Tuesday's Top 10 with NZ Mint: Bo Xilai and the poisoned 'James Bond'; Day of reckoning nears for Yen; More China Coup talk; The LIBOR scandal; Why central banks can't be independent in liquidity traps; Dilbert

Here's my Top 10 links from around the Internet at 4 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 #9 on why liquidity traps and independent central banks are incompatible.

1. Well lookee here - The extraordinary story about the sacking of Chongqing Mayor Bo Xilai just gets more amazing the closer everyone looks.

It turns out a shadowy former British intelligence officer appears to have been murdered and Bo Xilai may be involved.

The latest revelations are deeply unsettling and suggest a struggle for power is going on right now within the upper echelons of the Chinese communist party in Beijing.

Remember in recent days we've had whispers of coups, house arrests and shots being fired.

Now some sort of ex James Bond Mr Fixit for Bo Xilai has been poisoned in mysterious circumstances.

It doesn't get any better than this.

Here's the Wall St Journal on the story:

The revelation adds a layer of intrigue to the scandal, which increasingly appears to mix the worlds of international diplomacy and corporate sleuthing with China's shadowy domestic security apparatus and opaque politics.

Mr. Heywood's death is one of the events in the drama surrounding the fall of the Communist Party chief in Chongqing, Bo Xilai, whose dismissal this month has thrown Chinese politics into turmoil.

The Wall Street Journal reported Sunday that suspicions about Mr. Heywood's death were raised by Wang Lijun, the former Chongqing police chief who triggered the political drama when he sought refuge from Mr. Bo in the U.S. Consulate in Chengdu on Feb. 6. Mr. Wang claimed to have fallen out with Mr. Bo after discussing with him his belief that Mr. Heywood was poisoned, according to people familiar with the matter. He also claimed Mr. Heywood had been involved in a business dispute involving Mr. Bo's wife, Gu Kailai, according to one of those people.

2. Productivity decline to come? - Bank of America is wondering if the retirement of the Baby Boomers in the coming years will lead to a second round deterioration in productivity as they are replaced by younger, less experienced workers.

It seemed productivity slumped when the baby boomers first joined the workforce in the 1970s.

Here's BusinessInsider citing BoA on the research:

By 1969, Baby Boomers made up the entire youth labor force and the entrance of these new workers into the labor market was at least partly responsible for the decline in productivity witnessed during the 1970s, in our view. Now that these workers have built up a lifetime of skills and are planning to exit, albeit with some delay, they will be replaced with younger, less productive workers

3. How China is helping Iran's sensors - Reuters reports on how China's ZTE is helping Iran censor the Internet. All very topical in the wake of Australia's banning of Huawei from bidding for its broadband projects. New Zealand hasn't banned Huawei, or ZTE for that matter.

Also interestingly, days after this report ZTE said it was pulling out of Iran, but not before it became clear ZTE had violated sanctions on re-exporting American-made technology to Iran.

A Chinese telecommunications equipment company has sold Iran's largest telecom firm a powerful surveillance system capable of monitoring landline, mobile and internet communications, interviews and contract documents show.

The system was part of a 98.6 million euro ($130.6 million) contract for networking equipment supplied by Shenzhen, China-based ZTE Corp to the Telecommunication Co of Iran (TCI), according to the documents. Government-controlled TCI has a near monopoly on Iran's landline telephone services and much of Iran's internet traffic is required to flow through its network.

The ZTE-TCI deal, signed in December 2010, illustrates how despite tightening global sanctions, Iran still manages to obtain sophisticated technology, including systems that can be used to crack down on dissidents.


4. A day of reckoning to come - Noted Asia-watcher Andy Xie writes at Caixin that Japan is about to embark on an attempt to massively devalue the yen.

He looks at what China and Japan's other close neighbours might do in response to such a shock.

