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Top 10 at 10 to 11: Chermany's deluded logic risks 1930s style trade wars; Aussie houses unaffordable for young; Dilbert

Top 10 at 10 to 11: Chermany's deluded logic risks 1930s style trade wars; Aussie houses unaffordable for young; Dilbert

Here are my Top 10 links from around the Internet at 10 to 11. I welcome your additions and comments below or please send suggestions for Friday’s Top 10 at 10 to bernard.hickey@interest.co.nz Today is a bit of a China-US trade tensions special, apart from the doozy on Aussie house prices at the bottom. Our website does worky. Dilbert.com 1. Compulsory reading - I don't often say something is a must read, but this piece from Martin Wolf in FT.com is a must read, I reckon. He has summed up the global trade and capital flow tensions in a single brilliant piece. He essentially says that German and China are deluding themselves if they think they can continue to run trade surpluses and pseudo-fixed exchange rates. Wolf says Germany and China seem to expect the deficit countries to deflate their way back to competitiveness in a brutal way that will inevitably rebound on global trade through 1930s style politically driven trade wars. His logic is compelling and this piece sheds a bright light on the growing tensions between the trade surplus countries and the rest.

Both believe that their customers should keep buying, but stop irresponsible borrowing. Since their surpluses entail others’ deficits, this position is incoherent. Surplus countries have to finance those in deficit. If the stock of debt becomes too big, the debtors will default. If so, the vaunted “savings” of surplus countries will prove to have been illusory: vendor finance becomes, after the fact, open export subsidies. I am beginning to wonder whether the open global economy is going to survive this crisis. The eurozone may also be in some danger. Last week’s interventions by Wen Jiabao, China’s premier, and Wolfgang Schäuble, Germany’s finance minister, illuminate these dangers perfectly. Behind all this is a fundamental divide. Surplus countries insist on continuing just as before. But they refuse to accept that their reliance on export surpluses must rebound upon themselves once their customers go broke. Indeed, that is just what is happening. Meanwhile, countries that ran huge external deficits in the past can cut the massive fiscal deficits that result from post-bubble deleveraging by their private sectors only via a big surge in their net exports. If surplus countries fail to offset that shift, through expansion in aggregate demand, the world is inevitably caught in a “beggar-my-neighbour” battle: everybody seeks desperately to foist excess supplies on to their trading partners. That was a big part of the catastrophe of the 1930s, too. In this battle, the surplus countries are most unlikely to win. A disruption of the eurozone would be very bad for German manufacturing. A US resort to protectionism would be very bad for China. Those whom the gods wish to destroy, they first make mad.
2. Tensions grow - Relationships between China and foreign businesses are starting to sour, report Andrew Browne (who I used to work with at Reuters) and Jason Dean from the Wall St Journal. This is ominous. The last thing we need is trade restrictions popping up all over the place. The following details suggest all is not well in relations between China and America on the ground, where it matters.
Interviews with executives, lawyers and consultants with long experience in China point to developments they say are making it much harder for many foreign companies to succeed. They say the changes suggest Beijing is reassessing China's long-standing emphasis on opening its economy to foreign business -- epitomised by the changes it made to join the World Trade Organisation in 2001 -- and tilting toward promoting dominant state companies. Next week, the American Chamber of Commerce in China is coming out with a new survey of its members that is expected to document a downturn in sentiment. Technology executives say they are highly concerned about government procurement rules issued late last year that would favour local suppliers who have "indigenous innovation". The rules, if implemented, could limit foreign access to tens of billions of dollars in contracts for computers, telecommunications gear, office equipment and other goods. Patent rules imposed on February 1 threaten to increase costs in China for foreign innovators in industries such as pharmaceuticals, and let authorities force foreign drug companies to license production to local companies at state-set prices. Executives in several industries say the liberalisation spurred by China's WTO entry is stalling. Foreign makers of wind turbines and solar panels say they are being shut out of big renewable-energy projects. Regulatory barriers effectively cap participation in insurance: Foreign companies had just 4.7 per cent of China's life-insurance market as of June, and 1 per cent of its property and casualty market, according to PricewaterhouseCoopers. "I am pro-China and I am in favour of doing business in China, but I have some serious concerns about what has been happening in the last year," says Fraser Mendel, an attorney with US law firm Schwabe, Williamson & Wyatt.
3. This could get ugly - Meanwhile a bunch of US senators have introduced a bill declaring China a currency manipulator, the Chronicle reports. This could trigger US trade duties. Lovely. Check out the rhetoric below.
Arguing that the Treasury Department has failed under successive administrations to combat China's policy of artificially pegging the yuan at low values against the dollar, the bill would compel the department to make such a determination. This could result in import duties. The introduction of the legislation by Sens. Charles Schumer, D-N.Y., Lindsey Graham, R-S.C., Debbie Stabenow, D-Mich., and Sam Brownback, R-Kan., follows Chinese Premier Wen Jiabao's rejection earlier this week of any move to increase the value of the yuan. Schumer said the U.S. was “fed up” with Beijing after years of discussion had failed to produce any significant change on the issue of China's currency valuation. “We have the upper hand, we just refuse to use it,” Schumer said. “China needs the U.S. market more than we need anything from China, and it is about time we took some real action,” Schumer said. “We're here to do it.”
4. Angels and Demons - Foreign Policy Editor Christina Larson writes at Time Magazine about how the US-China relationship might develop in coming years. She sits on the fence, but it's an interesting view from on high.
