Tuesday's Top 10 with NZ Mint: How tight monetary policy worsens inequality; The Economist's 'Banksters' front page; Chinese developers pass the parcel; Nouriel Roubini's perfect storm; Dilbert

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

We welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz.

See all previous Top 10s here.

My must look today is the British front page of the Economist with a cartoon of 'Banksters' on the front page. Who would have thunk we'd ever see that.

1. Monetary policy contractions worsen inequality - The Economist reports on this Berkeley research showing that contractionary monetary policies designed to push inflation lower simply enriched the 1% and made the poor even poorer.

It turns out that falling inflation rates and rising property values coincided with a rise in the corporate (mostly financial) profit share and rising asset values.

Given that most of the assets, particularly in shares and property, are owned by the rich, they benefited most.

It seems inflation targets have a role too.

Here's the Economist:

Changes in monetary policy can account for up to 20% of fluctuations in American inequality since 1980, although changes in monetary policy regimes can be much more important; in Ireland changes in inflation targets explain almost all the rise in inequality during the 1980s.

As expected “rich, old” households suffered more from looser policy (and the resulting higher inflation) than their younger indebted counterparts.

2. Nigel Farage unloads again - This is compelling viewing from Eurosceptic MP Nigel Farage on the floor of the European parliament last week. HT Hugh via email.

He is applauded at the end, which is unheard of in the EU parliament, for Farage, who has been seen as a nutty outsider, until now.

3.  Playing pass the parcel - The Wall St Journal reports on how Chinese developers are kicking their own cans down the road.

After bank loans started getting hard to come by in late 2010, the developers turned to trust companies for financing on a massive scale. The banking regulator startedtightening trust financingmid-last year, and more recently has made it difficult for trusts to roll over loans to developers that are maturing. According to data from the China Trustee Association, outstanding trust financing to the property sector at the end of March was down from the end of last year (in Chinese). That’s the first ever decline since early 2010, when data first became available.

“The government’s crackdown on trust funding as an artery for financing is just the latest of its measures to force developers to bring down property prices,” said Richard David, chief executive of Shanghai-based real estate firm Treasury China Trust. “There is going to be significant disruption to developers that rely on trust funding.”


4. Here comes the supply - Reuters reports China's coastal shipping is losing business locally and venturing onto the high seas to compete for business.

Stockpiles are growing rapidly as the Chinese domestic economy slows down.

China's huge fleet of coastal ships, usually confined to plying the Chinese seaboard, has sailed out of the shadows to seek international business in yet another sign that China's economy is slowing.

The fleet, previously unnoticed by the global market, is suffering from a slowdown in China's coastal trade amid weaker domestic demand from utilities and steel mills and a growing glut in Chinese coal and iron ore stockpiles.

5. Devaluation is default - Gordon Kerry states the obvious, but not often discussed implication of money printing, in this piece on Bloomberg.

In the U.K., which -- unlike Greece -- isn’t part of the euro area and can devalue if it wishes, there’s growing pressure to do so. A letter recently circulated to some 3,000 influential figures proposed deliberately weakening the British pound to boost exports and hence economic growth. Debasing currencies in this way is promoted as an alternative to sovereign default, as well as to other methods of increasing competitiveness, such as cutting nominal wages.

But all this wistful focus on currency devaluation -- the route that countries such as Greece, Spain and Italy cannot take so long as they remain in the euro area -- is a mistake.

To start with, devaluation is not an alternative to sovereign default. When a government decides to devalue, savers who trusted the currency to store their wealth, and creditors who bought bonds denominated in the currency, find the value of their assets cut. That’s sovereign default by a different name.

6. Matt Taibbi and Eliot Spitzer nail it here - If LIBOR is false then the financial world is built on quicksand 

7. Putting the brakes on an economy - BusinessWeek reports on the bizarre frenzy of car buying in Guangzhou on June 30 after the local government announced a clampdown on car buying.

It says a lot about the capriciousness of Chinese authorities, and the seriousness of the authorities in trying to slow economic growth.

At 9 p.m. that Saturday, when all 57 showrooms at the Race Course Automall in the southern Chinese city of Guangzhou had closed, the municipal government announced that to rein in congestion and air pollution, it would cap the number of new vehicle registrations at about half of last year’s total and suspend new registrations for July -- effective midnight. Caught by surprise, dealerships recalled their staff and stayed open until the next morning selling to buyers packing the mall the size of four soccer fields.

