Thursday's Top 10 with NZ Mint: Why America may blow up rather than stagnate; Spain's 2 sets of accounts; Self managing compulsory KiwiSaver?; Dilbert

Here are my Top 10 links from around the Internet at 10 past 12 pm, brought to you in association with New Zealand Mint for your reading pleasure.

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.

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

1. 'America not like Japan' - The meme doing the rounds at the moment is that America's economy is destined for a couple of decades of Japanese style stagnation as it stumbles out from the wreckage of a housing bust under the burden of heavy household debt.

But are they the same?

Paul La Monica at CNNMoney says America's population is ageing much more slowly than Japan's so America is different.

Japan was able to keep going with rising public debt through the lost decades because its ageing population was in a 'high saving' mode and were buying Japanese government bonds.

America is different because it starts from a weaker position with its household and public debt and it is still selling more than half its government bonds offshore.

It is therefore, more vulnerable to a collapse in foreign investor confidence and a hyper inflationary blowout than a couple of lost decades.

Yay. Maybe not.

America's major problem is its mountain of household debt and high unemployment that is restraining consumption.

Japan didn't have those same problems.

According to research from Brockhouse Cooper, a brokerage firm based in Montreal, the percentage of people aged 65 or older nearly doubled in Japan between 1990 and 2008. Meanwhile, that percentage has stayed roughly the same in the U.S. So even though there are a lot more people in the U.S. that are retiring as the Baby Boomer generation gets older, total population growth is rising due to high fertility rates and increased immigration.

That's key since younger consumers tend to spend more. "Demographics are the main difference between Japan and the United States. Aging in Japan was a huge issue that led to stagnation," said Alex Bellefleur, a financial economist with Brockhouse Cooper.

"Senior citizens tend to have consumption patterns that are a lot different than their younger counterparts. They're not buying as many homes, cars and other durable goods."

2. 'No it won't. Yes it will' - The battle between Basel and the Banks is on in earnest. The Basel-based Bank for International Settlements is rewriting the capital rules for banking globally and is coming up against some stiff resistance from the 'Too Big To Fail' multi-national investment banking behemoths.

The banks want to keep their highly leveraged bonus-producing machines pumping out the debt. The BIS rightly says we all need to be a bit more careful. Here's the Bloomberg take on the latest exchange of fire.

The Basel Committee on Banking Supervision rebuffed complaints from banks that proposed regulations would damage economic growth, saying the impact would be “modest.” The committee estimated in a report today the new rules would trim 0.38 percent from gross domestic product in the U.S., euro area and Japan after 4 1/2 years.

That’s about an eighth of the 3.1 percent reduction foreseen by the Institute of International Finance, an industry group, over five years. The study follows suggestions from banks including Deutsche Bank AG and Bank of America Corp. that a rush to regulate may force them to cut lending, jeopardizing the economic recovery.

The committee is seeking to frame the debate as the Group of 20 nations face a November deadline for outlining new rules after the worst financial crisis since the 1930s.

3. Two sets of accounts - Anyone who thinks the European Financial Crisis is over should look at this piece by Edward Hugh in Credit Writedowns on exactly how much Spanish government debt is carefully hidden away from the European bean counters and the bond markets. The Bank of Spain has two sets of accounts, it seems.

Very handy if you're trying to keep a ballooning fiscal debt away from the prying eyes of the bond vigilantes.

What Spain’s central, local and regional government does is take advantage of loopholes in Eurostat accounting regulations to generate debt that really is debt, but is not classified as such according to the Eurostat excess deficit criteria. Key areas involved are debts on the balance sheets of state (or regionally, or locally) owned companies, overdue payments for receivables (very common practice in Spain), and public-private-partnership-type leaseback-arrangements.

None of these are (typically) classified as debt, though they do all have to be paid at some point, which means there is a stream of revenue (flow) impact rather than a debt (stock) one (unless and until Eurostat changes the rules). Which means that while they do not impact that critical debt to GDP number, servicing these liabilities does exacerbate the annual fiscal deficit one. Which is why ultimately bringing Spain’s fiscal deficit under control will almost certainly prove to be much harder work than it seems.

