changes that will not survive the next election, he says. Translation: The Government is not going to expend time and political capital making the case for more radical change to the tax system. And so a "broken" tax system joins superannuation and climate change in the too-hard bin.

2. 'We're not gloating' - 'We're just breathing a big sigh of relief.' This audio clip from Peter Aranyi at Empower Education is well worth a listen. Aranyi, a former political journalist turned property investment publisher, talks to Mark Withers, who wrote Property Tax - NZ Investor's Guide. They try their best not to sound like they're thrilled with the Prime Minister's apparent timidity towards taxing the property sector, but it's clear they're pretty happy. Lots of good insight and detail. By the way, we enjoyed this accidental juxtaposition of a story and an ad on this NZHerald story. HT Alex via IM. 3. Just like Pearl Harbour - Niall Ferguson (the guy behind Ascent of Money) has come out in his usually noteworthy way in an FT opinion piece and said US government debt is a safe harbour in the same way Pearl Harbour was a safe haven in 1941. It is a must read.

The idiosyncrasies of the eurozone should not distract us from the general nature of the fiscal crisis that is now afflicting most western economies. Call it the fractal geometry of debt: the problem is essentially the same from Iceland to Ireland to Britain to the US. It just comes in widely differing sizes. What we in the western world are about to learn is that there is no such thing as a Keynesian free lunch. Deficits did not "save" us half so much as monetary policy "“ zero interest rates plus quantitative easing "“ did. First, the impact of government spending (the hallowed "multiplier") has been much less than the proponents of stimulus hoped. Second, there is a good deal of "leakage" from open economies in a globalised world. Last, crucially, explosions of public debt incur bills that fall due much sooner than we expect. For the world's biggest economy, the US, the day of reckoning still seems reassuringly remote. The worse things get in the eurozone, the more the US dollar rallies as nervous investors park their cash in the "safe haven" of American government debt. This effect may persist for some months, just as the dollar and Treasuries rallied in the depths of the banking panic in late 2008. Yet even a casual look at the fiscal position of the federal government (not to mention the states) makes a nonsense of the phrase "safe haven". US government debt is a safe haven the way Pearl Harbor was a safe haven in 1941. Even according to the White House's new budget projections, the gross federal debt in public hands will exceed 100 per cent of GDP in just two years' time. This year, like last year, the federal deficit will be around 10 per cent of GDP. The long-run projections of the Congressional Budget Office suggest that the US will never again run a balanced budget. That's right, never.

4. Tobin tax - Actor Bill Nighy and Director Richard Curtis have launched their own campaign for a Tobin Tax on financial transactions. Here's the video , which is also on Youtube below. Nighy does nice line as a smug, squirmy banker from London. I remember talking to a lot like that when I was working as a banking reporter there in the early 2000s. 5. An Aussie Kiwibank - The talk about establishing an Australian government owned version of Kiwibank to keep the big four honest is gathering momentum. Christopher Joye at businesspectator.com.au has the detail on how the winds are shifting over the Tasman.

Take three juicy pieces of recent intelligence, and one major new scoop, which I can offer up exclusively today. First, we have arguably the best informed Australian commentator, Andrew Cornell at the AFR, advise us that Ahmed Fahour was spied having breakfast with his old rival, Cameron Clyne, only a week after assuming the top job at Aussie Post. Cornell went on to confirm a controversial Crikey story that the former senior Westpac executive, Mike Pratt, had advised the Rudd government that he thought Aussie Post could be a "politically interesting potential rival to the Big Four." According to Cornell, Pratt's counsel was "particularly insightful, and well received in Canberra." Indeed, Cornell further claims that Pratt's (notably unattributed) "˜thoughts' "were covered in this column in June last year." Next we have recent Fairfax hire Adele Ferguson punch out a column yesterday revealing that there are moves to establish a "˜covered bond' market here in Australia. People have been talking about this for ages. It sounds fancy, but covered bonds are actually quite simple. And they are certainly not a competitive panacea for non-bank lenders. More on that later. Finally, I have been given some potentially explosive information: very reliable Canberra sources tell me that Senator Stephen Conroy, who is Minister for Communications and overseer of Australia Post, has drafted up new legislation that will amend the Australian Postal Corporation Act 1989 to facilitate Aussie Post's entry into banking. Yes, that's right: the groundwork is being laid for the "˜People's Bank', whatever that actually means.

6. Cap and Dividend - Here's an interesting alternative to 'Cap and trade' method for the carbon credit market developing globally. It would get around a lot of the policing and lobbying issues currently be-devilling Cap and Trade.

