Monday's Top 10 with NZ Mint: King Tupou V's pith helmet; The legacy of American baby boomers; How Inequality creates debt and slows growth; John Key's lack of ambition for NZ; Dilbert

Here's my Top 10 links from around the Internet at 2 pm in association with NZ Mint.

I welcome your additions in the comments below or via email

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

My must read today is #3 and the academic paper that goes with it. When the IMF starts talking about inequality and debt then you know the subject has gone mainstream.

1. Michael Field and the King of Tonga - I'm a big fan of Fairfax journalist Michael Field who has been pushing the slave fishing story and is a fearless reporter on Pacific issues.

He has been kicked out of and banned from a bunch of less-than-democractic Pacific states.

Here's his obituary at Stuff of King Tupou V.

He pulls no punches.

I got a feeling he won't be invited to the funeral.

The detail is extraordinary:

In the diplomatic world he was regarded as something of a parody, showing no interest in Tongan or South Pacific regional affairs, but keen to discuss the battle order of the Warsaw Pact nations. He once said Tongans were squatters who "left to their own devices they would urinate in the elevators. As it is, they see nothing wrong with allowing their pigs to run all over their townships leaving pig droppings everywhere."

He wore a rich array of military uniforms complete with self-awarded medals. He was an avid collector of toy soldiers and staged Agatha Christie-type murder mysteries in Nuku'alofa for his friends.

He said he had written a Tolstoy-esque novel on Russia and wearing a pith helmet, goggles and riding pants, he filmed and directed a television documentary on remote Mongolian tribesmen.

2. The legacy of the baby boomers - 'Tyler Durden' of Zerohedge points to some charts showing (he says) the legacy of baby boomers in America.

The US economy, as represented by its Balance of Payments, the profligacy of the US consumer, the massive expansion of consumer leverage, and the collapse in US manufacturing jobs, and specifically its current near-terminal state, is as much as legacy of the baby boom generation's actions (and lack thereof), as of everything else that has already been mulled over and scapegoated an infinite number of times in both the mainstream and fringe media.

3. How inequality grows debt and slows growth - Eurozine interviews IMF economist Michael Kumhof in this piece. Kumhof co-wrote the IMF article in 2010 that argued wealth and income inequality slows economic growth and increases debt.

Kumhof considers the cause of the financial crisis in 2008 and the debt crisis in 2011 to be increased inequality, especially in the United States. He has argued that in order to avert future crises, the negotiating position of the majority vis-à-vis the very rich needs to be strengthened. "I bet you've never heard an IMF economist call for increased salaries before. This is highly controversial", he says. But for an economist with hands-on experience in corporate banking who is vexed by economists who fail to anchor their theories sufficiently in the way the world actually works, it makes perfect sense.

In an article co-written with Romain Rancière in 2010, Kumhof argues that increased gaps in income have led to increased household debt ratios. Nations with major income disparities tend to have the highest debt quotas, the largest financial sectors and often the biggest trade deficits. The richest five per cent of the population lends parts of its wealth to the remaining 95 per cent via an inflated financial sector. The rich try to find ways to invest their surplus wealth, while the less well-off majority attempt to maintain the level of consumption they have grown used to but no longer can afford. The result is increased indebtedness and the gradual build-up of a debt crisis. The only way of sustainably minimising this debt is to reduce income inequality.

4. An unambitious government - I don't always agree with Matthew Hooten, but his analysis of John Key's decision to go for a third term is about right in this NBR comment piece.

Part of Mr Key’s appeal is his disarming honesty, and that was indeed the case – but in a way that revealed how un-ambitious his government is.

Mr Key admitted his interest-free student loans policy is bad economics and “a tragedy because it sends the wrong message to young people, it tells them to go out and borrow debt.” Nevertheless, he declared, it is “great politics.”

Students don’t show up to the polling booths, Mr Key explained, but inflation-adjusting their loans would “get them out of bed before 7 o’clock at night to vote, [so] it’s not politically sustainable.”

This is an interesting justification for a policy costing over $300 million a year. Most disconcerting is Mr Key not backing himself to sell such policy no-brainers.

