Thursday's Top 10 with NZ Mint: 'US should fight currency intervention fire with fire'; 'Pan-Pacific Queasing' squeezing NZ$, A$; NZ's high tax rate; Dilbert

Here are my Top 10 links from around the Internet at 10 to 5 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 Thursday'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. Are we rebalancing? - Brian Fallow has a nice wrapup at NZHerald of the latest economic data that suggests deleveraging is hitting household spending more than many expected.

He also points out the long-forecast rebalancing to exports may be struggling.

It's early days, but perhaps we need to speed up the rebalancing.

On the long-desired rebalancing of the economy - a shift from spending to saving, from consumption to investment, from importing to exporting - the Treasury this week sounded a cautionary note. "Signs of rebalancing towards the tradeable sector which were present earlier in the year have eased recently," it said.

Drought had hit agricultural production and the associated downstream processing activity, and what little growth the June quarter could muster was driven by non-tradeable sectors such as construction and services.  

2. 'Fight fire with fire' - How is America going to respond if China continues to stop a revaluation of the Yuan vs the US dollar?

It is already looking at printing money, but it could do more.

The US Federal Reserve could intervene to sell some of these printed dollars and buy yuan, suggests famed US trade economist Fred Bergsten. It just sounds like an awful lot of paper flying in a few more directions to me... HT Andrew Patterson via email.

When China or Japan buy dollars to keep their currency substantially undervalued, the United States should sell an equivalent amount of dollars to push back. The IMF should authorize such intervention when necessary to discipline countries that are violating their obligations by engaging in deliberate undervaluation.  

The United States has, of course, bought foreign currencies for dollars on numerous occasions. It purchased euros in 2000 and yen in 1998, when it was widely agreed that those currencies had become far too weak. The most important interventions came in 1985–87, under the Plaza agreement, when the United States bought German marks and yen to help correct an overvalued dollar.

But these were carried out with the cooperation of those involved, whereas a countervailing intervention would punish a country that was deliberately undervaluing its exchange rate. Hence the target country should be able to appeal to the IMF, if it thought it could make a persuasive case that the new tool was not being used to promote widely agreed systemic objectives. In the case of China there would also be technical problems.

The renminbi is inconvertible for capital flows, hence proxies would have to be found such as renminbi futures contracts and debt instruments. This would probably limit the scope of counterintervention well below the magnitude of Chinese dollar purchases. But the message would be unmistakable. Private capital would flood into China, around its capital controls, and push the currency upward as needed.  

3. Pan Pacific 'Queasing' - Daily Reckoning has dreamt up a new word to describe Quantitative Easing -- 'Queasing'. It points to the prospects for a 'Pan Pacific Queasing' when the US Federal Reserve joins the Bank of Japan in printing money to buy bonds and all sorts of assets.

All this is doing is pushing up commodity prices and commodity currencies like the Brazilian Real, the Australian dollar and the New Zealand dollar. HT Michael via email.

The trouble is, everyone is trying to stay weaker relative to everyone else. It doesn't sound like a formula for economic strength. We may have underestimated how serious things have become with this currency war. It really is a race to the bottom. And it's deceptive because it's driving commodity prices and stocks higher, giving you the illusion of strength.

Capital is exiting the US and looking for a high yield home and now that Japan has also decided to play the same game we may be about to embark on some serious inflation of hard assets and commodity currencies while the US dollar plummets.  

4. IMF warns against currency wars - The FT reports on CNNs the head of the IMF warning about the problems with currency wars.

The comments by Dominique Strauss-Kahn came before the yen fell as a result of the Bank of Japan shifting towards quantitative monetary easing, cutting its key interest rate and proposing a new fund to buy government bonds and other assets.

"There is clearly the idea beginning to circulate that currencies can be used as a policy weapon," Mr Strauss-Kahn told the Financial Times on Monday.

"Translated into action, such an idea would represent a very serious risk to the global recovery . . . Any such approach would have a negative and very damaging longer-run impact."

5. Even India may intervene - The Hindustan Times reports The Reserve Bank of India has warned it may move to halt a rise in the Rupee. The currency wars are on in earnest.

