Here's my Top 10 links from around the Internet at 12.30 pm today in association with NZ Mint.
As always, we welcome your additions in the comments below or via email tobernard.hickey@interest.co.nz.
See all previous Top 10s here.
My must read today is #2 for those who want to understand what's really going on in China and what it means for us.
1. Excessive austerity doesn't pay - Handelsblatt economics editor Olaf Storbeck reports that now even the economists at the IMF are saying that concerted austerity actually just drives an economy even deeper into recession, particularly when the household sector is deleveraging at the same time.
This will be the theme of economics and political debate all around the world for years to come.
It's clear the austerity medicine is not working in Greece, Spain, Italy, Portugal and Ireland.
It makes sense in an inflationary environment where the 'other sides' of the economy (households and corporates) are leveraging up.
When they're deleveraging and deflation is setting in the worst thing a government can do is cut spending and increase taxes.
Yet that is the recipe the Germans and the Republicans in America are pursuing.
It is probably one of the most important trips in Greece’s modern history. On Friday, the new Greek prime minister Antonis Samaras will travel to Berlin and ask the German chancellor Angela Merkel for more time. His stricken country, he will insist, needs more years to meet the austerity targets. “All we want is a bit of ‘air to breathe’ to get the economy running and to increase state income”, he said in an interview with Germany’s tabloid “Bild Zeitung”.
A new research paper published by the research department of the International Monetary Fund (IMF) backs his claim. Countries trying to consolidate their public finances in the midst of a recession need patience and a steady hand, the paper entitled “Successful Austerity in the United States, Europe and Japan” concludes.
Given the fact that the IMF is part of the troika that insists on severe austerity programs in return for bailout funds, this is quite a perplexing message.
And John Key and Bill English should take notice of this line as well:
The results of the new paper are also stunning with regard to the optimal composition of austerity programs. Currently, most economists recommend cutting government expenditures rather than hiking taxes as the most growth friendly strategy. However, as Batini et al. point out, depending on the economic environment, this can turn out to be a dangerous piece of advice.
In a recession, cutting government outlays proves to be rather detrimental to growth. According to the results, the fiscal multiplier for so-called expenditure shocks varies between 1.6 and 2.6. This means that every Euro of cuts costs 1.60 to 2.60 Euro of GDP. Tax hikes are significantly less harmful: The fiscal multiplier only ranges between 0.16 and 0.35.
Unfortunately, however, most crisis countries in the Euro area heeded the prevalent economic advice and gave a higher priority to cuts rather than to tax hikes
2. Rebalancing under way - Beijing based economist Michael Pettis has been arguing for a while now that China needs to rebalance away from heavy infrastructure investment and exporting towards more domestic consumption and a better social safety net.
He now thinks that restructuring might actually be starting because inflation has fallen faster than interest rates, removing some of the financial repression responsible for the current imbalance towards infrastructure investments and exports. This is important because Australia is so dependent now on exporting iron ore and coal to the Chinese steel mills making the materials for that infrastructure investment boom of the last decade.
Here's Pettis:
Debt levels have risen so quickly that unless many years of overinvestment are quickly reversed China will face debt problems, and maybe even a debt crisis. The sooner China starts the rebalancing process, in other words, the less painful it will be, but one way or the other it is going to be painful and there are many in China who are going to argue that the rebalancing process must be postponed. With China’s consumption share of GDP at barely more than half the global average, and with the highest investment rate in the world, rebalancing will require determined effort.
As China rebalances, in other words, we would expect sharply slowing growth and rapidly rising real interest rates, which is exactly what we are seeing. Rather than panicking and demanding that Beijing reverse the process, we should be relieved that Beijing is finally resolving its problems.
even with the rate cuts, perhaps demanded by the State Council, with inflation falling much more quickly than interest rates the real return for household depositors has soared in recent months, as has the real cost of borrowing. China, in other words, is finally repairing one of its worst distortions.
But this necessarily comes at a cost. Raising the real borrowing cost cannot help but reduce investment growth and increase cashflow pressure on local governments, and so with the rise in real rates China’s GDP growth rate must fall sharply. China bulls, late to understand the unhealthy implications of the distortions that generated so much growth in the past, have finally recognized how urgent the rebalancing is, but they still fail to understand that this cannot happen at high growth rates. The problem is mainly one of arithmetic. China’s investment growth rate must fall for many years before the household income share of GDP is high enough for consumption to replace investment as the engine of rapid growth.
As China rebalances, in other words, we would expect sharply slowing growth and rapidly rising real interest rates, which is exactly what we are seeing. Rather than panicking and demanding that Beijing reverse the process, we should be relieved that Beijing is finally resolving its problems.