5.One way to spend bailout funds - Bloomberg reports the government of Italy paid Morgan Stanley US$3.4 billion to unwind derivatives contracts that had backfired...

Italy, the second-most indebted nation in the European Union, paid the money to unwind derivative contracts from the 1990s that had backfired, said a person with direct knowledge of the Treasury’s payment. It was cheaper for Italy to cancel the transactions rather than to renew, said the person, who declined to be identified because the terms were private.

The cost, equal to half the amount to be raised by Italy’s sales tax increase this year, underscores the risk of derivatives countries use to reduce borrowing costs and guard against swings in interest rates and currencies can sour and generate losses for taxpayers. Italy, with record debt of $2.5 trillion, has lost more than $31 billion on its derivatives at current market values, according to data compiled by the Bloomberg Brief Risk newsletter from regulatory filings.

6. 'We all need to save more' - The Economist points out here that investors who are betting on high returns from equities to dig themselves out of a savings hole are kidding themselves.

Many pension funds were counting on equities to keep rising, and—notwithstanding dodgy accounting which, in the public sector, is hiding some of the holes—are now in deficit as a result. The problem is widespread, but sharpest in American local-government pension funds, most of which assume that their investment portfolios will earn 8% a year and fund their schemes accordingly. They invest in a mixture of equities, Treasury bonds (which currently yield 2%) and corporate bonds (which yield 3-4%). If the risk premium is four percentage points, then equities will earn 6%, and pension funds will fall well short of their target. Those pension funds will either have to increase contributions sharply, which means raising taxes or cutting services, or reduce benefits, which may mean prolonged battles with the trade unions and in some cases may require changes in state constitutions.

Individuals who are funding their own pensions, or who are members of less generous defined-contribution schemes from their employers, also need to take note. They should save more. If they want a comfortable retirement their contributions need to be more than 20% of current salary, rather than the current average of just 10% or so.

The high returns from equities in the late 20th century made investors lazy. Such returns may not come back. If employees want a decent retirement income (or if employers are to keep their promises), they must put more money aside.

7. Another way to block reform - Gretchen Morgenson writes at the New York Times about how some global banking lobbyists plan to use World Trade Organisation rules to stop attempts to regulate banks.

Back in the 1990s, when many in Washington — and virtually everyone on Wall Street — embraced the deregulation that helped lead to the recent crisis, a vast majority of W.T.O. nations made varying commitments to what’s called the financial services agreement, which loosens rules governing banks and other such institutions.

Many countries, for instance, said they would not restrict the number of financial services companies in their territories. Many also pledged not to cap the total value of assets or transactions conducted by such companies. These pledges also appear to raise trouble for any country that tries to ban risky financial instruments.

So far, no countries have asked the organization to challenge rule changes like those made in the United States under the Dodd-Frank law. But rumblings of such an objection emerged in late December, in a comment letter sent to United States banking regulators. That letter criticized elements of the Volcker Rule, which is intended to prevent financial companies from making bets for themselves with deposits backed by taxpayers.

8. How America avoided a Fascist Coup in 1933 - Jesse's Cafe Americain points to evidence of a plot to overthrow FDR in 1933.

It was exposed by a Marine General who had helped many large businesses do similar things in Latin America and was asked to do the same in America.

9. Europe's two depressions - Paul Krugman compares the slump in Europe's production since 2007 with the one after 1929.

He says it's better this time than last, but not by much.


10. Totally Stephen Colbert on Super Tuesday. Amazing. This is what presidential candidates actually said.

"The dangers of carbon dioxide. Tell that to a plant!"

"You can't drive a car with a windmill on it."


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That Mr Key "cannot sell poor policy no brainers" is only half the coin.
Worth noting - the voters who will not buy good economic policy because they place their own selfish interests ahead of others.
You could equally say he is not justifying the policy so much as explaining the political realities of his day.

Ironic that it's only illegal to buy votes using your own money.  300million x 3 years round it up to a Billion, divide that by the numb3r of voters with a student loan = cost of 1 vote.  Fund it with debt, combined with zero accountability, and you get to help your mates while wallowing in the public trough for a few years.  Awesome.

