Monday's Top 10 with NZ Mint

Monday's Top 10 with NZ Mint: Mood shifting against family trusts; Gaynor on foreign ownership again; How America writes NZ's laws; Cartoon-fest Dilbert

2nd May 11, 1:07pm by Bernard Hickey

Here's my Top 10 links from around the Internet at 1 pm in association with NZ Mint.

I'll pop the extras into the comment stream. See all previous Top 10s here.

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

Cracking Dilberts today.

1. The anti-(family) trust mood is growing - Rob Stock from the Sunday Star Times put some pointed questions about family trusts to the government in this exchange.

Peter Dunne tried to bat away the issue, but it's a real problem, particuarly as we try to balance a budget deficit exploding out of control.

The government's decision to abolish gift duty has brought it all to a head. Here's Rob's article from a few weeks back.

Here's Stock's view, which I agree with:

Trusts are being used for a wide range of illegitimate reasons – to avoid tax, debt repayment and family obligations. Why do we and our parliamentarians put up with it. A few months back, however, I went through the parliamentary interest register, and found 72% of MPs had a beneficial interest in one or more trusts. With so many members of parliament having interests in trusts (yourself excluded), it is perhaps hard to imagine much will change.

In that light, it is not hard to understand Mr Carmody's cynicism, and indeed, it does begin to look like some laws apply more to those who can't afford good lawyers and accountants than those who can.

And here's a Michael Coote piece on family trusts on our site from late March.

2. And here's a Radio NZ Insight documentary on family trusts from this weekend, which I get cited in.

3. Owners get wealthy - Sellers don't. This is a good point made by Brian Gaynor in his column in NZHerald.

Our politicians, beginning with Roger Douglas and Richard Prebble, sold a large number of the country's strategic assets to overseas investors.

These politicians failed to realise they were establishing a domestic wealth destruction culture as wealth is mainly created through ownership rather than disposal. Bill Gates and Warren Buffet, who maintain substantial shareholdings in Microsoft and Berkshire Hathaway respectively, are good examples of this and the Australian Government also realised the importance of domestic ownership as the majority of its assets were sold to Australian investors through sharemarket floats.

Telecom was sold to overseas interests for $4.25 billion in 1990 and since then has made distributions to shareholders, in the form of dividends and capital repayments, of $14.6 billion.

4. Shifting goalposts - Brent Sheather does a nice job at NZHerald of fisking an NZX claim that shares have outperformed property in the last 20 years.

FundSource, the NZX division responsible for the research, has repeated a mistake that fund managers used to employ to make their unit trusts look good relative to a benchmark back in the 1980s.

The FundSource report suggests that over the past 20 years to June 2010 residential property has returned 5.9 per cent a year, whereas New Zealand shares have returned 7.3 per cent, NZ government bonds have returned 8.3 per cent and cash has returned 6.7 per cent.

Now this was all going along very nicely for me until I looked at the "investment computation methodology" used, which said all of the asset classes include income produced by the asset - except for residential property. So share returns included dividends and the returns for bonds and cash included interest income.

But when it came to residential property, rents were ignored, a hugely significant error, with rent minus costs likely to have averaged 2 to 3 per cent a year. Adding 2 per cent to the 5.9 per cent return on residential property gives 7.9 per cent, which is higher than the 7.3 per cent return FundSource arrived at for New Zealand shares.

5. Questions for McDouall Stuart and the board of Allied Farmers - Tim Hunter writes at the Sunday Star Times about what went on at Allied Farmers when it pushed to buy Hanover Finance.

McDouall's firm McDouall Stuart has worked on deals for Allied several times and, according to public disclosures, from 2006 to 2009 it received $831,100 in fees for a range of services including several capital raisings.

Two weeks ago it emerged publicly for the first time that McDouall Stuart also had a pivotal role in creating the Hanover deal and received hefty fees for its efforts.

The question is – how much did the board know about McDouall Stuart's involvement?

And should more have been disclosed to investors?

6. The sheen is coming off Warren Buffett's shine fast - Reuters reported over the weekend Buffett told his big shindig annual meeting in Omaha, Nebraska he got it wrong by allowing his right hand man to do a spot of insider trading.

Buffett's performance during the crisis has been self-interested at best. He bet on Goldman knowing it would be bailed out by taxpayers.

Warren Buffett said he was wrong not to press David Sokol about purchases of Lubrizol Corp stock while his former top lieutenant was pitching the chemicals company as a possible takeover target for Berkshire Hathaway Inc.

It was the kind of answer investors had clamored to hear from Buffett at this year's Berkshire annual meeting, ordinarily a lovefest for tens of thousands of shareholders, and over which the Sokol episode had cast a cloud.

Buffett said Sokol had violated Berkshire insider trading rules by failing to disclose his January purchase of Lubrizol shares, less than four weeks after starting talks with Citigroup Inc bankers about the company.

7. Matt Taibbi and the Shadow Banking system - Matt Taibbi talks on MSNBC about the bailouts for the wives of Wall St. His Rolling Stone article was a cracker.

Here he is in person.

8. The endgame approaches - John Mauldin uses this chart to show that eventually America will suffer an 'endgame' default.

The US in particular and much of the developed world in general began a cycle of ever-increasing debt in the late ’40s, after World War II, both in the private and public sectors. Government began to grow as a percentage of overall GDP in the latter part of this cycle. In addition, politicians created large (well, huge) entitlement programs of pensions and health-care benefits that require significant taxes and, as we shall see, are unsustainable in the our present medium term. There is a limit to how much money an individual or country can borrow. We all intuitively know this. If you grow your debt faster than your income and your ability to service the debt over a long period of time, people will eventually stop loaning you money.

