Friday's Top 10 with NZ Mint: When govt austerity programmes actually worsen recessions; How China's rebalancing hits NZ and Australia; Republican Party eyes US return to gold standard; Vietnamese bank run; Clarke and Dawe

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

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.

Here's Storbeck:

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 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.

The move shows how five years of easy monetary policy – and the efforts of libertarian congressman Ron Paul – have made the once-fringe idea of returning to gold-as-money a legitimate part of Republican debate.

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.

9. Who's your daddy? - Businessweek reports on a mobile truck for DNA testing doing the rounds in New York.

10. Totally Clarke and Dawe on accusations that someone is a witch...

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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The time is ripe , Hugh , for you Hugh , to set up your own political party ....... our future PM ...
........ get Less Rude in on the ACT , there is no alternative ...... minister of manufacturing ...
Cuckoo Kunst from Kaikoura can be minister of trade & enterprise ......
Viva le sheeples revolution ! ..... I'll supply the Gummibars , minister of snacks  ........
...... where's our finance minister , Wolly got to ?

Been busy Gummy...hammering a house together...between rainstorms...wanted to get it done before gst goes up it will...also before the inflation storm hits...
The farce continues inside the new fandangled Labour Group...whatever that 'mission statement' more red tape...more stupidity...
Marlborough builders and roofers now have two version of the 'scaffolding idiocy'...yes they can so long as they have their harness on...and no they can't..
Truth is there is a bun fight going on between mandarins...some pommy gits in the soup!....they want to enforce pommy building greater madness has been created by so few that causes so much misery and cost to so many....
Stupid Minister is asleep.

D'yer want top billing Wolly , 'cos Humble Hugh only wants to be minister of housing ?
..... be nice to have a PM who can do something useful , rather than just trade on exotic financial derivatives ( Jolly Kid ) , or be a junior lecturer on Romanian economics  (  Herr Helen ) ....

Bernard, Re #1.
We can either do austerity now, sufffer for a relatively short while, and bounce back, or we can print money, suffer for a long time, and eventually crawl our way back. We cannot avoid the pain but we can reduce its duration. Look at the depression of 1920 in the USA and Japan. Read this for sober advice:-

During the Great Depression austerity simply made it worse and even caused a relapse in 1937.  Also today like the 1930s we see a debt problem as a main factor. So really we want to compare like with like.
So from the von-mises piece,
The Federal Reserve's activity, moreover, was hardly noticeable."
Lets take a non von-mises view of the 1920s,
"Milton Friedman and Anna Schwartz, in A Monetary History of the United States, consider mistakes in Federal Reserve policy as a key factor in the crisis. In response to post-World War I inflation the Federal Reserve Bank of New York began raising interest rates sharply. In December 1919 the rate was raised from 4.75% to 5%. A month later it was raised to 6% and in June 1920 it was raised to 7% (the highest interest rates of any period except the 1970s and early 1980s)."
or PK,
"Economist Paul Krugman, who is critical of the Austrian interpretation, notes that the monetary base expanded significantly from 1922-1925, and that this expansion was accompanied by a reduction in commercial paper rates.[15] Allan Metzger suggests that deflation and the flight of gold from hyper-inflationary Europe to the U.S. also contributed to the rising real money stock and economic recovery.[16]"
Kind of interesting those differences...and of course we have ppl wanting the interest rates to rise...which it seems played a significant part in the 1920s event.

Or even better than both of those options, we could just let the people holding the bad loans take the losses instead of the governments...

I sort of wish....a jubilee....however,
1) With full recourse the ppl who took the debt on own the problem not the banks....
2) Banks collapse taking depositors with them....the OAPs who are the (to an extent) the holders of the debt suffer the losses....not the banks.
3) No one can buy food as there is no banking system for transactions.....
It kind of gets ugly really fast.
Is it the ppl who lent? or the ones who borrowed? who should take the loss? or is it the banksters who lent to any one because their bonuses relied on it? I'd suggest the latter, but how do you "catch" those?

They certainly seem to be showing signs of shruging off the "austerity will fix it mantle"

The money tap never turned off for some - just the under represented majority felt the pain of austerity.
They say timing is everything when trading financial markets, but it really is pre-positioning that counts.
Making oneself correctly available to be the recipient of others weath is important. We really need to be teaching these matters to a wider spectrum of citizens so a wider and accompanied swathe of society can go broke together.