Japan is on an unsustainable path of a strong yen and deflation. The unprofitability of Japan's major exporters and emerging trade deficits suggest that the end of this path is in sight. The transition from a strong to weak yen will likely be abrupt, involving a sudden and big devaluation of 30 to 40 percent. It will be a big shock to Japan's neighbors and its distant competitors like Germany. The yen's devaluation in 1996 was a main factor in triggering the Asian Financial Crisis. Japan's neighbors must have a strong banking system to withstand a bigger devaluation of the yen.

Both China and South Korea have weak banking systems. South Korea's banking system is one of the most leveraged in the world due to high level of household loans. In 1998, a similar shock sank its banking system that was overleveraged with industrial loans. Now it is overleveraged with household loans. A shock could sink it again.
Overinvestment and a property bubble make China's banking system very vulnerable to such a shock. Unless China substantially increases the capital in its banking system, a big yen devaluation could cause China's banking system to sink. China suffers from overinvestment and a property bubble, as Southeast Asia and South Korea did in 1997. In terms of the magnitude of leverage, China's situation is much worse. Hence, a yen devaluation could wreak havoc to China's economy.

5. US$1 trillion of deleveraging - The FT reports (via CNBC) that Morgan Stanley and consultants Oliver Wyman reckon investment banks will shrink their balance sheets by US$1 trillion within the next two years.

Watch out below if this happens.

Higher funding costs and increased regulatory pressure to bolster capital will force wholesale banks also to cut 15 percent, or up to $0.9 trillion, of assets that are weighted by risk, a joint report by Morgan Stanley and consultants Oliver Wyman predicts.

In addition, banks are expected take out $10 billion to $12 billion in costs by reducing pay, firing employees and paring back investments in areas that are no longer considered core.

“It is really decision time for investment banks,” said Huw van Steenis, analyst at Morgan Stanley. “The market underestimates the degree to which banks will rationalize their portfolios of activities.”

6. China's vulnerable banking system - Reuters reports (via CNBC) that the world's second largest lender, China Construction Bank, has reported a 10% rise in non-performing loans in the fourth quarter.

CCB said loans classified as "substandard" also spiked 27 percent in the second half of the year. The rise in non-performing loans forced the bank to set aside more money in loan-loss provisions, which rose 20 percent against total loan growth of 14.5 percent. 
The higher bad loan costs highlight growing concern that non-performing loans are likely to increase as growth in the economy slows. Premier Wen Jiabao this month forecast sub-8 percent GDP growth for the first time in eight years. Fee income, which has been driving much of the bank's profit growth in the past few years, also fell, declining 14 percent in the fourth quarter to 18.2 billion yuan.  
"As loan pricing weakens and the Chinese regulators target off-balance sheet activities and control fee income, momentum in fee income may further slow down going forward," said May Yan, an analyst at Barclays Capital in Hong Kong. 

7. Not so stable - Here's the Wall St Journal with its take on the latest coup rumours sweeping the Weibo-isphere in China. It has some fascinating insights.

China is supposed to have "institutionalized" its leadership transitions so that such an upheaval could never happen. The outgoing Politburo Standing Committee hands over power to the anointed party general secretary and premier and picks the rest of the new Politburo. The Standing Committee also selects the two slightly younger men who will take over the top jobs 10 years down the road.

But is this arrangement really so stable? Power is now shared on an alternating basis by the Shanghai or "princeling" faction (former Party Secretary Jiang Zemin and the presumptive next one, Xi Jinping) and the Communist Youth League faction (current Party Secretary Hu Jintao). This sets up a dynamic of the current ruling faction sharing power with its presumptive successors in the other faction, a delicate balance to maintain over time.

And because paramount leader Deng Xiaoping picked Jiang Zemin and Hu Jintao, this year will mark the first transition not determined by the revolutionary generation. In 2002, Jiang Zemin tried to prolong his hold on power and pack the new Politburo with his proteges. No doubt Hu Jintao is trying to do the same.

