Wednesday's Top 10 with NZ Mint: Chinese to dredge much of Yangtse; European financial landmines; Massive Swiss-UK tax avoidance crackdown; Portugese bailout; Dilbert

Here's my Top 10 links from around the Internet at 4 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.

Today, Miley Cyrus murders a perfectly good Nirvana song. Sorry no general cartoons today. It's all about Osama. Not very funny.

1. River to somewhere - The Chinese know how to spend big money on infrastructure in a hurry. Now they plan to spend US$2.7 billion dredging the lower reaches of the Yangtse, the People's Daily reports.

This could be a bit like those bridges to nowhere in Japan, but it certainly shows the Chinese don't muck around.

It would be a bit like us deciding to tunnel the Cook Strait or concrete the Waitemata harbour...

Now there's an idea...

I've got a feeling the consent process doesn't take long in China for this sort of thing...

Chen Yuanhua, deputy director with the Nanjing Yangtze River Waterway Bureau, said the project would allow 50,000-tonne vessels to sail from the estuary of the river all the way up to Nanjing, capital city of east China's Jiangsu Province.

2. 'Get ready for a global growth slowdown' - Hedge fund manager Marshall Auerback writes at Naked Capitalism that the world's economic and financial problems are far from solved.

This column explains why the NZDMO is borrowing hand over fist now before global financial markets run over another landmine in Europe, China, Japan or the United States.

Many European governments are facing a fiscal crisis due to their failure to advance public purpose and raise the funds needed to maintain existing programs. Only the interventions of the ECB are saving the whole system from total meltdown, but the underlying solvency problem for the individual member states is getting worse as the days go by. The Euro bosses are failing, and with any luck, so is political resistance to rational economic policy.

The euro disaster de jour is an eight percent year on year decline in Spanish retail sales. This in a country with a 21.3% unemployment rate. Their construction industry is probably still in decline, and there will be further government cutbacks. The Spanish trade account is now deteriorating and should continue to do so at this exchange rate, short of a disastrous decline in domestic demand. Spain was the domino that wasn’t supposed to fall in Euroland. So much for that idea.

3. Cats among tax-avoiding pigeons - Citywire.co.uk reports that British citizens will be forced to pay a 50% levy on assets hidden in Switzerland.

Do we really think a Luxembourg/Irish syle tax haven in New Zealand for fund administrators is such a good idea?

Here's Citywire:

The agreement marks a crackdown in the use of tax havens and is expected to raise £3 billion over the course of the current parliament. Investors will pay 50% on any assets currently held plus a one-off retrospective levy for any unpaid tax.

The accounts will be legitimised and taxed by Switzerland on a no-names basis. The measure has been criticised as a protection for tax evaders, although on balance it has been argued that the deal is pragmatic and will bring in more revenue.

4. NZ's preventable deaths - The OECD have done a study on preventable deaths (medical misadventure, wrong drug use, that sort of thing) which shows New Zealand performing better and improving much more than America.

Remember I mentioned yesterday that US drug industry lobbyists had accused Pharmac of allowing preventable deaths because they wouldn't use certain drugs?

These lobbyists want to use the Trans Pacific Partnership to gut Pharmac.

On this topic, here's a useful submission paper from the Australian National University to Australia's DFAT on how to appraoch the Trans Pacific Partnership.

5. Portugese bailout depends on June 5 election - Reuters reports the Portugese bailout announced today depends on the result of an election on June 5.

The world's financial markets will be tuning in for that one.

Portuguese agreement to the loan terms is needed by June 15, when Lisbon needs to redeem 4.9 billion euros of bonds.

"We have said from the beginning that it is important that any program should have broad cross-party support and will continue our engagement with the opposition parties to establish that this is the case," European Commission spokesman Amadeu Altafaj said in a statement.

6. Every boom busts eventually - The great and crucial unknown for New Zealand's economic future is whether China's amazing growth can continue.

Economist Richard Duncan thinks not. HT Scarfie.

It should be clear why the breakdown of the American economic model of debt-fuelled consumption has thrown China into a terrible crisis of its own. Whereas the United States’ problem is that it cannot make as much as it consumes, China’s problem is even worse. China can’t consume as much as it makes. Chinese factory workers do not earn enough to buy the products they make. If China can’t export those products, there is no domestic market for them. Then production must stop, and the workers lose their jobs.

Since the economic crisis in the United States began, China has averted disaster through an explosion of domestic credit creation. Over the last 24 months alone, China’s state-owned banks have expanded outstanding loans by 60%. There could be no more certain way to destroy a banking system that to permit 60% loan growth over a two-year period.