I really want to say thank you for the information you have shared. Keep writing these kind of posts and I will be your loyal reader. Thanks again.
Melbourne Cup 2012 news and tips

They are interesting times indeed when the IMF starts pointing out moral issues like income inequality.  However, they dare not take the next logical step and point out the source of the moral rot that carpe diem and his useless mates have gifted us.

…correct Ralph - and what we have next are people, who worked for Goldman Sachs, as FX traders or 10 months for Blackwater in Iraq - leading countries all over the world. “The World Buddy Club”
...and most sheep think the world is a better place tomorrow and vote for them.

Everyone should read this mornings Slog

Re "The Baby Shower" cartoon.
It is assumed that the US pollies will be able to avoid discussing the giant debt bomb elephant during the 2012 election campaign (rather like the last two election campaigns in NZ, where the main parties artfully dodged any serious discussion about the state of the global economy and its likely impact on New Zealand)
However, I'm noticing media outlets - other than the usual reliable blog sites - starting to talk more and more about the significant financial problems ahead; for example in this article from David Brooks in the NY Times about Pres Obama's so-called "Cagey Phase" Brooks says:
"In December, a re-elected Obama would face three immediate challenges: the Bush tax cuts expire; there will be another debt-ceiling fight; mandatory spending cuts kick in. In addition, there will be an immediate need to cut federal deficits. During the recession, the government could borrow gigantic amounts without pushing up interest rates because there was so little private borrowing. But as the economy recovers and demand for private borrowing increases, then huge public deficits on top of that will push up interest rates, crowd out private investment and smother the recovery.  
"These big problems won’t be solved during the transition. They are too complicated. Congress will find a mechanism to delay, and the nation will embark on a major effort to do tax reform, entitlement reform and debt reduction. This grand project — reforming the basic institutions of government — will consume the first two years of the next president’s new term, no matter who is elected. It has to get done or a debt crisis will be imminent."
Maybe, just maybe, this bomb will explode before November, and the US debt crisis will get the attention - both locally and overseas - that it warrants. 

Or perhaps they will start another war in order to deflect/confuse that attention.

Todays Christ Martenson's blog brings a link about President Obama's Executive Order from this friday, in peacetime, which is practically Martial Law. Unbelieveable!

I never thought I'd say it, but John Key is correct about something: Kiwis are selfish voters. I visitd NZ a couple of times last year and wherever I went to catch up wih fellow baby boomers I heard stories about how they were getting the small cracks in their houses repaired,  entire repaints thrown in, and weren't the Nats great.... no thought about the poorer people in the eastern suberbs with actual real damage.
Of course they want JK to sell off the SOEs; it's too hard getting a decent return from stocks now, and interest rates are too low, so what's better than a utility company that can arbitrarily rort its customers and make the over 65s' retirement so much more comfortable. Keep the superann at 65 naturally.
No wonder the planes are full of our children going to Australia.
No wonder just about everyone from overseas is buying land and property in NZ; the country is for sale as we have a government with no vision, no capability (look at the front bench: English..what a joke!, Brownlee! Nick Smith!!), no leadership (John Key, a money man betting on the banking roulette wheel with a nice hidey hole in Hawaii), and no preparedness to make decisions that may affect their privileged core support.
It's interesting, as I type this overlooking a pristine Philippines beach, that the tourists come from Korea, Singapore, China (OK, things aren't too rosy long term in China either, but it's understandable why the aware are trying to buy assets in NZ). Where are the western tourists - no money, lah?
Western countries have allowed the bankers and the me-now baby boomer generation to destroy their children's children's dreams. Wealthy baby boomers' children are ok; they expect to inherit with no inheritance tax and no gift duty to further enlarge the gap between te haves and have-nots.
Disclaimer: I pay tax in NZ even though I could legally avoid it. I was raised to be a contributing part of society, unlike the attitudes of the current government who simply want to contribute to those who placed them in power: their business friends in Australia.
Sadly, NZers voted for them.

Muppets voting for Muppets.

And Britain plans to privatise its roads, The Independent reports
Responsibility for running motorways and main roads will be handed to private companies under plans to be announced today by David Cameron.

