Top 10 at 10: How squeaky old wheels get NZ's health grease; China's painfully unfair connections; Dilbert

Here are my Top 10 links from around the Internet at 10 to 2 pm. 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. The squeaky (old) wheel gets the health grease - Gareth Morgan comments in the NZHerald on the coming competition for public funds in the health sector and how the winners will be those who shout loudest, rather than those who should get it. This will become a debate we hear a lot more about. As competition for scarce public funds become more intense, allocation decisions will get political very fast. And guess who will win? The baby-boomers, who have a lot more clout...for now.

Because of the lack of a coherent and consistent framework for allocating resources - across conditions, patients and regions - we have an ugly situation where the loudest get served first. Put bluntly, it's an obscene abuse of universal health care.

Politicians tried, of course, to implement a rationing system via then-health minister Simon Upton's ill-fated core services committee of 1992, but its approach - to ask the public what it wanted the public health system to provide - was as flawed as asking an infant in a candy shop which sweeties they wanted. They wanted it all and they wanted it now - what a surprise.

Over the subsequent 18 years the problem hasn't gone away; there are still unmet health needs despite the boom in health sector spending. And the official forecasts are for that demand to keep soaring so the health spend rises from 9.6c in every dollar earned (GDP) to 18c.

Morgan then dips his toe into some hot political water and asks the question about rationing which no politician will even ask let alone try to answer. Good on Gareth.

In a world where all needs cannot be met, society has to decide what "greatest need" is. How do you decide between a 92-year-old and a 10-year-old in need of the same knee operation? Personally they both have equal need so that gets you nowhere, and the limited resources mean you have to make the choice. The 92-year-old has paid more taxes, the 10-year-old has more taxes to contribute, so that doesn't help decide either.

But we must make a decision, we must decide who it will be. This is the reality facing society and the reality several generations of politicians have run away from. The answer is very clear but we must have the courage to declare and stick to it. The 10-year-old gets the nod because from this point of time society will benefit more from them being fixed - they have far more quality-adjusted life-years to contribute to society than the 92-year-old has.

From society's perspective it's a no-brainer investment.

At least if it was clear, everyone would know that their entitlements would be diminishing as they age and so they would plan for that in their financial affairs. They would insure or self-insure or accept that being able to do the high jump when you're 92 is unrealistic.

But we're guilt-ridden; as a society we are too gutless to make that decision explicit. So we abdicate that responsibility and leave it to the ad hoc process, outlined above, to make it for us. The squeaky wheels get their heads in the trough and leave it dry for those without those advocates.

There is nothing equitable about that, nor is it anything that society should be proud of. It has to be changed

2. No bank tax - Ian Verrender at the Sydney Morning Herald makes the point that Australian bank lobbyists have won some big gains from the Australian government in recent weeks, including getting the Australians to work with the Canadians to put the kibosh on the idea of a global bank tax at the G20.

It is with some surprise that the federal government, facing an election and desperately keen to shore up a budget deficit, leapt in to the frontline to oppose the tax. Perhaps it figured taking on one powerful opponent was more than enough.

Swan successfully argued that a global policy was not appropriate. Australia's banking system had emerged not just intact from the crisis of 2008-09 but with rude good health. Taxpayer funds hadn't been used to bail them out.

3. 'We trashed a wonderful inheritance' - British baby-boomer Francis Beckett writes at The Guardian's excellent Comment is Free site about how politically powerful Baby Boomers are loading debt onto their children so they can have a nice life now. HT Rob Mackintosh via email.

Beckett makes a wider point about how today's Baby Boomers are actually more restrictive on their children than their own parents.

Not sure I agree with it, but interesting change in the tone of the debate. He also makes a potent point about the Vietnam War vs the Afghan and Iraq wars.

We are the first generation in which pretty well everyone can read and write fairly fluently. We had the freedom that comes from not having to fear starvation if your employer fires you: there were other jobs to go to, and a welfare state to fall back on. These things made possible the freedom of the 60s. And what did we do with this wonderful inheritance? We trashed it.

We created a far harsher world for our children to grow up in. It was as though we decided that the freedom and lack of worry which we had inherited was too good for our children, and we pulled up the ladder we had climbed. Most capital expenditure for education and health no longer comes from the present-day taxpayer, but from the next generation, because the baby boomers have been too stingy to pay for it.

This trick is done by means of the private finance initiative (PFI), a scam for getting the cost of public buildings such as schools and hospitals off the present government's books, and placing them on the books of governments 10 or 20 years hence. Harold Wilson saved the baby boomers from having to fight alongside young Americans in Vietnam.

