Top 10 at 10: Gareth Morgan attacks the corporate rate cut; 'Peak gold was in 2001'; European deflation; Dilbert

Here are my Top 10 links from around the Internet at 10 to 1pm. I welcome your additions and comments below or please send suggestions for Wednesday's Top 10 at 10 via email to bernard.hickey@interest.co.nz

1. Tax lawyers and accounts win again - Gareth Morgan has used this column in the NZHerald to attack the government's decision to lower the corporate tax rate to 28% while leaving the trust rate at 33%. He reckons tax lawyers and accountants will be the winners. I agree. HT Les Rudd via email. Your view?

The Key/English regime is to be congratulated for rectifying that dumb policy, after a decade of wasted resources paying tax accountants to restructure to avoid it. Which makes it even wierder that they would now open up another wedge between companies and persons and trusts, the former taxed at 28 per cent and the latter at 33 per cent maximum.

There is no more sense to this than Cullen's 33/38 per cent wedge, which makes it fascinating to examine why it's been done.So who is pushing this patently hollow rationale and what might their motives be? You won't be surprised to learn the proponents are accountants and lawyers from the big corporate firms - those who stand to generate themselves heaps of fees from "tax restructuring" work that "rich" Kiwis will need now to commission in order to arbitrage the 33/28 tax wedge as they move income from trusts to companies.

It is incongruous that Bill English has lain down and been trodden under by this Trojan horse of self-interest.

2. Good news for dairy industry? - This academic paper from the Queensland Institute of Medical Research in the European Journal of Clinical Nutrition appears to show that those who eat more full fat dairy products have fewer heart attacks than those who eat less full fat dairy products. Interestingly counter-intuitive. Here's Stephen Guyenet with his take in this blog. 

People who ate the most full-fat dairy had a 69% lower risk of cardiovascular death than those who ate the least. Otherwise stated, people who mostly avoided dairy or consumed low-fat dairy had more than three times the risk of dying of coronary heart disease or stroke than people who ate the most full-fat diary. Contrary to popular belief, full-fat dairy, including milk, butter and cheese, has never been convincingly linked to cardiovascular disease.

In fact, it has rather consistently been linked to a lower risk, particularly for stroke. What has been linked to cardiovascular disease is milk fat's replacement, margarine. In the Rotterdam study, high vitamin K2 intake was linked to a lower risk of fatal heart attack, aortic calcification and all-cause mortality. Most of the K2 came from full-fat cheese. In my opinion, artisanal cheese and butter made from pasture-fed milk are the ultimate dairy foods.

3. Those crazy Canadians - Canada's economy grew at a stonking annualised rate of 6.1% in the March quarter, the Globe and Mail reports. This partly explains why its housing market is going ballistic and why its central bank is about to hike rates, possibly as early as tonight. 

The release, landing one day ahead of the Bank of Canada’s interest rate decision, fuelled expectations of a rate hike and sent the Canadian dollar higher. It’s the latest in a series of reports showing everything from employment and retail sales to trade and manufacturing is gathering steam.

“With the monthly numbers showing strong momentum late in the first quarter, the Bank of Canada will take reassurance that this strength is likely to be sustained near term,” said Paul Ferley, assistant chief economist at Royal Bank of Canada.

4. Brazil and China overheating - Nouriel 'Dr Doom' Roubini is back to put a dampener on the party. Bloomberg reports Roubini saying the Brazilian, Chinese and Indian economies are at risk of developing asset bubbles and overheating.

The outlook for Brazil’s economy is “very positive,” though the crisis in the euro zone countries and a slow “u- shaped” recovery globally could dent the country’s growth, Roubini said today at an event in Sao Paulo.

“In Brazil, like in many other emerging market economies, there is now evidence of overheating of the economy,” Roubini said.

“Expected and actual inflation is starting to rise, and that implies that over the next few quarters there has to be a tightening of monetary policy, gradually but progressively, in order to make sure that inflation expectations remain anchored.” Roubini recommended that Brazilian policy makers take steps to limit the appreciation of the real, including the “judicious” use of capital controls.

5. European deflation? - Serious voices are now being raised about the potential for a deflationary debt spiral and Japanese-style balance sheet recession that could last for years and drag on global growth. The New York Times has the story here. Of course, many economists and bankers are arguing for a good bout of printing to avoid deflation at least. German voters may not be so keen. It all emphasises just how broken the euro is.

The central bank’s doubters grew louder after it made a big show of taking measures to cancel out the supposed inflationary impact of the government bond purchases it began on May 10 to help keep Greece and several other euro zone countries from defaulting on their debts.

“It’s nuts: how can they be concerned about the inflationary impact of this?” said Carl B. Weinberg, chief economist of High Frequency Economics in Valhalla, N.Y.

“If I were the head of the E.C.B., I would be printing money to avert the decline in the money supply.”

Many economists regard deflation as more dangerous than inflation, because it prompts consumers to delay purchases as they wait for lower prices, creating a downward spiral of lower demand and production. Deflation is also bad for debtors like Greece, because they may have to pay back money that would be worth more than it was when they borrowed it.

