Monday's Top 10 with NZ Mint: China's 'Bridges to Nowhere'; Better ways to measure GDP?; A Latvian implosion; The Long Finance movement; Dilberts

Here are my Top 10 links from around the Internet at 10 past 2 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 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.

1. Is GDP a real measure of output? - Last week's GDP figures slumped in part because fewer people used their phone to make toll calls.

Instead they're using Skype and email more, and prices are falling.

It shows up as less GDP, but people are still getting the same or more 'value' out of their telecommunications.

HT Neville via email..

Here's Helen Twose at the NZHerald on this.

2. Another way to boost GDP - China's growth miracle seems more miraculous and/or fraudlent by the day. China Hush reports many Chinese buildings are blown up and rebuilt just a few years after they are built. This 'boosts' GDP because new concrete, steel and other materials are used to create new output.  HT Zerohedge.

This is in effect China's version of Japan's 'Bridges to nowhere'.

Ever wonder how China can endlessly generate goal-seeked GDP of precisely 8.00001% year after year? Or how it can constantly find use for the massive and ever-larger surplus of warehoused commodities? Simple - never stop building. Which, apparently means blowing up empty building before they are even finished and rebuilding them. Rinse. Repeat.

After all gotta keep all those construction workers from rioting, and all those USD reserves redirected into Brazilian and OZ commodities, now that China is not really buying US debt anymore. China Hush has some stunning pictures confirming that in its search of the great home bubble perpetual engine, the politbureau comrades may have stumbled onto the bricks and mortar equivalent of Shangri La.  

3. Competitive devaluations - The world is descending into a series of devaluations by very stressed economies willing to print themselves out of the mire.

It is a type of tragedy of the commons in an era of deflation. Whoever prints first wins. Those who don't print because they are trying to be 'good' are the last ones standing when the music stops. Southern Europe appears to be the one being left on the sidelines (along with New Zealand....).

Here Andrew Balls from Pimco, the world's biggest fund manager, talks about the risks of a rising euro. He doesn't mention that the Germans are doing OK.

The U.S. has its own problems, not least its high level of unemployment and a social safety net that is not designed to cope with these kinds of structural problems. The U.K. is attempting its own fiscal adjustment, based upon what looks like fairy tale assumptions and false logic, but at least supported by currency deprecation. Japan remains in the mire. China is unwilling or unable to move away from an export-led growth strategy that served it so well under old normal conditions.

But the eurozone is in an extremely poor position to cope with a rising currency. Indeed, if the ECB takes the money supply data as seriously as it professes, it should be very worried and perhaps pursue quantitative easing for domestic reasons rather than just to protect itself from the international game of beg-thy-neighbor. There are a wide range of possible outcomes as the eurozone attempts to cope with its peripheral problem.

The euro strength makes the negative fat tail risks fatter. Something has to give. The global economy faces a classic macrofinancial coordination problem, in which the eurozone is one of the chief losers, and further stoking protectionist pressures in the U.S., which is hit with its own shock of high structural unemployment without the social safety net to cope.  

4. And we thought Ireland had it bad - Latvia was one of the fringe EU states to be hit hardest by the Global Financial Crisis. Jamie Smyth at the Irish Times took a visit to the Eastern European country to find a country worse off than Ireland. Latvia is in a complete mess. HT Brendan via email.

The extent of Latvia’s collapse is shocking even for Irish observers. Since the recession began at the start of 2008, Latvia’s gross domestic product (GDP) fell by a quarter, one of the biggest falls in output of any country since the Great Depression. The unemployment rate has tripled, hitting 22 per cent at the start of 2010 before falling back to 16 per cent in June. Tax revenues fell 30 per cent last year and government debt is projected to rise to 74 per cent of GDP this year, up from just 7.9 per cent in 2007.

Martins Bicevskis, Latvia’s state secretary for finance. “We would have had a big economic decline due to the global financial crisis in 2008 but it certainly wouldn’t have been so deep if our system wasn’t so weak.”

Bicevskis blames several factors: a property boom inspired by successive governments’ lax fiscal policy, which provided tax breaks for developers and low taxes on real estate; a flood of cheap money into the economy from foreign banks, particularly from Scandinavia; huge increases in wages prompted by labour shortages; and the global liquidity crisis.  

5. They knew all along - Shahien Nasiripour at HuffPo reports that many Wall St banks knew they were buying very Sub Prime mortgages through the US housing boom, but did it anyway. HT Nikki via email.

During a little-noticed hearing this week in Sacramento, Calif., a firm hired by Wall Street to analyze mortgages given to borrowers with poor credit, which were then packaged and sold to investors during the boom years, revealed that as much as 28 percent of those loans failed to meet basic underwriting standards -- and Wall Street knew all along.