In traditional cap and trade, the extra money we pay goes to companies who receive free permits. Under cap and dividend, by contrast, it flows into a not-for-profit trust. There it's divided into equal shares and wired to every American's bank account or debit card. This happens monthly and automatically. As the price of carbon rises, so do the dividends everyone receives. And no large bureaucracy is needed.

7. Deeper into the Euro crisis - 'Tyler Durden' at Zerohedge has a deep look at how a 20 billion euro liquidity crisis in European government debt markets could turn into a $1.6 trillon funding crisis for the global banking and bond trading system.

Now that some sort of Greek bailout is imminent, most likely in asset guarantee form, it is high time to evaluate the full impact of Europe's decision to jettison monetary prudence at the expense of patching a crumbling fiscal dam holding back trillions in bad investment decision cockroaches, accumulated over the years. Relying on a presentation by ML's Jeffrey Rosenberg1, we observe that by providing loan guarantees to the periphery, the core (Germany/France/Benelux) may have well destabilized the core problem for the Eurozone, namely a whopping €1.6 trillion (that's in euro) in total 2010 financing needs, a number which consists of €400 billion in 2010 bond maturities, €700 billion in rolling short term debt and €530 billion in combined 2010 fiscal deficits. Germany has just taken an acute liquidity crisis in the periphery, and courtesy of action we already saw earlier in Bund rates, has sown the seeds for a funding crisis of none other than the very heart of the Eurozone.

8. 'The emperor has no clothes' - Noted independent US banking analyst Chris Martenson has written a compelling post arguing that the United States seems to have no choice but to print money to fund its deficits, which are mostly about defence spending and social welfare benefits, rather than long term investment.

If we divide defense spending of $744 billion by projected individual income taxes ($1,121 billion), we find that 66%, two-thirds (!) of all such receipts, are consumed by defense spending. It pretty much goes without saying that a nation cannot be prosperous in the long run if it is spending two-thirds of its individual income tax receipts on defense expenditures. Of course, we've managed to hide this over the years by going deeper and deeper into debt, so most people are not directly aware that two-thirds of their April 15th contributions are mainly headed either overseas or into the coffers of defense contractors. Only 17% of our entire 2011 budget is going to go to nondefense spending, and the lion's share of that is for programs and hires that are already in motion or in place. 84% of all receipts are going to go towards mandatory spending in 2011. Let that sink in for a moment. 84%. Let me type that slowly: e.i.g.h.t.y. f.o.u.r. p.e.r.c.e.n.t. And 94% of all revenues are entirely consumed by mandatory spending plus the interest payments (also arguably "mandatory"). So no matter how much politicians say they want to "cut spending', rest assured that they have backed themselves into a very sharp corner. There's no maneuvering room left. In FY 2011 expenditures are slated to exceed revenues by 49%. Forty-nine percent. 49% (!). Okay, now I am scaring myself. Now matter how you slice these expenditures, they are unsustainable. Think of how intense the future budget battles would be if the government had to live within its means. Imagine if each wedge of the budget had to be shrunk by a third to bring expenditures in line with revenues. Politically, I just can't see this happening, which is why I continue to believe that every effort will be made to print our way out of the problem.

9. Tougher capital rules - Borrowers and lenders alike should be watching rules being written in international banking regulatory circles, which are likely to force banks to put aside more capital and use less leverage. That will either mean banks will have to lend less or charge more. It's all part of the global de-leveraging process. Here's what the Sydney Morning Herald's Eric Johnston is reporting from the big central bankers conference in Sydney that has just finished. Our Alan Bollard was there too.

THE world's top central banker, Jaime Caruana, has a message for Australian banks: prepare for tougher rules, whether you like it or not. For months Australian banks have argued they should not be subject to the full impact of planned global reforms aimed at making banks safer, because they did not suffer the same problems of their rivals around the world in the financial crisis.

CBA boss Ralph Norris said yesterday he hoped Australian banks wouldn't be punished for the failures of banks oop north.

''While I accept there is need for regulatory reform we must be careful that Australia, which has a healthy banking scheme and an effective and a well managed regulatory regime, is not materially disadvantaged by changes driven by poor practices in the northern hemisphere,'' Mr Norris told analysts. But Mr Caruana, general manager of the Swiss-based Bank for International Settlements, said Australian banks could not expect to be quarantined from changes taking place across the global system. The interconnected nature of bank balance sheets and common lending exposure meant the entire financial sector was responsible for its own stability, he said during a Melbourne Centre for Financial Studies lecture. ''I agree some institutions were weak. Some institutions were at the centre of the problem, but this is a global thing that demonstrates that there was a global issue that needs to be addressed.''

10. Totally irrelevant video - Jon Stewart at The Daily Show on the mess in Washington. And it's not the snow.

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