This is true for individuals, businesses, and nations. The end result is a restructuring of the debt (default by one of several means, including serious inflation) or a very reduced standard of living (by previous standards) for a period of time in order to service the debt. For individuals, that may mean cutting off the cable, no eating out, no vacations, etc. For countries it means reduced government programs and benefits, and higher taxes. And make no mistake. I believe that the situation in the US is becoming urgent all too quickly. We are risking the health of the economic body of the US. While the republic will survive the crisis, the shocks and burdens it will place on all of us will be very great. For those not prepared it will seem like the end of the world, as jobs and safety nets might evaporate without proper restructuring.

As I argue, the goal of fiscal sanity is to get the growth of the debt below that of the growth rate in nominal GDP. Failure to do so will result in the US suffering much as Greece or Ireland are today. Ugly .

9. Here's how the Americans write New Zealand laws - Canadian law professor Michael Geist has jumped on a bunch of wikileaks cables from US embassy officials in New Zealand that show just how deep and dirty they get in New Zealand's lawmaking process around Intellectual property.

We shouldn't be doing a Trans Pacific Partnership deal with America. Their lobbyists, and the government that does its bidding, will beat us up every time. We wouldn't get dairy access and we'd lose Pharmac.

Here's some detail.

An April 2005 cable reveals the U.S. willingness to pay over NZ$500,000 (US$386,000) to fund a recording industry enforcement initiative. The project was backed by the Recording Industry Association of New Zealand (RIANZ) and the Australasian Mechanical Copyright Owners Society (AMCOS). Performance metrics include:

"The project's performance will be judged by specific milestones, including increases in the number of enforcement operations and seizures, with percentages or numerical targets re-set annually. The unit also will be measured by the number of reports it submits to the International Federation of the Phonographic Industry (IFPI) on its contributions to IP protection and enforcement methodology."

The proposed budget included four salaried positions, legal costs for investigation and prosecution, and training programs. The RIANZ still runs an anti-piracy site, but does not include disclosure about the source of funding. It certainly raises the question of whether New Zealand is aware that local enforcement initiatives have been funded by the U.S. government

10. Totally Obama video - The president makes fun of Donald Trump's ridiculous birther campaign. The best bits are the cutaways to Trumps equally ridiculous hair in the audience. It's hard to know what's underneath the hair. Where was the hair born Donald?

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44 Comments

by Bernard Hickey | 2nd May 11, 1:14pm 1304298847

FYI here's Anne Gibson with very badly behaved real estate agents.

http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10722801

David Wayne Beiszer, who has worked as an agent for Bayleys and Harcourts in Cambridge and Matamata, faced a disgraceful conduct charge after posting a comment on Facebook about a colleague's appearance on a TV current affairs show.

"Hand on heart, yes I did watch!" he wrote. "Your vendor seems like a c**ksmoker proper, he didn't have the decency to thank the folks who gave him their home yet he's ...grown the cahones to front up now he's looking to make 3 or 4 million - nice publicity stunt. A shame Close Up didn't tell Mr Vendor to go f*** himself."

by Bernard Hickey | 2nd May 11, 1:17pm 1304299037

Interesting move in the Renminbi over the week. It seems the Chinese are allowing some appreciation, eventually...

http://english.people.com.cn/90001/90778/90857/7366426.html

The Renminbi (RMB), China's official currency, went up 61 basis points on Friday to a new ratio of 6.4990 yuan per U.S. dollar, breaking the symbolic 6.50 ratio for the first time after being preceded by historic highs in the previous two days.

by Bernard Hickey | 2nd May 11, 1:32pm 1304299943

It seems Silver has plunged on worries about Chinese economy slowing down. Also after the Aussie dollar hit US$1.10

http://www.zerohedge.com/article/silver-plunges-china-slowdown-concerns-dollar-short-covering

The reason for the collapse is not immediately clear, although concerns of a Chinese slowdown and overtightening are rumored to have been among the culrpits. The circumstantial evidence is in the OZ pairs, with the AUDUSD which has long been a high beta proxy for China plunging in early trading as well.

by Gummy Bear Hero | 2nd May 11, 1:48pm 1304300919

..... Or meebee it's just that silver has run so far up , so quickly , that traders are locking in some profits ...........

Who knows , but the question is , does it continue to slide , or is now a buying opportunity before the next leg up . ? .........

........ Have a crack at silver price forecasting , Bernard , it can't be any more embarrassing for you than house price guessing ...............

by Wolly | 2nd May 11, 1:51pm 1304301067

Invest in Gummy Bears...taste the wealth!

by Wolly | 2nd May 11, 1:49pm 1304300951

Correction Westminster!...get it right....how's the econ 101 study progressing...I see you are up the page on "consequences of US Fed stupidity"

by Wolly | 2nd May 11, 2:54pm 1304304877

Do yourself a big favour Westminster..go read the item Bernard posted below at 2.43pm...it'll count toward your econ 101 grades....off you go...

by Wolly | 2nd May 11, 1:46pm 1304300761

Love the cartoon....Don and Rod where they both belong....it didn't need any script!...what's the bet Smiley Wavey appoints Rodders to a salary bloated position......oh hang on....the Party will wont a 'working group' on that first...gotta suck the tit dry....

by Neil | 2nd May 11, 2:32pm 1304303576

Re. 3. Surely the sale of the Yellow Pages was positive for NZ. The Canadian Pension fund essentially pumped a subsidy into Telecom not much money flowing overseas there?

