Wednesday's Top 10 with NZ Mint: Der Spiegel argues for 'Grexit'; How Greece might default; China may have purged internal security boss Zhou Yongkang; How US, America (and NZ?) are turning Japanese; Dilbert

Here's my Top 10 links from around the Internet at 3.30 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.

My must read today is #5 on why British and American bond yields are falling despite blowouts in government deficits. They're turning Japanese with balance sheet recessions that force households to buy government bonds.

1. What the Germans think - Der Spiegel writes a long argument here in favour of Greece leaving the euro.

This is turning into an awfully dangerous game of chicken.

The Greeks are saying they want to drop the austerity AND stay in the Euro. The Germans say the euro can handle it if the Greeks leave.

Meanwhile, Southern European bonds are selling off like crazy in a silent bank run that could bring down the Euro...

Who's going to blink first?

And even if they do, will it be too late to put the fear and loathing and bank runs back in the bottle?

Here's today's exciting episode courtesy of Germany's most influential magazine:

After Greek voters rejected austerity in last week's election, plunging the country into a political crisis, Europe has been searching for a Plan B for Greece. It's time to admit that the EU/IMF rescue plan has failed. Greece's best hopes now lie in a return to the drachma.

At the Chancellery in Berlin, the television images from Athens now remind Merkel's advisers of conditions in the ill-fated Weimar Republic of 1919-1933. Back then, the Germans perceived the Treaty of Versailles as a supposed "disgrace." Now, the Greeks feel the same way about the austerity measures imposed by Brussels. And, as in the 1920s in Germany, the situation in Greece today benefits fringe parties on both the left and the right. The country's political system is unraveling, and some advisers even fear that the tense situation could lead to a military coup.

Greece has been in intensive care for years, but the patient, instead of recovering, is just getting sicker and sicker. In a confidential report, which SPIEGEL has seen, experts from the IMF arrive at a devastating verdict. The country, they write, has only "a small industrial base" and is characterized by "structural incrustations" and an "excessively large role of the public sector."

2. 'They never learn' - Satyajit Das writes at ABC about JP Morgan's 'Whale' of a loss.

The bank's assertion that the entire set of transactions was both a hedge and a source of earnings is confusing. The bank should have heeded the warning of the seventeenth-century French author François de La Rochefoucauld:

We are so accustomed to disguise ourselves to others that in the end we become disguised to ourselves.

Given JPM vaunted risk management credentials and boasts of a "fortress like" balance sheet, it is surprising that the problems of the hedge were not identified earlier.

3. How Greece might default and leave the euro - Felix Salmon takes a stab at working out the actual mechanics and sequencing of Greece's likely exit from the Euro.

It all hinges on Greece's banks.

Once you strip out Greece’s debt payments, the country’s primary deficit is pretty modest — just 1% of GDP or so. So could Greece make one more round of cuts, default on all its debts, and remain within the Eurozone?

I think the answer is no — and the reason is the banks. If the ECB were to stop funding the Greek banks, and if Greece were to default on its debts, all of Greece’s banks would be insolvent. And you can’t have a functioning economy without banks. Basically, Greek depositors need to be able to withdraw something from their checking accounts. And if the EU stops supporting the banks, that something can’t be euros any more.

4. And the cost? - The WSJ says the IIF has estimated a cost of a Greek default at around 1 trillion euros...

The Institute of International Finance, an industry group representing some 450 financial institutions from around the world, circulated a confidential note in February placing the costs at €1 trillion ($1.29 trillion). The IIF said, in an internal note to staff that was leaked to the press at the time, that different players would be injured significantly by a Greek euro exit, ranging from the ECB to private financial institutions and other euro-zone countries, which would face higher borrowing costs as the contagion would hit their bond markets.

5. Turning Japanese - Martin Wolf compares Britain and America to Japan since 1990 in this post at FT.com.

He argues persuasively that countries that suffer balance sheet recessions see huge demands for government bond yields, confounding the warnings of all the bond market vigilantes.

The implication is that government's should eschew austerity and instead boost domestic demand by heavy government borrowing at low interest rates. Exactly not what John Key is planning.

I've excerpted at length because it's a fascinating argument.