The rise of China’s economy over the past 20 years has changed the world. It is generally believed that China will continue to grow rapidly for decades to come. It won’t. Every boom busts. China’s boom will be no exception.

7. How to inflate your way out of debt - When we borrow money from the bank we have to pay it back. When a government borrows money it can use inflation to get out from under it. That's the insight from the always entertaining and useful Bill Gross in his monthly PIMCO commentary.

He refers to an IMF paper from Carmen 'this time it's different Reinhart and  Belen Sbrancia about how governments inflate away their debts. It's called financial repression.

For developed countries such as the United Kingdom and the United States, the period beginning in the mid-1940s (when depression and WWII sovereign debt loads were oppressive) was used as a starting point for pocket picking, “skunking,” or what they term “financial repression.” While the ancient Romans used to shave metal coins in an attempt to monetize existing debts, our evolving financial system has used more sophisticated techniques. With inflation accelerating, due to WWII and post-war demands on commodities, the Treasury capped long-term bond yields at 2½% and in so doing ensured that its debt/GDP ratio would be reduced. If savers received an average 2% on their Treasuries while the nominally based economy was advancing at 5% or more annualized growth rates, then debt to GDP could be lowered from its peak level of 116% to 112%, to 109%…etc. every 12 months.

In fact, the authors found that “for the United States and the United Kingdom, the annual liquidation of debt via negative real interest rates amounted on average to 3 or 4% percent of GDP a year…which quickly accumulated (without compounding) to a 30 to 40% of GDP debt reduction in the course of a decade.” Even after interest rate “caps” were removed in 1951 via the Fed-Treasury Accord, extremely low/negative real interest rate policies continued until the Volcker revolution in 1979. By that time, U.S. (and U.K.) debt levels had been normalized, primarily at the expense of savers who had been “repressed” (and depressed!) for over three decades. At that historical turning point, government bonds were labeled “certificates of confiscation.”

Not only had savers received Treasury bill rates that were negative for over 25% of the nearly four decades, but they were holding long-term AAA rated bonds trading at 30 to 40 cents on the dollar.

Gross, who controls US$1.2 trillion at PIMCO, then explains why he's investing in anything but US Treasuries, including Australian government bonds.

Understand now why the NZDMO just increased its bond programme to NZ$20 billion?

If AAA quality is your requirement, then Canadian or Australian bonds may also fit your horizon. Join us, along with Carmen Reinhart, in shouting “constant bearing/decreasing range!” The Treasury market is on a collision course with financial repression and it is time to adjust your rudder to starboard to get home safely.

8. An almightly and painful game of dominos - Felix Salmon at Reuters reports on what the Guggenheim CIO Scott Minerd said at a conference about how the Greek crisis might cause a European Financial Crisis via an almighty series of domino losses by banks.

Here's the thinking and it's as scary as hell:

When you look at Greek assets, about 55% of bank capital in Portugal is exposed to Greece. And 83% of bank capital in Ireland is exposed to Greece. So it’s pretty clear that if we restructure Greece, we will severely damage the banking systems of Ireland and Portugal. And the big exposure to Ireland and Portugal is in Spain. Ireland represents 138% of the capital of the Spanish banking system, and Portugal represents 133%.

And if we take out Spain, Spain represents 94% of the capital of the German banking system. And I’m not adding these numbers up.

You see how it’s very easy to get a scenario going in Europe where the dominoes start to fall and it causes a crisis.

9. Brinksmanship - The United States of America will default on its debt by August 2 unless the Congress lifts the debt ceiling. It will hit the ceiling on May 16 but can get by with shaking out the coins from the couch until August 2.

Ryan Avent at The Economist discusses the possibility of a default, which is being ignored by markets. Worth keeping an eye on.

Markets are almost certainly right to shrug. Leaders of both parties maintain that the ceiling must and will be raised. Leaders of both parties also seem to agree that the reaching of the limit is a useful occasion to enact budget cuts. The only (but significant) point of disagreement is over the size and nature of those cuts. But given the disaster that would result if America actually breached the drop-dead point, it is widely assumed that this is mostly a theatrical bit of haggling.

Again, that's probably right. But America is approaching uncharted territory, and once in uncharted territory one never knows what pitfalls loom ahead. For safety's sake, it would be nice to get this all settled sooner rather than later.

10. Totally irrelevant and offensive video - Miley Cyrus sings Nirvana's Smells Like Teen Spirit...There is something truly wrong in the world.

Sorry.

Couldn't help it.