And here's the key line: (Remember NZ is a net commodity exporter...)
Rebalancing will inevitably result in falling prices for hard commodities, and so will hurt countries like Australia and Brazil that have gotten fat on Chinese overinvestment. Rising Chinese consumption demand over the long term and lower commodity prices, however, are positive for global growth overall, and especially for net commodity importers.
3. Republicans eye return to gold standard - Lordy, lordy. Can the world get any more topsy turvy? Someone in America needs to republish the famous 1896 speech by William Jennings Bryan about mankind being 'crucified on a cross of gold'.
The FT.com reports the Republican Party will debate the creation of a 'Gold Commission' at its upcoming convention. Sigh.
Drafts of the party platform, which it will adopt at a convention in Tampa Bay, Florida, next week, call for an audit of Federal Reserve monetary policy and a commission to look at restoring the link between the dollar and gold. The proposal is reminiscent of the Gold Commission created by former president Ronald Reagan in 1981, 10 years after Richard Nixon broke the link between gold and the dollar during the 1971 oil crisis. That commission ultimately supported the status quo.
“There is a growing recognition within the Republican party and in America more generally that we’re not going to be able to print our way to prosperity,” said Sean Fieler, chairman of the American Principles Project, a conservative group that has pushed for a return to the gold standard.
4. A fresh blast of stimulus - Ambrose Evans Pritchard reports here at The Telegraph on the blast of stimulus being prepared in America, Europe and China as global trade slumps.
“People should worry less about Europe right now and look more closely at Asia,” said Hans Redeker, currency chief at Morgan Stanley. “We think the Bernanke and Draghi 'puts’ will drive a further rally in global equities. But China represents the biggest risk to our bullish asset call.”
“Global trade is contracting at the fastest pace since 2008,” said Stephen Jen from SLJ Macro Partners. “The exports of Korea, Taiwan and Japan are contacting, and China is in stark deceleration.”
Container shipping volumes to Europe fell 9pc in June from Asia and 7.5pc from North America. The CPB World Trade Monitor in the Netherlands shows that trade volumes have been shrinking for the last five months. The Baltic Dry Index measuring freight rates for bulk goods has crashed to Great Recession depths.
5. Vietnamese bank run - BBC reports there was a run on one of Vietnam's biggest banks, Asia Commercial Bank, overnight after one of its founders, Nguyen Duc Kien, was arrested for 'economic violations.' He had been seen as politically well connected...
The Central Bank has pumped millions into the bank to reassure depositors. Large crowds of customers have gathered outside branches of ACB in Ho Chi Minh City and Hanoi.
The government has said that Mr Kien, who owns just under a 5% stake in ACB, is not involved in the day-to-day running of the bank. Mr Kien, whose family is the fifth richest in Vietnam, co-founded ACB in the 1990s. He is seen as a politically well-connected tycoon.
6. Who wins from QE? - The Guardian reports the Bank of England saying that the biggest winners from Britain's Quantitative Easing were the richest 10%...
The richest 10% of households in Britain have seen the value of their assets increase by up to £322,000 as a result of the Bank of England's attempts to use electronic money creation to lift the economy out of its deepest post-war slump.
Threadneedle Street said that wealthy families had been the biggest beneficiaries of its £375bn quantitative-easing (QE) programme, under which it has been buying government gilts for cash since early 2009.
The Bank of England calculated that the value of shares and bonds had risen by 26% – or £600bn – as a result of the policy, equivalent to £10,000 for each household in the UK. It added, however, that 40% of the gains went to the richest 5% of households.
7. China's soft toy glut - In previous Top 10s I've pointed to articles on the iron ore, coal, copper and cotton stockpiles building up in China.
Now the New York Times looks at the other glut in soft toys and the like building up at factories.
After three decades of torrid growth, China is encountering an unfamiliar problem with its newly struggling economy: a huge buildup of unsold goods that is cluttering shop floors, clogging car dealerships and filling factory warehouses.
“Across the manufacturing industries we look at, people were expecting more sales over the summer, and it just didn’t happen,” said Anne Stevenson-Yang, the research director for J Capital Research, an economic analysis firm in Hong Kong. With inventories extremely high and factories now cutting production, she added, “Things are kind of crawling to a halt.”
Wu Weiqing, the manager of a faucet and sink wholesaler, said that his sales dropped 30 percent in the last year and he has piled up extra merchandise. Yet the factory supplying him is still cranking out shiny kitchen fixtures at a fast pace. “My supplier’s inventory is huge because he cannot cut production — he doesn’t want to miss out on sales when the demand comes back,” he said.
8. Oh No - Europeans are cutting back on coffee drinking in cafes.
10. Totally Clarke and Dawe on accusations that someone is a witch...
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