“June 30 was the first time in Guangzhou’s history the mall’s dealers ever worked through the night,” the 28-year-old Chen said as he looked around the almost-deserted dealership where he sells BMWs. “Those three to four hours of mad, frenzied buying are now over,” he said, noting that sales were considered to have beat the deadline as long as payment was received by midnight, even if the paperwork stretched into the wee hours. “It’s been very quiet since.”

8. The problem with neo-classical economics - Ross Gittins takes a mild swipe at neo-classical economics in this piece in the Sydney Morning Herald lauding Nobel Prize winner Elinor Ostrom.

Elinor Ostrom, a professor of political science at Indiana University, devoted much of her career to combing the world looking for examples where people had developed ways of regulating their use of common resources without resort to either private property rights or government intervention.

As The Economist records, she found forests in Nepal, irrigation systems in Spain, mountain villages in Switzerland and Japan, and fisheries in Maine and Indonesia. In all these cases people drew up sensible rules for sharing the use of the resource and combined to perform regular repairs. People who broke the rules were fined or eventually excluded.

''The schemes were mutual and reciprocal, and many had worked well for centuries,'' the magazine says. For her pains, Ostrom, who died last month, was awarded the Nobel prize in economics in 2009, the first woman so honoured. Few economists had heard of her, or her model-busting work.

Why had this solution to the problem never been considered by economists?

Because of their model's implicit assumption that we only ever act as individuals, never collectively. We compete against each other, but we never co-operate to solve mutual problems. And, since all the market's benefits come via competition, co-operation by producers is probably an attempt to rig the market, which should be outlawed. The community pays a high price for allowing one model of how the economy works to dominate the advice we get and the way we think.

9. Buckle up - Nouriel Roubini says in this Bloomberg interview that 2013 is shaping up as a perfect storm for economies and markets with a potential euro-zone meltdown with an exit or two, slowing growth in America and the risk of a conflict in the Middle East.

And you all thought I was an uber bear...


10. Totally unfunnny but relevant and hard-hitting video from US Senator Bernie Sanders about why Americans are so angry.

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I repeat last nght's question, Hugh - define 'income'. Why do you persist in taking a variable as a fixed quantity?

I logged in this morning, looking forward to a good Houston style ear bashing and a hearty dose of new vision Hughconomics from Bernard, but surprisingly Bernard didn't mention Houston at all. I am starting to think that Hugh and Bernard might be on different pages. Also to bring to balance to Hughs commentary (maybe realism would be a higher grade euphamism) may every post by Hugh should be accompanied by a post mentioning the other place somewhere over the rainbow, North Dakota?

Talen observes, for instance, the "radically negative consequences" of American planners' traditional focus on separation in land use planning, tracing that focus to America's unique development history: "The U.S. had a lot of open space when it first developed. People had this notion of unlimited capacity to just spread out... the U.S. is composed of so many heterogeneous groups, and rather than trying to live together in close proximity, we translated all that diversity to uncomfortableness. We translated it into just moving away from one group to another."
The legacy of that mindset persists in planners' ongoing struggle with NIMBYism. Fortunately, for Talen, the answer is simpler than you'd expect: "I think the key is good design. People have been legitimately griping about some mixed-use [development]: That could be a 7-11, with a huge parking lot in front of it, next door to you with glaring lights all night. The devil is in the details."
"The irony is that most people — when you show them a wonderful design of mixed-use, where things fit together, and where it produces a vibrancy and quality of place — people love it! They flock to cities that have that kind of diversity. So, it really comes back to bad rules, and having rules that don’t protect those design qualities."
Ultimately, the way to better design may begin with a shift toward form-based codes. "Form-based coding, I think, is taking off. I wish it would go faster. I wish more people would adopt it. But there’s really been progress in the last year with these major American cities taking it on. Yeah, I’m hopeful. I think it will happen."

Senator Sanders should be burn't at the stake for telling the truth.
How dare he cast doubts on the integrity of wall street and all the great financial institutions that operate there.
How dare he portray the bankers as greedy  after all they were only trying to make a buck with our money.

Explanation of why taxing teh rich at 70% is actually not counter-productive.

 From No 1 above,  Monetary policy contractions worsen inequality -
"contractionary monetary policies designed to push inflation lower simply enriched the 1% and made the poor even poorer"
Compared to the rich the poor felt hard done by, so the powers that be, said, give them some welfare to make them feel better and close the weath gap.
Lets do this by borrowing the money from the rich and giving it to the poor but we must keep inflation in check
But the  "monetary policies designed to push inflation lower simply enriched the 1% and made the poor even poorer"
So again the poor felt hard done by and needed more welfare to close the wealth gap, so the powers that be said,  give it to them, borrow the money from the rich but keep inflation in check
Begining to sound like that old song "there's a hole in the bucket dear liza"

The first piece is nonsensical.  How are rising house prices not inflation?  How does 'tight' monetary policy cause house prices to increase more than 'loose' monetary policy?  Inflation is a transfer of wealth from the holders of the devalued paper to those who get the newly-printed money.  If the Occupy crowd really cared about the poor they would be advocating a gold standard.

