Tuesday's Top 10 with NZ Mint: Hubbard's Primavera bid; Turkey's new capital control; China's ageing problem; America's fiscal timebomb; Dilbert

Here are my Top 10 links from around the Internet at 10 to 10 am (yes!), 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 tomorrow'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. Hubbard's Primavera bid - Fran O'Sullivan at the NZ Herald has more detail on the bid for South Canterbury Finance that Allan Hubbard reckons might have kept it alive and saved the government some money.

Apparently, the bid was for South Canterbury, Southbury, Scales, Helicopters NZ and the preference share holders in South Canterbury. The government would have only had to stump up NZ$400 million to make the deal happen...

I'm with Bill English and John Key on this one. They felt they had been misled enough by Hubbard's previous deal making and didn't want anything to do with a scheme where the losses would be socialised and the profits privatised.

But Hubbard is still agitating...the Serious Fraud Office needs to end this farce pronto.

Here's the details, as reported by Fran.

Hubbard sent a copy of Primavera's proposal to Power. He said the offer would have required the Crown to contribute $400 million but Primavera would have assumed responsibility for the debentures and the deposits that the Crown had guaranteed.

Full settlement was to take place before September 30, 2010. The Business Herald understands Primavera had offered to introduce $300 million new equity. There would have been a $700 million guarantee back to the Crown.

The upshot is the Crown's total liability would have been reduced to $400 million assuming the finance firm had managed to flourish as a going concern.  

2. Now Turkey does it too - Yesterday I pointed out how Israel had introduced a 10% reserve requirement for banks on the value of foreign exchange swaps by non-residents. This is a form of capital control to slow a flood of newly printed US dollars pushing up smaller currencies, killing off export sectors and driving up inflation.

Now Turkey has announced it's doing a similar thing. Here's Emma Saunders at the FT's moneysupply blog and here's the Bloomberg story.

It does beg the question. If other small and open economies are abandoning their hands off approaches to their currencies and their simple inflation targeting regimes, why doesn't New Zealand?

Here's how Turkey has changed its thinking.

Turkey is trying to lengthen the maturity of deposits flowing into the country, as it explained at the outset of its new strategy in December:

“The fact that maturities of liabilities are shorter than those of assets in the Turkish banking sector exposes the sector to liquidity and interest rate risk, which increases the sensitivity of the banking system to shocks,” it said.

This new, two-pronged strategy marks a shift away from Turkey’s inflation-targeting regime, says Nicholas Spiro of Spiro Sovereign Strategy: “The new strategy is a sharp dilution of the central bank’s five year-old inflation-targeting regime.

Turkey’s monetary guardian is now effectively targeting the current account deficit through a combination of lower interest rates and tougher macro-prudential regulations.”  

3. The ECB's secret money shuffling - Citigroup economist Willem Buiter has had a close look at the European Central Bank's Emergency Liquidity Assistance programme run with national central banks and wonders if there's some very clever money printing going by national central banks (NCB) that undermines the entire Euro zone.

Oh dear.

What happens if a national central bank goes broke after it has created all this new euro money?

Here's what Buiter, a former member of the Bank of England's monetary policy committee, is saying via FTAlphaville:

In that case, the now insolvent NCB would have created liquidity (‘money’) independently of the ECB — a challenge to the very essence of monetary union.

This would be equivalent to treating the ELA as backed by the full faith and credit of the entire Eurosystem. A monetary union with multiple independent centres of money creation will end up looking like the Rouble zone that survived the collapse of the Soviet Union at the end of 1991 for a bit, until it collapsed in a series of chaotic hyperinflations.  

4. Why isn't the Reserve Bank or Kiwibank the Government's bank? - Currently the government uses Westpac as its bank, but has indicated it may put this business up for grabs. But why doesn't it simply use the Reserve Bank or Kiwibank as the middleman and keep the profits for the public?

There seems to be a movement growing in America to do just that.

Ellen Brown writes at Opednews.com about how Washington State on America's West Coast is looking to ceate a public bank for not just government banking, but to lend.

North Dakota has had a state bank for a while and the state's finances are in much healthier shape than the rest. HT Denzil Palmer via email.

Currently, all the state's funds are deposited with Bank of America. (A new law) HB 1320 proposes that in the future, "all state funds be deposited in the Washington Investment Trust and be guaranteed by the state and used to promote the common good and public benefit of all the people and their businesses within [the] state."

The legislation is similar to that now being studied or proposed in states including Illinois, Virginia, Hawaii, Massachusetts, Maryland, Florida, Michigan, Oregon, California and others. The effort in Washington State draws heavily on the success of the 92- year - old Bank of North Dakota (BND), currently the only state-wide public ly-owned U.S. bank.

The BND has helped North Dakota escape the looming budgetary disaster facing other states. In 2009, North Dakota sported the largest budget surplus it had ever had.

