Top 10 at 10: Reporting on the report card; Irish bank implosion; Robbing nations; Dilbert

Here are my Top 10 links from around the Internet at 10 to 12. I welcome your additions and comments below or please send suggestions for Thursday’s Top 10 at 10 to bernard.hickey@interest.co.nz 1. Scorecards - The New Zealand Institute has produced an online scorecard of New Zealand's economic and social performance. The link is here. Here's Rick Boven from the NZ Institute explaining the scorecard below in the video. Here's his text explanation. Introducing NZ Ahead from NZahead on Vimeo. Here's the results.

New Zealand’s highest grades are for life expectancy, educational achievement, and agriculture and forestry land per capita. These are New Zealand’s strengths, where New Zealand is consistently among the top 10 OECD countries. But none of these measures was graded A. Performance on life expectancy and educational achievement is very good but New Zealand has some disadvantaged segments within the population that suffer significantly worse results. And agriculture and forestry land per capita is very strong, but it has been declining quite quickly. Seven of the 16 measures are graded D, including three of the economic performance measures: Innovation and business sophistication, labour productivity, and household wealth. Grades of D are also given for two social measures: inequality and assault mortality, and for two environmental measures. Looking beyond the summary measures, there are three important patterns in the data. First, despite improvements on average in some social measures, New Zealand’s disadvantaged are not doing well relative to the disadvantaged people in other OECD countries. Second, relatively poor grades in innovation, labour productivity, GDP per capita, and wealth indicate that across the board economic performance must be improved. Third, New Zealand has important environmental strengths but environmental assets are being eroded, as they are for the world as a whole.

2. 'You listening John?' - Fran O'Sullivan in the NZHerald reckons John Key can't ignore this report.

If Kiwi parents want their kids to grow up in a more equal society where they have a good chance of getting a job and making it through the tough times without falling prey to youth suicide they have a choice: Go to Australia or take up the New Zealand Institute's challenge to do something about it. The NZ Institute's inaugural "NZahead" report card delivers a much-needed kick in the pants to Kiwis at all levels.

3. 'Not so fast' - Matt Nolan from Infometrics is more sceptical on the TVHE blog about Fran's response and the reportcard overall. I think a report card is a clever way to get the message across. But decisions still need to be made and political pressure applied. I'd like to be more positive, but it all seems academic when our Prime Minister is more focused on getting re-elected than reforming the country for the next generations.

This arbitrary call to arms on the basis that New Zealand is different to other countries is ridiculous. The goal should be to have the best society possible (based on the desire of New Zealanders) given our limited means. To do this we need to look directly at the costs and benefits on policies – instead of simply saying “we are behind Australia so something must be done”.

4. Deflation vs inflation - The debate about inflation vs deflation continues to rage. All the US money printing in 2008 and 2009 still hasn't been unwound, but US inflation is sliding. How come? Essentially US bank deleveraging and their inability or unwillingness to deploy all that printed money is more than enough to drive deflationary pressures, according to Charles Hugh Smith in his oftwominds blog. He points to this chart of an alternative 'Austrian' measure of US money supply showing growth is actually slowing. HT Fiona via email.

It seems the money "created" by the Federal Reserve and lent to private banks at near-zero interest rates is simply sitting in the banks as reserves to offset their continuing horrendous losses. As a result, it is not flowing into the economy, and thus it cannot trigger inflation. In contrast, a State such as Zimbabwe does run its printing presses to create money, and this explains why it suffers from hyper-inflation. It can be argued that the billions of dollars the Fed orders into existence and then trades for Treasury bonds (i.e. to buy T-Bills) is in fact "freshly created money" that flows into the economy via Federal deficit spending. True, but then the question becomes, do these purchases of Treasuries add enough to the $13 trillion U.S. economy to offset the reduction in credit as people and businesses either pay down debt or write off uncollectable/bad debt? According to the Wall Street Journal (Drought of Credit Hampers Recovery), consumer credit outstanding has shrunk some $119 billion, or 4.6%, from its peak in July 2008, to $2.46 trillion. Add in the mortgages paid down, paid off or written down in excess of new mortgages issued, corporate debt retired or written off, etc. etc., and it seems the deleveraging that is underway in both consumer and corporate balance sheets is reducing credit and money supply by hundreds of billions of dollars. The Fed purchasing $300 billion or even $500 billion in Treasury bonds simply doesn't pump enough money into a deleveraging $13 trillion GDP-economy to create inflation. It merely offsets some of the destruction of credit going on at every level of the economy.

Charles Hugh Smith then points to the obvious conclusion: a slide towards Japanese style stagnation. The interesting side effect for us is the carry trading that goes on as Japanese/US banks lend all this cheap money into other economies via carry trades. That may not be so easy now given liquidity restrictions that prevent banks from using these 'hot money' markets so freely.