The party has been able to keep internal strife under control by avoiding ideological struggle over the last 20 years. The factions have competed for important posts and the spoils of power, but they ruled by consensus. The public was simply told to believe in the myth of a monolithic party and ignore the men squabbling behind the curtain.

This technocratic pragmatism may now be breaking down. For instance, Bo Xilai appealed to leftists' disgust with bourgeois individualism and public unhappiness with income inequality, a tactic that alarmed some leaders. Since his dismissal, leftist websites and commentators have also been silenced.

8. The LIBOR scandal - CNN Money's Stephen Gandel reports on the LIBOR trading scandal which is bubbling away in the background.

Banks took a rate that they artificially set themselves, and then went out and convinced municipalities and pension funds and others to bet against them on the rate. LIBOR rates were supposed to be set by bank treasurers reflecting what it cost them to borrow from other banks. But reportedly a number of bank treasurers consulted traders when deciding what rate to report to the organization in London that collected and posted the rates. (LIBOR stands for the London InterBank Offered Rate)

What's more, traders at a number of banks were given access to the systems that bank officials used to enter the rate so they could overwrite the rates with ones that would better suit them. When the rate went the way Wall Street traders programed it to do, the banks cashed in millions. The LIBOR rate also affects what many of us pay on our adjustable mortgage, home equity loans, car loans and others. But that is a little bit of an aside. The real, clear damage is in the contracts that banks set up with municipalities and others to bet on their own manipulated rates.

9. Why central bank independence doesn't work in a Liquidity trap - This is a fascinating paper by Paul McCulley and Zoltan Pozsar from the Global Society of Fellows.

Imposing austerity without potential offsets and at a time of weak global aggregate demand is deflationary, which makes deleveraging much harder, balance sheet repair much slower and recovery much less likely to achieve. In a liquidity trap, governments have no logical option but to borrow and to invest. How could governments borrow more if government debt is also a problem everywhere? Would it not be irresponsible to increase borrowing at a time of record government debt levels?

Fiscal austerians are quick to invoke age-old textbook orthodoxies: (1) that additional borrowing will be too much for future generations to handle, citing the law of Ricardian equivalence; (2) that increased borrowing will crowd out private sector borrowing and will most likely delay the economic recovery; and (3) that bond investors will stop buying and send yields higher. However, in the topsy-turvy world of liquidity traps, these textbook orthodoxies do not apply, and acting irresponsibly relative to orthodoxy by increasing borrowing will do more good than harm.

The importance of fiscal expansion and the impotence of conventional monetary policy measures in a liquidity trap have profound implications for the conduct of central banks. This is because in a liquidity trap, the fat tail risk of inflation is replaced by the fat tail risk of deflation. In turn, the fatness of the deflation tail is a function of the government’s willingness and ability to pump-prime, i.e. to borrow and spend. For central banks, this is a game changer. in a liquidity trap the central bank’s role changes from one of policing the government to keep it from borrowing too much, to one of helping it to borrow and invest by targeting to keep long-term interest rates low by monetizing debt, with the aim of killing the fat tail risks of deflation and depression.

Such “cooperation between the monetary and fiscal authorities […] could help solve the problems that each [authority] faces on its own” – argued then Governor Bernanke - which are no willing borrowers in the case of central banks and fear of higher rates due to stimulus in the case of governments. The concept of fiscal-monetary cooperation also defies orthodoxies but, in the topsy-turvy world of liquidity traps acting irresponsibly relative to orthodoxy and central banks facilitating government borrowing will do more good than harm.

10. Totally Stephen Colbert talks Kermit the Frog.

"Saying the word dissect to a frog is not cool..."


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And there is a direct connection between #3 and #8 and the seperate article on National Broadband Network security. All in one day. You're on a roll.

