Thursday's Top 10 with NZ Mint: The history of debt jubilees and bans on usury; 'If Italy goes God help us all'; Budget austerity and riots go hand in hand; Dilbert

Here's my Top 10 links from around the Internet at 5 pm in association with NZ Mint.

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

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

Sometimes I wish the news would stop...but it is darn interesting...

1. The Human History of Debt - Anthropologist and author of "Debt: the first 5,000 years" David Graeber has written an excellent blog at WSJ about the history of debt and how society got by for most of history with credit systems that weren't backed by coinage.

They depended on other virtues such as honour and the ability of kings to erase debts to protect debtors, rather than creditors.

It's a fascinating read.

The ultimate conclusion is that institutions are needed to protect debtors and to wipe out unpayable debts, rather than insist on protecting creditors by driving borrowers into slavery.

This casts a light on the core issue at the heart of this financial crisis: the tension (or maybe the lack of tension) between private bankers and politicians.

Bankers want to enforce the rights of lenders to eventually be repaid in full, even if this is never realistically possible.

Politicians seem keen to avoid damaging the personal interests of bankers, their shareholders and their bondholders, even if it means putting economies into deep freezes for decades.

Meanwhile, those same politicians and their central bankers want to dig their way out of the crisis by allowing inflation to run ahead of interest rates. This ultimately damages the real value of savings by individuals and allows the bankers, their shareholders and bond holders to tip toe their way to full repayment without a shock.

It will just take forever and create a lost generation or two. Just look at Japan.

When do voters and savers stop their elected representatives from putting the interests of bankers and shareholders ahead of the interests of the wider economy?

Here's Graeber:

The remarkable thing was that they were able to maintain these credit systems despite the lack of any reliable state authorities willing or able to enforce contracts. How did they do it? Two ways: but both involved insisting that there were values that were more important than mere money.

The first was the cult of personal honor. In most parts of the world, in the Middle Ages (Europe was only a partial exception), merchants had to develop reputations for scrupulous integrity—not just always paying their debts, but forgiving others’ debts if they were in difficulties, and being generally pillars of their communities. Merchants could be trusted with money because they convinced others that they didn’t think money was the most important thing. As a result, “credit,” “honor,” and “decency” became the same thing—an identification which passed into ordinary life as well.

As a result in England, where probably 95% of all transactions in a Medieval village were on credit, and decent people tended to avoid the courts, people still speak of “village worthies,” or “men of no account.” The apogee of this system though was the world of Medieval Islam, where checks were already in wide use by 1000 AD, and letters of credit could travel from Mali to Malaysia, all without any state enforcement whatsoever. In Melaka, the great Indian Ocean entrepôt, merchants from as far a way as Ethiopia or Korea notoriously avoided written contracts, preferring to seal deals “with a handshake and a glance at heaven.” If there were problems, they were referred to sharia courts with no power to have miscreants arrested or imprisoned, but with the power to destroy a merchant’s reputation, and therefore, credit-worthiness, if he were to refuse to abide by their rulings.

This latter brings us to the second factor: the existence of some sort of overarching institutions, larger than states, usually religious in nature, that ensured that credit systems didn’t fly completely out of hand. For much of human history, the great social evil—the thing that everyone feared would lead to the utter breakdown of society—was the debt crisis. The masses of the poor would become indebted to the rich, they would lose their flocks and fields, begin selling family members into peonage and slavery, leading either to mass flight, uprisings, or a society so polarized that the majority were effectively (sometimes literally) reduced to slaves. In periods where economic transactions were conducted largely through cash, there are many parts of the world where this actually began happen.

Periods dominated by credit money, where everyone recognized that money was just a promise, a social arrangement, almost invariably involve some kind of mechanism to protect debtors. Mesopotamian kings used to rely on their cosmic ability to recreate society to declare clean slates, erase all debts, and simply start over. In ancient Judea this was institutionalized in the seventh-year Jubilee. In the Middle Ages, Christian and Islamic bans on usury and debt peonage, far from being impediments to trade, were actually what made most trade possible, since they ensured ordinary people were not entirely impoverished, and had the means to purchase the merchants’ wares, and because those religious systems became the foundation for networks of honor and trust.

This provides a hint of why we have been experiencing such a succession of debt crises. In this new phase of credit money that we’ve entered since 1971, we did exactly the opposite. Instead of setting up great overarching institutions designed to protect debtors, we created institutions like the S&P or IMF, essentially, designed instead to protect creditors. It has become increasingly apparent that the system simply doesn’t work. As the U.S. government seems intent on squandering its honor and reputation for the sake of sectarian advantage, and as millions of Americans feel themselves slipping into a state that feels disturbingly like debt peonage, we might do well to look to the past for inspiration.

2. The global problem of youth unemployment - This February 2 article from Peter Coy at Businessweek on the increasing legions of unemployed youth was prescient to say the least.

Here's Coy:

In Tunisia, the young people who helped bring down a dictator are called hittistes—French-Arabic slang for those who lean against the wall. Their counterparts in Egypt, who on Feb. 1 forced President Hosni Mubarak to say he won't seek reelection, are the shabab atileen, unemployed youths. The hittistes and shabab have brothers and sisters across the globe. In Britain, they are NEETs—"not in education, employment, or training." In Japan, they are freeters: an amalgam of the English word freelance and the German word Arbeiter, or worker. Spaniards call them mileuristas, meaning they earn no more than 1,000 euros a month. In the U.S., they're "boomerang" kids who move back home after college because they can't find work. Even fast-growing China, where labor shortages are more common than surpluses, has its "ant tribe"—recent college graduates who crowd together in cheap flats on the fringes of big cities because they can't find well-paying work.

