Top 10 at 10: 'Take vote off pensioners over 75'; Should the US print or default?; Send in the nukes?; Dilbert

Top 10 at 10: 'Take vote off pensioners over 75'; Should the US print or default?; Send in the nukes?; Dilbert

Here are my Top 10 links from around the Internet at 10 to 11am. I welcome your additions and comments below or please send suggestions for Friday's Top 10 at 10 via email to bernard.hickey@interest.co.nz

1. It's not just me sayin' it - Anatole Kaletsky at The Times has written what I hope is an incendiary comment piece pointing out the obvious: the developed world is headed for a clash of the generations as wealthy Baby-Boomers start receiving pensions and healthcare that their children can't afford to pay for.

Kaletsky pulls it all together nicely and relates it to the current Global Financial Crisis. This could turn out to be quite an influential article, which extends the premise of an equally important book called 'The Pinch' by a British MP called David Willetts. HT Anne Beston via Twitter

The battle over bailouts in Europe is only a sideshow compared with the great social conflict that lies ahead all over the world in the next 20 years. This will not be a struggle between nations or social classes, but between generations — and it is a conflict that, in Britain, begins in earnest this year. The end of the Second World War in May 1945 marked the start of the baby boom, which lasted until the mid-1960s.

Now, 65 years later, the corresponding retirement revolution is about to shake up our society, economy and political institutions. If the word “revolution” sounds like an overstatement, consider the most important issue in British politics today — and then let me draw your attention to the most important book about this issue, written, as it happens, by a senior minister in the new Government.

The issue is, of course, the unsustainable size of the public deficit. The book is called The Pinch by David Willetts, the Tory Minister for Universities, and its subtitle conveys his main message with his characteristic clarity and directness: “How the baby-boomers took their children’s future and why they should give it back.”

But strangely, however, nobody — least of all an active politician like Mr Willetts — seems to make the connection between long-term intergenerational tensions and the present controversies over public spending and taxes. Why, for example, are governments everywhere running out of money, not just in Britain and Greece, but also in America, Germany, Japan and France? Why are taxes relentlessly rising in all advanced capitalist countries? And why is public spending being cut on schools, universities, science, defence, culture, environment and transport, while spending on health and pensions continues to rise?

The populist answer to these questions is that we are all about to pay for the greed of the bankers. But this is not true. According to IMF calculations, the credit crunch, bank bailouts and recession only account for 14 per cent of the expected increase in Britain’s public debt burden. The remaining 86 per cent of the long-term fiscal pressure is caused by the growth of public spending on health, pensions and long-term care.

The credit crunch and recession did not create the present pressures on public borrowing and spending. They merely brought forward an age-related fiscal crisis that would have become inevitable, as by 2020 the majority of the baby-boomers will be retired.

Then Kaletsky has a startling idea to solve it. Deprive pensioners of the vote and give young mothers an extra vote. He also has a great new phrase (to me at least) to describe the power of the Baby-boomers: "Grey Panthers". Touchpaper lit. Standing back.

The baby boomers are so numerous that no politician dares to campaign against their interests. Moreover, older people are more likely to vote. As a result democracies will increasingly be held hostage to the special interests of “grey panthers”, whose power will steadily grow as more baby-boomers retire.

Will politics therefore degenerate into a conflict between the dwindling number of voters with children, who care about education and the future, and the massive power of pensioners with shorter time horizons?

Here is a modest proposal to avert this awful outcome. Since children under 18 are not allowed to vote, perhaps pensioners could be deprived of the right to vote after 75 or 80. An equally effective alternative would be to give mothers an extra vote for every child under voting age.

2. Ants and Grasshoppers Part II - Martin Wolf from the FT has another go at using the Ants and Grasshoppers fable to explain the global financial crisis. His first fable was a cracker. The Ants are the developing and developed countries like China and Germany that save, while the Grasshoppers are America (and New Zealand) who consume the savings of the ants via ant vendor finance. The second riff on this fable from Wolf is just as good. This time he looks at whether the ants and the grasshoppers can continue to trade with each other fruitfully. His answer is not optimistic. He also describes investment banks as "locusts" among grasshoppers and ants, which I love.

A reason people may not make informed decisions is, readers argue, that what some call “locusts” (financial capitalists) fool both grasshoppers and ants. At best, agency and information problems in financial markets make it hard for ants or grasshoppers to understand what is going on. At worst, locusts use their wealth and knowledge to rig the game to their advantage.