6. The Competition Myth - Paul Krugman writes an interesting piece here at New York Times about how President Obama remains allied to the globalised corporate interests that have lost their allegiance to America.

All very topical, given this morning's rally on the Dow after Intel's share buyback and another takeover (neither of which boost jobs in America but make shareholders richer) HT John via email.

A corporate leader who increases profits by slashing his work force is thought to be successful. Well, that’s more or less what has happened in America recently: employment is way down, but profits are hitting new records. Who, exactly, considers this economic success?

Still, you might say that talk of competitiveness helps Mr. Obama quiet claims that he’s anti-business. That’s fine, as long as he realizes that the interests of nominally “American” corporations and the interests of the nation, which were never the same, are now less aligned than ever before.  

Obama remains wedded to the Wall St plutocracy that runs America now. His new chief of staff is a former JP Morgan Chase banker. Here Krugman nails the problem.

The financial crisis of 2008 was a teachable moment, an object lesson in what can go wrong if you trust a market economy to regulate itself. Nor should we forget that highly regulated economies, like Germany, did a much better job than we did at sustaining employment after the crisis hit. For whatever reason, however, the teachable moment came and went with nothing learned.

Mr. Obama himself may do all right: his approval rating is up, the economy is showing signs of life, and his chances of re-election look pretty good. But the ideology that brought economic disaster in 2008 is back on top — and seems likely to stay there until it brings disaster again.  

7. America's parlous budget outlook - It's hard to believe that America thinks it can continue on its current fiscal path to oblivion, unless it either inflates away its debt or defaults or actually does something about it. Obama again overnight pledged not to extend the retirement age or cut the pension. Sound familiar?

But here is a useful CNN Money graphic showing how the US government will by 2020 have just 8 cents in the tax dollar to run everything except interest costs, Medicare, Medicaid and Social Security, down from 24 cents now.

I still can't work out why long term US interest rates are so low. I welcome explanations.

Beyond 2020, the 8 cents to pay for "everything else" would get whittled down to zero. By 2040, there would only be enough in federal tax revenue to pay for interest on the debt and Social Security, according to Susan Irving, GAO's director of federal budget analysis.

Sure, the country could try to borrow to pay for what revenue can't cover. But given the magnitude of what would have to be borrowed, the interest costs alone would be prohibitive. Another alternative: the government could abruptly raise taxes sky high and cut spending to the bone.  

8. China's ageing problem - We all talk a lot about the ageing problem in Japan and places such as New Zealand and Australia. But what about China, which has been running a one child policy for decades?

Here Leith van Onselen at Unconventional Economist has look at what it might mean for Australia (and therefore New Zealand). It's not great.

This policy initially produced a population pyramid optimal to economic growth – that is, where the largest segments of the population were neither young nor old, but in the middle (i.e. working age). This relationship is shown in the below chart, which maps China’s dependency ratios – i.e. the ratio of the non-working population, both children and the elderly, to the working age population.

As you can see, the precipitous fall in China’s birth rates from the mid-1970s caused a sharp fall in the dependency ratio which, other things equal, increased China’s growth potential. However, the demographic blessing provided by the one child policy is beginning to turn into a curse.

As China’s population ages, an inverted pyramid is beginning to develop, whereby too few workers might be left supporting an army of retirees. In many ways, China’s demographic trends are closer to its developed nation counterparts. Of its 1.33 billion citizens, 12% are currently aged 60 plus.

However, over the next two decades the retired segment will grow rapidly, with those aged over 60 years doubling to around 24% of the population  

9. China's Confucian consumers - The unwillingness or inability of China's consumers to consume is at the heart of the economic imbalances dominating the global economic and financial system. China saves too much, which it then lends to America. America borrows too much and eventually can't service its debts. This all ends in tears.

Everyone is tearing their hair out wondering why Chinese consumers (and the government) save so much.

Nouriel Roubini explains at Newsweek the seven reasons why China saves so much. It's fascinating.

One reason I hadn't heard is that many state owned enterprises don't pay dividends and simply reinvest their profits. Suffice to say, it's not all that sustainable.

How has China been able to maintain its high—8 percent–plus—growth despite the collapse of its net exports? It did not do it by reducing its saving and consuming more; rather, it has boosted further fixed investment in real estate (commercial and residential), in infrastructure (roads, airports, bullet trains), and in manufacturing capacity, which already suffers from a glut.

Fixed investment in China is now close to 50 percent of GDP. But no country can be so productive that it can take, every year, half its GDP and reinvest it into more capital stock without eventually ending up with a huge excess capacity and a mountain of bad loans.

Thus, China needs to radically change its growth model from net exports and investment to reduced saving and more consumption. There are, however, many structural reasons why the Chinese save too much and consume too little.  

10. Totally irrelevant video - Ricky Gervais talks with Piers Morgan about his 'outrageous' performance at the Golden Globes.