Thursday's Top 10 with NZ Mint: NZ's dangerous debt spiral; A war to fix America's depression?; McKinsey's 'corrupted culture'; What so bad about deflation; Dilbert

Here's my Top 10 links from around the Internet at 10 to midnight in association with NZ Mint.

Yes! Got it in just in time to still call it Thursday's Top 10. What a day. I'm buggered.

I welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz.

I'll add the extras in to the comments below. And anything else that takes my fancy.

1. 'A dangerous debt spiral' - Oliver Marc Hartwich has written a commentary at the Sydney-based Centre for Independent Studies on how New Zealand is in a dangerous debt spiral.

He compares NZ to the PIGS.

However, he doesn't take the inevitable next step of asking how the private bank debt in New Zealand is transformed into public debt as it was in Ireland. There, the Irish government made the decision.

It's not so obvious in New Zealand. The banks are owned by Australians and the last time they came under pressure the Australian government backed them up.

Would Julia Gillard and Australian taxpayers do the same again?

No worries mate.

We'll let you win the Bledisloe.

Oh and by the way. One of the New Zealand government bond auctions failed the other day. See more here from Gareth Vaughan.

The trajectory of a country that is slowly slipping into the danger zone of high foreign debt combined with a big, indebted government in a sluggish economy is dangerous. As Europe’s PIGS have demonstrated, once markets realise that a country is on an unsustainable path, the loss of confidence can happen almost overnight.

For the PIGS, at least, there was a safety net provided, thanks to European guarantees underwritten mainly by German taxpayers.

Should New Zealand’s troubles get worse, who will Kiwis turn to? Or asked differently: If you were an unemployed plumber or construction worker in Auckland, would you rather help rebuild Christchurch or move straight to Queensland? 

2. A war to fix a depression? - Michael Lind at Salon warns that American's neo-conservatives are trying to talk America into starting another war.

Sens. John McCain and Joe Lieberman, along with others, have raised the possibility of establishing "no-fly zones" in Libya, along the lines of those in Iraq between the end of the Gulf War in 1991 and the beginning of the Iraq War in 2003, in order to prevent Libyan dictator Moammar Gadhafi from using his air force to bomb the rebels seeking to overthrow his regime.

Another suggestion is to help Libyan rebels establish secure enclaves, from which they can capture the rest of the country from forces loyal to Gadhafi. The implication is that the enforcement of "no-fly zones," by the U.S. alone or with NATO allies, would be a moderate, reasonable measure short of war, like a trade embargo. In reality, declaring and enforcing a no-fly zone in Libya would be a radical act of war.

It would require the U.S. not only to shoot down Libyan military aircraft but also to bomb Libya in order to destroy anti-aircraft defenses. Under any legal theory, bombing a foreign government's territory and blasting its air force out of the sky is war.  

3. How the West is repeating Japan's mistakes - Nomura Chief Economist Richard Koo explains why the Fed's Quantitative Easing II won't work.

4. Chinese slowdown inevitable - Berkeley economics professor Barry Eichengreen writes here at Project Syndicate about when China's amazing growth machine might slow down. This is crucial for New Zealand because China is now our second largest buyer of exports and is the biggest buyer of Australian exports, which in turn is the biggest buyer of our exports.

Yet hardly anyone in New Zealand knows that China released its new five year plan late last month that included plans for slower growth.

New Zealand has foreign correspondents in Sydney, London, Los Angeles and Paris. But no one in Beijing, Shanghai or Hong Kong.

We reported this news. But it should have been on the front pages of our newspapers and television bulletins.

Here's Eichengreen explaining why a slowdown is likely as well as planned.

China has been able to grow so rapidly by shifting large numbers of underemployed workers from agriculture to manufacturing. It has an extraordinarily high investment rate, on the order of 45% of GDP. And it has stimulated export demand by maintaining what is, by any measure, an undervalued currency. But, in response to foreign and domestic pressure, China will have to rebalance its economy, placing less weight on manufacturing and exports and more on services and domestic spending. At some point Chinese workers will start demanding higher wages and shorter workweeks.

