Top 10 at 10: 'Massive money printing inevitable'; US economic slump indicated; Chinese policymakers frozen; Dilbert

'Massive money printing inevitable'; US economic slump indicated; Chinese policymakers frozen; Dilbert

Here are my Top 10 links from around the Internet at 10 to 4pm. I welcome your additions and comments below or please send suggestions for Thursday's Top 10 at 10 via email to bernard.hickey@interest.co.nz My apologies for the delay today. I was travelling to Wellington for tomorrow's Monetary Policy Statement.

1. China frozen in the headlights - Noted China watcher Andy Xie explains in this piece at The Big Picture why China's policymakers are frozen like rabbits in the headlights of competing internal interests.Xie predicts a bursting of the bubble and calls on China to raise interest rates. He says China can handle a bursting if done now. If it is delayed, there may be problems. This is one for New Zealand to watch.

Powerful interest groups have paralyzed China’s macro-economic policy, with ominous long-term consequences. Local governments consider high land prices their lifeline. State-owned enterprises don’t want interest rates to rise. Exporters are vehemently against currency appreciation. China’s macro policies have been reduced to psychotherapy, relying on sound bites and small technical moves to scare speculators. In the meantime, inflation continues to pick up momentum. Unless the central government bites the bullet and makes choices, the economy might experience a disruptive adjustment in the foreseeable future.

The first key point is that local governments have become dependent on the property sector for revenue as profits from manufacturing decline and spending needs to rise. Attracting industry has been the main means of economic development and fiscal revenue for two decades. Coastal provinces grew rich by nurturing export-oriented industries. But the economics has changed in the past five years. Rising costs have sharply curtailed manufacturers’ profits, and most local governments now offer subsidies to attract industries. The real revenue has shifted to property.

Second, preferential lending towards state-owned enterprises has led to their rapid expansion. Most debt on the Chinese mainland is owed by state-owned enterprises. The debts of households and property developers are really payments to the government. Keeping interest rates exceptionally low has become a national policy for protecting the state sector. Other considerations, such as inflation, have been suppressed.

Third, China’s exporters are suffering from rising costs and weak global demand. They are vehemently opposed to currency appreciation. The new labor law, rising tax rates, and tougher environmental standards are their other grievances. They still represent half of China’s manufacturing sector, and are in a position to influence government policy.

2. Leading indicator - The US Economic Council Research Institute (ECRI) leading indicator (chart below) has a good track record for predicting US growth and it's pointing sharply downwards, Societe Generale strategist Albert Edwards points out at FTAlphaville.

This is worrying because the ECRI has never fallen at such a pace, even in the middle of the subprime explosion, says Edwards. This suggests the current market swoon this is something more than the technical correction seen in February. This time, markets are heading lower and leading indicators are rolling over — and that’s not good

3. Run for cover - Royal Bank of Scotland strategist Bob Janjuah is a colourful character who is not afraid to tell it straight. He sees the global economic recovery as so weak that central banks will be forced to print (ie Quantatively Ease QE) to get the economy back on track. He also sees another 10% fall on global stock markets coming in July/August/September. Here's his thinking, thanks to FTAlphaville.

All that’s now left, as I have said before, is for the Fed to shift to a USD5trn or so new QE programme, likely in co-ordination with a bunch of other central banks, which in total may give us USD10trn or more of new QE. But this isn’t happening until much much later this year or, more likely, next year.

4. Rising Chinese wages - The doubling of salaries at Foxconn, which makes consumer electronics in China, has focused attention on how fast wages are rising in China. This is great for consumption (in theory) but bad for China's competitiveness. Here's the Sydney Morning Herald's take:

Anecdotes of China's rapidly tightening labour market conditions grew stronger from about the middle of last year and now they are everywhere. The Foxconn wage shock comes after a week in which a rare strike at a Honda factory in nearby Guangzhou led to a 24 per cent pay rise and the Beijing municipal government lifted the minimum wage by 20 per cent to 960 yuan.

Factory owners around China are complaining they cannot get enough workers. Cotton farm bosses from China's far west are competing with each other in central China to attract workers by offering better dormitories, better food and higher wages. Party officials in the Yangtze River delta are competing with those in the Pearl River delta (around Shenzhen) to persuade migrant workers that they will do a better job of enforcing labour laws.

Municipal governments are gradually treating the families of migrant workers more like citizens. The story of China's rapidly rising wages and diminishing pool of surplus agricultural workers is well known among a small group of Chinese scholars centred on Professor Cai Fang, director of population and labour economics at the Chinese Academy of Social Sciences. His colleagues, Du Yang and Wang Meiyan, have previewed the latest data in a coming paper. The paper cites results from three surveys, two of which have not yet been published.

The methodology and timing of each survey is opaque, the results vary widely, but the trend is abundantly clear. A survey of 22,000 rural households by the Agriculture Ministry's Research Centre for Rural Economy shows migrant wages surged about 15 per cent last year, after adjusting for consumer price deflation. A smaller survey of 4000 people by the People's Bank of China - also yet to be released - shows real migrant wages increased about 10 per cent last year.

5. Europe's demographic problem - Star econoblogger Edward Hugh has been talking a lot about how the problems in Europe are at least partly demographic as the younger populations in Greece, Spain and Eastern Europe have used their Euro status to borrow off the aging populations of savers in Germany, pushing up house prices and debt ratios. Felix Salmon points to a New York Times profile of Hugh that distils the thinking here:

“Why haven’t these countries converged” with the rest of Europe? he asks. “It’s demographics. As populations age, there are fewer people in their 20s to 40s to buy new houses, so they save more.”

Germany, where the average age is 45 and rising even as the population is beginning to shrink, is a nation of savers, and public policy has encouraged keeping wages under control and building up export industries. By contrast, the younger Greeks, Irish and Spaniards went on borrowing binges, driven in particular by rising demands for new homes and consumer goods that, in several cases, turned into housing bubbles before going bust.

Wages were pushed up, encouraging spending but soon making it all but impossible for their industries to compete with the thrifty Germans, Dutch and other northern Europeans.

6. 'F#ck my victims' - Any doubts about Bernie Madoff are wiped clean in this New York Magazine profile of his life in prison and what he really thinks of all the investors who lost so much in his Ponzi scheme.

According to K. C. White, a bank robber and prison artist who escorted a sick friend that evening, Madoff stopped smiling and got angry. “F#ck my victims,” he said, loud enough for other inmates to hear.

“I carried them for twenty years, and now I’m doing 150 years.” For Bernie Madoff, living a lie had once been a full-time job, which carried with it a constant, nagging anxiety.

“It was a nightmare for me,” he told investigators, using the word over and over, as if he were the real victim. “I wish they caught me six years ago, eight years ago,” he said in a little-noticed interview with them. And so prison offered Madoff a measure of relief. Even his first stop, the hellhole of Metropolitan Correctional Center (MCC), where he was locked down 23 hours a day, was a kind of asylum.

He no longer had to fear the knock on the door that would signal “the jig was up,” as he put it. And he no longer had to express what he didn’t feel.

7. How multi-tasking in an Internet age can change your brain - The New York Times has the story.

8. Gold could jump to US$1,300/oz by the end of the year, Bloomberg reports.

9. Here's Calvin and Hobbes' take on capitalism as we've become to know it. Click on the image for a bigger, more readable version.

10. Totally relevant video on how Ponzi schemes work.

Ponzi from Strike Anywhere on Vimeo.

11. A really totally irrelevant video of a driver leaving an airport the wrong way. Sort of funny. No one was hurt. Much.