Tuesday's Top 10 with NZ Mint: Europe set for another Greek showdown in October; The Republicans' gold standard deathwish; 'Don't worry about moral hazard in a crisis'; Paul Krugman and the Gold standard of instability; Dilbert

Here's my Top 10 links from around the Internet at 7.30 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 #5. I love a good Keynes vs Hayek debate.

1. Golden instability - Paul Krugman makes the point in this New York Times piece with this chart below that the real price of gold (ie adjusted for inflation) has been remarkably volatile.

Those who argue the gold price naturally offsets the impact of inflation are wrong, Krugman argues.

This is all on the agenda again after the Republicans decided to debate the creation of a Gold Standard Commission at their ongoing convention in Florida.

It has been one of the great debates of American political life over last 200 years and now it's back.

The first two rounds of quantitative easing (ie money printing) by the Federal Reserve have done little to boost the US economy, but they sure have got the Gold Standard debate back on the front pages.

Here's Krugman's view:

There may be bubble aspects, but there’s also a pretty clear (and economically understandable) relationship between the real price of gold and the real interest rate: when real rates are low, real gold prices are high. And when are real rates low? High inflation can do that, as it did in the late 1970s; but so can a severe economic slump due to a deleveraging shock, as in recent years.

What does that tell us about how a gold standard would work? Faced with the kind of shock we’ve just experienced, the real price of gold would “want” to rise. But under a gold standard, the nominal price of gold would be fixed, so the only way that could happen would be through a fall in the general price level: deflation. So if we’d had a gold standard operating in this crisis, there would have been powerful deflationary forces at work; not exactly what the doctor ordered.

Now, the gold bugs will no doubt reply that under a gold standard big bubbles couldn’t happen, and therefore there wouldn’t be major financial crises. And it’s true: under the gold standard America had no major financial panics other than in 1873, 1884, 1890, 1893, 1907, 1930, 1931, 1932, and 1933. Oh, wait.

The truth is that returning to gold is an almost comically (and cosmically) bad idea.

2. Let the banks' creditors go bust - Barry Ritholz pulls together the evidence to show Iceland got it right by letting bank bond holders take the pain of collapse rather than taxpayers.

Unlike other nations, including the U.S. and Ireland, which injected billions of dollars of capital into their financial institutions to keep them afloat, Iceland placed its biggest lenders in receivership. It chose not to protect creditors of the country’s banks, whose assets had ballooned to $209 billion, 11 times gross domestic product.

“Iceland did the right thing … creditors, not the taxpayers, shouldered the losses of banks,” says Nobel laureate Joseph Stiglitz, an economics professor at Columbia University in New York. “Ireland’s done all the wrong things, on the other hand. That’s probably the worst model.”

3. Get set for October - Der Spiegel points out Greece's fate is likely to be decided in October.

European leaders are unconvinced that the Greek government's austerity efforts will produce quick results. Greece's fate is now likely to be decided at the EU summit in October. The country's European partners will have to choose among a number of equally unattractive alternatives.

The troika of the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF) will spend the entire month of September auditing the books in Athens. Whether the report will be finished by the time the euro-zone finance ministers meet on Oct. 8 is already debatable. Meanwhile, staff at the European Council in Brussels are assuming that the summit of European Union leaders on Oct. 18-19 will be a showdown over Greece.

The IMF is taking a particularly hard line in the negotiations. The fund's envoys feel that Greece's debts are not sustainable and are threatening to withdraw from the aid program altogether. The only alternative is for the public creditors, in particular the European Central Bank (ECB), to write off a portion of Greece's debt.

4. The Republicans' golden death wish - Christopher Mahoney writes at Project Syndicate about the Republican Party's consideration of a gold commission at its convention going on right now in Florida.

I believe that the libertarian monetary proposals are a prescription for disaster on a scale that we can’t even imagine. I also believe that such policies would do to the GOP what they did to the GOP eighty years ago, and as a God-fearing Republican, I don’t want another twenty years in the wilderness.

History shows that Man does learn from his experience, and the American people have paid a heavy price to learn the following:
1. Soft money is more conducive to economic stability than hard money.
2. The gold standard is inherently unstable and is constantly tested by speculators and foreign central banks.
3. Hard money requires periodic depressions to remain “credible”.
4. The money supply should be controlled by a wise and independent central bank with the dual mandates of low inflation and maximum employment.
5. Wildcat currency printing leads to currency chaos. (Do we really have to relearn that particular chestnut?)
6. Hard money requires flexible nominal wages and incomes, which only exist in fantasyland and Hong Kong.

