Thursday's Top 10 with NZ Mint: A disappearing middle class; NZ's national savings problem; The coming deflation; Dilbert

Here are my Top 10 links from around the Internet at 10 to 1 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. Remember that registered commenters can more easily include links out in their comments. Use the box in the right hand column to register. We're turning off unregistered comments from September 12.

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

1. America's disappearing middle class - Some interesting trends have developed in recent months on US stock markets. Yahoo reports.

More people have been pulling money out of their stock funds (401ks) and not all of it is being invested elsewhere.

It turns out the money is being spent to pay the bills and buy the family food.

America's middle class is in deep trouble now it can't borrow to make up the gap between relatively low wages and relatively high spending.

It all means America's high consumption lifestyle is coming to an end. That's important for us because 70% of the world's largest economy is powered by consumption. 

When that slows we all feel it. HT Blair Rogers via Twitter.

Perhaps the biggest reason of all hasn't gotten enough attention: Americans are making due with less and don't have the money to put into stock funds, and many are taking money out of their investments to pay for basic necessities like food, clothing and shelter. With wages stagnant for those who still have a job "a lot of people are having to tap into their nest egg to keep their living standards going," says Damien Hoffman, co-founder of WallStCheatSheet. "A lot of people are living out of principal.

There's no other way to get around that." Fidelity's recent report of a sharp increase in the number of 401(k) participants seeking loans or hardship withdrawals in the second quarter is further evidence of the disappearing middle class.

"These are basically emergency ways to fund yourself. We think it's a scary statistic," Hoffman says. "Where is the middle class going to be if they draw down their 401(k)s drastically over course of next few years?"  

2. Bridge the savings chasm - Brian Fallow has a useful piece at NZHerald on New Zealand's savings and foreign debt situation.

He puts it simply, but well. Many still deny we have a savings problem.

I wonder whether relying on others to fund any sort of current account deficit in these volatile times is a good idea. Capital market work great to handle these sorts of global capital and trade imbalances. Until they don't. Then we're all in schtuck.

The current account deficit is a measure of how far New Zealanders' savings fall short of funding investment in the economy. We have run deficits every year since 1973 and the cumulative effect is that the stock of foreign claims on the economy, net of New Zealand investment abroad, is equivalent to 89 per cent of the annual output of goods and services.

That is actually an improvement from nearly 95 per cent a year ago, but it only means that we have gone from being up to our collective nostrils in debt to the rest of world to up to our chins. But with the deficit forecast to widen again, that is probably as good as it gets.

He finishes with a couple of posers.

Making KiwiSaver compulsory presents its own difficulties: would it come at the expense of lifting take-home pay for those who live hand to mouth now and who can ill afford to save? And would it merely cannibalise other forms of savings, including bank deposits?  

3. China's inflation surge - Bloomberg has a useful piece on what's really happening with inflation in China.

Lydia Wang, a 28-year-old marketing manager in Shanghai, gripes that the shoes and clothing she normally buys are at least 50 percent pricier than in 2009. Wu Sengyun, a 54-year-old retiree in the coastal city of Ningbo, Zhejiang, says prices of fruit and fish are up more than 20 percent in the past year.

Willy Lin has cut back on free drumsticks in the canteen of his Jiangxi clothing factory as meat and vegetables grow dear. “The workers suffer,” he says. “Everybody is crying.”

Officially, China’s consumer price inflation topped out at 3.3 percent in July compared to a year before, a 21-month high. Officials say the spike is a one-off caused by crop damage from recent flooding. Other costs, they say, such as cars, mobile phone bills, and clothing, are falling, and pressure on prices should ease as the economy cools. At an Aug. 12 press conference, Pan Jiancheng, a deputy director in the statistics bureau, said the inflationary threat was “overhyped.”

4. America is turning into the USSR - Gerald Celente talks at Yahoo about the similarities between America now and the USSR in its final years. Strangely compelling comparision, particularly in Afghanistan.

A rotten political system: He compares politicians (Democrats and Republicans alike) to "Mafioso" and says campaign contributions are really thinly disguised "bribes and payoffs."

