Here's my Top 10 links from around the Internet at 10.30 am 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 story is #3 from Martin Wolf. It explains a lot and is immediately both eye-opening and eye-watering.
1. The shattered dreams of grey years of growth - Alan Kohler writes colourfully at BusinessSpectator about the paradox of thrift sweeping the globe in this piece.
It is a fundamental problem, driven as much by demographics as market failure.
How are we to deal with this? If nothing is done the old and wealthy will sit on their trillions while tens of millions of young people labour under huge debts and unemployment.
What will break the logjam?
Ultimately it will be money printing and direct government investment to offset the household deleveraging and to create inflation to make the debt go away.
It happened in the late 1930s and 1940s and it will happen again. Let's hope we don't have to have a war to spark the spending.
The main purpose of saving is for retirement. Up to 2007 the world’s population was able to rely on a combination of investment returns and government welfare to subsidise them in old age. That belief has been shattered, either by the obvious bankruptcy of governments or the end of the housing and equities bubbles.
The result is the paradox of thrift at work on a grand, global scale. This was the phenomenon identified by John M Keynes which states that if everyone tries to save more during recessions, then aggregate demand will fall and actually lower total savings in the population.
Savings rates in Japan, already high, went up even further after the crash of 1990 and stayed, contributing to Japan’s “lost decade”, now in its 22nd year.
2. 'Our crisis of bad jobs' - Jeff Madrick at New York Review of Books writes about the poor quality of jobs left in America. Sounds familiar.
When one counts all those looking for full-time jobs and unable to get them, the true unemployment rate is close to 17 percent. Meanwhile, the US faces looming threats of a new European recession and a slowdown in China and other parts of the developing world. But the starkest evidence that something is seriously amiss in the American economy is the dramatic deterioration of the middle class. Median household income—the midpoint income of all American households—was reported by the Census Bureau (whose data is a year or so behind) to be down in 2011 compared to 2010, despite an economic recovery that began in mid-2009. More disturbing, that figure is now down to around $50,000, which is 7 percent or so below what it was in 2000 and its lowest level since 1996, adjusted for inflation. Incomes are falling still more sharply for black households.
The reason that the economic recovery is coinciding with middle class decline is increasingly clear. America is creating jobs, but they are bad jobs: retailing, food preparation, and table waiting, for example—in other words, jobs that don’t pay much. Economists like David Autor of MIT and Larry Mishel of the Economic Policy Institute have been talking for years about the hollowing out of middle-level jobs in offices and manufacturing.
Annette Bernhardt of the National Employment Law Project did the hard empirical work recently and found that most of the job losses from 2008 to early 2010 were in the middle-income category, jobs that pay from roughly $14 to $21 an hour. What is disturbing is that in the job turnaround since then, only one in five such jobs came back. Instead, very low-end jobs, paying $7.70 to $13.80 an hour, accounted for most new employment. This is a stark continuation of the hollowing out.
Here's the academic paper it's based on: Is US economic growth over? Falterning innovation confronts the Six Headwinds"
Might growth be ending? This is a heretical question. Yet an expert on productivity, Robert Gordon of Northwestern university, has raised it in a provocative paper. In this, he challenges the conventional view of economists that “economic growth ... will continue indefinitely.”
Yet unlimited growth is a heroic assumption. For most of history, next to no measurable growth in output per person occurred.
What growth did occur came from rising population. Then, in the middle of the 18th century, something began to stir. Output per head in the world’s most productive economies – the UK until around 1900 and the US, thereafter – began to accelerate. Growth in productivity reached a peak in the two and a half decades after World War II. Thereafter growth decelerated again, despite an upward blip between 1996 and 2004. In 2011 – according to the Conference Board’s database – US output per hour was a third lower than it would have been if the 1950-72 trend had continued (see charts). Prof Gordon goes further. He argues that productivity growth might continue to decelerate over the next century, reaching negligible levels.
And here's the sobering kicker:
Prof Gordon notes further obstacles to rising standards of living for ordinary Americans. These include: the reversal of the demographic dividend that came from the baby boomers and movement of women into the labour force; the levelling-off of educational attainment; and obstacles to the living standards of the bottom 99 per cent. These hurdles include globalisation, rising resource costs and high fiscal deficits and private debts. In brief, he expects the rise in the real disposable incomes of those outside the elite to slow to a crawl. Indeed, it appears to have already done so. Similar developments are occurring in other high-income countries.
For almost two centuries, today’s high-income countries enjoyed waves of innovation that made them both far more prosperous than before and far more powerful than everybody else. This was the world of the American dream and American exceptionalism. Now innovation is slow and economic catch-up fast. The elites of the high-income countries quite like this new world. The rest of their population like it vastly less. Get used to this. It will not change.
4. Talking with one hand and the other - Peter Martin reports at SMH.com.au on how much longer it takes Australia's big four banks to pass on rate cuts than rate hikes.
A study in the prestigious Economic Record has found Reserve Bank rate rises have ''a much larger and more instantaneous impact on the mortgage rate than rate cuts''.