Emerging countries are recycling current account surpluses, plus the net private capital inflow, into reserves. Nearly all of these surpluses are generated by emerging Asia, in general, and China, in particular, though these countries have the best investment opportunities. So long as this remains true, the grasshopper colonies of the developed world are likely to remain net recipients of capital, which they will surely continue to waste.

Yet, under the pressure of the crisis itself, many erstwhile grasshopper colonies are being forced to become more “ant-like”. If today’s rich ant nests do not change their behaviour, potential surpluses will be huge. Either the emerging world as a whole starts to absorb these surpluses into potentially productive younger nests, or the world will be stuck in a demand trap, with everybody seeking export surpluses. Flows of finance from export-driven ant nests to advanced grasshopper colonies end in tears.

Flows of finance from old ant nests to young ones have not worked out either. If a way is not found to fix these failures, the open global economy itself may disappear.

3.  It's all about De-leveraging - Citigroup has announced plans to sell its US consumer finance unit, CitiFinancial, and will close hundreds of branches to attract a buyer, FTAlphaville reports. This is all about Citigroup trying to get out of the business of lending to poor people and is symptomatic of the big pullback in household debt going on across America. It will be very hard for the world's biggest economy to power ahead with much growth while lending is contracting like this. 

The restructuring of CitiFinancial, a cornerstone of Citi’s original plan for a one-stop, “financial supermarket”, underlines management’s push to revamp the group. CitiFinancial, which lends to lower-income customers, was hard hit in the financial crisis as consumers defaulted and funding markets froze.

4. Buffett's warning - Warren Buffett has pointed out American states are virtually bankrupt and anyone buying their debt is taking a bet on whether the Federal government will bail them out or not, Bloomberg reports. He rightly points out the huge moral hazard risk now embedded into the American psyche. If you bail out the banks and the car makers, surely you should bail out the states. And who will bail out the United States when the debt all piles up in one place?  China? Europe? There isn't enough money in the world...unless someone prints it.

Warren Buffett, whose Berkshire Hathaway Inc. has been trimming its investment in municipal debt, predicted a “terrible problem” for the bonds in coming years. “There will be a terrible problem and then the question becomes will the federal government help,” Buffett, 79, said today at a hearing of the U.S. Financial Crisis Inquiry Commission in New York.

“I don’t know how I would rate them myself. It’s a bet on how the federal government will act over time.” It would be hard in the end for the federal government to turn away a state having extreme financial difficulty when they’ve gone to General Motors and other entities and saved them,” Buffett told shareholders in Omaha, Nebraska, at Berkshire’s May 1 annual meeting.

“I don’t know how you would tell a state you’re going to stiff-arm them with all the bailouts of corporations.” A report by the Pew Center on the States in February estimated that by the end of the 2008 budget years, states had $1 trillion less than needed to pay for future pensions and medical benefits, a gap the center said was likely compounded by losses suffered in the second half of 2008.

5. America's rotten dairy industry - BusinessWeek has written an interesting piece on the state of the US dairy industry, where farmers are being squeezed by huge cooperatives and agribusiness firms, despite higher prices on international markets.

I'm not sure who's on the side of good and evil here, although it's fair to say the US dairy industry is horribly broken, corrupt and ridden with special interests who have control of import policy and government subsidies. Let's hope those same special interests don't get involved in the Free Trade Agreement being negotiated with New Zealand. Hope is all we have. They will and it will get very ugly. A little foot note. US farmers are increasing production rapidly to try to make up for money they are losing to processors. It is far from a free or efficient market.

Congress, which spent $350 million on emergency dairy price supports last year, has taken notice. So has the Justice Dept. To assess the effect on prices, it is scrutinizing the biggest dairy cooperatives and food companies for possible anticompetitive conduct.

Along with the USDA, Justice officials will hold a June 25 hearing in Madison, Wis., on dairy market concentration. Meanwhile, the Commodity Futures Trading Commission is reviewing complaints of price manipulation in the spot cash market for cheddar cheese, which also affects the price of milk.

Another concern is that with prices falling, dairies are trying to make up profit declines by increasing production, which in turn exacerbates price deterioration. Representative Jim Costa (D-Calif.) in mid-May offered a bill that would require dairies that boost production to pay into a fund that would distribute cash to those who don't. The larger concern of many family dairies is that the industry is a rigged game favoring a few powerful players. "There's no correlation between the milk price and how many farmers there are, or consumption," says Joel Greeno, a dairy farmer from Kendall, Wis

Here's The bomb chair on Moggit for no other reason that it looks great.

