Friday's Top 10 with NZ Mint: China's Achilles heal; bigger cities are greener; euro unscrambled; Beyond Outrage; Dilbert

Here's my Top 10 links from around the Internet at 10:30 am today in association with NZ Mint.

Bernard Hickey is on vacation and won't be back until early May.

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

I am still keen to get your suggestions for suitable cartoons. If you notice a really good one, please email me.

See all previous Top 10s here.

1. Finance is a 'necessary' for society
Who is Robert Shiller? A Cassandra on high alert for economic bubbles? Or a hopeless utopian who believes that finance is a force for good?

He is an unassuming man with an unassuming style - I went to a lecture of his a few years ago in Chicago, but I was impressed by his intellect all the same. Very impressed, in fact. 

Dan Berrett digs deeper:

Among the members of the rogues' gallery blamed for the crash of the economy in 2008, none have worn the black hat of villainy quite as convincingly as greedy financiers.

Robert J. Shiller, however, sees them and their field in shades of gray.

"It's kind of a mythology that's developed around finance," says Mr. Shiller, a behavioral economist, professor at Yale University, and teacher of many future financiers. Rapacious Wall Street types, he says, may make handy bad guys in the movies. "The problem is, we can't live in a mythic world. We have to live in the real world."

And in the real world, Mr. Shiller argues in his new book, Finance and the Good Society, finance is a powerful and necessary tool to keep society running.

2. China’s Achilles heel
Things may be going China's way, and they may continue to do so for a while yet. But it won't last.

That's because of a startlingly negative demographic trend that they probably can't avoid. This trend will have profound financial and social consequences. Most obviously, it means China will have a bulge of pensioners before it has developed the means of looking after them. Unlike the rest of the developed world, China will grow old before it gets rich. The Economist compares the demographic trends of China and the US:

The differences between the two countries are even more striking if you look at their average ages. In 1980 China’s median (the age at which half the population is younger, half older) was 22. That is characteristic of a young developing country. It is now 34.5, more like a rich country and not very different from America’s, which is 37.

But China is ageing at an unprecedented pace. Because fewer children are being born as larger generations of adults are getting older, its median age will rise to 49 by 2050, nearly nine years more than America at that point. Some cities will be older still. The Shanghai Population and Family Planning Committee says that more than a third of the city’s population will be over 60 by 2020.

3. Can the euro omelette be unscrambled?
Although many people are thinking of how countries might leave the euro, the politics of it are fearsome. Most solutions involve secrecy and planning and in a 17-country currency-zone that approach would be impossible. However, Hugo Dixon has found a private investor who has come up with an ingenious solution:

The idea is that every euro is swapped for a fixed ratio of yolk currency and white currency, roughly in proportion to the relative size of the two sub-zone’s economies. Say for every euro, people got 70 percent of a yolk and 30 percent of a white.

Once this has happened, the yolk and white are free to float – with the yolk presumably appreciating and the white currency depreciating. New contracts are denominated in yolk or white. But existing euro contracts have to be honoured by delivering the fixed proportion of yolks and whites in the basket.

4. More firepower, less force
The IMF is talking up its recent commitment-raising: it has garnered promises of an extra US$320 billion to deal with mainly-euro woes. But actually, it was seeking US$600 billion. However, gaining these extra funds may be the least of the IMF's problems. James Saft explains:

The truth is that there are huge constituencies all around the world which each want to export their way out of the current malaise, as is the case for Europe and the U.S., or which want to continue to see their standards of living close the gap with the rich world at a satisfying clip, as in China and Brazil.

Unless life is discovered on Mars and they happen to want cars, iPads and flat-screen televisions, this simply is not going to happen. What is going to happen is rising tension, at the least, and a destructive wave of protectionism, at the worst.

That worst outcome is more likely, and the IMF's ability to head it off is less, because we live in a multi-polar world. That reality is far more important than an extra $400 billion or even $600 billion.

5. Beyond outrage
Berkeley professor Robert Reich talks to Jon Stewart about what it will take to change the American political landscape. Good luck with that. 

6. Bigger cities are 'greener'
Here's an idea you might not expect - and one that won't find favour with the minimalists. Bigger is better when it comes to sustainability and energy efficiency. At least that is Richard Florida thinks. He explains:

The size and density of cities confers considerable economic advantages. Denser cities are seed-beds of innovation and productivity improvement, as Jane Jacobs long ago argued. Pioneering studies of "urban metabolism" by Geoffrey West and his colleagues at the Santa Fe Institute find that as metro areas get larger their metabolic rate essentially speeds up, making them more productive and inventive.

7. Gritty data
By now, we all know rents are up in the central zones in Auckland. Here is some March data that will interest some readers. The plain fact is there are many declines as well; and some of the rises are minor. The focus has been on the rises, but this list shows falls year-on-year by as much as -39% (4 br City Centre).

8. 'Replicating portfolios'
The big Australian banks have been putting their mortgage rates up independently of the RBA official rate signals. They claim "higher funding costs". But some of this may be self-imposed. Upwards of 45% of Australian bank funding is reported to be in term deposits, and there has been spirited competition among the big banks there to attract term deposits. It is this activity that has driven up their funding costs, rather than rises in wholesale rates.

Then there are the margins involved. A simple comparison with the New Zealand situation on the face of it suggests much fatter margins are involved in Australia (and this is despite the results that show the NZ arms of these banks are just as profitable as their parent).

As at today, the rate data looks like this:

Looks like we are getting a better deal on this side of the ditch. Of course this is a superficial view; bank funding is used for much more than home loans and bank funding activities are technically sophisticated. All the same, these differences are surprising, and suggests the Aussie arms of these banks can bid up the price offered TDs someway yet. Not sure how they will react if/when the RBA reduces its benchmark rate, which could be as early as next month.

Then there is the 'problem' of those pesky customers wanting their money back.

Nevertheless, the reality that term depositors could withdraw their funds within relatively short time frames – which might be a particular issue if one of the majors got itself into some form of difficulty – means that APRA has been talking to the banks about finessing their term deposit offerings.

It is probable that, to minimise the amount of liquidity they have to hold against their term deposit funding, the banks will have to introduce meaningful penalties against early redemption to ensure the funds are there for the full term. There may also be automatic rollovers of the deposits when they mature unless the depositor explicitly instructs otherwise. There is an active discussion occurring between APRA and the banks about how to make those deposits "stickier."

9. The yuan enters the big-time
There is a scramble to be a yuan trading 'hub' now that the Chinese have signaled moves to make their currency more convertible. China is making moves in Hong Kong, and now London is positioning itself to be the major offshore yuan trading center. HSBC is in the box seat. More from Bloomberg:

China is encouraging global use of the yuan and allowing more overseas investors to access its local capital markets as Premier Wen Jiabao seeks to shift the focus of economic growth to domestic demand and away from slowing export industries.

The People’s Bank of China broadened the trading band against the dollar to 1 percent from its daily reference rate, effective April 16, after having held the limit at 0.5 percent since May 2007. The China Securities Regulatory Commission raised quotas for global funds pumping foreign currency into China’s stocks and bonds to $80 billion from $30 billion this month.

10. The last laugh smile
It's Friday and we haven't had a Muppet video for a few days, so here is a gratuitous one just to make you smile. (I know I am fairly safe ground here ... 12,500,000 people have viewed this one so far.)

And here is a bonus involving Wellington, Bret McKenzie, and my favourite muso Randy Newman. Enjoy your weekend.