Tuesday's Top 10 with NZ Mint: The rise of the Plutonomy; Wall St's 'piddling' Fed 'twist' profits; Germany's MAD Greek strategy; The amazing Chobani; Dilbert

Here's my Top 10 links from around the Internet at 6 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.

Jon Stewart's riff on Obama is good.

1. The rise of the Plutonomy - Don Peck writes at The Atlantic about a research report from three Citigroup analysts that predicted in 2005 the rise of the Plutonomy, an economy where only the super rich get richer and only the super rich matter.

Some of the inherent flaws in the current model of lightly regulated multinational capitalism are coming to the surface of mainstream political debate now.

The wealth of the middle classes is being hollowed out by a shift in high wage jobs to low wage economies with the shareholders of the multinationals pocketing most of the benefits on the way through.

This hollowing out of the last 20 years or so has been disguised by increased borrowing and increased government benefits, but the unsustainability of this 'top heavy' version of capitalism is now crashing down upon itself.

The indebted middle classes aren't spending any more because they can't borrow any more and many don't have jobs. The very rich are hoarding their money into 'safe' assets such as gold and US Treasuries as either they don't need to reinvest because the corporates they own are sitting on over US$1 trillion of cash, or because they are too nervous about investing because revenue growth is not forthcoming, partly because the middle classes are not spending.

The global economy has reached this point of realisation. Most don't want to spend because they are in too much debt. Those that have the cash don't want to invest because most aren't spending. So instead the money is hoarded. Rinse and repeat. This current system isn't sustainable.

Here's Peck at The Atlantic talking about the three analysts:

They said, America was composed of two distinct groups: the rich and the rest. And for the purposes of investment decisions, the second group didn’t matter; tracking its spending habits or worrying over its savings rate was a waste of time. All the action in the American economy was at the top: the richest 1 percent of households earned as much each year as the bottom 60 percent put together; they possessed as much wealth as the bottom 90 percent; and with each passing year, a greater share of the nation’s treasure was flowing through their hands and into their pockets. It was this segment of the population, almost exclusively, that held the key to future growth and future returns. The analysts, Ajay Kapur, Niall Macleod, and Narendra Singh, had coined a term for this state of affairs: plutonomy.

In a plutonomy, Kapur and his co-authors wrote, “economic growth is powered by and largely consumed by the wealthy few.” America had been in this state twice before, they noted—during the Gilded Age and the Roaring Twenties. In each case, the concentration of wealth was the result of rapid technological change, global integration, laissez-faire government policy, and “creative financial innovation.” In 2005, the rich were nearing the heights they’d reached in those previous eras, and Citigroup saw no good reason to think that, this time around, they wouldn’t keep on climbing. “The earth is being held up by the muscular arms of its entrepreneur-plutocrats,” the report said. The “great complexity” of a global economy in rapid transformation would be “exploited best by the rich and educated” of our time.

2. The rich vote for the rich - John Sides reports at the NY Times on how US politicians are more likely to vote in the interests of the rich, because they are rich.

John Edwards’s $400 haircut. Senator John McCain’s apparently uncountable houses. President Obama’s vacation in Martha’s Vineyard. Most recently, Mitt Romney’s home renovations. These things suggest that many, if not most, politicians at the federal level come from the upper social classes. Certainly they are much wealthier than the average American. But does the social class of elected leaders actually affect how they vote?

Nicholas Carnes, a political scientist at Duke University, finds that it does. Inthis forthcoming paper, he studied the connection between the occupational backgrounds of members of Congress from 1901 to 1996 and their voting behavior. Occupational backgrounds have proven to be stronger predictors of many political attitudes than other markers of class, like education and income.

3. Inequality throws us off balance - The IMF has a special inequality issue of its regular magazine out.

It concludes we've all gotten less equal recently. This is partly to show that this issue has well and truly crossed to the mainstream. The IMF aren't renowned for being a bunch of lefties...

Here's a chart to go with it. New Zealand in brown is mentioned.

4. Play with it for fun - This Reuters graphic showing how much various countries are owed by Greece and the PIGS is fun to play with. Click on the image to get there. Click on the package of graphics link once you're there for a whole heap of fun.

5. Here's an idea - Let's get the Reserve Bank to print a bunch of money and build a couple of hundred thousand homes.

I'm sort of not kidding. It seemed to work during the Depression when John A Lee tried it. (Cue triumphal comment from Iain Parker)

Here's Stan Fitchett with an OpEd in The Press.

