Top 10 at 10 with NZ Mint: Australia's immigration Ponzi scheme; China's property Ponzi scheme; IMF's Ponzi scheme advice; Dilbert

Here are my Top 10 links from around the Internet at 10 past 11 am brought to you in association with New Zealand Mint for your luncheon reading pleasure.

I welcome your additions and comments below, or please send suggestions for Tuesday's Top 10 at 10 via email to bernard.hickey@interest.co.nz.

I'll pop any surplus suggestions I get into the comment stream under the Top 10.

1. 'Get your house in order' - Kenneth Rogoff, the former IMF economist who co-wrote the essential book 'This Time it's different', has written in the FT that now is not the time for another Keynesian spendup.

He is the one who says a threshold of 90% of public debt is one worth worrying about as history says this is the point where growth slows and an economy faces the risk of a 'Minsky Moment'.

This is the point at which debt spirals ever higher because markets drive up interest rates to a level where it is impossible to deficit finance any more.

Indeed, it is folly to ignore the long-term risks of already record peace-time debt accumulation. Even where Greek-style debt crises are unlikely, the burden of debt will ultimately weigh on growth due to inevitable fiscal adjustment. The fact that the markets seem nowhere near forcing adjustment on most advanced economies can hardly be construed as proof that rising debts are riskless. Indeed, the evidence generally suggests that the response of interest rates to debt is highly non-linear.

Thus, an apparently benign market environment can darken quite suddenly as a country approaches its debt ceiling. Even the US is likely to face a relatively sudden fiscal adjustment at some point if it does not put its fiscal house in order. Some portray Japan, with nearly a 200 per cent government debt to income ratio, as a poster child for extremely indebted countries with low interest rates.

Japan’s “success”, of course, has a lot to do with its government’s ability to sell debt domestically. How the country will handle its finances as saving by retirees shrinks and as its labour force rapidly shrinks, remains to be seen.

2. 'No worries. Let's spend' - Meanwhile, Paul Krugman, the King of the Keynesians, has slammed Rogoff in this New York Times piece, saying spending now is not such a bad thing and the bond vigilantes are a bunch of pussies. We'll see.

How much difference does a few percent of GDP more or less in current spending make to the feasibility of that solution? The answer, almost surely, is not much: at current interest rates, a trillion dollars of spending would add at most around 0.1 percent of GDP in real interest payments, and might actually improve the long-run budget position if a stronger economy now means less long-run damage.

So where does Ken’s call for short-run austerity come from? As best I can tell, it comes from a generalized sense that debt is dangerous; but surely, given the hard choices we’re facing, we need more than this – and as I’ve already said, that 90 percent red line is nonsense. And there’s also the invisible bond vigilante thing, the claim that markets are going to demand that you have immediate austerity even though the math says that it’s more or less irrelevant to the real fiscal problem.

3. The Fed Express - Swiss tennis player Roger Federer is sometimes referred to as the 'Fed Express'. Now the biggest one way bet in the world is on the Swiss franc as worried Europeans sell their euros and buy francs to avoid financial armageddon. This is the Fed Express of global finance. This has forced the franc up sharply and forced the Swiss National Bank to try to force it down by selling francs and buying euros, reports Ambrose Evans Pritchard at The Telegraph.

It's clear most people don't think the European Financial Crisis is over.

I'm reading Thomas Keneally's Schindler's Ark at the moment. It is a grim read about life inside occupied Poland during the war and details the holocaust. But I'm also fascinated to see what happens to an economy in deep crisis: money means nothing. By the end Schindler gives up using gold and diamonds and marks to buy off the SS. He uses the ultimate currencies. Food, cognac, cigars and cigarettes.

Switzerland is fighting a losing battle to stop massive inflows of funds from investors fleeing sovereign risk in the euro area and the rest of the world, raising the risk of a violent spike in Swiss franc if global debt jitters return.