The size of the difference is shocking. Using monthly Reserve Bank statistics on its cash rate and mortgage rates over the two decades to 2011 the paper finds Australian banks have on average passed on 116 per cent of each rate rise and only 84 per cent of each cut.
7. China's housing bubble - The Washington Post reports on China's housing bubble here. This helps explain why the government there is so reluctant to do another 2008/09 style stimulus.
Guo gestured to the wall behind his couch. His neighbor? He owns six apartments in this compound alone. Guo’s friends, too, all own at least two homes each. “There is definitely a bubble,” said Guo, whose homes have tripled in value in roughly a decade. As home prices have skyrocketed, many Chinese households have gone all in on real estate by pouring years of savings into buying as many homes as they can.
But as the country’s economy slows to its worst pace in years, China’s dependence on real estate for growth — it’s a bigger driver than even exports now — has put the government in a tough position.
Allow prices to continue rising and help the economy in the near-term, but the real estate bubble gets worse. Cool things off and the entire economy slackens too much.
The nightmare scenario, though, is a bubble that bursts. A major drop in prices would ripple through the Chinese economy and potentially the rest of the world. Real estate investment constituted 13 percent of the country’s gross domestic product last year. The sector feeds steel, concrete and dozens of other industries.
I found this point most interesting:
The obsession with real estate is also embedded in the culture. People are expected to own homes before they get married, and there is a deep faith that real estate is a fool-proof investment.
Since private homeownership has existed here only since the 1990s, no one has ever seen firsthand what happens when housing prices start dropping.
“Just like in the U.S., that’s what the speculators thought in Vegas and Florida, that there’s only one way to go but up,” Lardy said. “Expectations could change very dramatically.”
And this looks awfully familiar. We're seeing quite a bit of this around Epsom at the moment: empty homes bought purely as 'gold bar' type investments.
People have bought so many homes for investment that they often leave them sitting empty.
On a recent evening driving around the outer edges of Beijing, it was easy to spot residential high-rise buildings along the highway that did not have a single window with a light on.
In an area called Daxing, one hour south of the city’s center, two security guards stood in front of a gate leading into a massive compound of 545 Italian-style, million-dollar mansions, almost all of them empty. The compound, Weilai deVille, boasted a clock tower, a grocery store and a giant fountain past the entrance gates. But just after dinnertime, there was little sign of life. The houses, row after row of them, were darkened, silent hulks. Some areas of the compound were so empty that the street lamps were turned off to save electricity.
There are 3.8 million vacant houses in Beijing, according to a report in June by the Beijing Municipal Public Security Bureau, though officials later tried toargue that the number was probably too high.
8. Mistresses and corruption go hand in hand - Here's Bloomberg on what's happening in China.
Which came first? The corruption or the mistresses? In China, they most often go together.
The stories abound: from the corrupt official in Fujian who, in 2002, held the first (and only) annual competition to judge which of his 22 mistresses was most pleasing, to Liu Zhijun, the former railway minister deposed in 2011 for allegedly embezzling the equivalent of millions of dollars -- and maintaining a relatively modest 18 mistresses. The association is so strong, in fact, that it’s all but taken for granted in China that when an official falls due to his -- and it’s almost always a he -- misdeeds and miscalculations, the mistresses will be uncovered next.
And so, when Bo Xilai, the now deposed former Chongqing party secretary once widely expected to ascend to China’s ruling Politburo Standing Committee, and his wife were first connected to corruption and murder this spring, rumors of mistresses accompanied the allegations. Of these rumors, the most spectacular involved Zhang Ziyi, the popular Chinese actress best known in the West for her starring role in “Crouching Tiger, Hidden Dragon” (and her friendship with Wendi Deng Murdoch). Zhang’s lawyer has denied the allegations, going so far as to insist Zhang has never met Bo, and the movie star is suing media outlets which reported the accusations.
9. Multiplying Europe's fiscal suicide - Here's Ambrose Evans Pritchard explaining why the austerity treatment in Southern Europe is killing, rather than curing, the patient.
The entire EU austerity plan is based on a false premise. This disastrous error is now clear beyond any reasonable doubt. The Teuto-Calvinists believe – or profess to believe, since much of their dogma is national self-interest dressed up as theory – that the fiscal multiplier is around 0.5.
That is to say, fiscal retrenchment worth 1pc of GDP will cut output by half as much, or around 0.5pc over two years. There is pain, but at least there is gain. This is based on the IMF's analysis of fiscal crises over the decades.
Well, it has not worked out like that. Ireland has contracted at nearly seven times the speed, Spain four times, and Greece three times. The multiplier is around 1.0 for the big countries, which is why France can expect a devastating year in 2013 as it tightens pointless by 2pc to comply with EU rules. And why the world faces a full-blown shock if the US goes over the fiscal cliff and tightens by 4pc next year.
10. Totally Clarke and Dawe on Alan Jones. There is a sound problem.
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