At the end of 1990, when its “bubble economy” went pop, the Japanese government’s 10-year bond was yielding 6.7 per cent. As the economy subsequently declined, deflation took hold and fiscal deficits and public debt exploded. But yields on 10-year Japanese government bonds (JGBs) fell to close to 2 per cent in 1997 and then, with sizeable fluctuations, to troughs of 0.8 per cent in 1998, 0.4 per cent in 2003 and, recently, to 0.9 per cent. In short, the worse the Japanese government’s present and prospective debt position has become, the lower the interest rates on JGBs has also become.

As with Japan, the fiscal positions of the UK and US have become much worse since the crisis. Yet, as in Japan, these two governments have managed to borrow far more cheaply than they could before the crisis. Moreover, the declines in 10-year rates on UK and US government bonds has been much the same as in Germany, even though, as the German government frequently points out, it has been far more fiscally disciplined. US bond yields have also fallen by quite as much as those of the UK even though, as the IMF forecasts also show, the UK’s austerity programme is far tougher than that of the US.

Countries with huge fiscal deficits are being rewarded with huge falls in bond yields. Is that the wages of virtue? Surely, this ought to disturb those right-thinking people who have frequently foretold a bond market meltdown in the UK and, still more importantly, the US. Moreover, those are the very people who also tend to believe that markets mostly get things right. But, apparently, markets do not believe there is the serious fiscal problem in the UK or US (or Japan) that the right-thinking people believe in.

What, then, is going on? What are markets telling us? The most important thing they are telling us is that the conventional view of the relationship between fiscal deficits, debt and interest rates is nonsense in balance-sheet recessions.

By running a large financial surplus in order to deleverage and improve net worth, the private sector generates a huge aggregate excess demand for the financial liabilities of other sectors, domestic and foreign. For a country with a floating exchange rate, some combination of two things must then happen: a fall in the exchange rate and/or a rise in the price of the other domestic sector’s liabilities. But the latter sector is, of course, the government.

One would, therefore, expect to see a huge increase in demand for the liabilities of the government. That is exactly what we do, in fact, see. This is why bond yields collapse even though the supply of government bonds explodes: both are the direct consequence of the balance-sheet induced weakness in private sector spending and its move into huge financial surpluses.

6. Bubble, bubble, toil and trouble - The WSJ reports on a 19% rise in farmland values in America's mid-West. Some aren't convinced. Low interest rates are helping boost land prices beyond the fundamentals of commodity prices.

"People who are buying ground right now are overly optimistic," said Michael Swanson, an agricultural economist with banking giant Wells Fargo & Co. "Nothing stays that good for that long."

Mr. Swanson said farmers buying land are counting on high crop prices for many years to come. But farmers around the world, also acting on high crop prices, are poised to dramatically increase their production in the coming years through better fertilizer, herbicide, seeds and equipment. That will eventually drive prices lower, Mr. Swanson said.

7. Big trouble in not-so-little China - Damian Grammaticus writes at BBC about the turmoil inside the leadership of China's Communist Party. No one is really sure if the internal head of security, Zhou Yongkang, has been purged. Grammaticus is sceptical given the huge power Zhou amassed over the last four years.

As Chair of the Political and Legal Commission, Mr Zhou has been in control of the police, the secret police, the prosecutors and the courts, and a giant network of informants. He also shared joint control over militia and paramilitary forces with military authorities.

Willy Lam points out that China's internal security forces now have a bigger published budget than China's military does. The budget has grown from 514.0bn yuan ($81.3bn) in 2010 to 701.7bn yuan ($111.1bn) this year. China's senior leaders oversaw and approved the build-up.

8. Here's the FT.com story about Zhou's apparent purging. If this guy heads up internal security, then this could all get very ugly.

According to three senior party members and diplomats briefed on the subject he has handed operational control of the pervasive Chinese security apparatus to Meng Jianzhu, the current minister of public security.

The trigger for Mr Zhou being sidelined was his enthusiastic lobbying on behalf of purged Chinese leader Bo Xilai during internal debates over Mr Bo’s fate in March and early April, these people say.

9. British MEP Godfrey Bloom gets all righteously indignant in this video of a speech he gave in the European Parliament. Fun to watch. HT Augusta Funds.

10. Here's Jon Stewart on George Clooney's love-in for Barack Obama