Maybe we just need more mugs to sell over leveraged deals to so they collapse and we can buy the assetts back?

by Bernard Hickey | 2nd May 11, 2:36pm 1304303810

I wouldn't be so sure about that.

The bank debt that went with it is still lumped in New Zealand. Banks have taken writedowns and it's all washed through in slightly higher interest rates for the rest of us, I'm sure.

cheers

Bernard

by Bernard Hickey | 2nd May 11, 2:43pm 1304304211

Excellent piece here from Liam Halligan at the Telegraph on Helicopter Ben and the doubling of US money supply inside two years....

http://www.telegraph.co.uk/finance/comment/liamhalligan/8484530/Americas-reckless-money-printing-could-put-the-world-back-into-crisis.html

America's base money supply – the bedrock of the world's reserve currency – has doubled in little more than two years. Despite consternation among many US voters, and dismay – rapidly turning to anger – across the world, most of America's political elite refuse even to debate QE. Such is the state of democracy in the "land of the free and the home of the brave". And America is not alone.

America's currency weakness is based on fundamentals including its vast, and upward-spiralling, $14,000bn debt – and that's just what's "on the books". Nothing material is being done to address this massive problem. The unspoken assumption among politicians on both sides of the aisle is that America can just "monetise" its liabilities by continuing to debase the currency.

So the Fed's actions are undermining the dollar precisely because that's what the White House wants. At the same time, sophisticated investors are exploiting ultra-low US rates by borrowing cheaply in dollars and switching the proceeds to currencies where returns are higher. This "carry trade" is flooding foreign exchange markets with US currency – weakening the dollar further.

Reading between the lines of Bernanke's statement, I don't think that last week's Fed missive, as most concluded, confirmed the end of QE2. In my view – and I write this with a sense of trepidation – the Fed's inaugural "meet the press" moment was in fact preparing the ground for the start of QE3.

by Anarkist | 2nd May 11, 7:11pm 1304320263

"Excellent piece here from Liam Halligan at the Telegraph on Helicopter Ben and the doubling of US money supply inside two years...." No Bernard, the piece just betrays the authors fundamental misunderstanding of how capital markets work, but its in no way a judgement of the author alone, but a testament to the fact that the public and even some banking regulators have a misconceived understanding of the nature of money and the operation of the monetary system. I lay the blame on Milton Friedman and his mischaracterization of the role of the Federal Reserve and its overstated influence on the operation of the private banking system. Virtually all economic textbooks are derived from his views, but they are now roundly dismissed by banking authorities. I'm not even sure he believed his monetary theories which can be encapsulated in his "helicopter analogy" where the Central Bank is seen as an exogenous force in the economy dropping money on the waiting public below, instead of an endogenous facilitator of capital market operations, which it actually is. No I think he became a convenient foil for the capitalist class who were faced with the threat of the Soviet Union and a newly activist domestic governments who were being pressured to tilt the playing field slightly more in favour of the workers. It was this existential threat that led neoclassical economists to construct patently absurd theories, such as the Arrow-Debreu theorem, the Dynamic Stochastic General Equilibrium model , and the Perfect Markets Hypothesis and in order to exonerate capitalism's susceptivity to periodic crisis they sought to divert the blame onto exogenous forces like governments and Central Banks, instead of acknowledging the fundamentally unstable nature of capitalism which more principled economists such as Joseph Schumpeter and Friedrich Hayek did. In a recent article, a Federal Reserve economist wrote that Hayek was developing a theory to show that credit creation by private banks caused periodic crisises in his book Monetary Theory and the Trade Cycle. Hayek was right that the endogenous supply of money by private banks are a major contributing factor, but is one amoung many. Nor is Professor Armey right to attribute to Hayek the view that the business cycle is caused by governments’ inflation of money and credit. In his first book on the subject, Monetary Theory and the Trade Cycle, Hayek stated that he was aiming to formulate a theory of the business cycle in which the very process of credit creation within a modern banking system generates cyclical economic fluctuations. http://hayekcenter.org/?p=335 Now more and more Central Bankers are coming forward to acknowledge how flawed the notions of the money multiplier and a selection of studies where they explain the true functioning of the monetary system can be found below. http://en.wikipedia.org/wiki/User:Andrewedwardjudd "At the same time, sophisticated investors are exploiting ultra-low US rates by borrowing cheaply in dollars and switching the proceeds to currencies where returns are higher. This "carry trade" is flooding foreign exchange markets with US currency – weakening the dollar further. " Duh, this just underscores the fact that in the currently weak state of the U.S. economy there are fews avenues for profitable investment aside for speculation on commodities with inelastic demand, which mirrors the situation that investors found themselves after the Japanese housing bubble burst at the end of the 1980s.Its not the actions of Alan Greenspan at the Fed that kept interest rates low in the United States, but the desire for exporting nations to prevent their currencies from appreciating against the U.S. dollar in order to protect their exporters, something which you yourself have advocated Bernard. The most aggressive experiment in monetary policy ever conducted is now under way. Japan is printing yen in order to buy dollars in such extraordinary amounts that global interest rates are being held at much lower levels than would have prevailed otherwise. http://blog.mises.org/1544/duncan-on-the-dollar/ Seriously though, that is of course not likely to happen. The background for this policy action is one that I've explained to regular readers of this blog repeatedly. Namely, that China's irrational decision to keep the yuan grossly undervalued requires it to amass such enormous amounts of foreign exchange reserves that creates massive excess liquidity.