“It is becoming a larger global problem because of the imbalance that there is so much of liquidity and the returns are skewed towards emerging markets,” Subir Gokarn, deputy governor, RBI, said in Mumbai. “So it is emerging as a potential threat and we are clearly thinking of ways to deal with it. As long as the capital flows are in excess of the current account deficit the pressure to appreciate will continue.”

Overseas investors and portfoilo managers have bought as much as $19.7 billion (R88,098 crore) worth of equities this year and a third of them have been bought since the beginning of September alone. The rupee has reacted to this, rising from 47 per dollar on September 1 to 45 per dollar on Tuesday.

6. 'Action is urgently required' - Martin Wolf at FT.com is yet again a must read on the Currency Wars. He says there's an urgent need for action to force China to allow its currency to rise and its economy to adjust.

This leads us to the third question: what might China reasonably be asked to do? An adjustment in the nominal exchange rate is neither a necessary nor a sufficient condition for the rebalancing of the world economy: not necessary, because higher inflation could bring about changes in relative prices, instead; not sufficient, because it would still require an increase in domestic spending, relative to output. At most, therefore, an adjustment in the nominal exchange rate is a facilitator of a wider set of desired adjustments. Thus the menu of possible options for the Chinese authorities could include a cap on the intervention, an end to sterilisation of the monetary consequences and targets for real domestic demand, household consumption and the current account.

Meanwhile, China should demand complementary actions elsewhere, notably in the US. In any such discussions, one would have to address Chinese concerns that letting the exchange rate appreciate significantly would not only damage export industry, but risk a “lost decade” similar to that of Japan in the 1990s. What happened to Japan was largely the result of using monetary policy after 1985 to offset the negative impact of the rising exchange rate on net exports.

This leads to the final question: how might China be cajoled or coerced into changing its policies? Negotiation remains a hope. The rest of Group of 20 leading countries should unite in calling for these changes. But if negotiation continues to fail, alternatives must be considered. Import surcharges are one possibility. Fred Bergsten of Washington’s Peterson Institute called for countervailing currency intervention in the FT this week; and Daniel Gros of the Centre for European Policy Studies in Brussels recommends capital account reciprocity: affected countries could prevent other countries from purchasing their financial instruments, unless the latter offered reciprocal access to their financial markets The post-crisis world economy will not work so long as its most dynamic economy is also its largest capital exporter. Moreover, China has insured itself to a vastly more than adequate extent. Adopting a set of policies that would turn China into a net importer would benefit both its own people and the rest of the world. The time has come to move beyond rhetoric. Action is urgent.

7. Excellent public debt clock graphic - Check out this graphic at The Economist. Very useful for checking NZ vs the rest.

8. Winners and Losers - Dave Johnson at HuffPo writes nicely about the challenges for China and others in trying to restructre the global currency landscape.

Right now in China there are currently winners and losers from the manipulated currency rate. If rates adjust to where they should be China might lose some jobs, but Chinese workers will immediately be higher-paid relative to the world than they had been, and Chinese consumers will also be more able to buy things made elsewhere. Right now those in control of industries that are moving to China are winners and those in China who want higher pay and want to import are losers.

And as is the way of the world, the winners in China are fighting to keep their advantages, while the losers want change to occur. And outside of China the winners are fighting to keep their advantages, while the losers want change to occur. But if China starts bringing its currency to market rates the world's winners and losers will be the winners and losers for the right reasons. It is time for China to move on from currency manipulation.

9. A tax comparison -  This useful KPMG analysis of income tax rates across the board shows that NZ's effective tax rate for someone earning US$100,000 of gross income is higher at 32.2% than Australia on 28%, UK on 31.5%, South Africa on 31.2% and America on 24.3%, but lower than Norway, Germany, Denmark and Croatia on 53.3%. Pages 10/11 have the relevant detail. A great resource. The Bahamas are the lowest with 0.8%.

10. Totally irrelevant video - TheOnion reports that most Americans get most of their exercise while drunk.

Study: Americans Get Majority Of Exercise While Drunk