Worse, when the firm flagged those loans for potential issues, Wall Street banks ignored its recommendation nearly half the time and likely purchased those loans anyway -- selling them to unwitting investors who were never told that the biggest home loan due diligence firm in the country had found potential defects in these mortgages. The revelations give a better picture of what many have likely known for years: Wall Street firms knew they were buying lead yet passed it off as gold to investors who had no knowledge of the alchemy behind the scenes.  

6. Trickle down doesn't work - Mark Thoma points to some interesting statistics showing tax cuts simply don't work to boost the economy and that trickle down economics is a fraud.

The chart shows the number of people earning over US$200,000 who legally paid no tax. HT Troy via email.

7. Long Finance -  A  conference was held over the weekend in London that talked about 'Long Finance'. This is where people start looking at financial decisions in terms of generations rather than nano-seconds. Faisal Islam at Channel 4 News has a summary. It sounds a lot like the 'Slow Food' and 'Slow news' movements.

This is evidently an issue of profound interest to economists and financiers. The financial crisis illustrated bankers and traders were incentivised and thus obsessed with time horizons of no longer than the next bonus round. High frequency trading in the City and on Wall Street, suggests the natural unit of financial time consciousness is getting shorter, not longer, and is probably close to a nanosecond.

Some hedge funds invest hugely in the physics of their telecommunications links to trading systems, so that they can make huge trading profits from giant bets against traders with marginally slower links.

8. The lobbyists won - Avinash Persaud from Intelligence Capital spoke at the Long Finance conference about how the lobbyists for the banks had gutted any real chance for reform through the Basel III process. Here's a piece he wrote for VoxEU on all of this.

The argument that the banking system is too broken and the world economy too fragile, to support more onerous regulations, is seductive for politicians desperately trying to boost consumer demand. But it is suspect. It highlights that attempts to make banking regulation more counter-cyclical have not gone far enough. The point of counter-cyclicality is to loosen the constraints to lending in times of recession like today and to tighten them when growth and optimism have returned and the worse credit mistakes are being made. Counter-cyclicality needs to be at the heart of the new regulatory regime and not an optional extra.

As Professor Charles Goodhart of the LSE and I have said before, crashes will not be avoided if we continue to feed the booms. The methodology of counter-cyclicality is complex and given that economic cycles are more national or regional than global, it makes for greater host country regulation and national ring-fencing of bankers’ operations. International banks do not like that. To counter they appeal to the “right”-sounding notion of level playing fields.

9. The race to the bottom - Ambrose Evans Pritchard has an excellent piece on the various attempts by central banks to print away their problems and the competitive devaluations that are now happening. We seem to be heading inevitably for trade and capital controls. Is that such a bad thing? HT Andrew via email.

The US and Britain are debasing coinage to alleviate the pain of debt-busts, and to revive their export industries: China is debasing to off-load its manufacturing overcapacity on to the rest of the world, though it has a trade surplus with the US of $20bn (£12.6bn) a month. Premier Wen Jiabao confesses that China’s ability to maintain social order depends on a suppressed currency. A 20pc revaluation would be unbearable.

“I can’t imagine how many Chinese factories will go bankrupt, how many Chinese workers will lose their jobs,” he said. Plead he might, but tempers in Washington are rising. Congress will vote next week on the Currency Reform for Fair Trade Act, intended to make it much harder for the Commerce Department to avoid imposing “remedial tariffs” on Chinese goods deemed to be receiving “benefit” from an unduly weak currency.

Japan has intervened to stop the strong yen tipping the country into a deflation death spiral, though it too has a trade surplus. There is suspicion in Tokyo that Beijing’s record purchase of Japanese debt in June, July, and August was not entirely friendly, intended to secure yuan-yen advantage and perhaps to damage Japan’s industry at a time of escalating strategic tensions in the Pacific region.

Brazil dived into the markets on Friday to weaken the real. The Swiss have been doing it for months, accumulating reserves equal to 40pc of GDP in a forlorn attempt to stem capital flight from Euroland. Like the Chinese and Japanese, they too are battling to stop the rest of the world taking away their structural surplus.

We have a new world order where China and India are buying gold on every dip, where the West faces an ageing crisis, and where the sovereign states of the US, Japan, and most of Western Europe have public debt trajectories near or beyond the point of no return.

The managers of all four reserve currencies are playing fast and loose: the Fed is clipping the dollar; the Bank of England is clipping sterling; the European Central Bank is buying the bonds of EMU debtors to stave off insolvency, something it vowed never to do just months ago; and the Bank of Japan has just carried out two trillion yen of “unsterilized” intervention.

Of course, gold can go higher.

10. Totally relevant video of game of muscial chairs, apropo the competitive devaluations above.