Wednesday's Top 10 with NZ Mint: NZ foreign debt jumps to 134% of GDP or NZ$18 bln in 90 days; America's prisons now bigger than Stalin's Gulags; NZ Inc's commercial property quake shock; Why NZ needs capital controls; Dilbert

Here's my Top 10 links from around the Internet at 12.30 pm in association with NZ Mint.

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

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

My must read today is #1. It's a table of figures and a spreadsheet. Read it and weep.

1. By the way - Reserve Bank of New Zealand issued figures quietly on the last working day of 2011showing New Zealand's foreign debt rose NZ$18 billion in the 90 days to September 30.

More than three quarters of that rise was corporate debt, which includes bank borrowing offshore.

A large chunk of that is linked to New Zealand companies, including SOEs, who are borrowing offshore using the very cheap interest rates on offer in America in particular.

This is how American money printing reaches our shores. It also explains why our currency is up over 81 USc. Our foreign borrowing of cheap money is pushing our currency up. How is this different from what happened from 2002 to 2007 when property investors borrowed heavily overseas via our banks to take advantage of Alan Greenspan's cheap money?

This sucked in cash and destroyed much of our manufacturing export sector.

Our foreign debt rose to 133.7% of GDP in the September quarter from 126.6% the previous quarter. The peak was 137.7% in the December quarter of 2008.

Overnight the Europeans rejected a restructuring plan that would have reduced Greece's government debt to around 130% of GDP, arguing it would not reduce the debt/GDP ratio by enough.

But John Key says we're fine. We have nothing to worry about.

In a way he's right. We have our own currency and monetary policy. If needs be, we can print money and devalue our currency. Most of the debt is denominated in New Zealand dollars. No worries then... HT John via email.

2. The caging of America - The New Yorker's Adam Gopnik points out six million Americans are now in prison in America, which is more than were in prison in the Gulags in Russia during the Stalin era.

The accelerating rate of incarceration over the past few decades is just as startling as the number of people jailed: in 1980, there were about two hundred and twenty people incarcerated for every hundred thousand Americans; by 2010, the number had more than tripled, to seven hundred and thirty-one. No other country even approaches that. In the past two decades, the money that states spend on prisons has risen at six times the rate of spending on higher education.

Ours is, bottom to top, a “carceral state,” in the flat verdict of Conrad Black, the former conservative press lord and newly minted reformer, who right now finds himself imprisoned in Florida, thereby adding a new twist to an old joke: A conservative is a liberal who’s been mugged; a liberal is a conservative who’s been indicted; and a passionate prison reformer is a conservative who’s in one.

3. This is fun - An Irish journalist harangues an ECB rep in a televised debate over why Ireland's people are bailing out the creditors of European banks.

4. This is happening all over New Zealand - Commercial property owners, councils, government departments, schools and hospitals all around the country are slowly waking up to the implications of the Christchurch earthquake.

Many of the buildings built before the 1990s are earthquake risks that need to be strengthened or bowled. This is now being uncovered as insurers ask for structural assessments before they roll over policies and government departments run through their portfolios to assess the risks.

How big an issue is this for NZ Inc? Will banks have to make a mass writedown of the value of their loans they made to commercial property owners? How much of a loss will have to be booked by the government in its accounts?

Can we afford to repair or rebuild all these buildings?

The first reverberation is being felt in Wellington.

Here's the Kapi Mana News with the latest example. The Porirua Council is having to relocate 150 staff and thinking of spending NZ$10 million to strengthen its administration building or spend even more building a brand new complex. HT Blair.

Studies conducted to investigate earthquake-strengthening, determined an expected cost of $10m - twice the value of the building itself.

Deputy mayor Liz Kelly says while the fact the building is not up to code "isn't new news" - a report was completed by consultants in 2007 - the expected cost pushes the issue to the "top of the agenda" as the council nears its long term plan review process.

Under the Building Act, which has been updated since the Canterbury earthquakes, PCC's administration building is required to meet category one standards as it will be the headquarters should a natural disaster strike the city. "The costs associated with [this] forces the council to urgently contemplate alternative approaches," Ms Kelly says.