No it makes sense you, just cant or dont want to understand, which explains why you think a gold standard is just a "great" idea....
The Occupy crowd are way ahead of you...you are just not bright enough to see that.

Steven you have no credibility after claiming the australian carbon tax is to 'stop us going extinct'.

The carbon tax was an attempt by economists to address a physical problem.
Will it do so? No. Mother nature is real physics/chemistry, money is artificial. Either we sink the carbon in real terms, or we don't. There isn't the real 'sink' available to absorb what we emit - and 'the market' won't/can't change that physical fact.
Does the issue have to be addressed?
Even if you're not sure whether the all-time-record US temps presage a problem or not, you have to be precautionary, and the lead-times are such, that it has to have been actioned a while ago.
Only those with a vested interest in status-quo continuance, argue against such action.

Okay Steven, do you have any actual rebuttal to my point that monetary expansion benefits the wealthy at the expense of the poor?  Or do you just have insults about my supposed lack of intelligence?  

Ignore Steven, he abuses everyone.
I would point out that cyclic economics, depressions, recessions and poor people all existed before the gold standard, during the gold standard and after the gold standard.

A good point Ralph.  However, the late 19th century was arguably the greatest era of economic growth in human history, helped in large part by the rapidly improving cost of living enabled by falling prices.  Tying the value of a dollar to gold meant that dollars held their value and actually increased in purchasing power over time, due to rapid gains in productivity.  This allowed working hours to decrease dramatically from 65-70 hours per week to under 50.
And don't believe everything you read about the "depressions" during this period, because many economists mistakenly associate falling prices with deflation, and deflation with depressions.  In fact, a recent study (can't remember the authors) found no association between deflation and depressions. 
Despite the Gold Standard, interfering in the banking sector was still a favourite pastime of politicians even before central banks became the norm in the early 20th century.  Murray Rothbard's A History of Money and Banking in the United States details much of this meddling and the consequences for the wider economy.
However, the biggest virtue of the Gold Standard was the limits it placed on government spending.  In essence, it forced governments to be honest about their finances and fund spending through taxation rather than inflation or borrowing (which is usually paid for by inflation).  If you are a fan of unbridled state power (as several commenters on this site seem to be), the ditching of the Gold Standard was the greatest thing ever.

Senator Sanders, a independent self-described "democratic socialist" rather than a Republican or Democratic, is one of the most popular senators in the U.S. (at least with the people he represents).
In the Senate you can continue speaking until you leave the floor, and in Dec 2010 he gave an 8.5 hour speech protesting the extension of the Bush era tax cuts.

If devaluation of a currency is default then what is overvaluation due to money trading?

Nice thought.  I wish I had a witty answer.

Or if wittingly done

You left out capitalism, and neoliberalism.

Daniel Hannans latest analogy is also amusing ... legislating a common definition of homophobia .... bah!

Always love the top 10 links Bernie and interest.co.nz crew. 
The Prince at MB

Yes Hugh, agreed, best daily reading that there is .. 

Why is Bernie Sanders not standing for President as an Independent candidate ? He makes more sense than the candidates for the two mainstream parties...who have sold themselves already....

Watched the video at number 6 and wondered if our Mr Key was one of the the dishonest immoral gangster bankers being slagged off?

#8 I have read Governing the Commons by Elinor Ostrom after reading about the guy trying to sort out the Central Plains Water Issue. It didn't work there as both sides were to recalcitrant.
Elenor Ostroms world is one where there is no magical (Julian Simon's) "infinite resource" (feet are firmly on the ground). 

We complain about how the banks create money through fractional reserve banking and how our fiat curency has nothing to back it.
Consider the 300 trillion dollars created by the wall street bankers using financial instuments such as derivatives. What is that 300 trillion dollars they created backed by? Well nothing, but they take our money, by converting as much of their rubish as they can, into our money, and leave us broke and out of pocket.

Not sure it was 300 trillion clicked into existence by the 'Gang Banksters' but in any event it may well be the down fall of the current banking system. About time SFOs in UK, USA grasp the formidable task in front of them and prosecute these law breakers, tho I'm not holding my breath.

Useful read at Strafor as the internal trouble in Syria looks to escalate rather than be reduced anytime soon.