http://stefanmikarlsson.blogspot.com/2007/04/china-worlds-largest-foreign-aid-donor.html

by Anarkist | 2nd May 11, 7:29pm 1304321379

A commentator on an article hosted by the Foreign Affairs blog of the Council on Foreign Relations revealed that most monetary growth has occured in the U.S.' trading partners who recycle the cash their trade surpluses back into U.S. dollars in a bid to prevent the appreciation of their currencies against the U.S. dollar, whilst the Federal Reserve's balance sheet wasn't growing appreciatively and this state of affairs continues today. All Quantitive Easing seeks to do is to stem the contraction of the monetary supply that resulted from the liquidation of bank balance sheets due to the Global Financial crisis.

gillies — the fed isn’t actually issuing that many dollars. look at the data on the fed’s balance sheet. it isn’t growing that fast — as a senior economist at a major wall street firm noted privately to me. Neither the fed’s total assets nor total liabilities have increased much (there have been big changes in the composition of its assets but that is a different story). The fed has been able to lower policy rates without printing much money/ growing its balance sheet.

"the really fast money growth these days is found in the emerging world (China, the Gulf, Argentina) not the US. You don’t need a committee to control dollar issuance to change that; these countries could stop pegging to the dollar. Their central bank balance sheets are growing fast — on both the asset and liability side."

http://blogs.cfr.org/setser/2008/06/10/shhh-don%E2%80%99t-tell-any-one-the-us-trade-deficit-is-getting-worse-not-better/

The story here couldn’t be more self explanatory. The US M2 money supply is simply not expanding anywhere close to its historical rate. The only country where the M2 money supply is seeing any sort of substantive growth is in China. And so it’s not surprising to see the combination of commodity hungry China and enormous money supply growth result in higher commodity prices

Read more: http://www.businessinsider.com/the-myth-of-the-exploding-us-money-supply-2011-3#ixzz1LB5l3J9z

by Roelof | 2nd May 11, 10:38pm 1304332695

I lay the blame on Milton Friedman and his mischaracterization of the role of the Federal Reserve and its overstated influence on the operation of the private banking system. Virtually all economic textbooks are derived from his views, but they are now roundly dismissed by banking authorities. I'm not even sure he believed his monetary theories which can be encapsulated in his "helicopter analogy" where the Central Bank is seen as an exogenous force in the economy dropping money on the waiting public below, instead of an endogenous facilitator of capital market operations, which it actually is. nnnn

Are u sure about this....?????? ... Central Banks are "gods"... in regards to the banking system., in my view... ( incestuous gods )

Money and money supply have only taken on "endogenous " qualities because Central banks have chosen for this to be so.... To allow money supply to be elastic.

In the early 1980s' Central Banks chose to make the monetary aggregates 'irrelevant", and decided to influence the demand for credit thru short term interest rates. .... in this way they became an endogenous facilitator of capital market operations. ( your words )

Don't forget that the global reserve currency is the US$. Commodities are priced and traded in $US not chinese YUAN. It does not matter how much the Chinese expands its' own money supply, in regards to Global commodity prices. ..

Why do u malaign Milton Freidman..????

U say....

"The story here couldn’t be more self explanatory. The US M2 money supply is simply not expanding anywhere close to its historical rate. The only country where the M2 money supply is seeing any sort of substantive growth is in China. And so it’s not surprising to see the combination of commodity hungry China and enormous money supply growth result in higher commodity prices.." ".

Duh.... don't u see.... for 30 yrs M2 has been expanding at at rate that was far....far beyond the actual growth in GDP.... The world has become "awash" with Dollars.... Milton Freidman actually said that the monetary aggregates were IMPORTANT. He said that Money supply should only grow at marginally greater rates than GDP... In this regard he implies that the Central bank SHOULD be an exogenous force.

All those $US are out there .. like a shoul of sharks...have turned towards commodities and food..... resulting in higher prices.

The Deflationary forces of Globalization and China are no longer there.... We have moved into an "inflationary climate'..... if M2 should start growing at 6% componded again.... then all hell will break loose in an inflation sense.... the fact that it is only expanding at 3%..and we have food and commodity price inflation..should be a worry..??? (Nothing to do with Chinese money supply growth)

ALSO.... I am a real fan of Richard Duncan...but I can't find any evidence that the Japanese are printing yen in an extraordinary amount...?????

In summary... and in simple language.... I would say that the biggest Central Bank policy error of the last 30 yrs has been too completley disregard the rates of growth in money supply..... and as a result we have had a massive increases in money supply and a massive debasement of the $US...... Central banks have had the view that as long as inflation ( CPI ) was within target, .... money supply growth rates were irrelevent .... and that the demand for credit was based on "rational" decision making.

There were enough people who saw the CFC coming.... that one has to question the paradigms that central Banks view the "real world' with.

Richard Duncan wrote the book "the Dollar crisis in 2003.... Peter Warburton wrote "debt and delusion" in 1999....

cheers Roelof

by Anarkist | 3rd May 11, 3:04am 1304348642

"Money and money supply have only taken on "endogenous " qualities because Central banks have chosen for this to be so.... To allow money supply to be elastic.

Money supply has always been endogenous in a market economy since ancient Greece where credit instruments were accepted as to settle transactions as well as Gold and other commodities such as Grain.

http://tinyurl.com/44f8af2

Milton Freidman actually said that the monetary aggregates were IMPORTANT. He said that Money supply should only grow at marginally greater rates than GDP... In this regard he implies that the Central bank SHOULD be an exogenous force.