And here's the key quote from Cameron:
The Prime Minister will argue that the Government is looking at innovative ways of funding improvements to roads. But he will add: "We now need to be more ambitious. Why is it that other infrastructure – for example water – is funded by private-sector capital through privately-owned, independently-regulated utilities ... but roads in Britain call on the public finances for funding?
"We need to look urgently at the options for getting large-scale private investment into the national roads network – from sovereign wealth funds, pension funds, and other investors."

And China's Sovereign Wealth Fund is happy to help the British out, it seems, according to Faisal Islam at Channel 4:
Britain’s economy has at best stalled. Its joblessness is sky-high. So tomorrow we’ll see perhaps a roadmap for reindustrialisation. Britain is badly in need of hundreds of billions of pounds of ports, roads, railways just to keep up with eastern high-growth economies. But the government says it doesn’t have the money.
Lucky then, that the man overseeing China‘s $410bn sovereign wealth fund, Jin Liqun has told me that: “We would be more than happy to step in and invest in the infrastructure development in the UK.
“Your country has a very good infrastructure over the years but it needs upgrading, needs renovation or you need new infrastructure facilities. I was invited to attend a couple of meetings by your government for instance financing Digital Britain and financing other developments in the UK.
“I’m very much encouraged by the vast amount of opportunities we could have in your country and the China Investment Corporation has put a lot of money into your country”.

Britains 8.4% unemployment might not be great but it looks better next to some of its neighbours; Portugal/Ireland around 14-15%, Greece nearly 20% and Spain at 23-24%.

You believe 8.4&....I don't.....~!

"All your roads are belong to us"

Nice! :-)

Gotta laugh, printing presses running flat out, still broke as a joke, now they are going to pay the Chinese to manage their roads.  Awesome.  Tactical economics.  "Stupidity got us into this mess.  Why can't it get us out?"---Homer Simpson.
One day, maybe economists will realise that debt actually isn't wealth.  I wouldn't count on it though.

"innovative ways of funding" where have I heard that before?

..and from the (very) right wing Daily Mail
Ministers are proposing selling long-term leases, probably lasting several decades, to firms or investment funds who want to take over the running of major routes and be guaranteed a regular income over the life of the contract by taking a slice of vehicle excise duty.
Treasury sources said such a scheme would not be full-scale privatisation, since the state would retain ultimate ownership, but would still generate ‘billions’.

Read more:


I draw attenton to my previous post; now that interest rates are effectively zero or less and shares are very weak, conservative governments are trying to give their friends and supporters access to money making utilities.

Talking about water. Did you see the coronor's report on the pile of aluminium that was tipped into the drinking water supply by mistake and the public not informed for over two weeks.

…and S. Joyce is celebrating production = more roads, when here in Kaikoura a team of 15 -20 incl. heavy machinery worked for 2 months maintaining the HW1 between Kaikoura and the airport, when they should secure/ stabilise the hillsides south/ north of Kaikoura in stead.
An hour ago I have driven along the new stretch. Ha – on some places there are holes the size of a tennis ball already ! Congratulation minister Joyce great production – what an economy !

Then again, other crises may render the current US debt problems inconsequential. 
Ambrose Evans-Pritchard manages to discuss: the perils of peak oil, a possible military strike against Iran and China's economic slowdown - all in the same out-breath.
Cheerily, he then posts this piece about Portugal being poised to take over Europe's biggest basket case mantle from Greece...

Re 2. I think you (and 0hedge) are mis-reading these charts. It was the deregulation of finance that allowed an expansion of new credit way beyond anything that had been experienced previously. 
The availability of new credit and the wealth that appeared from it (asset price inflation) created a new norm of leveraged speculation and the ability to drawdown (borrow) against the increased value of aforementioned assets. 
To that point, it might be argued that, the social desire to keep up with the hickeys (!) and enjoy the joys of limitless consumption generates a need for more and more debt. After all, how does one pay for all this.
Nevertheless, it is quite clear that it is debt itself that causes inequality and not the other way around. Debt is the mechanism that transfers wealth from borrower to lender. That is how a small minority end up owning the great majority of assets.

