Tuesday's Top 10 with NZ Mint: The innovation enigma; Hard money and the gerontocracy; 'Our currency is your problem'; FrankenRomney lives; Jon Stewart; Dilbert

Here's my Top 10 links from around the Internet at 10.15 am today in association with NZ Mint.

As always, 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 read story is #1 on the history of investment banking.

1. The rise and fall of investment banking - This is a useful if long piece from Alex Preston at New Statesman on the rise and fall of investment banking.

A great potted history lesson.

And it ends with a discussion with an investment banker, who thinks little has basically changed and central bank intervention is keeping the business running along nicely.

It's like a doomsday machine on the rinse cycle.

Rinse and repeat until...

See the chart for #9 below...

I asked the Banker how many more would lose their jobs in the industry, and whether, indeed, the job market in the City might pick up. “It depends on the continued severity of the downturn,” he said. “Banks are behind the curve. They haven’t fired as many as we first thought they would, and the reason for this is 2009. In 2009 there was so much liquidity pumped into the system by central banks that asset prices reinflated very, very quickly. It was called the ‘Bazooka’, when the Fed pumped this cash in, and no one knows what or when the next ‘Bazooka’ will be.

“Everyone is worried about being understaffed when it comes – the next Tarp [the Troubled Asset Relief Programme, the plan under which the US government bought illiquid assets from the banks] or whatever. The year 2009 was very good for investment banks; we were all making money again.” (We were speaking before the latest round of quantitative easing in the US and before Mario Draghi’s bond-buying exercise in Europe, moves that – if not the “Bazooka” the Banker was hoping for – have managed to bring some small measure of cheer to the markets.)

“In five years’ time, we could still be having the same problems in the euro; you could have low growth in the emerging markets; unless banks outside the US are forced to mark-to-market their assets on their books, you could have a more entrenched, systemic credit crisis, where no one’s willing to lend to anyone else; and at some point inflation will come back to knock back any recovery we do have. So things look bleak for investment banks as they currently stand.”

The Occupy protests aside, there is nothing like the public anger against the banks today that there was after the 1929 crash. It may be that, quietly, the banks are allowed to carry on operating exactly as they did before the crisis.

2. The innovation enigma - Further to the theme of a lack of innovation slowing economic growth, the Oxford Union is holding a debate on November 9 between Chess Champion Gary Kasparov and Facebook funder Peter Thiel on the one side and Kenneth Rogoff and Mark Shuttleworth on the other.

This is the question for debate: Is the current growth crisis a result of decades of technological stagnation in a risk-averse society?

3. Hard money and the gerontocracy - Economics Professor Noah Smith writes about the Bullard, Garriga, Waller paper I referred to last Thursday, which suggested ageing populations will enforce deflation because it's in the interest of elderly savers to have deflation.

Who loses from inflation? "Net nominal lenders". These are people who own a lot of non-inflation-adjusted bonds, and not a lot of stocks, and who get less of their income from wages. Who are these people? They are old people. Owning lots of bonds, and not much stock, is the wise thing to do when you're old. Stocks are riskier than bonds, and old people can't afford to take as much risk - this is the core idea of "life-cycle investing".

Also, obviously, old people have a lot of savings (and hence a lot of income from investments), and not much in the way of wage income. So old people tend to be hurt by unanticipated inflation, while young people are generally helped. elderly countries will have a much harder time fighting recessions.

If old people's desire for the redistributive benefits of low inflation overwhelms the need for the Fed to boost growth, then we're going to have a much tougher time ending our current stagnation...to say nothing of Japan, where hard money is much more of a cult even than here in the States, and which has been mired in near-deflation for decades.

4. The end of the great migration - Rob Schmitz reports for Marketplace on how many migrants to China's city are returning to their rural homelands...again. But this time some of the factories are moving inland to follow the workers.

Some nice insights into life in China.

It’s not exactly a welcome home party, but it’ll do. Thousands of workers mill about inside a building resembling an airplane hangar outside the city of Chengdu, capital of Sichuan province. They scan local job listings on a red electronic board the size of a jumbotron. Nearly all the people here are locals who recently returned home from factory jobs on China’s coast.

Zhang Xianjun just returned from a factory in Guangzhou, where he assembled plastic parts. He left home ten years ago, joining a quarter of a billion other Chinese in the largest human migration the world has known. But times have changed. These days, factories are migrating. Companies are relocating manufacturing from China’s coast to inland provinces like Sichuan and Henan, where the labor came from in the first place. Zhang can now choose between making iPads at Foxconn or microprocessors at Intel. Both companies are hiring here. "Everything here has modernized," says Zhang, "I live three hours away in a small town. Now my hometown even has an industrial park where I could work. It’s a big change."