Re #9
It's an interesting piece but I can't help but think one of their core assumptions is erroneous.  They state the western world is in a liquidity tap, which they then define as 'no demand for credit.'
But lending growth is, in fact, not dead.  It is reported to be sluggish in the Dec quarter, but mostly as compared to the last quarters before that.  And slowing growth in demand is certainly not no demand.
I don't think any of their ideas are particularly new either, the idea of central banks 'pushing on a string' is well appreciated.
Certainly we must bear in mind the problems of central bank independence whould we actually arrive at a point where there is zero demand for credit.  But should we arrive at said destination one feels the problems we be much more challenging than simply lining up fiscal and monetary policy.
Anything greater than a sound bite examination of the Greek problems bring to light the kind of pressures from the electrorate and creditors that will surface and how these are managed may have equal or even more impact on outcomes than fiscal or monetary policy.  Even if those two are combined.

Funny thing is but central banks have probably done more to avoid a 2nd great depression than their Govns, when they finally acted.....mind you they have at best delayed things.
We are in a liquidty trap...and there is a reduction in demand for credit where we need an expansion to keep going..... its not a stop / start, black or white thing.....
I suggest Steve Keen and Minsky are really good reads/watches, then maybe you will have a better idea why "slowing" is so bad and is enough of an effect that we face serious doo doo.
Paul Krugman meanwhile says stimulus in the face of this (liquidity trap response) is right and austerity wrong....he's sort of right, if we had the energy to grow our way out, but we dont.
We have already jumped off the cliff into a mega depression IMHO, ie we are committed....existing debt nails us there......

Another report that indicates credit growth has stalled to *only* 8.3% in Australia.  No liquidity trap there either.

"a 15-year inquiry costing more than €250m"...Fabulous
And to cap it off the Tribunal judges expected to be told the truth....how stupid are they!

"Climate Change Minister Tim Groser heads to Paris today for a meeting of the OECD Environment Committee.
The two-day ministerial meeting begins on Thursday, and will include discussions about future priorities for international cooperation".  herald
Oh how super...Paris in the spring....shopping...plonk....the odd meeting...more plonk....yet more shopping....slap up dinner...first class  there and back.....Tim is so please nobody has managed to develop internet video communication systems!

Like WTF?    National dont agree with or accept AGW....so why waste time and fuel going.....
So they will sit there, like a *******, agree to nothing concrete, stand up for a photo op and fly home.....and we are paying these losers!!!!!

I say I say I say...isn't this Parkys example of how great public credit creation at zero cost can be...
"The granddaddy of property tax revolts is now underway in North Dakota.
The North Dakota group, Empower the Taxpayer writes "On June 12, 2012, the voters of North Dakota will have the opportunity to make North Dakota truly 'Legendary', as the first to pass a state constitutional amendment that will abolish the property tax, prioritize spending by the legislature, and finally give local governments something they never had: true local control over spending."
Public unions and proponents of big government are now involved in a major wave of fearmongering because North Dakota counties get about 60 percent of their revenue from property tax.
If the amendment passes, school districts will simply have to get funding from another source, or cut budgets"
No worries cos they can just imagine the credit into the State...at no cost...free money to run the schools.

Such big differences will make a minimal difference.....what we will see is the collapse of house prices in the next few years.....making houses affordable again to ppl.....if they have jobs and with a 2nd Great Depression under way that is problematical.
"Finance infrasture properly" I can guess what you want, municipal bonds with interest to pay back as well...So you want to hand off the debt to ppl who cannot afford it and should not...funny thing but user pays only applies when its someone else as far as the rabid right are concerned...........So when a developer wants it the developer pays and in turn the house owner of the new house. Not some OAP or poorer worker to pay heavier rates they can ill afford.  So lets stay with what we have thanks as with what we have rates look after the maintainance and eventual replacement....its by far the best, fairest and most moral way.