Thus you can have a central bank shoveling credit-created money into private banks where it sits, never entering the economy at all. How can that create inflation? Indeed, as has often been noted by Mish and others, this is what has happened in Japan for the past two decades: the central bank shovels money into private banks, who either engage in "carry trade" activities (borrowing at near-zero interest and then moving the money overseas to earn a decent yield elsewhere for easy profits) or they stash the funds to offset their ongoing losses in defaulted/impaired portfolios. Those portfolios of impaired assets in Japanese, U.S. and European banks--just how much are they worth in a transparent "marked to market" setting? How many trillions of dollars in mortgage-backed securities, household debt, corporate debt and defaulted/impaired sovereign debt do these banks hold? If they had to sell those assets in an open market, how much would they fetch? How big would the losses be? Nobody knows, but we can guess the losses are easily in the tens of trillions of dollars. The accounts of banks keeping defaulted mortgages on the books are legion; Japan has played the "waiting for better asset prices" game for decades, and now U.S. banks are playing the same game: accepting interest-only payments of a few hundred dollars from homeowners as an accounting gimmick to keep the loan on their books as "performing."

He then concludes that this will make the US dollar strong, contrary to popular belief.

Since so much debt is dollar-denominated, then there will be demand for dollars to pay down debt. That is the essence of deleveraging. And since other assets will be falling as interest rates rise and risk aversion returns with a terrible vengeance, then "cash will be King." Dollars will rise in value, and the best and safest return on capital will be money-market funds or short-term notes. Rather than doom the dollar, these trends suggest the dollar could rise in purchasing power and demand for years to come. I know this is contrarian, but ponder the distinction between "printing money" and selling bonds/attempting to expand credit in a credit-averse, collateral-impaired system.

5. To rob a country, first own a bank  - Bill Black explains how to rob a bank and a nation. He is a former regulator who explains in detail the fraud going on inside the US mortgage system. He's no nutter. "The lenders deliberately gutted their underwriting standards." He has a great beard and speaks credibly about a systemic ponzi scheme and the changes in accounting standards that have hidden US$1 trillion in losses. And here's Part II 6. We're paying already - Here's the details of the payouts from the government (ie taxpayers like us...) to investors in Timaru-based Mascot Finance, thanks to The Timaru Herald.

Mascot Finance investors have received more than $67 million from the Government's retail deposit guarantee scheme. The Timaru finance company's 2511 investors had $65.2m in secured debenture stock and $3.3m in unsecured deposits when the company went into receivership in March last year. A Treasury spokesman confirmed yesterday that as of late last year, 2358 claimants had received $67m, 34 claims were being processed and an additional 41 had been received but not dealt with yet. Mascot has been in receivership for 12 months, and receivers Brett Chambers and Paul Munro now expect no funds will available to pay unsecured deposit holders, unsecured creditors, redeemable preference shareholders or ordinary shareholders.

7. Money scandal - The scandal around Securency, the joint venture partly owned by the Reserve Bank of Australia, is entering an interesting new stage. The Sydney Morning Herald reports that two executives from Securency have left after an audit report.

The damning audit found that Securency, which makes polymer banknotes used in Australia and 28 other countries, had paid almost $50 million in commissions and other payments since 2003 to a global network of politically connected agents. Accounting firm KPMG found that managers of Securency failed to follow legal advice on payments to agents, conducted poor due diligence before appointing agents, deliberately withheld information from the company's board and presided over a system where there was a "consistent lack of documentation". The managing director of Securency International, Myles Curtis, and company secretary John Ellery both left yesterday. Securency has been under investigation by an Australia Federal Police taskforce since May last year after The Age revealed its multimillion-dollar payments to foreign middlemen previously implicated in corruption scandals. The AFP is investigating Securency for allegedly bribing officials in countries including Nigeria, Malaysia and Vietnam where it paid millions of dollars to well-connected middlemen after being awarded banknote supply contracts.

The New Zealand angle here is that Securency makes the polymer material upon which our own bank notes are printed. Here's the executive summary of the KPMG report. New Zealand is not mentioned in it. 8. 'Truly shocking' -The losses uncovered overnight in the Irish banking system were "truly shocking", according to the Irish Finance Minister Brian Lenihan in this IrishTimes.com report.

“At every hand’s turn our worst fears have been surpassed,’’ he said. “Some institutions were worse than others. But the fact is that our banking system, to a greater or lesser extent, engaged in reckless property development lending,” In too many cases, said Mr Lenihan, there were also shoddy banking practices. “The banks played fast and loose with the economic interests of this country,’’ he added. Mr Lenihan said that the State’s previous regulatory system had failed abysmally, and it was right that the role of the regulator, the Central Bank and the Government was now the subject of an independent inquiry. “But the fact remains that senior figures in Irish banking made appalling lending decisions that will cost the taxpayer dearly for years to come,” he added.

9. Monster bailout - BeeJaysus! The Irish banking regulator has detailed what's needed to stabilise the Irish banking system and it's enormous. Essentially, the system is being properly nationalised. IrishTimes.com reports.

Irish banks require an estimated €22 billion to cover losses from soured property loans and this total may rise by a further €10 billion depending on the extent of impaired loans at Anglo Irish Bank, the Dáil was told today. The true scale of the “black hole” left in the sector by toxic property debt was laid bare today as Nama confirmed the initial tranche of bad loans would be acquired at a discount of 47 per cent, substantially more than the Government’s initial estimate of 30 per cent.

10. Totally irrelevant video - Jon Stewart does his thing with the US healthcare debate.

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
Health Care Slime Machine
www.thedailyshow.com
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