More consumption will mean less investment. All of this implies slower growth. Chinese officials are well aware that these changes are coming. Indeed, they acknowledged as much in the latest Five-Year Plan, unveiled earlier this month. So what is at issue is not whether Chinese growth will slow, but when.

In recent work, Kwanho Shin of Korea University and I studied 39 episodes in which fast-growing economies with per capita incomes of at least $10,000 experienced sharp and persistent economic slowdowns. We found that fast-growing economies slow when their per capita incomes reach $16,500, measured in 2005 US prices. Were China to continue growing by 10% per year, it would breach this threshold just three years from now, in 2014.  

5. McKinsey's corrupted culture - Felix Salmon writes here about how management consultants are open to corruption because of their access to priveleged information. All very topical in the wake of former McKinsey boss Rajat Gupta being indicted for leaking insider information to a mate while he was on the board of Goldman Sachs.

McKinsey consultants in particular, have made their entire business out of exploiting the moral grey zone surrounding confidential information. The reason you hire McKinsey is that its consultants have seen strategic business issues like yours before, and therefore might have developed good insights into how to approach them.

But the reason they’re familiar with those issues is that they’ve been given highly confidential information about your competitors. So when you hire McKinsey you’re essentially trying to acquire, for a very high hourly fee, the kind of corporate intelligence that can only be built up through long exposure to highly-sensitive commercial information.  

6. Why save when you can print? - Michael Hudson looks at Norways's sovereign wealth fund in an age when the Fed can simply magick up US$600 billion to buy stuff at the swipe of a mouse. He highlights the deep corrosiveness of what the Fed is doing. HT Darryl. Today's must read.

So what's the point of us saving hard into the Cullen fund again?

Here is the real problem: Money is not what it used to be back when it was backed by gold bullion or anything tangible, earned by labor and enterprise. Banks create credit almost freely on computer keyboards, and entail little cost in making huge gambles on derivatives based on which way foreign exchange rates, interest rates, bond prices and even defaults will move. This cost-free credit is flooding the global economy.

This makes Norway’s foreign exchange savings (i.e., the Oil Fund) much less valuable in terms of how much it actually costs to buy $600 billion worth of stocks and bonds. The cost is almost zero for the U.S. banking system. And that is what Norway’s Oil Fund is competing with when it puts its money into the U.S. and European financial markets.  

7. What's so bad with deflation? - Tim Staermose writes at Sovereign Man about the experience of deflation in Japan and how it wasn't all that bad for everybody.

I’m a net saver who has no debts apart from the revolving balance on my credit cards, which I pay off each month… so I quite enjoy falling prices because the purchasing power of my savings is always growing. Why wouldn’t the average Japanese person, who is in the exact same boat, enjoy falling prices, too?

Well, as it turns out, they do! Though wages and asset prices have stagnated in Japan for decades now, the quality of life for the average Japanese has not massively deteriorated in the way you’d think if you blindly accepted what the Western media tell you. Sure, Japan has huge problems. The rapidly aging and shrinking population, a lack of political willingness to reform, and a huge government debt burden all pose enormous challenges.

But, as far as I can see, what’s usually portrayed as the biggest problem of all in Japan, deflation, only really hurts the government. And that’s only because the “real” value of all the hundreds of trillions of yen that it owes (mostly to its own citizens) goes up every year.  

8. We were warned - This documentary was broadcast in 1996. "Christchurch has quite a susceptibility to liquefaction, particularly in the east of the city."

9. How education could be different - Former hedge fund analyst Salman Khan explains in this video how he created an educational video monster while still a hedge fund manager. Interesting for those who think about technology and education. He wants to build one classroom for the world. He gets a standing ovation.

"Here I was an analyst at a hedge fund. It was quite strange to do something with a social value."

10. Totally rollicking video - A bunch of cyclists hurl themselves down a hill.