Here are my Top 10 links from around the Internet at 10 to 4pm, 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
1. Is that the best we can do? - Brian Fallow expresses something that is starting to dawn on everyone in his NZHerald column. The scale of the deleveraging that has to happen is enormous and it's going to hamper growth for a long time.
Retailers and bankers are only now starting to grasp the scale of it.
We essentially need to pay back debt equivalent to about 50% of GDP.
That will take a decade or more at current rates. In the meantime we need to shift a lot of savings from property into export producing businesses.
This is what de-leveraging means.
Do we have the policy settings for that? Capital gains tax? Land tax?
There is a decent chance the economy did not grow at all over the past six months. It is troubling if that is the best we can do at a time when the stimulus from the Government is at its peak, interest rates are as low as they are going to go, and export prices close to all-time highs.
We are a quarter of the way into a financial year in which the Government expects to run a cash deficit of $13 billion (up from $9 billion last year). Likewise the average mortgage rate people are paying is as low as it is expected to go in this cycle. And world prices for a basket of New Zealand export commodities are just 1 per cent off their all-time high last May, boosting farm incomes.
The net effect is a joyless, jobless phase of the recovery, where progress is measured by the fact that we have gone from being up to our nostrils in debt to merely up to our necks.
2. Wondered why the Chinese want our nicely watered and arable farmland? - China Daily says new report out in China says the average area of the glaciers in Western China is expected to shrink 30% by 2050 because of Global Warming, which would in turn worsen water shortages and reduce crop production by 5% to 10%.
Forecasts of glacier recession patterns, summer temperatures and precipitation showed the average glacier area in western China might be reduced by 27.2 percent by 2050, said the report. Glacier shrinkage would also threaten China's agriculture sector.
The report warned that overall crop production capacity would drop by 5 percent to 10 percent by 2030 due to global warming, especially in wheat, rice and corn, and the impact would worsen after 2050.
The Chinese government had attached importance to tackling the problems caused by climate change and taken effective measures to reduce the negative impacts, said Sun Cuihua, an official with the National Development and Reform Commission (NDRC), Friday at the climate talks.
3.' Let's just reduce our standard of living' - Now Americans are starting to say heretical things such as whether it's now time to deliberately reduce America's standard of living rather than try to print their way out of trouble. Here's Sara Grillo at BusinessInsider.
US QE2 could be the final straw that ignites conflict amongst the already tense and non-cooperative world powers. The recent IMF meeting did not foster resolve. All that US QE2 is going to do is further motivate countries like Japan and Brazil to intervene and devalue their own currencies defensively. It could also spur asset bubbles in Emerging Markets like China. Europe has clearly dug its heels and stayed tight, resorting to VAT increases instead.
However, a strong Euro will ultimately be counterproductive for the recovery. We may see reactive tariffs or trade quotas against inexpensive imports. The best way to create balanced and sustainable growth of world aggregate demand is through concerted movements, but that unfortunately does not seem to be the tone. The bottom line is that unilateral movements reflect global tensions and a lack of cooperation amongst major world powers. This boosts the likelihood of another high tail risk event.
Instead of monetary policy, how about some fiscal? Taxing the rich more won’t work because they will work less or find tax shelters. Cutting spending won’t work because the Baby Boomers are starting to retire, and they get their Medicaid and Social Security. The least painful measure would be to broaden the tax base. I’m not against Volcker’s VAT tax idea. While we are at it, let’s see about higher taxes on luxury goods, tobacco, alcohol, and energy. These measures are weak at best and will only dent the $14 trillion or so that we are in the hole.
Here’s a cynical and imaginative idea: maybe there is no solution. The structural problems are too deep, and every answer creates more problems. Maybe the US should just cope with the pain that it deserves for binge overleveraging itself. Maybe the frugal nations of the world should dominate, because they have the discipline to save and invest their money wisely. Perhaps it is time that the US should step aside and accept that we just can’t compete anymore. We almost nationalized the banks a few years ago. Maybe Socialism isn’t a bad option.
This is an old-fashioned, shrewd philosophy. The US should own up to our debt addiction, accept that we are down for the count, and adopt lower standards of living until the country learns to save and invest wisely its money instead of operating like a casino or a shopping spree where everyone owns 4 cars, 2 houses, and vacations like it’s the last time the sun is going to shine.
4. Why Obama is against a foreclosure moratorium - You'd think with an election coming up the US government would take the opportunity to beat up on the banks and demand a moratorium on all foreclosures in the United States. But no. Here's Nomi Prins at Zerohedge with a possible explanation. The government can't afford to force a revaluation on the loans because it now owns so many itself. It is the Extend and Pretend economy.
The free-market, let the banks do what they do mentality was what allowed them to create a $14 trillion mountain of securities backed by precarious mortgages to begin with. Don’t look at what they’re doing, that might hurt the boom. Don’t ask them for anything in return for bailouts -- that might clog the system.
Don’t stop them from churning foreclosed properties -- that might stop the recovery. But the real reason for Geithner’s reluctance about a foreclosure moratorium is that he’s scared stiff about those securities – because even if he won’t admit it, he knows that the bailout wasn’t just about TARP and Bernanke isn’t just an economic savior.
The government owns or is backing trillions of dollars worth of assets predicated on the same or similar suspicious loans that defaulted during the 2008 crisis period, which they did nothing to stop (or force banks to restructure).
5. Here's an interesting idea - Michael Pettis is a closely watched academic economist in Beijing who has his finger on the pulse of US-China economic, currency and trade relations. He suggests one way to solve the big problem in the currency wars is to get America to organise China to build and own infrastructure in America.