Bernard re #2
What a load of rubish
Take physical work
Who is the best worker a 65 year old or a young kid who probably plays rugby?
Take computer work
Who works best on computers a 65 year old or a young kid who grew up with computers?
Just what sort of work did you have in mind Bernard.
What is and how do you measure the cost difference between an old worker and a new worker
As far a falls in productivity go
I already mentioned the productivity fall off in the 60's - see my post on the Industrial Revolution under
"Bernard Hicket examines wealth trends here

It very much depends on the job.   There is a huge difference between unskilled and skilled labour. While im not 65, Im heading that way....but I do very well with computers....and I give most ppl 20+ years younger a bloody good run for thier money at them.
To do this I retrained twice as well, i started out as a marine engineer, did building services engineering and re-trained again in IT as I could see at 40 it was suicide to stay. Lots of youngersters simply dont apply themselves enough.  The ones that do are better than me, yes, its a pleasure to teach them they want to learn. Otherwisenough are not that I should hopefully with keeping my skills current and good be OK to retirement.....(all else being equal).
ie I dont need to be as fit as I was at 20~30 and Im not...but my brain still works pretty well............
NB I used to know several surgeons all in their late 60s/70s.......they knew their stuff.....sadly they have passed away......a great loss of knowledge applied to saving lives........or teachers......for instance, Ive met some good ones....Ive met a load that are OK.....
So no I dont think age is a barrier, intelligence and applying yourself are.....

Much as it pains me to say it Steven, I agree with you on this one

Agree.  In IT, its the people 35-50 IMO who know the most.  They had to struggle with their technology to get it working 'back in the day'.  If you hacked games on the C64, you're probably as tech savvy as it gets.
The youngest employees are not the tech savvy generation we were led to believe in:

Indeed!  I wonder about the future of IT.  The field is expanding at a huge rate.  Twenty years ago there wasn't so much to learn.  If you kept learning for the last twenty years then you actually know a heck of a lot of stuff.  Anyone who didn't start twenty years ago because, say, they weren't born yet, has either (1) a lot of catching up to do or (2) will have to skip a lot of stuff.  Option 1 will be possible for fewer and fewer people as the talent required to absorb more and more increases.  Option 2 is what is happening.  It results in people who tend to know more of the higher level, upper layers of abstraction, and less of the underlying fundamentals that everything is built upon.

re my post above
Here is what i wrote in the other post
The Industrial Revolution brought gains in productivity. Year after year jobs were being replaced by machines as these machines became better and better at replacing workers. Yes, people just like you and i. The businesses don't want you, they need to find ways to get rid of you so they can increase productivity and hence their profits.
By the late sixties or thereabout's the Industrial Revolution was reaching it's peak. Henry Ford had a worker built a car every twelve and a half hours and got that down to one every ninety three minutes. But nowdays improvements in machinary bring fewer gains.
In the eary days of the IR life was tough and miserable for workers, so they united and formed unions. It was through this action that the economy prospered, as the workers shared in the rewards, and so were able to aford the products they produced and so production increased.
Some argue that those boom years were a result of cheap oil but I dispute that. Had oil been a problem Henry Ford would have mass produced some other fueled vehicle such as an electric car and industry would have continued using coal for much longer. What cheap oil did do was allow the workers to move out of the smoggy cities and into the newly established suburbs. They could live just about anywhere as they possesed their own transport. Unfortunately, because oil was so cheap it was wasted. Big petrol guzzling eight cylinder cars and it didn't matter if you had a bit of a petrol leak. It was shamefully wasted, but not the cause of the boom years.
By the seventies, economies, struggling to make further productivity gains through replacing workers, were faltering. Governments and economists were desperate for a solution and so resorted to monopolies on the grounds that economies of scale would save us. But that was only a short term measure.
Along came the eighties and a new breed of young bright eyed economist who new everythig. Yes, they were going to save the world, they produced the magic wand “The Market”, deregulate eveything, sell everything and slash wages even further.
By the nineties it was clear, the “The Market” was not going to save anything, or anyone but the rich, and so a new solution was needed. But with no solution in sight further wage cuts was the answer and so enter the employment contracts act.
Since the nineties we have contiued meddling and still no solution in sight. Free Trade Agreements to further reduce wages by taking jobs to low paid economies, borrowing and debt spiralling out of control but no answer, no solution.
For over a hundred years we have been attacking the worker, wasting valuable resources and manipulating the money system, and now all three are under constant threat, will it ever end? However what the banking and the finance sector destroys can be repaired. Debts can be forgiven and money can be printed to infinity. It will not be peak oil that destroys us as other forms of energy can be found. There is only one BH and there is only one of you and I. Destroy the people and you have nothing left, everything will collapse.
As we can see, since the start of the IR the goal for our future has been to destroy our jobs and our wages. All prosperity is based upon destrying jobs and wages, and that must change, we must help guide our governments and economists to a future we all desire. It will not be easy but it is essential.
By people uniting in the early days of the IR, they achieved a more equitable share of the prosperity, and as a result the economy, and the people, prospered. We must do the same today or face the consequenses.
The are two roads to our future, the right one and the wrong one, I guarantee it will take the wrong road unless people intervene. The people have a choice, take action or sit on your bum blaming others, like baby boomers, while we sink.