When the baby boomer generation formed a government, its prime minister, Tony Blair, told lies to the young so that he could send them to fight alongside the Americans in Iraq. Opinion polls show that the now elderly baby boomers will use their increasing voting power to ensure that when the bad times come, the young are hit first, even though it is by a chancellor of the exchequer who was not even born until the 60s were over.

4. Mr Elliott Wave waves us lower - Bob Prechter's prediction yesterday of a massive slump in global stocks in line with his Elliott Wave theory certainly got people talking. Here's more, including a juicy chart. Click on the chart or this link to go to a fuller link to the embedded videos.

5. 'It's who you know in China' - John Garnaut from the Sydney Morning Herald reports that Chinese-Australian citizen Stern Hu is behind bars in China, convicted of taking bribes, while the well connected Chinese businessmen who paid the bribes are out and about buying a golf course north of Beijing. Garnaut's story is well worth a read for those wondering what really goes on behind the scenes in Chinese political/business circles, which are circles we will need to know and love in coming years.

Since admitting to bribing Rio Tinto's Wang Yong to the tune of $US10 million ($11.9 million), mostly via Macau casinos, the billionaire Du Shuanghua has not only avoided prosecution and indulged his passion for golf but also reversed the Shandong government's theft of his Rizhao Steel factory and set up a 3 billion yuan ($525 billion) private-equity construction fund.

At one stage it had looked like Du - worth 35 billion yuan in 2008 and a business partner of the cousin of the President, Hu Jintao, in Hong Kong - had been set up as one of the key targets of this investigation. It is now clear that he paid his bets wisely and has come out in front. In fact there has not been so much as a slap on the wrist for any of the 20 steel makers and traders on the bribe-paying list.

One year on, the Rio Tinto case shows how China can be simultaneously more sinister, more complicated and less effective than imagined.

6. Rising funding costs - The Australian reports Bank of Queensland saying funding costs are rising in Australia, which could force banks there to pass on mortgage rate hikes independent of a rise in the Official Cash Rate over there. We are hearing similar things behind the scenes over here. The European crisis is pushing up funding costs. This is starting to bake in higher margins in a way that means variable mortgage rates stay cheaper than fixed for a long time yet.

I wonder if people really understand what the Global Financial Crisis meant. It meant higher lending margins and lower bank leverage. It meant less debt-funded growth and more de-leveraging-driven slowdown.

The cost of wholesale borrowing for banks has come under renewed scrutiny after Westpac last week issued new five-year debt at a risk premium higher than some expected, highlighting fresh strains in the market on the back of Europe's debt crisis. Having enjoyed some improvement during the first six months of the year, risk aversion has returned to investors and an improvement in funding costs isn't expected in a hurry, said Bank of Queensland chief operating officer Ram Kangatharan

"All of the banks are starting to feel the pinch in terms of deposit margins." The net result of the rising pressures will likely prompt the major banks to raise their own lending rates, irrespective of whether the Reserve Bank of Australia moves the official target.

"As the pressure continues on the majors, they would want to move outside the RBA rates. I think what's holding them back is election year," Mr Kangatharan said.

7. 'It's different this time' - The research done by Kenneth Rogoff and Carmen Reinhart into episodes of deleveraging after financial crashes is proving to be very influential. It dominates my thinking on the inevitability of deleveraging and its effect on growth. Their book 'This time it's different' is a must read. This New York Times profile is well worth a read as a primer for their work and the book itself, which they started researching in 2003. Their conclusion is that growth slows by 1% per annum once public debt rises over 90%. It essentially says deleveraging is unavoidable.

Rogoff and Reinhart have been lauded for mining data to make their case, rather than just dreaming up a theory. Here is their academic paper.

 Microeconomics — the field that focuses on smaller units like households and workers, as opposed to big-picture questions about how national economies function — has embraced real-world data-mining. (Think “Freakonomics.”)

Macroeconomics has been slower to change, but the popular success of “This Time Is Different” and related work seems to be changing how macro practitioners approach their craft. It has also changed how policy makers think about their own mission.

Mr. Rogoff says a senior official in the Japanese finance ministry was offended at the suggestion in “This Time Is Different” that Japan had once defaulted on its debt and sent him an angry letter demanding a retraction.

Mr. Rogoff sent him a 1942 front-page article in The Times documenting the forgotten default. “Thank you,” the official wrote in apology, “for teaching the Japanese something about our own country.”

8. 'They're gettin' nervous' - Foreign investors and creditors are starting to ask more questions about Australia's housing market and the exposure of the big four banks to that housing market, BusinessDay reports. This may explain the rising funding costs for the Australian (read ours too...) in recent weeks. That and the non-trivial matter of the European financial crisis.