Crony capitalism: Like in the USSR of old, Celente laments that so much of America's wealth (93%) is controlled by such a small group small portion of its population (10%). Owing to that concentration of wealth, the government makes policies designed to reward "the bigs" at the expense of average citizens (see: Bailouts, banks).

Military-industrial complex: The USSR went bankrupt fighting the cold war and Celente fears the U.S. is "squandering its greater but still finite resources on a gargantuan defense budget, fighting unwinnable hot wars and feeding an insatiable military stationed on hundreds of bases worldwide."

5. Deflation is coming - Gary Shiller, the guy who noticed the US housing bubble before anyone else, reckons deflation is coming, Business Insider points out. HT Roelof via email. This series of charts is well worth reading.

So what's Gary's current outlook? Same as it ever was: Prepare for chronic deflation, buy bonds, and sell stocks.

Why is Gary still expecting deflation? Because consumers still have way too much debt, and this debt will take decades to work off.

Also, consumers are saving money again, which means they aren't spending it. Banks have plenty of cash and reserves, but the demand for money just isn't there. And when consumers are strapped and credit is contracting, prices tend to fal.

6. Working poor rather than Yuppies - Californian foreclosures are not just affecting rich people who spent up large. They're mostly affecting poor people who were borrowing to survive in a low wage economy, Creditslips.org points out. HT Troy via email.

The typical California home in foreclosure is a very modest 1,500-square-foot, 2- to 3-bedroom house in the Central Valley or Inland Empire, refinanced in 2005 or 2006 by a Latino family. The average home value at the time of the loan was about $400,000, considerably less than the $500,000 median home price statewide. At today’s prices, that average California foreclosure property is likely to be worth between $200,000 and $300,000.

Fewer than half of mortgages in foreclosure were purchase loans. Thus, the typical foreclosure story is not a family reaching too far in order to buy an unaffordable house, but more likely, of using home equity to pay credit card debt and maintain a middle-class standard of living in the face of stagnating incomes.

Essentially half of all foreclosures in California involve Hispanics, roughly in the same proportion that subprime mortgages were given out in the years prior to the crisis. Thus, the last to arrive at the bottom rungs of the middle class ladder are the first to be pushed back off. The picture that emerges from this foreclosure study is of a generation of Hispanic homeowners, typically refinancing an existing, modest home, rather than buying an extravagant McMansion, losing years of accumulated wealth and savings in the process.

Opponents of foreclosure relief and debt reduction regularly invoke the useful fiction of foreclosure victims as profligate yuppies with surplus bathrooms. The facts are otherwise.

7. Now even Morgan Stanley is saying it - US investment bank Morgan Stanley says now it's not a matter of if governments default, but when, Bloomberg reports.

Here's the full research note for those of an inquisitive and less trusting nature.

Investors face defaults on government bonds given the burden of aging populations and the difficulty of increasing tax revenue, according to a Morgan Stanley executive director. “Governments will impose a loss on some of their stakeholders,” Arnaud Mares in the firm’s London office wrote in a research report today.

“The question is not whether they will renege on their promises, but rather upon which of their promises they will renege, and what form this default will take.” The sovereign-debt crisis is global “and it is not over,” he wrote. Rather than miss principal and interest payments, governments may choose a “soft” default in which they pay back debts with devalued currencies resulting from faster inflation or force creditors to take lower returns, Mares said in an interview.

8. Dubai is back in the headlines - Reuters reports that Dubai World is planning a fire sale to repay assets. HT Gertraud via email.

Dubai World is prepared to sell prized assets including previously ringfenced ports firm DP World in a bid to raise as much as $19.4 billion to repay creditors, a document obtained by Reuters showed.

The document, presented on July 22 to creditors at Dubai's lavish Atlantis Hotel, also revealed that the state-owned conglomerate's debt stood at $39.9 billion, higher than the widely expected mid-$20 billion range. Dubai World, battling to win creditor support for a restructuring by October 1 in order to start cleaning up its balance sheet, warned a sale of assets right now would generate a maximum of $10.4 billion. 

9. Totally irrelevant link to animations of engines - HT John via email.

10. Totally relevant video - This is the trailer for the new documentary Inside Job. Looks like a cracking watch. HT Kevin via IM.