After years of focusing on its coast, China is now investing in its interior. Chengdu, for example, enjoyed fifteen percent GDP growth last year. Ben Schwall is a factory consultant in the former boomtown of Dongguan. He says all of this began in 2009, after the financial crisis in the U.S. Americans stopped buying things, and millions of Chinese factory workers were suddenly unemployed. They returned home and realized home wasn’t so bad anymore. "Cost of living was a lot cheaper," says Schwall, "You can live at home. Mom cooks good. you’re not locked in a dorm room with six people. You can perhaps sleep with your wife, you can see your children. Hey! Being at home was not so bad."

5. How the Bo Xilai scandal has undermined the Party - Jamil Anderlini, a New Zealander, reports for the FT from China about how the Bo Xilai has ripped the scab of corruption off the top of the elite leadership in Beijing.

One senior retired western diplomat who specialised in China for nearly 30 years recently confided to the FT that the Bo Xilai case had prompted an epiphany when he finally realised the top mandarins were just as tainted as officials at the lower levels.

A string of revelations about the fortunes amassed by other top leaders has followed in the international press, further undermining the idea that Mr Bo is an anomaly. While senior officials have faced the wrath of the “socialist legal system with Chinese characteristics” before, none as powerful as Mr Bo have ever stood trial in a modern courtroom. Not only did he sit on the party’s 25-member ruling Politburo, he is also the son of Bo Yibo, a Communist founding father who was once Mao Zedong’s finance minister.

Anderlini explains the significance thus:

When historians look back on the Bo Xilai scandal they will almost certainly identify this as the moment when China’s vicious backroom political battles spilled into the open and the myth of the good emperor was shattered.

Far from revealing authoritarian China’s meritocracy and ability to self-correct, the Bo Xilai saga underscores how its leaders believe they are above the law and how little accountability there actually is.

6. A hoarding problem - There seems so little money around to solve the world's problems. Yet there is money galore stashed in savings accounts.

Here's the Washington Post with a look at America's hoarding problem.

The pattern suggests that Americans, wounded by the financial crisis and scared by an uncertain job market, do not want to take any risks with their money — even as the government is encouraging risk-taking.

The Fed recently announced an unprecedented plan to pump hundreds of billions of dollars into the financial markets to reduce interest rates, which should have the effect of boosting stock prices and making it cheaper to buy homes. But if consumers remain on the sidelines, it means the policies may benefit only the most well off and secure — and fail to help average Americans or the broader economy.

7. What Australian deleveraging looks like - Here's Leith van Onselen at Macrobusiness.com.au with the latest on mortgage lodgements and property sales volumes in Victoria.

September’s transfers (12,140) were the lowest September volumes on record and the third lowest monthly volumes in the series’ 10-year history. On a rolling annual basis the annual number of Victorian home transfers fell over the month – from 170,862 in August to 168,249 in September – which is the lowest level reached in the series’ 10-year history and 14% below average levels.

8. 'It's our currency and your problem' - Here's Alan Wheatley from Reuters with a nice analysis of what China is up to with its plan to internationalise the Renminbi.

If New Zealand was ever to peg its currency to anything in the future, would it be the renminbi rather than the US$ or Australian dollar?

Fed up with what it sees as Washington's malign neglect of the dollar, China is busily promoting the cross-border use of its own currency, the yuan, also known as the renminbi, in trade and investment.

The aim is both narrowly commercial - to reduce transaction costs for Chinese exporters and importers - and sweepingly strategic.

Displacing the dollar, Beijing says, will reduce volatility in oil and commodity prices and belatedly erode the ‘exorbitant privilege' the United States enjoys as the issuer of the reserve currency at the heart of a post-war international financial architecture it now sees as hopelessly outmoded.

9. Here's why Europe is the real danger - Zerohedge has a great chart showing just how much leverage is pumped into some European banks and economies.

The chart below shows the ratio of the biggest European and American bank assets to domicile nation GDP. The red line is the 50% assets/GDP breakeven. It is safe to say that if a bank's "assets" whether marked to myth, unicorns, or markets (sadly nobody has done the latter in the past 3 years) represents at least half of a domicile nation's GDP, the bank is obviously Too Humongous To Fail, and when it comes to leverage it is its unelected executive committee which calls the real shots for not only the host country, but any monetary union it may be part of.

This is how 20 or so corner offices hijacked Europe. The ironic observation is that for all the complaints about the TBTF phenomenon in the US (banks in red), it is Europe where the TBTF spectacle will truly unfurl once the central banks finally lose control, and the giant unwind begins.

10. Totally Jon Stewart giving Barack Obama a right hammering over his debate performance.