Unfortunately your argument is somewhat moot.  There is only one road, that of less energy every year which will see our "prosperity" decline.  Certainly I agree that for at least the last 20 years "capitalism" like "communism" has failed most ppl...but really "prosperity" relied on exploiting cheap fossil energy....and that era is ending.
So the economy as we know it will go, globalisation go, prosperity, complexity as we know it will go. Far fewer of us will live within the annual energy provision from the sun.....we will make local and live local, we do have a lot of knowledge, so retaining taht and education will be essential, its our advantage.  The importtant thing really is not to go back to the feudal / land owning system we had before ie lose democracy....sadly that is a real threat...but the USA had a pretty good one in the early days so Im hopeful.....

Hi Steven
Without cheap oil progress would still have been achieved.
The world would not still be using well engineered steam engines today, man is able to progress better than that.
I do not subscribe to the view that if we had not found oil the world would have been stuffed and we would have all gone back to living in caves, we can adapt better than that.
Those adaptions may have involved improvements in other engines such as the Stirling engine amongst others. No doubt also progress in the production and use of vegatable oils and so on. Who knows, but progress would have been achieved.
Cheap oil may have contributed to speeding up the industrial revolution progress, but none the less it was the industrial revolution, and not cheap oil, that brought about that progress.
Unfortunately this all distracts from the main point which is.
Up untill the 60's the industrial revolution had brough big productivity gains and instead of generating a 1% the workers united and shared in those gains.
 BUT those gains were achieved by reducing labour costs.
In the 60's the industrial revolution peaked and so it became difficult to continue making big productivity gains by reducing labour.
Ever sice the 60's there have been continual attemts to repeat the industrial revolution and make gains by screwing labour, BUT they have failed to realized that you cannot screw the workers to infinity, NOT unless you go to the next step and turn all workers into slaves.

Caves, no.....pre about 1830s we had sailing ships and some had nice houses....we managed that with an annual sun energy endowment. However we are now something like 7 times the amount of people...so if we hadnt had oil we would have "fallen back" to pre 1830s style living...
Sterling engines have limits and they still use some form of quality energy.....really its free or spare energy which with oil at 100 to 1 from the likes of spindletop allowed huge advancements and population increases.  The industrial revolution was all about using / converting cheap energy...productivity was and is  about an energy conversion process.......screwing labour is about something else, really I thin it was the pie wasnt growing fast enough for the greedy, so the only option was get a bigger % off someone else.
Its moot anyway....the pie now gets smaller...the problem will be how we deal with that, though we have to admit it first...


3. but an American company, Cisco sold censoring and monitoring equipment to china....so the moral difference is?

On #4 .  Here is the story in it's entirety..the ramifications are not just China's problems.
 If Japan wishes to target speculation, they will have to make good on the threat or stand facing the wind whilst urinating.