In each of these nations, an economy that can't generate enough jobs to absorb its young people has created a lost generation of the disaffected, unemployed, or underemployed—including growing numbers of recent college graduates for whom the post-crash economy has little to offer. Tunisia's Jasmine Revolution was not the first time these alienated men and women have made themselves heard. Last year, British students outraged by proposed tuition increases—at a moment when a college education is no guarantee of prosperity—attacked the Conservative Party's headquarters in London and pummeled a limousine carrying Prince Charles and his wife, Camilla Bowles. Scuffles with police have repeatedly broken out at student demonstrations across Continental Europe. And last March in Oakland, Calif., students protesting tuition hikes walked onto Interstate 880, shutting it down for an hour in both directions.

3. Margin call - Gold prices dipped from their highs this morning after the CME (Chicago Mercantile Exchange) raised margin requirements for gold.

Here's the detail via MarketWatch:

The speculative margin requirement for a new position in Comex 100 gold futures will rise to $7,425 from $6,075, or to $5,500 from $4,500 for existing "current maintenance" margins.

4. Curfew in Philadelphia - The BBC reports the authorities in America are beginning to prepare for the sort of social unrest we've seen in London in recent days.

Authorities in the US city of Philadelphia have ordered a curfew for minors in an effort to halt a series of violent flash mobs.

Mayor Michael Nutter said that the curfew would apply at 22:00 for anyone under 13 years of age and at midnight for those under 18. Flash mobs, organised through social networking websites, have left several city residents injured in recent weeks. Mr Nutter said the curfew would go into effect on Friday evening.

5. Budget austerity and riots go hand in hand - Economists Jacopo Ponticelli and Hans Joachim Voth write at VoxEu that the evidence shows budget austerity and social unrest have gone hand in hand since 1919...

From the end of Germany’s first democracy in the 1930s to the anti-government demonstrations in Europe after 2009, austerity has tended to go hand-in-hand with politically-motivated violence and social instability. Economists have long argued that unrest and attempts at revolution are more likely when incomes are temporarily depressed – the opportunity cost of trying to change the existing order is low.

One key determinant of the level of unrest should then be the scale of government expenditure cuts. We assemble cross-country evidence for the period 1919 to the present, and examine the extent to which societies become unstable after budget cuts. The results show a clear positive correlation between fiscal retrenchment and instability.

6. Now that's a protest -  The Daily Mail reports A banker in New York paid for a plane to fly a banner saying: 'Thanks for the downgrade: you should all be fired" past the offices of Standard and Poor's in New York.

7.  Britain cuts growth outlook - In all the kerfuffle about markets this morning I missed this. The Bank of England cut its growth outlook.

Here's The Independent:

The Bank of England bowed to the inevitable yesterday and downgraded its 2011 growth forecast for the British economy to 1.5 per cent.

As recently as May, the Bank had projected growth of 1.8 per cent. This is the fifth downgrade of its estimates for growth in 2011 since the Coalition Government was formed last June.

Sir Mervyn King, the Governor of the Bank of England, also warned that "headwinds to world and domestic growth... are becoming stronger by the day". The forecast for 2012 was downgraded from around 2.5 per cent to closer to 2 per cent.

8. This doesn't look good for the RBA - Fairfax's BusinessDay reports the leadership of the Reserve Bank of Australia knew all about bribery allegations against its (and our) money printer Note Printing Australia (NPA), but didn't tell Police. 

After being alerted about the bribery concerns by the NPA board, the Reserve Bank leadership decided to handle the matter internally rather than call in the Australian Federal Police. The police were not alerted until May 2009 after Fairfax Media, through the Herald and The Age in Melbourne, first exposed corruption concerns at NPA's sister company, Securency.

In response to the 2007 internal corruption warnings, the bank's chief auditor, Paul Apps, was asked to investigate.

The bank confirmed yesterday Mr Apps had found serious problems with NPA's use of agents and recommended a separate investigation to determine whether Australian laws had been broken. NPA sacked all its agents in response to the bribery concerns. 

9. 'If Italy goes, God help us all' - Jesse Eisinger at ProPublica writes that US Federal Reserve stress tests done in early 2010 found American banks could cope with just about any European debt crisis.

Just about any.

Except.

One.

The conclusion from the stress tests that resulted was heartening to supervisors at the regulator, according to a person who was directly involved in the exercise: American banks didn't have too much exposure to Portugal and Spain, so the contagion would not be a problem.

Unless it hit Italy.

"At the time, the results made us a bit relieved; our focus was on Ireland and Greece," said this person, who spoke on the condition of anonymity because the Fed has a policy of not discussing supervisory actions. "But if Italy goes, God help us all."

American banks had not only a small exposure to Italian government bonds, but a larger one to Italian banks and companies. If the European debt crisis spread to Italy, it could cause another global financial catastrophe. Only this time, global regulators might have fewer weapons to combat it.

10. Totally a Not The Nine O'Clock News video - 'Cut off their Goolies'.

I'm old enough to be a fan of this programme.