“It’s a constant question,” said Macquarie senior economist Brian Redican of his interactions with European and American investors.

“There are just lingering concerns about household debt levels and whether house prices are going to hold up in Australia.”

Overseas investors held A$645 billion in Australian wholesale debt and deposits in May, on Reserve Bank data, with local banks getting nearly 30 per cent of their funding from global markets. Should global markets for housing debt become stressed – if, for example, there is another leg to the Europe’s sovereign debt crisis - or should Australia’s household debt be singled out by global investors, the ability of banks to lend could be squeezed.

Tighter access to credit could reduce loan sizes, which would weigh on housing prices. Total outstanding mortgage debt in Australia was about $1.1 trillion in April, while other personal debt, including credit cards, stood about $141 billion, according to the RBA.

“Australia’s reliance on wholesale markets and offshore elements needs to be taken into account because you are more exposed to how other markets perceive the relative risks of Australia to other alternatives,” said Standard & Poor’s managing director rating services Fabienne Michaux.

“They’re not looking at Australia individually but in terms of their portfolio,” she said.

Hence, US-based investment fund GMO founder Jeremy Grantham, on a visit to Sydney in June, said interest rate rises will inevitably pop an Australian housing bubble.

9. Even Bloomberg has noticed - Nichola Saminather from Bloomberg has written a big long piece about Australian housing affordability for Bloomberg and BusinessWeek. Some people might work out what the elephant in the room is in this part of the world... Let's hope they don't look too close. She quotes Jeremy Grantham. I think his June 15 comments may be a signpost we look back on as the day the rest of the world woke up.

Grantham, chief investment strategist at Boston-based Grantham Mayo Van Otterloo & Co., says higher rates may pop Australia’s housing bubble. The nation’s home prices need to fall 42 percent to “return to trend,” he said, without giving a timeframe or by how much interest rates would have to rise before that happens.

“It’s like a time bomb, just waiting for the rates to become increasingly impossible to support,” he said at a media briefing in Sydney on June 15. “All bubbles break, they’re the only thing that matter. They break because we live in a mean reverting world. Things go back to normal, even Australian housing prices.”

Christopher Wood, chief equity strategist at Hong Kong- based CLSA Asia-Pacific Markets, said the first-home buyer incentives in 2008 and 2009 -- at a time when interest rates were at a half-century low -- may have put Australia on the path to its own version of the subprime mortgage crisis.

“In the long term, that policy will boomerang back on the Australian economy and the government because all they’ll have succeeded in doing is incentivizing people to buy houses who can’t afford them -- very similar to the subprime issue in America,” Wood said.

10. Ambrose is fearful - This is a must-read from Ambrose Evans Pritchard at The Telegraph on the debate facing policy makers oop north. Should they print or not? He says yes and pronto to avoid another depression.

Investors are starting to chew over the awful possibility that America's recovery will stall just as Asia hits the buffers. China's manufacturing index has been falling since January, with a downward lurch in June to 50.4, just above the break-even line of 50. Momentum seems to be flagging everywhere, whether in Australian building permits, Turkish exports, or Japanese industrial output.

On Friday, Jacques Cailloux from RBS put out a "double-dip alert" for Europe. "The risk is rising fast. Absent an effective policy intervention to tackle the debt crisis on the periphery over coming months, the European economy will double dip in 2011," he said.

It is obvious what that policy should be for Europe, America, and Japan. If budgets are to shrink in an orderly fashion over several years – as they must, to avoid sovereign debt spirals – then central banks will have to cushion the blow keeping monetary policy ultra-loose for as long it takes.

The Fed is already eyeing the printing press again. "It's appropriate to think about what we would do under a deflationary scenario," said Dennis Lockhart for the Atlanta Fed. His colleague Kevin Warsh said the pros and cons of purchasing more bonds should be subject to "strict scrutiny", a comment I took as confirmation that the Fed Board is arguing internally about QE2. Perhaps naively, I still think central banks have the tools to head off disaster.

The question is whether they will do so fast enough, or even whether they wish to resist the chorus of 1930s liquidation taking charge of the debate. Last week the Bank for International Settlements called for combined fiscal and monetary tightening, lending its great authority to the forces of debt-deflation and mass unemployment. If even the BIS has lost the plot, God help us.

11. Totally relevant video - I'm happy to cite a Marxist when he/she says something interesting. This video of a cartoon of a speech about the crises of capitalism is well worth a read/listen/watch. "Capitalism never solves its problems. It just moves them around a bit."