Cheers Raf
I'm not keeping up with many ...

John Key is quite straight forward . He is just acknowleding the political reality of MMP government.  Clark and Cullen knew exactly how many voters had student loans when they bought the 2005 election and Key knows that putting interest back on those loans would cost him the next election. Its got nothing to do with vision or a plan for the Country.
Interest free debt makes no sense but that genie is not going back into the bottle anytime soon.

In the 80's
Thacher ruled Britain and was born 13 October 1925
Regan ruled America and was born 6 February 1911
Roger Douglas ruled New Zealand and was born in 1937
I think this guy must be talking about the baby boomers from after the first world war.
Anyway wich boomers caused the 2008 collapse?
And which boomers caused the 1930's crash?
Looks like the boomers caused them all and the wealthy people are blameless.

Bernard #6
I said you need to look at the pension fund scam. I have been saying for a while now that it will all turn to crap.
When i was born my mother took out an endownment policy to mature when i was 21. She paid something like a half penny per week and when i reached 21 i would get the fabulouse sum of something like 100 pound. Enough to set me up for life (Ha,Ha)
Throughout the years we have paid 6 percent of our income only to find the government spent it and other failed attemps at getting a pension system working. They all failed.
Will todays superan work? NO, so don't hold your breath that you will have enough to retire. It just wont happen.
Most people today seem to live into their eighties and this generation, i have no doubt, will live to 100. If the retirement age rises to 75 then you need enough money (plus a freehold house) to last 25 years. If you save 10 percent of your income then in ten years time you will have one years income. So to save for 25 years income you will need to save for the next 250 years plus buy a house.
Of course if you need to work until you are 75 then where will the jobs come from.
Go figure.

Income inequality is the natural evolution of capitalism?  The strong survive, and flourish, while the weak die out.  There are just far more weak then strong, which is a natural state.  Are we civilised yet?  I don't believe we are.

That has been prophesied since Marx and Engels.
Let us compare the western model of capitalism versus the Chinese non capitalistic economic systems since the year 1800.
The wage ration in 1800 was 2:1; as in wages in London were twice what they were in Beijing or Canton.  By the middle of the 20th century the results delivered by each system of commerce were such that the ration was 6:1 in the favour of London.
Not only that but the nutritional and scientific results delivered under that system increased both height and life span well beyond the Chinese (or most of Asia) averages.
The results speak for themselves.
Capitalism eventually shrank the income inequality and created what became termed "the middle class" to an extent never seen before.

Yet now the UK is selling everything including nailed down things?  China is buying?  Sure China sounds like a crap place to live, but you gotta wonder how they got so rich, after they changed to a Scientific Development Method 30 years ago.  6.5% GDP growth is called "a hard landing" while zero growth in the UK is not a problem?  Not that China measures success with GDP, they use the poverty index, green index and another that I forget.  In terms of forward planning they seem light years ahead.

The salient point there being they have achieved this by adopting the very same western capitalistic systems and practices.

I dub the previous statement dogma

Depends what kind of capitalism you are talking about. London and (to the extent China has achieved this) China are on the same course. So was the USSR, so was the US. Its hard to find exceptions to this rule.

"China has suspended the purchase of 10 more Airbus jets, two people familiar with the matter said on Thursday, raising the stakes in a potentially damaging trade row over European Union airline emissions charges."
And new car sales across all of the EU farce but for Germany are crisis level.....I wonder why!

Ralph - you cannot look at items in isolation.
While that 'middle class' was being created, what was happening to debt, collectively/globally?

M3 plus credit plus all government debt, longer term charts
(near the bottom).
Most of the time a 'middle class' was developing, so too was debt/credit. This is now several orders of magnitude bigger than there is physical planet to underwrite it, should everyone who holds expected 'wealth', will be competing for chairs when the music stops.
Capitalism failed to address the real planet, thought it could grow exponentially foreven. We've seen the end of that, globally. Watch for a share-market crash (the Dow is a flight to hope, unbased on fact) and a mad scramble out of Europe, as folk try to protect 'equity'.