Here's my Top 10 links from around the Internet at 9.10 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 articles today are #8 and #9 on the looming battle of the generations. Worth reading together. #8 from The Economist the best summary I've seen in a while. #9 a nice personal take on it from the National Journal.
1. Between the wars - Martin Wolf at FT.com points to the comparison made by the IMF between Europe's debt crisis now and the one faced by Britain between the wars.
I didn't realise Britain's post-WWI government pursued a tough austerity strategy aimed at repaying debt and returning Britain to the gold standard.
It ground the British economy even further into the dirt.
Output didn't recover to 1918 levels until just before 1938.
And even then it only happened because Britain abandoned the gold standard in 1931.
New Zealand suffered a similar fate in the 1920s, largely because our economy was so closely aligned to Britain's at that stage.
The lessons are clear: government austerity doesn't work when the private sector is heavily indebted and your currency is too high.
Here's Wolf:
It is far harder to control fiscal deficits if the private sector wants to lower its own excessive indebtedness too: less spending by one side means less income for the other. In the absence of strong external demand, the result is then likely to be deleveraging via default and depression. That is the worst imaginable outcome.
This is an extremely useful study, not least for bringing out the lessons of the UK’s interwar experience for the eurozone today. There is a high risk that the combination of tight fiscal policies with stringent monetary conditions will push Italy and Spain into debt traps via the interaction of high interest rates with low growth. At least the UK retained control over monetary conditions: in the end, it went off gold and lowered interest rates. Members of the eurozone do not have those painless options. But fiscal austerity and efforts to lower wages in countries suffering from monetary strangulation could break societies, governments and even states. Without greater solidarity, the story is unlikely to end well.
2. Bank lobbyists winning in fight to avoid regulation Version 1 - It's been a theme of the last four years. As fast as regulators and lawmakers try to shackle European and American 'Too Big To Fail' banks, they spend hundreds of millions on lobbying to avoid regulation, including the Volcker Rule to prevent such mega-banks from gambling with depositers' money.
The banks are winning. They didn't in the early 1930s when FDR imposed Glass Steagall to prevent investment banks joining up with retail banks. The repeal of Glass Steagall in the late 1990s turbocharged the US housing boom with the jet fuel of bank leverage.
Here's the WSJ reporting on Goldman's latest plan to avoid one particular rule:
Goldman Sachs is lobbying regulators to exempt investment vehicles known as credit funds from the "Volcker rule" in a bid to preserve the firm's lucrative merchant-banking unit. But if Goldman fails, it has a backup plan. Some executives at the New York company believe they have found a way to extricate the credit funds from proposed limits on how much can be invested in hedge funds and private-equity funds, according to people briefed on the efforts.
The skirmish over credit funds is just one example of how big banks are fighting to influence how the rule is applied.
Since Congress passed Dodd-Frank, the financial-services industry has spent more than $330 million on lobbying, according to a Wall Street Journal analysis of expense filings that cite Dodd-Frank as an issue lobbied. The filings don't break out how much was spent on any specific issue, such as the Volcker rule.
"It's the biggest trench warfare that's happened in this town maybe ever," says Dennis Kelleher, president of Better Markets, a nonprofit group funded by an Atlanta investor. It seeks to represent the public's voice in Dodd-Frank's implementation and has met with regulators. The fierce lobbying campaign is a reason why regulators have moved slowly to produce the final version of the Volcker rule. They failed to meet a previous deadline of October 2011.
One very effective tactic of the banks is to say that increased regulation would worsen the deleveraging suppressing growth and There Is No Alternative right now...
UK-domiciled banks such as Royal Bank of Scotland, Lloyds and HSBC and UK subsidiaries such as Santander UK can treat that new lending as basically risk-free for regulatory purpose.
London regulators have also stepped back from tough overall capital rules they imposed after the Basel III reform package was adopted. No longer will UK banks be required to achieve and maintain a core ratio equal to 10 per cent of their assets, adjusted for risk by the end of next year.
Instead, individual UK banks have been set numerical targets for capital and have been told their ratio can drop below 10 per cent in the meantime. The absolute number means banks cannot meet regulatory targets by cutting lending and the flexibility on the ratio gives them room to expand lending as demand grows.
“The goal is to avoid rapid deleveraging that would harm activity in the economy,” Andrew Bailey, head of the FSA’s prudential business unit, told the Financial Times.
4. Iran's hyper-inflation - Pragmatic Capitalist has 10 interesting factoids about Iran's latest bout of hyper-inflation, which now has an annual inflation rate of almost 200%.