He's the one who convinced U.S. policy makers to abandon the Bretton Woods system in the first place and instead establish a floating rate regime under the rubric that such a regime would better discipline governments, which would make them more fiscally prudent, instead of a Gold Standard which by its very nature was firmly in the grip of the United States government who until the late 1960s possessed the majority of the world's gold reserves. Free markets are completely incompatible with tightly controlled capital markets. You can't bake your cake and eat it too.

Yeh banking authorities have abandoned targetting, because the policy showed itself to be a manifest failure. They tried to apply his prescriptions in the 1970s and 1980s, only to continually miss their objectives until giving up and switching to interest rate targetting in the 1990s.

The British Labour government under the helm of Dennis Healey, then Chaneller of the Exchequer tried to apply Friedman's tenets and those policies were intially continued under the government of Margaret Thatcher. She was advised by Alan Walter and a Swiss economist Jerg Niehans that they were in fact responsible for the poor performance British economy and that they recommended that monetary policy should be loosened.

It was that North Sea oil had probably not been a major factor in sterling's appreciation; rather, tight monetary policy had caused the pound to rise so high, imposing such pressure on British industry and deepening the recession. The report argued that we should use the monetary base rather than £M3 as the main monetary measure and suggested that we should allow it to rise in the first half of 1981. In short, Professor Niehans thought monetary policy was too tight and should quickly be loosened. Alan emphatically agreed with him.

http://www.margaretthatcher.org/document/110696

The same story prevailed in the United States, Paul Volcker advised on monetary policy by Milton Friedman, sought to control money supply growth between 1979-1981, which he repeatedly failed to achieve his objectives only to declare victory after he precipated a recession in 1981, the worst since the Great Depression.

"The dollar’s aforementioned fall was of course sped along by another major mistake carried out by Volcker just a few months prior. Correctly recognizing the futility of interest-rate targeting, Volcker shed the latter only to make a fateful decision that would drive the U.S. economy even further into the ditch. Put simply, in October of 1979 Volcker began a three year experiment with Milton Friedman’s monetarism.

Instead of targeting the Fed funds rate, Volcker attempted to target the quantity of money with disastrous consequences. Though inflation is surely a monetary phenomenon as Friedman long noted, with the majority of physical dollars outside these fifty states, attempts to control the quantity of dollars within these fifty states were bound to fail. To the extent that the Fed targeted various aggregates of U.S. money supply lower, this merely meant that dollars in other markets (eurodollars for instance) would fill the shortfall. "

http://www.realclearmarkets.com/articles/2008/02/the_paul_volcker_myth.html

"The Deflationary forces of Globalization and China are no longer there.... We have moved into an "inflationary climate'

Nobody knows that better than me. Economists will have you believe that the CPI index not exceeding the bounds mandated in the terms of performance of the Reserve Bank demonstrate the effiacy of the inflation targetting regime, rather than acknowledging it was the deflationary impact of the "China Price" in international trade and the "flexible" labour markets keeping workers compliant, but I knew that the days of the "China Price" were numbered fully three years ago after reading a couple articles on the 'net.

The days of ultra-cheap labor and little regulation are gone. As manufacturers' costs climb, export prices will follow

http://www.businessweek.com/magazine/content/08_14/b4078078846220.htm

The Chinese economic juggernaut and its thirst for minerals and markets has increasingly brought it to Africa, including here to Zimbabwe.

http://www.csmonitor.com/2005/0330/p01s01-woaf.html

The Chinese have been using their U.S. dollar reserve that they've accumulated over the last 20 years to lock in resource contracts throughout the world on THEIR terms and will leave the rest of the world scrambling to fight over the remnants that they leave behind. The war in Libya can be seen as a proxy resource war for Oil between China and the West. China had oil contracts with Gaddafi worth millions and thousands of Chinese oil workers have left stranded due to the uprising disrupting their work.

"the fact that it is only expanding at 3%..and we have food and commodity price inflation..should be a worry..??? (Nothing to do with Chinese money supply growth) "

Yes it is, if it weren't for the fact that emerging market banking authorities were acting to prevent the appreciation of their currencies against the U.S. dollar, they wouldn't be so eager to finance the U.S. current account deficit and interest rates would be higher as the Treasury would have to hike them to attract money away from other investments.

ALSO.... I am a real fan of Richard Duncan...but I can't find any evidence that the Japanese are printing yen in an extraordinary amount...????? """"

I wasn't clear in the post but I was seeking to demonstrate that it wasn't the U.S. Fed who was printing money before the global financial crisis, but the Japanese were printing money to buy U.S. dollar to prevent the Yen appreciating, which in turn kept interest rates in the States lower than they otherwise would have been. These low rates are what stimulated the artifical money demand, which led to the Global Financial Crisis. Greenspan didn't keep interest rates low through open market operations. He didn't need to. Banking authorities in emerging markets, Japan, and Germany did it for him through their misguided merchantallist policies.

by Roelof | 3rd May 11, 7:14am 1304363650

Anarkist... thanks for the response...

I understand what u are saying.... BUT ...I do question some of it.

Money supply does not have to be endogenous.... The Private Banking system do not have to be the ones that create money thru credit....New money does not have to come into existence as a loan...????? ( the current system suits the private banking system)

I understand what u say about the difficultly of controlling the money supply.. ( there is a famous quote by a Canadian Reserve Bank Govenor : "we did not abandon the monetary aggregates ..they abandoned us" )

My own guiding principles are that:

1/ every new dollar created devalues every dollar in existence. ( philisophically)

2/ Money is simply... A medium of exchange,.... a unit of account... a store of value.

Growing the money supply IS NOT a free lunch.... It acts as a transfer of wealth, and has all sorts distortionary side effects,

I believe that the disturbing trend where more and more of the worlds assets are owned by fewer and fewer people.... is largely facilitated by the expansion of money supply and the current Banking Systems.