5. 'Don't worry about moral hazard' - Simon Wren Lewis writes at LSE about the Keynesian vs Hayek/Austrian debate and concludes in favour of the Keynesian side. Fair enough, though I'd much rather governments spent the money rather than central banks lending the money to banks.

There was, and still is, a very simple and effective solution to the immediate Eurozone crisis, and that is for the ECB to undertake a programme of Quantitative Easing (QE) focused on markets where interest rates were inappropriately high. There is a deep fear in all central bankers about fiscal dominance, but that has not prevented QE in the US and UK, because those programmes are designed to be reversible once they are no longer needed (or if inflation becomes a threat).

The main reason this has not been done by the ECB appears to be a concern about moral hazard: that without market pressure, governments would lose their incentive to undertake austerity and structural reforms. (There is also a concern about ECB balance sheets, but this just seems to misunderstand what a central bank is.) There are two quite reasonable responses to this concern. First, in a crisis, moral hazard concerns have to be put on one side, as central banks recognise in a financial crisis. The fire engine does not drive slowly to the fire to encourage others to be careful. Second, data on underlying primary balances clearly shows that all periphery governments have already undertaken a massive amount of austerity.

These moral hazard concerns are misguided for a more fundamental reason: they misdiagnose the key problem as public rather than private sector profligacy. Intervention by the ECB to lower interest rates on government debt today is unlikely to encourage excessive private sector spending and lending during the next boom.

There is an underlying pattern behind Eurozone policy errors. They reflect a view that macroeconomic difficulties are primary due to bad government decisions, while private sector decisions within a free market environment do not create problems. Whatever label we want to give this view (Ordoliberal orAnti-Keynesian), it is the fundamental cause of the current Eurozone crisis. Its persistence despite all the contrary evidence allows the crisis to continue and threatens the integrity of the Eurozone itself.

6. Here's an idea - Why don't we auction or lottery off a set number of car registrations a year to limit the number of cars  on the road.

That's what China and Singapore do.

Here's Xinhua with the story.

7. The problem with Australian house prices - Contrarian Australian economist Steve Keen is visiting New Zealand for three half day seminars on September 7 and September 8 in Auckland, and September 9 in Wellington.

Here in this blog post from Keen in June where he points out just how over valued Australian house prices are relative to their long term real averages and relative to the falls in America.

This chart tells the story.

8. 'Peak oil is an incontrovertible fact' - So says Ambrose Evans Pritchard in this piece in The Telegraph.

Goldman Sachs said the industry is chronically incapable of meeting global needs. “It is only a matter of time before inventories and OPEC spare capacity become effectively exhausted, requiring higher oil prices to restrain demand,” said its oil guru David Greely. This is a remarkable state of affairs given the world economy is close to a double-dip slump right now, the latest relapse in our contained global depression.

What will happen too when car sales in China surpass 20m next year, as expected by the China Association of Automobile Manufacturers?

Kamakshya Trivedi and Stacy Carlson from Goldman Sachs say a disturbing pattern has emerged where each tentative recovery in the world economy sets off an oil price jump that it turn aborts the process. A two point rise in global manufacturing indexes leads to a 30pc rise in oil prices a few months later.

“Oil has become an increasingly scarce commodity. A tight supply picture means that incremental increases in demand lead to an increase in prices, rather than ramping up production. The price of oil is in effect acting as an automatic stabilizer,” they said. If so, it is “stabilizing” the world economy in perma-slump.

9. One of the four biggest bubbles of the last 40 years - Marc Faber points out via ZH that Iron Ore is in that category.

Let's see now. Which country is most vulnerable to a slump in the iron ore price?

Australia. See #7 above.

10. Totally The Onion on America's real unemployment problem.

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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9 : Let's see now . Which country is most vulnerable to a slump in the iron ore price ?
....... you're a tricky bugger , Bernard ....... but the Gummster has the answer : Mauritania !
Am I right , or am I right ....... I'm right , aren't I ......
....... in 2011 , Australia produced 480 million tonnes of iron ore , Mauritania produced 11 million ( 15'th biggest iron ore producer in the world ! ) ...... so Oz produced 44 times as much iron ore as Mauritania did ....
But on GDP , as a nation Australia had $US 1 488 billion in 2011 , 354 times Mauritania's paltry $US 4.2 billion .....
354 / 44 = 8 : Mauritania is 8 times more devastated by a slump in iron ore prices than Austalia is .......
..... do I come to the office to collect my prize , Bernard , my bag of Gummibars ?

No - because of '8'.
No ore was ever extracted without oil, and realistically, never will be.
Mauretania is the key though. The more y'retain ya, the betteroff y'a.