6. The other side - Paul Krugman puts the other side of the argument at The New York Times between the hawks wanting budget cuts and the doves who want to print more money. He's the chief dove. Krugman reckons the mentality of policymakers has shifted in recent months to wanting to inflict pain on people by tightening budgets.

My view is the policymakers are right and actually responding to the will of the people, who know in their bones that more bailouts and money printing on top of a mountain of debt is a recipe for long term disaster. Just as 'There will be blood', in the end. 'There will be deleveraging'. It cannot be avoided or flicked aside or tricked away or sidestepped. The question is how it is done. My view is it is best done quickly with restructuring and default rather than through printing and inflating away the pain. Debt restructuring destroys perceived (but not real) savings in a way that retains confidence in financial systems and the ethos of savings in the long run.

Printing-led inflation just destroys the savings ethic for a generation or two.

But here's Krugman's thoughts. He isn't worried about inflation. Your thoughts? 

When the financial crisis first struck, most of the world’s policy makers responded appropriately, cutting interest rates and allowing deficits to rise. And by doing the right thing, by applying the lessons learned from the 1930s, they managed to limit the damage: It was terrible, but it wasn’t a second Great Depression.

Now, however, demands that governments switch from supporting their economies to punishing them have been proliferating in op-eds, speeches and reports from international organizations. Indeed, the idea that what depressed economies really need is even more suffering seems to be the new conventional wisdom. Both textbook economics and experience say that slashing spending when you’re still suffering from high unemployment is a really bad idea — not only does it deepen the slump, but it does little to improve the budget outlook, because much of what governments save by spending less they lose as a weaker economy depresses tax receipts. And the O.E.C.D. predicts that high unemployment will persist for years.

Nonetheless, the organization demands both that governments cancel any further plans for economic stimulus and that they begin “fiscal consolidation” next year. Why do this? Again, to give markets something they shouldn’t want and currently don’t. Right now, investors don’t seem at all worried about the solvency of the U.S. government; the interest rates on federal bonds are near historic lows. And even if markets were worried about U.S. fiscal prospects, spending cuts in the face of a depressed economy would do little to improve those prospects.

But cut we must, says the O.E.C.D., because inadequate consolidation efforts “would risk adverse reactions in financial markets.”

7. 

7. Send in the nukes - There is now serious discussion in America about using an undergroundr nuclear weapon to cauterise the oil leak in the Gulf of Mexico in much the same way the Russians did a few times with rogue gas leaks. Here's Matt Simmons, founder and chairman emeritus of Simmons & Co., talking to Bloomberg about the need for the US government to take over the plugging operation and even suggesting the nuclear option.  

Mat Simmons “… From all of the best scientists who have thought about this in the past few days, probably the only thing we can do is create a weapons system and send it down 18,000 feet, detonate it and hopefully case in the oil. Such techniques have been used by the Russians on several different occasions”

Here's the video showing how the Russians did it. Perhaps Obama should ask for Russian help...

 

8. "How to profit from the coming Aussie Property Crash" - It's taken me a while to catch up with this presentation, but here it is. Well worth a read for those following the market over the Tasman.

How to Profit From the Coming Aussie Property Crash (and Banking Crisis)

 

9. The new ethos - Chinese kids are now being taught how to read with pictures of BMWs and Mercedes, Patrick Chovanec points out on his blog with this great pic.

My wife and I went to a baby supply store in Beijing this weekend, to stock up on necessities for our 7 month-old little guy. I was browsing through the educational toy section when something caught my eye.Apparently, in China, by age 3 it’s every bit as important for your tot to be able to pick out a Rolls from a BMW as it is for them to tell red from blue, a circle from a square, or a tiger from a giraffe!

This isn’t the first time I’ve seen brand consciousness in cars being pushed at an early age here in China. A couple of weeks ago, I was at our local department store gawking at the battery-powered cars they have for kids to drive around these days — a far cry from the plastic push-pedal version I had growing up. What I noticed, though, was that a joy ride wasn’t all these Little Emperors – and presumably their parents — were looking for. They wanted to display their status.

10. Totally relevant video - Is Washington bankrupting America? The makers of this video certainly think so and have done a nice job of corralling some data with a nifty soundtrack. Worth a watch.

 

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