That could be entertaining in a political sense, but here's the thinking.
Essentially, China needs time -- perhaps up to 10 years -- to switch its internal economy from production of exports to a lot more consumption of its own stuff. To do that it needs to maintain a trade surplus with America. Meanwhile, America's problem is a lack of spending and jobs in America. It needs spending on infrastructure but can't afford to do it itself or borrow more to do it.
The other way the US can run a rising trade deficit is for a surge in investment. With a slowing world economy it is unlikely that private investment will rise, but as Joseph Stiglitz pointed out recently the US is paradoxically in a very good position to increase investment because it has very poor infrastructure for its levels of development.
The US has tons of room for a major expansion in infrastructure and, unlike in China, almost any infrastructure spending is likely to be value creating. One way for this to happen is for the US government to fund and engineer the infrastructure spending directly. The resulting increase in the US trade deficit would of course be financed by Chinese lending to the US government as it is forced to accumulate USG bonds.
But aside from the fact that there is too much pork-barrel politicking involved in US government spending, it will result in a rapid rise in the US fiscal deficit. Would that matter? No, because this is exactly the kind of fiscal spending that is sustainable. US wealth creation would exceed the rise in debt and so the US is in the aggregate better off.
But of course the politics of a rise in the US fiscal deficit are pretty sticky. So why not have China do it directly? Let China engage in a massive rebuilding of US infrastructure – it can build airports, highways, damns, and railways – which would raise investment levels enough keep the US trade deficit high in a way that benefits the US and China.
Of course China would also have the right to charge for the use of these projects so that it can earn a positive return on its investment. The return doesn’t even need to be high – just better than the return it gets on its huge expansion in investment in China, which I suspect is negative for the country as a whole.
Talk about win-win. China will get the eight to ten years it desperately needs to engineer what will otherwise be a brutally difficult rebalancing. It will get a much higher return on its investment. And it can avoid the foolish pork-barrel domestic expenditures that have characterized the past several years. The US can sharply improve its infrastructure in a rational way without a boatload of Congressmen arguing over who gets what. It can raise employment without raising the fiscal deficit.
And as icing on the very large cake we can avert the trade war that is an almost inevitable outcome of the current imbalances. So can we get China to fund the Xin Fa’an (New Deal) in America? Probably not. Muddled Chinese public opinion will be furious that desperately poor China is investing in rich America, even though the overall returns will be better and the cost of China’s adjustment will be much lower. Muddled American opinion will be furious that America is “selling out” to China. Bumptious politicians in both countries will completely fail to get the underlying economics of the trade, and they will never allow it to happen. But it is still a pretty good idea.
6. The problem with Parity - The Australians have a curious attitude to their currency. Many of them (particularly the consumers) actually like the fact it is strong. But Elizabeth Knight writes at SMH.com.au that parity for the Australian dollar may not be such a good thing. Can you imagine a parity party in New Zealand? It would be more like a wake.
Once you look past the froth and excitement, the reality is that we are in a global currency war and Australia has yet to pick up a weapon. Perhaps there is insufficient focus on the international battle because we are so drunk from two weeks of celebrating (near) parity.
7. 'You didn't tell us' - Felix Salmon from Reuters talks in this video about how much of the US mortgage market is fundamentally flawed and how investment banks (the Too Big To Fail banks) face an almighty disaster. That's because they sliced up mortgages that they knew were impaired but didn't tell the buyer of the securities over these mortgages that they were impaired. Just plain fraud. Here's his reasoning on the video and here's his original text post.
Just about every major investment bank in the world might have huge legal risk surrounding the way that they built their mortgage bonds. The stock market in general might be relatively sanguine about the mortgage mess, but bank stocks are falling, and I suspect that the worst is yet to come.
Certainly the tail risk to the banking industry as a whole is as high as it’s been since TARP was first unveiled.
8. What Henry didn't do - Henry or 'Hank' Paulson was George Bush's Treasury Secretary and failed to stop the final stages of the housing boom before it bust with such devastating effects. There's a reason for that, as Greg Gordon from McClatchy reports.
In his eight years as Goldman's chief executive, Paulson had presided over the firm's plunge into the business of buying up subprime mortgages to marginal borrowers and then repackaging them into securities, overseeing the firm's huge positions in what became a fraud-infested market.
During Paulson's first 15 months as the treasury secretary and chief presidential economic adviser, Goldman unloaded more than $30 billion in dicey residential mortgage securities to pension funds, foreign banks and other investors and became the only major Wall Street firm to dramatically cut its losses and exit the housing market safely.
Goldman also racked up billions of dollars in profits by secretly betting on a downturn in home mortgage securities. "No one was better positioned . . . than Mr. Paulson to understand exactly what the implications of his moving against the (housing) bubble would have been for Goldman Sachs, because he knew what the Goldman Sachs positions were," said William Black, a former senior thrift regulator who delivered the harshest criticism of the former secretary. Paulson "knew that if he acted the way he should, that would have burst the bubble. Then Goldman Sachs would have been left with a very substantial loss, and that would have been the end of bonuses at Goldman Sachs."
9. New Zealand's economy is worth about the same as Arkansas'
10. Totally relevant video - Mr T talks to Bloomberg about Gold. Seriously. He wears an awful lot of Gold. He started buying gold chains in 1977. He now wears 45 pounds of gold. He must have problems at airports. "Gold is the sweat from the sun. Gold is special." He represents a company that buys gold jewellery via the post. Yikes. That's a whole new type of jingle mail.
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