"If we have a US slowdown with a fresh financial crisis, everybody is going to want to buy the Swiss franc, along with bottled water, tins hats, and a shotgun," said David Bloom, currency chief at HSBC. "Now that Japan’s debt is around 200pc of GDP the franc has displaced the yen as the ultimate safe haven."

Handelsblatt reported that German citizens in Bavaria are crossing the border to open franc accunts in Zurich as a precaution, repeating a time-honoured tradition in times of stress.

The Swiss government may need to consider even more radical action if the euro fails to stabilize. Switzerland imposed negative interest rates on deposits from 1972 to 1978 to repel capital inflows. Rates reached minus 0.40pc. A study by JP Morgan said the results were "not compelling". The franc rose by 75pc over that period. 

4. 'An immigration Ponzi scheme' - Immigration is shaping up as the key election issue in Australia. It's important for us because migration has been one of the drivers for fast growth and higher house prices in Australia. If they all fall that will effect us.

Here Terry McCrann from The Australian wonders about the point of all this migration.

At core the new "populate or our future fortunes will perish" cry is the ultimate national pyramid scheme. We need to get to 36 -- or 50? -- million, to have the taxpaying workforce to support the now ageing baby-boomers. Beware of a Japanese-style population implosion! Oh yeah?

And when all those younger new arrivals start to age, we will presumably then need to move to 72 -- or 100 -- million, to have a sufficiently large taxpaying workforce to support them. Just as every boom busts, even our China one will; the laws of arithmetic always topple even the most elegant pyramid scheme.  

5. 'Exceptionally low for an extended period' - UK and US short term interest rates are near zero and have been there for over a year. The US Federal Reserve has now patented the catchphrase 'exceptionally low for an extended period'. But just how long is extended?

Ernst and Young's ITEM club reckons UK official rates could stay this low until 2014, Bloomberg reports.

The potential impact on Britain’s exports from the sovereign debt crisis in the euro zone and the “significant” budget tightening will mean the Bank of England will not raise its main interest rate from a record low of 0.5 percent for the next four years, the Item Club will say. An expansion of the central bank’s 200 billion-pound ($308 billion) bond-purchase plan “cannot be ruled out,” the group will say.

The economy will now grow 2.8 percent in 2012 compared with an April prediction of 3.4 percent, and 2.9 percent the following year compared with the earlier forecast of 3.1 percent, the Item Club will say.

6. Just an 800% increase - Getting accurate data on what is actually happening within China's housing market is not easy.

Now econbrowser points to a new NBER working paper by Jing Wu, Joseph Gyourko, and Yongheng Deng, which used recorded prices for 300 residential land auctions in Beijing to develop the first constant-quality land-price series for a Chinese market. Here's the chart below. Looks like a bubble to me.

The most fascinating detail is this: It seems many of the developers pushing land prices sky high in Beijing are state owned enterprises, who believe they are too big to fail and have no risks... No worries then.

There also is a statistically and economically strong positive correlation between land auction price in Beijing and the winning bidder being a state-owned enterprise (SOE) associated with the central government. All else constant, prices are about 27% higher when a central government-owned SOE wins a land auction, so these entities appear to be playing a meaningful role in rising land values in Beijing.... If these particular developers are superior investors and are able to buy unobservedly high quality sites, then part of this effect could be a proxy for quality.

We certainly do not claim that our hedonic controls are perfect. However, in other regressions not reported here, we also find that Central SOE developers pay high prices relative to the values of nearby housing unit sales prices. That suggests these particular buyers simply pay more and that this does not merely reflect omitted quality effects. Moral hazard arising from these entities believing they are too important to fail, combined with their access to low cost capital from state-owned banks, also could help explain their bidding behavior

7. More on the Ponzi scheme - Mish at GlobalEconomicAnalysis has more detail from various correspondents about how Chinese people can afford to buy these multi-million dollar apartments. We've used the phrase Ponzi scheming loan sharks before. This is beginning to look very ugly.