John A Lee was appointed director of housing. His department knew that interest on bank loans is normally the major composition of ordinary rent, so Lee demanded and got Reserve Bank credit at 1 per cent to finance the housing scheme. Lee was a man in a hurry. Within six months of his appointment, 3220 new houses were started. That provided real work for thousands of builders, plus thousands more jobs in the sawmills and factories that supplied the materials.

The vision and drive of Lee and his uneducated colleagues brought New Zealand out of the Depression faster than any other country in the world. In 1935, there were 58,000 men unemployed (and that didn't include women and youths). Just two-and-a-half years later, the number of men unemployed was 13,600 and dropping.

The state housing programme is one of New Zealand's great success stories. By 1970, 72,498 houses had been built by the State.

6.  Brace for it - Former IMF economist Simon Johnson reckons we should all brace for a long recovery from the credit glut.

Can China do a better job managing the flow of credit to its hybrid state-private sector combinations than the U.S. did with its private sector and the euro zone did with its governments?

Probably not. Careless lending, backed by implicit government guarantees, has increased around the globe over the past 40 years (see “Will the Politics of Global Moral Hazard Sink Us Again?” which I wrote with Peter Boone). The Chinese learned these practices from the best in the business, that is the people and organizations that were revered for their wisdom in the 1990s and early 2000s, but ultimately systematically mispriced risk.

Economic development is often described as “catching up.” But the prospects for global growth in the short term greatly depend on whether China can avoid following in the footsteps of the U.S. and Europe. Growth based on a great deal of leverage has proved fragile, but we haven’t yet moved to a different model. For now, the transition away from high levels of private and public sector debt will most likely be prolonged. It will certainly be painful.

7.  Poor dears - Reuters reports Wall St banks are only likely to make around US$100 million in profits from the Fed's likely 'Twist' strategy that many think it will announce after the September 20/21 FOMC meeting. They made much, much more from QE I and QE II.

The Fed is considering intervening in the bond market to lower long-term interest rates in a move known as "Operation Twist." According to Rick Spear, who advises Wall Street banks on strategy at consulting firm Novantas, the effort could boost Wall Street trading revenue by $100 million through the Fed's direct purchases, as well as a "ripple effect" from other bond investors' activity.

That is piddling compared with the $23 billion of quarterly trading revenue that global banks averaged from 2000 through 2010, according to Oppenheimer Research, and compared with the $1 billion of extra revenue that Spear estimates Wall Street received from the second round of quantitative easing.

For the first two rounds of quantitative easing, the Fed was expanding the money supply by buying billions of dollars of bonds. The purchases translated to new money sloshing around the bond markets, which supported overall trading activity beyond the Fed's purchases.

Both rounds of quantitative easing coincided with relatively strong trading profit for Wall Street, with the biggest benefit coming from the first round, when the Fed was buying a wider array of products.

8. Germany's Mutually Assured Destruction (MAD) strategy - Ambrose Evans Pritchard argues that Germany's threats to get Greece to toe the line may just be plain mad.

First we learn from planted leaks that Germany is activating "Plan B", telling banks and insurance companies to prepare for 50pc haircuts on Greek debt; then that Germany is “studying” options that include Greece's return to the drachma.

German finance minister Wolfgang Schauble has chosen to do this at a moment when the global economy is already flirting with double-dip recession, bank shares are crashing, and global credit strains are testing Lehman levels. The recklessness is breath-taking.

If it is a pressure tactic to force Greece to submit to EU-IMF demands of yet further austerity, it may instead bring mutual assured destruction.

"Whoever thinks that Greece is an easy scapegoat, will find that this eventually turns against them, against the hard core of the eurozone," said Greek finance minister Evangelos Venizelos. Greece can, if provoked, pull the pin on the European banking system and inflict huge damage on Germany itself, and Greece has certainly been provoked.

9. The amazing Chobani - Here's a good news story about dairy products. Chobani is an American brand of Greek yoghurt made by a Turkish immigrant, Hamdi Ulukaya. Forbes reports on how it's now worth over US$700 million after just 4 years. Could Fonterra have done this?

Ulukaya got Chobani got off the ground in 2007 with the help of an SBA loan. Between then and now, Chobani became the largest yogurt maker in America.  It started with Ulukaya winning over upstate New York shops.   Then came regional chains, then New England, then national coverage.  Chobani became one of the primary engines in the great American discovery of Greek yogurt.  Ulukaya could barely keep up with demand.

Chobani has taken no investor money, instead building on cash flow and conventional bank loans.

10. Totally Jon Stewart on Obama's Jobs speech