I believe that the banking system and financial system should serve , and be a small part of the real economy.... What we have now is the financialization of Western economies.

I believe the current Monetary system ( including the flawed global exchgange rate system ) are largely the cause of our current problems.

I don't know my history as well as you.... What I have taken from Milton Freidman makes sense to me.... just as some Kenynes makes sense...and also Hayek.. ( They all have good ideas to offer )...

"Free markets are completely incompatible with tightly controlled capital markets. You can't bake your cake and eat it too."....... Hmmmmm.... Hope u are not saying the current system is good....?????...

Don't forget that one of the underlying ideas of Central bank economics is that we all make very Rational decisions.... .. ( William Black uses the term Control Fraud )

One can't blame China for subsidising Exports and basically swapping trinkets for land...?????

One can't blame China for American leaders corrupt practices..??? for multi nationals shifting their manufacturing to china..??? for the corruption of wall street..???

One can't blame China for the Keynesian policy of stimulating aggregate demand when we smell a recession... The liquidity trap is the end game in this respect ...( the failure of the idea ). Each recession has required lower interest rates... just like a heroin addict needing a stronger fix.

One can't blame China for USA consumer spending being 70% of GDP before the GFC.

Anyway... sounds like we are on the same wave length when it comes to Global trade.. ( richard duncan )

cheers Roelof

by Anarkist | 3rd May 11, 3:13pm 1304392404

"Money supply does not have to be endogenous.... The Private Banking system do not have to be the ones that create money thru credit....New money does not have to come into existence as a loan...????? ( the current system suits the private banking system)"

I agree which is why I'm working on a project myself to develop a trade credit and settlement system modelled on the WIR "Barter" system in Switzerland which has operated continually since the Great Depression. Its patronised by 77,000 firms and is the bulwark of the Swiss small and medium sized businesses in tough times.

http://ftalphaville.ft.com/blog/2009/02/18/52550/the-wir-bank-model-or-back-to-barter/

"1/ every new dollar created devalues every dollar in existence. ( philisophically) "

That is now the conventional wisdom, but that doesn't make it true. Its irrelevant as to how much money is created, but matters very much how its used and how its distributed. If new money is used for investing in productivity to produce higher output at lower cost, then money is actually deflationary. But if its used for speculative purposes to push the price of commodities and assets up then its inflationary. Its inflationary when wealth is concentrated in the hands of the wealthy who are able to use their greater purchasing power to bid economic activity away from those less well off. This is supported by the historical record going back to the Great Inflation of 1520-1640.

The remainder, however, are not without interest in light of some of the alternative (that is, nonmonetary) explanations that were current in England at the time.

I pass over the other reason for high prices, as being not so important to the case at hand, namely monopolies of merchants, artisans and labourers when they unite to fix the prices of goods or to enhance their daily wage or the price of their work. (Bodin, 1997, p. 68)

The same case, against monopolies, was being made simultaneously in England in an anonymous pamphlet "Policies to Reduce This Realme of England unto a Prosperus Wealthe and Estate," published in 1549

(Tawney and Power, 1953, III, p. 319).

The pleasure of princes, says Bodin, leads to competition for the possession of the goods and services that they make fashionable. These included not just precious stones and paintings, but also "the most learned men and the best artisans"( Bodin, 1997, p. 70).

The 1520-1640 Great Inflation: An Early Case of Controversy on the Nature

TheT

by Roelof | 3rd May 11, 10:02pm 1304416948

"1/ every new dollar created devalues every dollar in existence. ( philisophically) "

When I say ..." every new dollar created devalues every dollar in existence..'... it kind of goes without saying that the new money is used... To me ,this is a fundamental truth.... The first people who have access to this new money are the primary beneficiaries..... and then it slowly radiates out... The new money is a cost to all holders of existing money, but the benifits of the new money only acrue to a few, and primarily to those who have first access to the new money.

The only truely fair way to increase money supply, in my view, would be for the Government to be able to create new money and use it to pay every adult a universal wage ( or something like that ). ... in that way we could allow the market economy to set interest rates.... and balance savings/investments and provide the liquidity for growth and Capital investment....AND ...it would be fair.

I believe Banks should play a far less role in the economy... They should simply be deposit holding institutions that are only able to lend what they have on deposit... ie. they can no longer create credit out of thin air....

One thing I learnt from reading some of Hayek... was to percieve Marco economic ideas thru the microscope of micro economic impacts and effects.... even hayek used the model of the "closed island economy" to think thru his ideas..!!!!!!

Anyway... thanks for your responses... I've learnt from it.

Cheers Roelof

by Anarkist | 3rd May 11, 5:31pm 1304400714

Money is simply... A medium of exchange,.... a unit of account... a store of value.

Its also a standard of deferred payment, a means of settling debts, without which society would be reduced to primitve barter exchange of neolithic times.

"I believe that the disturbing trend where more and more of the worlds assets are owned by fewer and fewer people.... is largely facilitated by the expansion of money supply and the current Banking Systems."

Of course it is just as it has been since ancient Greece and classical Rome, because that is how ownership over goods and services is transferred in our societies. And in all societies those with political connections are better able to secure the means of acqiring wealth, which justs happens to be money.

"One can't blame China for the Keynesian policy of stimulating aggregate demand when we smell a recession... The liquidity trap is the end game in this respect ...( the failure of the idea ). Each recession has required lower interest rates... just like a heroin addict needing a stronger fix."