There are circles in neighborhoods, or churches, community groups that are kind of like informal credit unions. People pool money into a large sum and then bid for its use month by month. 5% a month is the typical rate of interest.... Parents lend to their children to buy their condo with the understanding it will be repaid or they will come to live in their old age under that roof.

Almost no one has the 20 to 30% down to buy a place. The down payment is typically borrowed at terrible interest or comes from a "marriage gift" which had its origin in borrowed funds, not from savings.... A collapse of the bubble could cost lots of folks their life savings. This makes the financial aspect of Chinese society much more fragile than it appears on the surface. There is a lot of interconnected personal debt below radar.

8. 'Then they lose track of it' - Bloomberg reports an unidentified source saying that Chinese banks may struggle to recoup about 23 percent of the US$1.1 trillion they’ve lent to finance local government infrastructure projects. HT David via IM. I have bolded the key line. This looks more and more like a Ponzi scheme the closer anyone looks.

Local governments set up the financing vehicles to fund projects such as highways and airports due to limits on their ability to directly borrow money. The central government this year restricted borrowing on concern money isn’t being used for viable projects.

About half of all loans need to be serviced by secondary sources including guarantors because the ventures can’t generate sufficient revenue, the person said, declining to be identified because the information is confidential. The China Banking Regulatory Commission has told banks to write off non-performing project loans by the end of this year, the person said.

Only 27 percent of the loans to the financing vehicles can be repaid in full by cash generated by the projects they funded, the person said.

Commission Chairman Liu Mingkang said this week borrowing by the so-called local government financing vehicles may threaten the banking industry. The nation’s five-largest banks, including Agricultural Bank of China Ltd., plan to raise as much as $53.5 billion to replenish capital after the sector extended a record $1.4 trillion in credit last year. “In China now, it is the same as the people getting loans in Phoenix here in the U.S. three years ago,” said Vikas Pershad, chief executive officer of Chicago-based Veda Investments LLC. “People who want money get money, and then they all lose track of it.”

9. 'Lean against the bubbles' - The Australian reports The International Monetary Fund has warned that central banks need to 'lean against' asset bubbles in future. Let's hope Alan Bollard is watching this Thursday. HT Gareth via email.

"The high costs of systemic financial instability shown by the crisis can be seen as strengthening the case for using monetary policy to lean against asset price bubbles," the fund says in a new policy paper, entitled Central Banking Lessons from the Crisis.

The debate over whether interest rates should be used to "lean against" asset price booms was active in the years after the dotcom boom and bust but was never resolved.

10. Peak oil and another US recession - This research paper from energy analysis firm Douglas Westwood reckons peak oil is very near and could push the oil price over US$80/barrel, which is the threshold to drive the US economy back into recession. HT Blair Rogers via Twitter

If the health of the economy matters, then the administration should take note that oil, at the time of writing, stands around US$70, and that the recession threshold, by the books, is US$80.

Oil prices do not have to rally very much to reach unsustainable levels for the US economy. In the longer term, the administration would do well to heed the forecasts and concerns of wide range of a mainstream analysts.

Take for example, an oil forecast from an April report from the Commodities Research group at Macquarie, a leading natural resources investment bank: “When looking out into 2011-12 and beyond, we see global spare capacity reduced to zero by 2013. Prices will again need to rise to accelerate upstream spending. We do not think, however, that production can be ratcheted higher fast enough.

Oil prices could then rally to reflect scarcity, just like they did in 2Q of last year.” Should oil return to $150/barrel, as Saudi Oil Minister, al-Naimi, has warned or as Macquarie implies above, the statistics are not ambiguous. Expect a recession, and a severe one at that.

Totally irrelevant video - Here's what the Chinese really think of Sarah Palin. I liked the mud wrestle with Obama at the end. Pity they're not quite so scathing about their own leaders...