Wednesday's Top 10 with NZ Mint: Stagflation in China?; Turning Zim dollars into blood diamonds; When competition is a bad thing; Dilbert

Here are my Top 10 links from around the Internet at 10 pas 10 am, 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. The problem with competition - The SMH in Australia reports that APRA, the main banking regulator there, has warned the Senate inquiry into banking that increased competition between banks may lower lending standards.

This is the dirty little secret of banking and the economy.

We all love dog eat dog 'unbeatable' competition between our banks, but it does drive down interest rates and lowers credit criteria.

It helped lead to surges in foreign borrowing, housing lending and property prices on both sides of the Tasman.

John Laker, the chairman of the Australian Prudential Regulation Authority, citing the US banking crisis, said the subprime lending problems that sunk the American economy were partly due to a hyper-competitive lending market.

His comments at a Senate economics committee have added to the concern among financial regulators that too much tinkering in the banking sector could have unintended consequences. APRA's view follows the Reserve Bank telling the government to be wary of exposing taxpayers to risks through its efforts to boost competition in banking. Arrayed against the regulators' warnings is the rising political pressure to combat banks' outsized home loan interest rate rises.

During the Australian housing boom in 2002 and 2003, Dr Laker said, strong competition in mortgage lending began to dilute credit standards. "And that was a form of competition which we were uncomfortable with," he told the committee's bank competition inquiry. "We have to balance financial safety with these other considerations - but there is some competitive behaviour that troubles prudential regulators."  

2. After 2013 - New Zealand will still be issuing bonds after 2013 and may well face turmoil in global markets.

After that date many buyers of European bonds will be very nervous because it appears European governments will allow bond holders to take big haircuts after that date. Leaders are meeting later this week to finalise the plans.

Alexander Gloy of Lighthouse Investement Management explains the case at Naked Capitalism.

Sovereign bonds with issue date before mid-2013 would be “exempt” from restructuring? Who in his right mind would venture out to buy bonds issued by a heavily indebted country after that fatal date? Obvious answer: nobody. Even if that country managed to sell a few new bonds – those bonds would make up only a small percentage of total debt outstanding (but would have to bear the full burden of haircuts, dramatically impacting expected recovery value). Even if such an event was to occur – how much debt relief would the issuing country gain (if, say, 99% of bonds outstanding have been issued prior to mid-2013 and hence will not suffer haircuts)? This plan is not only half-baked, it is akin to a pile of sand and mud mixed together by a couple of 2-year olds and presented to their parents (the taxpayers) as a “beautiful cake”.  

3. Blood on Gideon's hands - We have a special place in our anti-inflationary hearts for Gideon Gono, the governor of the Reserve Bank of Zimbabwe. Now it seems he's been even more evil than just printing money. Ambrose Evans Pritchard at The Torygraph points out Wikileaks cables saying Gideon and his family have been involved in blood diamond smuggling. At least the diamonds hold their value I suppose.

The cables suggest that the US diplomats give weight to allegations by Zimbabwe sources claiming that central bank chief Gideon Gono ran the operation, paying for gems with freshly printed "Zim dollars", and reselling them for US dollars.

The trade helps explain why Zimbabwe's central bank had a motive for generating the worst hyperinflation since Hungary in 1946 or Germany under Weimar. The currency disintegrated in early 2009, giving way to US "dollarisation" under the power-sharing deal with premier Morgan Tsvangirai. The cable relayed claims that Mr Gono ran the operation and pocketed "several hundred thousand dollars a month" before being displaced by Zimbabwe's military.

Vice-president Joyce Mujuru allegedly skimmed off similar sums.  

4. Stagflation in China? - Bloomberg reports some in China think it now faces the worst of both worlds. Inflation and slowing.

China began experiencing a period of stagflation in the second half of this year with high inflation and unemployment, the Guangzhou Daily reported today, citing He Keng, deputy director of the finance and economic affairs committee of the National People’s Congress.

The nation will also face the possibility of an economic double dip next year, the newspaper cited. 

5. An abusive nation - A bond vigilante speaks. FT.com reports a fund manager from a fund looking after half a trillion dollars reckons America is being grossly irrersponsible in charge of a reserve currency. He sees the recent rise in US bond yields accelerating. HT Gertraud.

“They are running an extremely irresponsible fiscal policy, completely abusing their reserve currency status. No other country would be able to run such a deficit without a long-term plan to bring it under control,” said Tim Drayson, economist at LGIM.

“There seems to be absolutely no political will, judging by the events of the past few days, to tackle this deficit. At some point the US bond market is going to wake up and realise that US fiscal policy is on completely the wrong path. Even if US growth is strong, it still leaves them with a horrendous long-term fiscal outlook.”

Mr Drayson feared that if and when inflationary pressures started to build and the Federal Reserve needed to withdraw its quantitative easing programme, which is poised to soak up $600bn of bond issuance, “there could be a potentially catastrophic rise in bond yields”.  

6. American plutocracy - Francis Fukuyama has written a brilliant piece on the curious situation in America where the top 1% of the population now control 23.5% of income and yet the populace are not revolting. Today's must read.

Scandalous as it may sound to the ears of Republicans schooled in Reaganomics, one critical measure of the health of a modern democracy is its ability to legitimately extract taxes from its own elites. The most dysfunctional societies in the developing world are those whose elites succeed either in legally exempting themselves from taxation, or in taking advantage of lax enforcement to evade them, thereby shifting the burden of public expenditure onto the rest of society.

We therefore raise a different and more interesting set of questions regarding the relationship between money and power in contemporary America. All these questions come together, however, in a paramount puzzle: Why has a significant increase in income inequality in recent decades failed to generate political pressure from the left for redistributional redress, as similar trends did in earlier times?

Instead, insofar as there is any populism bubbling from below in America today it comes from the Right, and its target is not just the “undeserving rich”—Wall Street “flip-it” shysters and their ilk—but, even more so, government policies intended to protect Americans from their predations. How do we explain this?  

7. Bankrupt pensioners - CNBC reports that US pensioners are the fastest growing group of people filing for Bankruptcy in America. HT Troy.

People 65 and older are the fastest-growing segment of the population seeking bankruptcy protection, according to a recent study from the University of Michigan Law School. The problem is simple math, said Johanna Sweaney Salt, a CPA with Kaufman, Schmid, Gray & Salt in Claremont, Calif.

Their medical expenses, taxes and other costs keep going up, while their income is going down. Social Security hasn't had a cost-of-living adjustment in a long time and pensions and retirement accounts took a huge hit during the recession. Reverse mortgages and other alternatives presented to them as "solutions" often just dig them further in the hole.  

8. December 19, 2012 - What the day of the collapse of the US dollar might look like ... after QE IV. HT Ross.

9. 'Hyperinflation and a Great Depression' - John Williams from ShadowStats has some strong views on what is about to happen in the US economy. HT Gertraud.

10. Totally Jon Stewart video on the riots in London - A horse beats up a cop. Jon Oliver presents some commemorative plates for your perusal.