Keynesian policy is no where near as effective as they'd leave you to believe, because it relys on an overestimation of the power of the Central Bank in capital markets. They can lower the interest costs, but they can't back banks lend nor the public borrow. As the old saying goes you can lead a horse to water, but you can't force it to drink. At best they can stem the tide of deflation as a consequence of capital de-leveraging. And increase the spread in speculative bets on the capital markets.

People especially so-called leaders are going to be corrupt and stupid even without the means of the private banking system, it'll just take another form. I don't sweat something I can't control.

"Hope u are not saying the current system is good....?????... "

Of course not. I didn't choose my tag on a whim to get attention. I AM an anarchist at the very least a minarchist if a State free society is unachievable. Todays problems stem from the fact that powerful interests have hijacked the State to serve their own interests since the 18th Century at the very least, but most especially since the Long Depression of the 1870s. The prime beneficiaries have been Big Business interests throughout the Western world who have used the State's instruments of power to secure special privileges in order to lock in their positions in society and to further increase their wealth. Typical objectives include the prevention of access to the marketplace by potentially more efficient firms who are able to undercut the prices of the incumbant and to control the volatility in terms of prices and logistical chains that make future decision making difficult for large complex commercial enterprises.

"Kolko shows that at the turn of the century decentralization and vigorous competition were the main trends in the American economy and that the attempts by would-be monopolists to gain a chokehold on the marketplace failed in the abortive Merger Movement of 18971901.¹² As competition persistently undercut such private efforts to achieve stability and predictability (and long-term profits), corporate "liberals" of Big Business sought industry by industry federal laws to limit the subversive effects of open competition."

Joseph R_ Stromberg The Political Economy of Liberal Corporativism

The liberal corporativist State had its own presence in New Zealand with the introduction of the Board of Trade Act 1919, which gave the State Powers to determine prices, which were only strengthened during World War II. Its rather curious that since then with a brief exception in 1921-22 prices have continued on a inevitable upward trend? http://www.teara.govt.nz/en/law-and-the-economy/3

by steven | 3rd May 11, 8:48am 1304369280

Keynesian economics in terms of REAL Keynesian economics probably does work, the problem was the left took it and corrupted it......the result high inflation.....the term that comes to mind is "too much of a good thing" or more crudely the Poliies f**** it up.....

Then we had the likes of Thatcherists who took Friedman's work and uh did the same thing to it....corrupted it......in both cases Politics distorted teh good work/theory IMHO....the result of course is the second huge f**** up....

I will try and read these in detail after...they look really well written, thankyou.

regards

by andyh | 2nd May 11, 2:45pm 1304304339

Australian house prices looking sicker and sicker:

http://www.smh.com.au/business/aussie-home-prices-fell-in-march-quarter…

by Bernard Hickey | 2nd May 11, 2:51pm 1304304694

Now America has a problem with pop-up casinos in shopping malls.

This country is eating and gambling and borrowing itself to death. Today's must read.

http://www.businessweek.com/print/magazine/content/11_18/b4226076180073.htm

Inside a one-story building on the edge of a strip mall in Central Florida, Joy Baker calculates the sum total of her morning bets. It's almost noon, and she's down $5. Not bad. Her husband, Tony, sits a few feet away. "This is the most fun we've had in 20 years," says Joy, who is 78 and retired. "At our age, we can't hike. You can't pay him to go to the movies. This gives us a reason to get up in the morning."

It's a Wednesday morning in mid-March, and the Bakers are sitting inside Jacks, a new type of neighborhood business that is flourishing in shopping malls throughout Florida—and across America. Jacks bills itself as a "Business Center and Internet Cafe," but it looks more like a pop-up casino.

Jacks is about the size of a neighborhood deli. There is a bar next door and a convenience store around the corner. Inside, jumbo playing cards decorate the walls. The room is filled with about 30 desktop computers. Here and there, men and women sit in office chairs and tap at the computers. They are playing "sweepstakes" games that mimic the look and feel of traditional slot machines. Rows of symbols—cherries, lucky sevens, four-leaf clovers—tumble with every click of the mouse.

by andyh | 2nd May 11, 2:56pm 1304304993

Blimey Dusty bin Laden is mort according to the yanks

http://www.nbr.co.nz/article/obama-announce-death-osama-bin-laden-us-ha…

Always thought he was more valuable to them alive........

by Alexander | 2nd May 11, 2:58pm 1304305097

The US networks report that Osama Bin Laden is dead

by Christov | 2nd May 11, 3:02pm 1304305327

The President is Dead...? no way .....he just recieved his birth certificate n all....wonder how long it'll take U.S. mail this time.....

by Christov | 2nd May 11, 3:06pm 1304305611

oooops ...!..Osama...my bad....Aw jees I won't be needing the camel no more .........symbolism really needs live figureheads to open new branches....ah well C'est la vie.

by Gummy Bear Hero | 2nd May 11, 3:56pm 1304308568

Usama , according to Fox News ....... meebee the Yanks killed the wrong guy ? .......... no matter , if they keep shooting and bombing , they'll get him ........ eventually .

by Gummy Bear Hero | 2nd May 11, 3:02pm 1304305350

That news just come over Bloomberg Asia TV , too ..... I'll tune into KKOL Seattle for verification .

by Snarlypuss | 2nd May 11, 3:15pm 1304306146

Was Osama having a cuppa with Muammar in Tripoli last night? He shouldn't have sat so close to the window.....

by Gummy Bear Hero | 2nd May 11, 3:26pm 1304306793

Fox News reports that he was killed a week ago by a US Military bombing of a mansion house on the outskirts of Islamabad , Pakistan . They have his body , or pieces of it , and will do DNA tests to verify that it is him .