We are able to make this comparison since the Bank of Spain effectively maintains a double entry book keeping system, whereby it keeps one record under the National Financial Accounts of the total debt , while at the same time keeping a separate record of debt as classified for the EU Excess Deficit Procedure.

As we can see in the chart below, total gross government debt in Spain as classified in the Financial Accounts was some 751 billion euros (or around 75% of GDP), as compared with the 585 billion (or around 58% of GDP) in gross debt recognised under the EU excess deficit procedure classification.

4. How America exports inflation and how it rebounds right back - Economist Andy Xie is a close watcher of China and its relationship with America, which is one that will dominate the global economic and strategic outlook for the next 50 years or so.

Xie reckons America is exporting inflation to developing countries like China and there's a risk it will rebound back to America. He is in the Inflationistas camp and has a good argument to say the Deflationistas are wrong. It is a fascinating read on the implications of globalisation post-GFC.

The global economy is like fried ice cream: If you don’t act fast, it turns into a mess.

Deflation prophets in the West are in for a rude awakening. Eastern fire will turn Western ice into a mess, and 2012 looks like it will be the year of melting. The fuel for the fire is coming from deflation-fighting stimulus programs, such as that of U.S. President Barack Obama. Stimulus is prescribed as a panacea for recession. In today’s global economy, it isn’t effective in the best of circumstances and is outright wrong for what ails the West now. Trade and foreign direct investment total half of global gross domestic product. Multinational corporations drive both.

They shop around the world for the lowest-cost production centers and ship goods to wherever the demand is. Demand and supply are dislocated. So when a government introduces stimulus, the initial increase in demand doesn’t necessarily boost local supply. More importantly, if multinationals decide to invest somewhere else, there wouldn’t be an increase in jobs to sustain the growth in demand beyond the stimulus. Just as water flows down, stimulus affects low-cost economies more, wherever it is initiated.

As the West pours money into the global economy through large fiscal deficits or central banks expanding balance sheets, the emerging economies are drowning in excess liquidity. Everything is turning red-hot. How will this all end? Ideally, before inflation takes hold in the U.S. and Europe, the costs in emerging economies will rise high enough for multinationals to invest and hire in the West again. I wouldn’t count on that. The average wage in the developed economies is 10 times that in emerging markets. There are five people in the latter for one in the former. A more likely scenario is that the West will have to stop stimulus programs when inflation spreads to it from the emerging economies. The most immediate channel is through rising commodity prices.

It’s a tax on the West to benefit emerging economies that produce raw materials. That’s the irony: The stimulus in the West can immediately bring harm to itself. It’s also the magic of globalization. labor in the West will demand wage increases to compensate for current and future inflation. One may argue that high unemployment rates will keep wages in check. Think again. In the 1970s, the U.S. suffered a wage-price surge even with high unemployment because workers saw through the Fed’s “growth first and inflation be damned” intention.

In 2012, the Fed will run out of excuses not to raise interest rates. As the excess liquidity in the global economy will be gigantic by then, the tightening will probably trigger a global crisis as asset bubbles burst.  

Here's the video below and the full version on Bloomberg.

5. Where's China putting its money? - If China doesn't put its fast growing foreign reserves into US Treasuries or Crafar Farms, where will it store the stuff? Bloomberg reports it's buying Korean government bonds.

China more than doubled South Korean debt holdings this year, spurring the notes’ longest rally in more than three years, as policy makers shifted part of the world’s largest foreign-exchange reserves out of dollars. Korean Treasury bonds held by Chinese investors rose 111 percent to 3.99 trillion won ($3.4 billion) in the first half of the year, data from the Seoul-based Financial Supervisory Service show.

China should allocate some reserves to “financial assets in major Asian economies,” Ding Zhijie, a former adviser to China’s sovereign wealth fund, said in an Aug. 16 interview.

“The significance of both the dollar and euro has declined because of the global financial crisis and the European debt crisis, while the role of some emerging-market currencies rose,” said Ding, dean of finance at Beijing’s University of International Business and Economics.  

6. Should KiwiSaver allow self-management? - Australian pension fund investors are deserting the official fund managers in droves, this report in The Australian explains.