I'm getting a bag of Gummibars , and you're not : Nyah nyah nyah !
..... c'mon Hickey , pay up ........ Mauritiania !
( ..... I'll share them with Hugh .... 'cos he's a cool & groovey sort of blogger ! )

Hughey - stop being a cracked record, and have a look at incomes. What are they? What underwrites them? Are they sustainable, at what level and over what period?

I asked a reasonable question.
You ducked it.
As per usual.
That's the basis of your whole argument, Hugh. That income-taken-for-granted thing. And you can only repeat lame put-downs. Does that not suggest something?

Standby for a negative pigs sermon.
Yes thats right folks hes back from sailing superyachts around French Polynesia, and after securing his acres of property will spread his malthusian wisdom on the peasantry live via the malthuinternet* streamed like pigs urine from the pdk bunker.
Thats' right folks you in fact can't have it all.
* a special sustainable internet run on cow excrement.

I recently listened to Morgan, back from chartering an ice-breaker for 1.5 million, and taking it to the Ross Sea.
I managed to separate the message from the messenger, cancelled my pre-prepared question, and gave him an accolade for what he is doing. Qualified, but credit where credit's due.
Something you might like to think about.....            :)

Re. #1:  It is worth noting that since the Federal Reserve was established as the Central Bank of the U.S. the dollar has lossed 98% of it's purchasing power.
The main problem currently is that the same item i.e. fiat currency is used as both the medium of exchange and the store of value.   There is no reason why this has to be the case.  Gold has proved it's worth performing the store of value function, it does not mean that it also has to perform the medium of exchange function as well.   

AR - both rely on faith. At the end of the day, something essential is a better measure. Gold is not essential. Fiat currency has not been a 'store of value' for some time (except in mass-deluded minds). If all the expectation-to-buy was used to buy, the supply would be a long way short. That's not just 'immediately', that's 'totally'.
You might enjoy these:







Gold has proved it's worth performing the store of value function
For a very brief period in history, yes.
Going forward I feel ecosystem services are more likely to become the 'store of value' on which a nations relative 'wealth' is calculated;
Very detailed assessments have been done.
Just imagine a world where the relative 'value' of fiat currency was measured on how effectively a nation developed and nurtured its ecosystem services.  A different future indeed.

Soros keeps buying gold. I'd rather follow him than Krugman.

There is a term I learnt some time ago - FIGJAM - which describes accurately verbose economists the world over. Those that really know something are not usually the same actors that are good at spouting their bulls*** in front of the camera, in fact quite the opposite is usually true in my experience. 
Of couse what you have done is followed the money trail, which an even more sound way to find the facts :-) 
Bottom line is that any money supply that facilitates unearned income is wrong.

and what % of his wealth is gold?
If he keeps buying gold but the % is say 10% of his wealth then that's a reasonable thing to do IMHO....
"He increased his position in SPDR Gold to $137.3 million in the second quarter from $52 million previously. SEC filing for the second quarter showed Soros Fund Management more than doubled its investment in the SPDR Gold Trust from 319,550 shares to 884,400 shares at the end of June."
So he's a billionare who holds 137million in gold....
If on the other hand you are at 90% in gold that I think isnt reasonable....great thing about life is it teaches well I think.

If you compare PK's track record in the last 4 yeasr v say the WSJ you may realise who's been far closer.

8. Ambrose and GS are at least 7 years behind....so much for rational markets and free markets work/allocate best etc etc.
Robert Hirsh said in 2005 that we need to start moving off oil 10 years before peak oil (which was in 2006) only 16 years so far too late....and we've not even started to move yet as we dont even have anything to move to.

Yep - but don't knock him too hard. The delusion was almost universal at one point. The need now is for us to support the previously-delusional, when their pennies drop.
Morgan is one such (Nat Radio, 9. whatever to now) and Dick Smith another, Dieter Paulmann yet another. They are coming from a pre-mind-set, though. Let's nurture them.
Saying 'I told you so' isn't the point any more. We have to be proactive, give them a blueprint.

Well said. 