Since it is Friday, have a beer.

Have the Maoris saved us from ourselves or at least from the machinations of the trailer trash economics of the privatisation ideologues?
The Government must halt its asset sales programme until Maori water rights can be sorted out, the Waitangi Tribunal says.
Maori ownership of water has thrown a spanner in the Government's privatisation plans and may yet cause further delay with the damning tribunal report released today. Read Article

Ironically it might be Rio Tinto and its veiled threat to close Tiwai Point, and Skog to close half of its paper mill in Kawerau. 16% extra capacity would hammer down power prices and revalue all the generators downwards. If the government gives in and renegotiates prices for Tiwai Point down (off already bargain rates) they set  a terrible precedent for subsidising not only multi national mining companies but also for supporting high electricity prices and the profits for  soon to be private shareholders at the expense of the general consumer and long term energy supply, the opposite effect of what the much vaunted electricity reforms were supposed to do. All their deregulated, market based economic rationale would lie in tatters.

...All their deregulated, market based economic rationale would lie in tatters.
I presume you have given them the benefit of some small fraction of a per cent of doubt.  For me, the blue/red NACT/Labour pol-Lies of the last quarter century or so have had their economic policies confirmed as being no better than the voodoo economics depicted by South Park.

With luck indeed the Maori may well have saved the power companies, as you say. As WTF notes, future demand may be softer than I anyway had thought, while alternative new supply technologies just may be cheaper and easier than I also had thought. In which case there may have been some justification in selling them except for at least the following 4 things:
Hydro stations in particular really do seem irreplaceable, and a huge market asset in the event demand does keep rising.
There would have remained oligopoly pricing power, with consumers potentially shafted, in order to keep getting good returns.
It was yet another transfer of wealth from all New Zealanders to wealthy New Zealanders (and no doubt then offshore for some of the value).
Both the government and the macro economic situation would have blown all the money from sales at roughly $300 million a week. So regardless of whether they got a good price, it would have merely delayed proper solutions to the current account (my personal priority) and the fiscal one.
With this problem and WTF's softened demand, along with clear public disapproval, hopefully the sales will stop.

Regarding #2. NZ may be a commodity exporter, but the bulk of our exports are not 'hard commodities'. Dairy, fruit meat and timber will not be particularly affected by a decrease in investment by China. 
The only problems I would anticipate to NZ would be flow-on effects from other industries and Australia.

#3 William was not advocating a fiat money system over a gold standard - but a release of the control of the then money supply from wall street banks to the people by remonetising of silver. I think you have made the wrong link with this.
These days we have the same problem - wall street banking establishment absolutely control the world fiat money supply. A return to a gold standard would have the opposite effect as it did in Jennings day, being it would destroy these same banks (who are way short paper gold - having sold more paper gold than what actually exists to deliver), bring sovereign solvency back to Europe and the US (most of these nations still hold a lot of reserves in gold), return wealth to the third world (gold is one of the most evenly spread metals - found accross every continent), make governments live within their means (they can't steal through inflation), secure the spending power for savers (making saving actually worth while), therefore creating funds for investment and thus passing real productivity gains onto the general public... creating in turn a higher standard of living for everyone (not just the money elite)... 
Some see this. Unfortunately, as wall street control the government they are just paying lip service to make the sheeple feel they are being listened to, and like the Regan commission, the conclusion will be set before the commission is even issued with stationary to put its report on. There is no way these banks will let go of the money they have without a real nasty fight...
... but it is a strange thing to count real wealth as the obligation debt notes you hold from one bankrupt entity owing to another bankrupt entity, yes?...
I think you mean 'someone in America needs to have the insight to publish what Williams speech was really about' as its just as relevant today as it ever was.

Fairfax ( ASX : FXJ ) reported a loss of $A 2.73 billion , for the past 12 months .......
....... much of this was write downs , of goodwill and other complete shite , sitting in the balance sheet ..... masquerading as " assets " ....
....... ummm , guys , " mast-heads " are not assets , not now ...... have you lot at Fairfax wizened up to the fact that the internet is here to stay ?
The trading profit was down a smidge , 6 % on last year ...... not too bad , considering ...
...... and Gina Rhinebutt  is trying to bail out , no takers at 50 cents .......
Remember those old pictures in National Geographic , artists impressions of mastodons thrashing around , stuck in primeval tar pits ..... that is you guys , that is Fairfax !