If KiwiSaver does become compulsory, should savers be allowed to manage their own money? Would they put it all straight into rental properties? Can fund managers be trusted and are their fees too high?

That amazing Australian scheme is cited as the model. But I wonder how happy they are with it, particularly given the poor market performance of late. Australians have the option of self managing their compulsory savings. Should we have the same option?

FINANCIAL planners and advisers are fleeing managed funds under pressure from their clients, according to a survey. They are increasingly putting money directly into shares and other listed investments, the report finds. Market research firm Investment Trends found the exodus from unlisted managed funds gained pace in the last year.

Only half of clients' money was directed to managed funds, down from 62 per cent the year before, according to the survey of 700 planners in April and May. Recent figures from analysts at Mercer showed the average active manager of Australian shares performed slightly worse than the 13.1 per cent return on the sharemarket in the 12 months to June 30, after fees were deducted. This has coincided with a surge in interest in market-tracking investments such as ETFs.  

7. Could the Australian and New Zealand dollars collapse? - Danish bank Saxo thinks they might, BusinessSpectator reports. Along with our housing markets. HT Hugh via email.

Saxo notes that the big commodity exporting countries such as Australia and Canada withstood the global financial crisis extremely well, because both had solid banking systems. They were also helped by the move by central banks around the world to quickly cut interest rates in the wake of the crisis, because this supported asset prices. In addition, Australia benefited from China’s massive stimulus program that caused a sharp rebound in industrial commodity prices.

“So some countries escaped the turmoil relatively unscathed – but they won’t be so lucky this next time around as global growth begins to weaken in coming months.”

Saxo argues that Australia, Canada, New Zealand, Norway and Sweden (which is an exporter, if not a commodity exporter) have all seen a massive surge in housing prices. It warns that “when these bubbles pop in a weak global environment, this is likely to serve as a double whammy to these countries, particularly Australia and Canada, whose currencies are the strongest, and where private indebtedness is as bad or worse than it has ever been in the US or the UK.”

As a result, Saxo warns, “The commodity currency levels could look very different when 2011 rolls around.”  

8. Rebounding inflation and the game of musical chairs - Further to the Andy Xie piece above, Ambrose Evans Pritchard reports on the growing inflation pressures in emerging economies and how this is hitting the profits of the globalised companies.

Some companies are now looking to move to cheaper places. I wonder how long everyone can play this game of multi-national musical chairs before the music stops and inflation catches up with everyone.

Rising wage and production costs in China are eating into the profits of Western companies and may soonset off an exodus of multinational companies to cheaper locations. Reliance on Chinese plants is suddenly proving double-edged. "We conclude that labour and transportation cost pressures are a major concern for executives that may be under-appreciated by investors," it said. The US industrial giant General Electric raised eyebrows in May with plans to shift production of its hybrid water heater from China back to Kentucky next year after securing lower wages from US workers. The company cited the narrowing pay gap, lower transport costs, and shorter delivery times.

Ambrose throws in this little property bubble bomb in at the end.

Beijing may have manoeuvred itself into a policy swamp by relying on tiger-style export growth for so long with a suppressed currency instead of boosting domestic demand. Consumption has fallen from 47pc of GDP in 1998 to 35pc, the flip-side of over-investment in excess capacity. It will be tricky for China to extricate itself smoothly from such extreme imbalances.

Meanwhile, China Daily reports that 70pc of all flats in Hainan, 66pc in Beijing, and 51pc in Shanghai are empty, based on a survey of electricity use. They are presumably owned by investors and speculators. Given that the "cohort" of young people aged 20 to 30 currently joining the workforce is now contracting as China's demographic crunch starts to bite, this property glut looks all too like the bubble peaks in Taiwan, Hong Kong, and Singapore in the 1990s.  

. 9. Completely and utterly irrelevant video - Ah zose Germans know how to have zee fun. A Lufthansa flight attendant decided to hand out pillows on a flight from Tel Aviv. She accidentally started a pillow fight. How amusing. I love how the passengers clapped at the end. Oh what fun. HT Ken Freer.

10. Totally irrelevant video - A marriage proposal. For those of you who think my heart is hard and I need to be a little more positive... I liked this. HT Ken Freer