Aljazerra report that a senior Pakistani military person has claimed that the body is Osama's .

by Wolly | 2nd May 11, 3:57pm 1304308664

Hey Gummy, you don't spose he had a life policy with AIG....!

by Gummy Bear Hero | 2nd May 11, 4:26pm 1304310406

I expect that he did have coverage with AIG , the Arab Insurance Group . ........ Surprised me , Wolly , that you'd heard of them .

by Wolly | 2nd May 11, 6:24pm 1304317440

I'd like to know who owned the mansion the Yanks turned into rubble....perhaps that too was insured under the Arab Insurance Group.....funny how we have shites emerging from beneath rocks to praise that mass murderer and lash out at the Yanks...I'm all in favour of drone justice...should be fun in the near future when the drones will be the size of a Hawk and the missiles no more than pencils and the strike rate near 100%....

by scarfie | 2nd May 11, 4:00pm 1304308816

Momentous achievemet apparently, gee only took them 10 years.

Guess that gives Gadaffi an indication of how long he has got.

by Vanderlei Luxemburgo | 2nd May 11, 5:12pm 1304313156

ok so will the yanks remove their ground operations and drone flights in pakistan?

by Wolly | 2nd May 11, 6:26pm 1304317596

No and why should they VL....that place is stuffed with swine that are no better than binladen...perhaps you should pop over there and do some flag burning!

by meh | 2nd May 11, 5:15pm 1304313339

Woulda thought they'd done DNA tests already - where do they get the matching DNA data from to confirm it is Osama?

Conspiracy theory - it's all lies to get the punters minds off of the USA's debt problems. Punters all over america will rush out for supplies for mass parties instantly adding to the country's GDP. :)

by steven | 3rd May 11, 8:56am 1304369762

I understand that originally Osama was CIA trained and has spent time in hospitals due to ill-health...blood tests would have been done....

regards

by scarfie | 2nd May 11, 4:44pm 1304311491

I wonder what the overall cost of the 10 year campaign to get him is?

by Vanderlei Luxemburgo | 2nd May 11, 5:27pm 1304314044

oh and i see Phil Goff won't work with the Mana party. Is that cos it'll make it obvious that Labour is now a right-of-centre party?

as looney as hone's ideas are, at least he believes in what he says and if he starts to get some traction with these crazy ideas it'll force the vote-whore centrists to cover some of that ground. interesting times ahead

by Wolly | 2nd May 11, 6:02pm 1304316179

"at least he believes in what he says"....how do you know that VL?.....I would have thought it was a case of Hone Hatfield saying what he believes will bring him votes....!

by Vanderlei Luxemburgo | 2nd May 11, 8:00pm 1304323222

wol compared to goff or key, i bet hone tells way less porkies.

of course it may well be that most of what he believes is absolute madness, but i would give hone credit for being a lot more straight up than many of our current pollies. and anyway, is his brand of socio-economic activism any crazier than a national govt borrowing $300m a week?

as for pakistan wol, the yanks have got themselves into an intracable mess everywhere from morocco to pakistan, and the fact of the matter is it is bleeding them dry. what to do over there? i don't know. the killing of OBL shows that there is the idealistic world (take him alive, put him on trial) and the practical world (you have a muderous loon in your sight - kill the f**ker!)

by Chris_J | 2nd May 11, 8:51pm 1304326314

#3 and #4 are particularly complementary.

If someone had purchased an average house for $110,000 without a mortgage in Q1 1991 (when floating rates were 15% and rental yields were generally double digits), a 9% return net of expenses (before tax) would have been easily acheivable, which with inflation in rents equates to a 4.4% return on the Q1 2011 value of $350,000.

So $110,000 -> $350,000 in 20 years equates to 5.9%PA.

But add in after tax net of expense rents (which in nominal terms alone add to $244,000 cf. Telecom in #3) then the (internal rate of return) IRR is 9.8%PA.

This is equivalent to a pre-tax IRR of 14%PA.

In comparison, bonds returned 8.3%PA, shares 7.3%PA and cash 6.7%PA for the period.

But let's compare to what this means for after tax returns for the 20 year period:

$110,000 in cash would now be worth $315,000

$110,000 in shares would now be worth $348,000

$110,000 in bonds would now be worth $412,000

$110,000 in residential rental property would now be worth $820,000 (if rents were reinvested at the same rate of return). This is nearly double the return from bonds.

Of course if the property owner needed somewhere to live and the alternative to owning a house was renting and investing the "savings" (then to work out the equivalent return required rents wouldn't be taxed) so for the same house the IRR would need to be 12.5%PA, which equates to a pre-tax (to compare with cash/shares/bonds) return of 17.9%PA.

So, in short, to be better off renting than owning over the past 20 years, you would need to have earned an average 17.9%PA on your alternate investment. Of course if you couldn't pay cash and needed to borrow to buy a house, then the return would have been even more (about 25%PA equivalent pre-tax return (or up to 34%PA return if the deposit was just 5%!) - even Madoff couldn't come up with that kind of return!)

by scarfie | 2nd May 11, 10:24pm 1304331869

Therein lies the problem Chris, a disproportionate investment in property over this period of time on the back of a fantasy currency all chasing capital gains. 75% of borrowing in an investment that is non productive.

But the system is pretty much broken now, except for a few select areas.

I just hope you weren't indulging in this nonsense, because if you played the game, then don't complain when the game turns against you, ie: there is no money left when the scheme tips over.

I have said it before, capitalism isn't done on borrowed money.