AEP's article was actually subbed 'Cheap Peak Oil'.
Oil will be around for a very long time, if only because Gaia insists on keeping making the stuff - the Ruskies figgered this out decades ago and hence now have the Eurozone by the vitals.  Around 30% of all oil remains in the ground even using best extraction methods, simply because getting it all is tecnhically infeasible.
Just won't be around at current prices, is all.
NZ's transition policy is crystal clear as anyone who's read Solid enrgey's plans and taken a squizz at Crown Minerals site will know:

  • Dig up as much of Southland as needed and convert it to liquid fuels (there's 300 years' worth at current consumption rates)

And as for ore needing external energy input, pure moonshine, chaps and chapesses.  The Great Orme copper mine used human power, ran for 1700 years plus, and the archaeologists have another century's worth of excavation before the real picture emerges in that one place. 
Iron ore has been the backbone of the Iron Age for a coupla millenia now, and I don't think it ran on oil until the last 80 years or so.
Heck, even the Brits only converted their war machine to the runny stuff early last century, and they managed a fair amount of the world for the centuries before that.  On wood, coal, charcoal, tin and bronze.  Take a look around the Science Museum.
What PDK and the other theory  monoculturista are missing is that humans are extremely adaptable:  it is the hallmark of our species.
Sure, our present methods are a tad unsustainable.  But so was the ship-fleet-building mania  of the 1500's which stripped Britain of most of its forests.  So was the cod fishing of the Atlantic.  So was the rubber plantations of the Amazon.  So was ....  but Was is the key word,  We don't Do that crap any more. 
And so it will be for Oil.
We torture electrons instead, and I fully expect Peak Subatomic Particles, any day now....

Waymad - silly comment.
It takes energy to produce present goods/services (which has to be done to pay), so 'cheap' oil is a stupid comment, and if that is what he meant, he's got a long way to go.
Brownlees ignorant 'x hundred years supply of lignite', you rightly qualify with 'at current rates'. Now what about oil displacement, and relative EROEI? Then apply the 'cheap' from the above sentence. Lignite doesn't keep BAU going.
Copper is at or about peak.
And you relate the Fisher/Churchill choice as if part of a linear continuum. Can you not think exponentially? Is that the problem? Their change happened when there were around 1.4 billion people on the planet, consuming less per-head by a goodly margin. There are over 7 billion now - same physical resources (your 'still making oil comment is nonsense, relatively).
Every one of your 'we don't do that crap now' items, was way back down that exponential graph too,
Cognitive dissonance, my physics Prof calls it.....

The great thing about ppl writing in here is sooner or later you get a clear picture of their ability to look at things (like maths, science engineering), think and write....so out of 10 I'll give you 0 as this is pure deluded hogwash.
1) It isnt made, if you think the russians know how your are easily fooled or deluded.
2) More than 30%, more like 50% stays in the ground.
3) Current or future prices are not affordable by our present economic system...what you have seen for the last 4 years is now the good times. We cat afford $100 oil let alone $150 2008 proved that. Whats left is now $90, no oil company is going to invest on that margin.
4) Southland's got 300 years at current rates, well OK try working out how long it will last when that use accelerates to replace oil....even if you ignore AGW, which since its science you wont believe in.  Even if thats possible energy will be globally priced so NZers will be competing with Americans in price terms.....they will just print.
5) oil mines on human power, indeed and they were shallow so technically feasible...not so today.
6) wood etc, britain denuded its oak forrests to build sailing ships....cant go back to waht isnt there....so has NZ btw.
7) Sure will will adapt not at this world population count though....and after about 2150 unlikely...you see we need to eat and the food chain wont adapt that fast. We'll starve to death...

If we are to have a circa 80% chance of limiting anthropic climate change to around 2degrees global average increase we can not use more than 20% of the current proven coal, oil and natural gas reserves.  This makes debate about peak oil relatively acedemic and makes this government's oil exploration programme and Solid Energy's ideas for lignite exercises in delusional insanity.

Sure, our present methods are a tad unsustainable. 
Just a tad, eh?
The Great Orme copper mine used human power, ran for 1700 years plus
Now there's an idea.
PS  Why do I get an ominous feeling the ptb understand that.

Posted Today, 09:30 AM

The only people tha tare worried are thsoe that embraced the false religion that is blowing up in their stupid faces.

You go to University to recieve specialized social engineering in order to be a more effective/useful drone within the absolute capitalist system.

That is doomed to do nothing more than inflate to maximum potential and pop in their brainwashed faces.

That is all the current system you all have been trained to identify as civilization can do...

At it's basic operational level...The current iteration is no different than all the previous iterations.

The skeletal remains of all previosu attempts litter the surface of the planet.

They rise up and collapse...and the survivors say...man that sucked...lets not do that again...they then procceed to do it all over again.

Because they don't know any better.



If a statement is continually false it is a lie.
So your thinking is: I have not seen the bubble pop therefore the bubble will not pop therefore anyone claiming the bubble will pop must be a liar.
I have never seen a black swan therefore all swans must be white.

Hugh where does declining real income for most people fit in your cheap housing theory.  If that was addressed would that make housing more affordable or is the ONLY solution in your view this rezoning of land around the periphery of urban areas?