China will continue to flex its muscles and pursue its interests — including seeking oil, timber and mineral resources in far-flung corners of the globe as it strives to maintain high growth — in ways that will at times unsettle Americans. Yet the U.S. is not seeking to contain China's rise, nor can it feasibly do so. The real challenge for Washington will be structuring a relationship that encourages China to support the global commons that it benefits from. That will require our leaders to manage the complex partnership in a clear-eyed manner and not be consumed by the temptation to either coddle or demonize the world's next superpower.
5. Float it - Now the World Bank is calling on China to let its currency strengthen, Reuters reports.
The World Bank raised its 2010 growth and inflation forecasts for China and recommended a tighter monetary policy as well as a stronger exchange rate to restrain inflation expectations and asset bubbles. As for the yuan, a stronger exchange rate would help dampen inflation pressure by lowering the price of imports and toning down demand. It would also help rebalance China's growth toward services and consumption and away from industry and investment. "Over time, more exchange rate flexibility can enable China to have a monetary policy independent from U.S. cyclical conditions, which is increasingly necessary," the report said.
6. Big, big bubble - China is in the midst of its biggest bubble in history, says James Rickards, former general counsel of hedge fund Long-Term Capital Management in this Bloomberg report. HT Troy Barsten via email.
The Chinese central bank’s balance sheet resembles that of a hedge fund buying dollars and short-selling the yuan, said Rickards, now the senior managing director for market intelligence at McLean, Virginia-based consulting firm Omnis Inc. “As I see it, it is the greatest bubble in history with the most massive misallocation of wealth,” Rickards said at the Asset Allocation Summit Asia 2010 organized by Terrapinn Pte in Hong Kong yesterday. China “is a bubble waiting to burst.” Rickards joins hedge fund manager Jim Chanos, Gloom, Boom & Doom publisher Marc Faber and Harvard University professor Kenneth Rogoff in warning of an overheating and potential crash in China’s economy following a rally in stocks and property prices. The government has raised lenders’ reserve requirements twice this year to cool an economy that grew at the fastest pace since 2007 in the fourth quarter.
7. Yuan undervalued - Even the Economists' now famous BigMac index says China's exchange rate is overvalued. A Big Mac costs US$1.83 in China, while it costs US$3.58 in America. Meanwhile, a Big Mac here costs NZ$4.90 or US$3.52 at current exchange rates, which means our exchange rate is about right. 8. The bloody cheek - Now the Chinese are urging US multinationals to lobby the US government to stop trade sanctions, the FT reports. Cheeky buggers.
Yao Jian, a spokesman at the Chinese commerce ministry, said that some companies had already been lobbying against recent restrictions on Chinese imports to the US and he hoped this would increase. “We hope that US companies in China will express their demands and point of views in the US, in order to promote the development of global trade and jointly oppose trade protectionism,” he said. The comments came as the political heat surrounding China’s currency policy intensified in Washington.
9. Finally an Australian newspaper says it - Australia's housing market is overvalued and woeful affordability is going to make the young there very grumpy. Sound familiar? Tim Colebatch from The Age reports. HT Hugh Pavletich via email.
Rising prices may be good for those of us who own homes - but far less than we assume. And they are not good for ''us'' as a society. Let's be blunt. No social change in recent times has done more to make younger Australians worse off than the waves of house price rises since late 1987, when Labor restored the tax break for negative gearing. If rising house prices make you and me as homeowners better off, they make our kids worse off. It's a zero sum game: we win, they lose. The bar they face to buy their first home is now almost twice as high as it was in 1987. That's the first reason why higher house prices don't work for us as a society. They raise barriers to home ownership, and make it more difficult for people with low incomes or small savings to own their own homes. Since Labor restored the tax break for negative gearing, tax records show, the number of landlords has trebled to more than 1.6 million, while their declared losses have multiplied to more than $10 billion a year. The tax break means about $4 billion a year is paid for them by other taxpayers. Do you see what I mean about what is good for you and me being bad for us? But let's note one other crucial thing: the only home owners who really win out of higher house prices are those who are selling to move down in the housing market. Higher house prices widen the gaps in the market, so downgraders pocket more money when they sell the big old home to move somewhere smaller. By contrast, upgraders - despite being home owners already - are made worse off by rising prices. They now face a bigger gap between what they receive for their old home and what they must pay for their new one. They too are losers from the rising prices we keep being urged to celebrate. The first step is that we must stop cheering rises in house prices. They make the problem worse. If governments seriously want to put the broader interests of society first in housing policy, they must understand that their long-term goal is to reduce house prices significantly, relative to incomes. Let's go back to fundamentals. Housing prices rise because there is a gap between demand and supply. If more people want to buy homes in an area than there are homes to buy, prices will rise. If supply of homes rises relative to demand, prices will fall. Isn't it obvious? Government policy, at all levels, should aim at increasing the supply of new housing. That is what will make housing affordable. Young Australians have been let down by governments of both sides. It's time to right the wrong.
10. Totally relevant video - Jon Stewart nails Wall St bankers in one of the best pieces of satire I've seen in a long time. He explains what Lehman, Goldman and Citigroup did to Americans in the best (darkly funny) way. Compulsory viewing. HT Kevin via IM.
The Daily Show With Jon Stewart Mon - Thurs 11p / 10c
In Dodd We Trust
www.thedailyshow.com
Daily Show Full Episodes Political Humor Health Care Reform

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