It's interesting though that the academic studies of hyperinflation show it is mostly due to the breakdown of economic law and order during or after (or before) wars.
At the current monthly inflation rate, Iran’s hyperinflation ranks as the 48th worst case of hyperinflation in history.
Iran currently comes in just behind Armenia, which experienced a peak monthly inflation rate of 73.1%, in January 1992.
5. Xi Jingping to be a great reformer? - That's what the Washington Post reports Henry Kissinger as saying of China's next leader after meeting him and his predecessors over the last 40 years.
The new generation, Kissinger said, faces a “transformation over the next 10 years” of moving “400 million people from the countryside into the cities.” This will involve not just technical infrastructure problems but a change of values and also a change in the role of the Communist party, he said.
Kissinger said he had spoken to Xi Jinping, the expected next Chinese president, and believes he will seek such enormous internal changes that “it’s unlikely that in 10 years the next generation will come into office with exactly the same institutions that exist today.
6.Where's the memory stick? - Greece's political class is agog right now with a hunt for a list of 2,000 tax evaders, many of whom may be members of the government. Somehow, it got lost...
Here's the NYTimes. HT Andrew.
Can a memory stick bring down a political order? That is the question in Greece, where a tragicomic debate over what became of a list of nearly 2,000 Greeks with Swiss bank accounts is rapidly turning into a full-blown political crisis that is imperiling Greece’s fragile coalition government at a crucial time.
The investigations have also revealed the close ties between Greece’s political establishment and its oligarchs and business elite. There is growing public outrage that no Greek government wanted to touch the infamous list of 1,991 Greeks with accounts at a Geneva branch of the global bank HSBC that the French government gave Greece in 2010 to crack down on tax evasion.
7. Depression economics - Paul Krugman weighs into the debate over fiscal multipliers in this piece pointing out that private sector deleveraging makes the multiplier bigger than 1. The Austerians are assuming, based on multipliers measured during the leveraging up part of the cycle, that it is less than 1.
A large leveraging/deleveraging cycle is likely to be followed by a persistent shortfall in aggregate demand that can’t be cured using ordinary monetary policy; what I consider depression economics.
Now, the same thing that makes deleveraging so hard to handle also makes the fiscal multiplier larger than it is in normal times. Normally, expansionary fiscal policy is offset by monetary tightening, contractionary policy by monetary loosening. Hence the lowish multiplier estimates based on recent history. But if deleveraging has pushed you into a liquidity trap, there are no offsets.
So how big would you expect the multiplier to be under these conditions? Bigger than one.
8. Sponging boomers - That's the headline in the Economist. Just so you know I'm not the only one saying things like this.
ANOTHER economic mess looms on the horizon—one with a great wrinkled visage. The struggle to digest the swollen generation of ageing baby-boomers threatens to strangle economic growth. As the nature and scale of the problem become clear, a showdown between the generations may be inevitable.
These boomers have lived a charmed life, easily topping previous generations in income earned at every age. The sheer heft of the generation created a demographic dividend: a rise in labour supply, reinforced by a surge in the number of working women. Social change favoured it too. Households became smaller, populated with more earners and fewer children. And boomers enjoyed the distinction of being among the best-educated of American generations at a time when the return on education was soaring.
Yet these gains were one-offs. Retirements will reverse the earlier labour-force surge, and younger generations cannot benefit from more women working. There is room to raise educational levels, but it is harder and less lucrative to improve the lot of disadvantaged students than to establish a university degree as the norm for good ones, as was the case after the war. In short, boomer income growth relied on a number of one-off gains.
It's an interesting read, in-so-much as it's set up as a debate between a father and son. It illuminates the issues well.
He (the son) concludes thus:
I am 34 years old. I have some pretty successful friends. How have we sacrificed to balance the budget, to slow climate change, to deliver better opportunity for our children? We haven’t. I own an SUV, and I don’t compost my trash. We are barreling, generationally, toward higher and higher levels of carbon emissions; a demographer from the Max Planck Institute for Demographic Research estimated last year that an individual’s emissions rise some 50 percent from the time he is in his 30s until the time he retires. Worst of all, we don’t seem to care about changing things: Only about a third of registered 25-to-44-year-olds voted in the 2010 election, compared with half of registered baby boomers.
If my father is a leech on the future, then I am becoming one, too.
“Your generation should be thinking about how you’ll step up to the plate,” my dad says, brown eyes boring into mine. “And you also need to step up to the plate, learning from us about the politics. Just say no to the kind of politics that get in the way of what you perceive are the solution.”
10. Totally Jon Stewart on Mitt Romney's fiscal and mathematical wizardry.
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