5. Two new gilded ages - The New York Times has a good piece on how the 1% in the developed world are making out like bandits for the second time (first time was Great Gatsby era of 1920s) and the 1% in the developing world are experiencing their first gilded age.

In the 19th century, the Industrial Revolution and the opening of the American frontier created the Gilded Age and the robber barons who ruled it. Today, as the world economy is being reshaped by the technology revolution and globalization, the resulting economic transformation is creating a new gilded age and a new plutocracy.

The two forces are intricately related. Indeed we are living through slightly different gilded ages that are unfolding simultaneously. The West is experiencing a second gilded age, while the emerging markets, as (Goldman Sach's Jim) O’Neill and others have documented, are experiencing their first gilded age.

The resulting economic transformation is even more dramatic than that in the Gilded Age. Now, billions of people are taking part across much of the globe, not just the inhabitants of the West.

6. Giz a job - The International Labour Organisation says in a new report the world needs 600 million new jobs to stop unemployment and under employment from rising.

It talks with insight about a developing negative feedback loop in the developed world.

There is growing evidence of a negative feedback loop between the labour market and the macro-economy, particularly in developed economies: high unemployment and low wage growth are reducing demand for goods and services, which further damages business confidence and leaves firms hesitant to invest and hire.  Breaking this negative loop will be essential if a sustainable recovery is to take root.  

In much of the developing world, such sustainable increases in productivity will require accelerated structural transformation – shifting to higher value added activities while moving away from subsistence agriculture as a main source of employment and reducing reliance on volatile commodity markets for export earnings.

7. Local government vs global shareholders - Robert Reich has a good piece on the political challenge facing America's political decisionmakers.

Put simply, American workers are hobbled by deteriorating schools, unaffordable college tuitions, decaying infrastructure, and declining basic R&D. All of this is putting us on a glide path toward even lousier jobs and lower wages.

Get it? The strategic responsibility for making Americans more globally competitive can’t be centered in the private sector because the private sector is rapidly going global, and it’s designed to make profits rather than good jobs. The core responsibility has to be in government because government is supposed to be looking out for the public, and investing in public schools, colleges, infrastructure, and basic R&D.  

But here’s the political problem. American firms have huge clout in Washington. They maintain legions of lobbyists and are pouring boatloads of money into political campaigns. After the Supreme Court’s Citizen’s United decision, there’s no limit.

8. Follow the money - Economists Carmen Reinhart and Nicholas Magud write at VoxEu about the problem of expansionary monetary policy (money printing in America and Europe) spilling over into hot money capital flows into developing countries.

They propose capital controls for those economies without flexible currencies.

But what about those (like us) with flexible currencies? See #1 above.

9. There's nothing inherently evil about capital controls - Yes I said it. And Here's Boston University's Kevin Gallagher saying the same thing in an FT blog.

Economists such as Keynes argued long ago that capital controls are important to prevent crises and to maintain an independent monetary policy that can strive for full employment and financial stability. This new work however elegantly models capital flows and capital controls in a broader contemporary economics context and thus could be seen by some to be a more rigorous justification for policy action on capital flows.

This work is not just for the blackboard. With quantitative easing, and as interest rates were lowered for expansionary purposes in the industrialised world between 2008 and 2011, capital flows returned to emerging markets at an alarming rate, where interest rates and growth were relatively higher. With eurozone jitters in the final quarter of 2011, capital flight occurred to the “safety” of the US and beyond. This has caused significant asset and exchange rate volatility that has made for an uncertain environment for policy-making and investment alike.

In response, many nations deployed capital controls to regulate the negative effects of cross-border capital volatility. Like earlier studies confirming that capital controls can change the composition of inflows, make for more independent monetary policy, and ease exchange rate tensions, new studies are emerging that show how nations such as Brazil, Taiwan, and South Korea have been at least moderately successful as well.

Yet New Zealand is not even talking about capital controls.

10. Totally irrelevant video from Jon Stewart on how Newt stole North Carolina.