Economists like Mr. Weinberg — and a few policy makers as well — are beginning to worry that a danger of deflation in Europe, similar to the one that strangled Japanese growth for most of the 1990s, is a bigger threat than inflation.

6. Peak gold was 2001 - Many thanks to Simon Tegg who pointed me in the direction of this paper from a couple of German Geologists who reckon peak gold production was 2,600 tonnes in 2001 and will fall to 1,600 tonnes by 2018 and 780 tonnes by 2026.  

7. More stimulus - Barack Obama just can't help himself. He and his mates in Washington are planning to spend yet more future taxpayers money flogging the dead horse now, the Economist reports. Just nuts and more proof that Barack 'Change We can Believe in" Obama is a liar and a fool who has delivered little real change on the economic front from Bush's profligacy.

The “American Jobs and Closing Tax Loopholes Act” is a typical piece of congressional sausage-making originally projected to add $134 billion to the federal deficit. Only $79 billion of that qualifies as true stimulus: extended unemployment benefits, health subsidies for the unemployed and more Medicaid money for the states.

Most of its hundred-odd other provisions are goodies for assorted constituents from Indian reservation property developers to cotton shirt manufacturers and routine extensions of expiring provisions such as the research tax credit. Congress was scheduled to vote on the bill after The Economist went to press. Republicans and some Democrats have balked at the price tag, prompting changes that would reportedly bring its deficit impact below $100 billion.

Mr Obama’s fiscal policy has been described as “gas now, brake later”: wider deficits in the near term to keep the economy out of depression (which would risk even bigger deficits), followed by a switch to deficit reduction to cap the rise in the national debt. The switch, however, remains a future abstraction. The latest initiatives would bring the total amount of stimulus since Mr Obama took office to well over $1 trillion.

8. 'Mark to Mayhem' - FTAlphaville's Tracy Alloway points to a change coming from the US Financial Accounting Standards Board (FASB) that she says would force banks to mark the real value of their loans to what the market would value them at. The implications are worrying. The American Bankers Association has warned this would further restrict lending growth. If forced to recognise losses, banks may need to raise yet more capital from shareholders.

The US Financial Accounting Standards Board has published a proposal that would require banks to report the fair value of most of the loans on their books, in other words, do the dreaded mark-to-market. At the moment they can hold a hefty portion of them at amortised cost.

It looks like the average bank’s loan portfolio is 1 per cent below its carrying value. That is, the estimated market value is one per cent below the value using FASB’s current practices.

 Felix Salmon at Reuters doesn't think this change will cause major grief, but reckons there is a risk.

My feeling is that so long this is just an extra reporting requirement, and it doesn’t show up on the income statement or the balance sheet, we’re probably fine. Banks should certainly be marking their loans to market internally, and if they’re doing that it makes sense to ask them to report those marks to their shareholders on a quarterly basis.

But there is a real risk here, if those shareholders start to panic when they see the marks.

9. Must read from Roubini - Here is a diagnosis and a set of solutions to the global financial crisis from Nouriel Roubini and Arnab Das on Roubini Global Economics The say: the eurozone must get its act together; debt must be forgiven and balance sheets cleaned up; macro policies must be rebalanced; the Western financial system needs radical reform; and for good measure; the global economy requires rebalancing.

We can all rest on the seventh day.

The debt-fueled global growth process was justified by paradigm shifts: from Cold War to Washington Consensus; re-integration of emerging markets into the global economy; the Goldilocks high-growth/low-inflation economy; a much-ballyhooed convergence ahead of EMU across Old and New Europe; and the widely-touted benefits of financial innovation.

A consumption binge in deficit countries; an export surge in surplus countries; vendor financing courtesy of the latter; creditors and debtors on different sides of the same coin. Global output/growth, corporate profits, household income/wealth, public revenue/spending temporarily shot well above equilibrium. Wishful thinking enabled asset prices to scale to absurd heights and pushed risk premia to incredible lows thanks to ever-widening access to credit.

The private financial sector intermediated and compounded rising national indebtedness with its own borrowing. When the asset and credit bubbles burst, it became clear that the world is less wealthy, more indebted and faces a lower speed limit on growth than we had banked on. Now, governments everywhere are re-leveraging to socialize private losses and to slow private-sector deleveraging.

But public debt is ultimately a private burden: Governments subsist by taxing private income and wealth, or the ultimate capital levy of inflation or outright default. Thus public debt cannot substitute fully or indefinitely for excessive private leverage.

Eventually governments must deleverage too, or else public debt will explode, precipitating further, deeper public and private sector crises. Without a comprehensive solution along these lines, we will condemn ourselves to lower growth, greater macro volatility, and a heavier burden on future generations than is necessary. We may well still be able to avoid financial Armageddon, but we will still perform well below potential globally and face the risk of further serious crises.

10. Totally irrelevant video - Cats explain the history of 'Lost' in one minute. Hilarious. HT Gareth via email.