Friday's Top 10 with NZ Mint: How QE shifts wealth from the middle to the top; Catastrophe theory and economics; Floods of foreign money; A rebuttal for 'The end of Growth'; Clarke and Dawe

Here's my Top 10 links from around the Internet at 3.30 pm 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 article today is #1. The Germans are very grumpy.

1. What the Germans think - Der Spiegel has a long piece criticising the money printing of the European Central Bank and others.

It makes the good point that the very wealthy stand to do the best out of this form of money printing.

This is a fair criticism. The Quantitative Easing being practiced by central banks on both sides of the Atlantic and the English Channel is money printing to buy government or mortgage bonds.

This boosts asset prices for bond and share holders, but if (and it's a big if) it increases inflation then it will hurt those with plain vanilla savings in term deposit accounts.

These term deposit account interest rates are being repressed by those same central banks.

Der Spiegel rightly points out this form of money printing shifts wealth from middle class savers to the very wealthy.

That's why a Quantitative Easing for the people, where money is given directly to public or used to wipe out debt directly, is more likely to both boost economic growth and more fairly distribute wealth.

Here's Der Spiegel:

Central banks are currently flooding cash-strapped industrialized nations with money. This may help governments reduce their debt load, but it also erodes the value of people's savings. A massive redistribution of wealth is threatening to take place in Germany and Europe -- from the bottom to the top.

Andrew Bosomworth can offer some insights into how this form of indirect theft of assets is taking place. When Bosomworth, the head of portfolio management in Germany for PIMCO, the world's largest investment management firm, talks about the calamity that the debt crisis will bring upon mankind, he sounds like a concerned doctor. "The industrialized world is stuck in a severe debt and growth crisis," he warns. "The central banks are fighting the disease with monetary infusions of previously unknown proportions, and the side effect is a slow but dangerous devaluation of money."

Bosomworth argues that a gigantic redistribution from the bottom to the top has begun. "Gradual inflation has a numbing effect. It impoverishes the lower and middle class, but they don't notice," says Bosomworth. He believes that the Germans' fear of inflation is more than justified.

2. What the Greeks think - Alexis Tspiras, the leader of Greece's opposition, has written an Op-Ed for The Guardian which captures the mood of the anti-bailout protestors in Greece.

The government argues that only the austerity agenda can make the Greek public debt viable again. But the opposite is true. Austerity policies prevent the economy from returning to growth. Austerity creates a vicious spiral of recession and an increase in debt that in turn leads both Greece and its lenders to calamity.

All this is known to the European and Greek policymakers and elites, including Merkel, who aim to implement similar programmes in all European countries facing debt problems, such as Spain, Portugal and Italy. Why do they insist so dogmatically on this disastrous political and economic path? We believe that their aim is not to solve the debt crisis but to create a new regulatory framework throughout Europe that is based on cheap labour, deregulation of the labour market, low public spending and tax exemptions for capital. To succeed, this strategy uses a form of political and financial blackmail that aims to convince or coerce Europeans to accept austerity packages without resistance. The politics of fear and blackmail used in Greece is the best illustration of this strategy.

3. Catastrophe theory - Steven Strogatz has written a fascinating column at NY Times about different types of catastrophe theory and how the last straw that broke the camel's back always looks so small.

You have to read it to get it.

Depending on how the line and curve are situated, one, two or three intersections can occur. The upper intersection (the green dot) represents a strong economy with high levels of national income. The lower equilibrium (solid red dot) depicts an economy stuck in the doldrums. The middle equilibrium (open red circle) turns out to be unstable and acts like a watershed; when economic conditions are near it, they drift away toward one of the other two equilibriums.

Now comes the crucial idea. The amount of investment doesn’t depend only on national income but also on how much investment has already been accumulated. At some point enough is enough. During the housing boom, for example, increases in income fueled the demand for housing investment. But as the stock of housing rose, the demand for investment dropped. In the model this drags the S-shaped investment curve down. It’s like the straw being added to the camel’s back.

4. China now vs Japan in the 1970s - Michael Pettis (via Macrobusiness.com.au) considers the comparison. He thinks Japan in the late 1980s is more appropriate.

it is much more important to understand how Japan rebalanced after 1990 if you want to understand the challenges and risks facing China today. China is not like Japan in the 1950s, 1960s or 1970s in any meaningful way even if its current development level is much closer to Japan during those decades. Because of the serious imbalances China is much more like Japan in the late 1980s, with the major difference being that Japan never took debt, investment, and consumption imbalances to anywhere near the levels that China has taken them.

For this reason what we really have to consider when thinking about China is how these imbalances tend to be reversed. Since they were reversed in Japan in the period following 1990, Japan provides at least one possible model for China’s rebalancing process and, perhaps much more importantly, it demonstrates the kinds of pressures that China will face as it is forced into rebalancing.

5. Floods of foreign money - BNZ's Tony Alexander has written an interesting column at the Waikato Times pointing out why the New Zealand dollar is so strong. It's something not really being debated by our politicians...yet.

By pumping out liquidity central banks are pushing people to seek yield beyond government bonds. That means buying far flung currencies like the Kiwi, buying commodity futures, buying shares, and in the New Zealand case buying houses with a shortage used as rationale. These next few years are going to be very bumpy because of this extraordinary period of money printing.

Investors should therefore give extraordinarily deep thought to whether they understand the factors driving prices of some assets upward, and whether they can really afford to take on the risk they need to in order to pick up an extra 1 per cent or so yield on their assets.

My message is that just as the 2000s were driven by excessive private sector credit creation, don't be surprised if a lot which happens in the next ten years is driven by excessive central bank credit creation.

6. Hot Property - Hot location. This advertisement on TradeMe for 750 Remuera Rd via Barfoot and Thompson captures the mood. They actually use this picture as the main picture for the property. HT EmmaEspiner.

7. Enough with the austerity - FT.com reports IMF boss Christine Lagarde has called for governments to ease off on the austerity to avoid driving the world into a deeper recession.

Ms Lagarde also urged countries more generally to refrain from new austerity measures amid signs that the IMF is becoming increasingly concerned about the impact of government cutbacks on growth.

She cautioned against countries front-loading spending cuts and tax increases. “It’s sometimes better to have a bit more time,” she said at the annual meetings of the IMF and the World Bank on Thursday.

The fund warned earlier this week that governments around the world had systematically underestimated the damage done to growth by austerity. Ms Lagarde said that, given this reassessment of the impact of fiscal consolidation on output, it was no longer sensible for governments in Europe to stick to budget deficit targets, should growth disappoint.

8. The rebuttal - The Bob Gordon paper on The End of Growth created quite a stir. Here's a rebuttal from University of Colorado Environmental Studies Professor Roger Pielke:

The fact that Robert Gordon’s exercise in “provocative fantasy” has been the most discussed paper in economics over the recent summer tells us a lot about the discipline of economics – at least how it is received in the public sphere – and much less about growth and the economy. There may indeed be “headwinds” working against growth, but they won’t be discovered by simplistic curve fitting and ad hoc theorizing.

9. Wrong medicine - Richard Koo explains via Bloomberg that Europe is dispensing the wrong medicine of austerity to fix a demand problem. He is right about the balance sheet recession argument.

The budget cuts and structural reforms prescribed to nations such as Spain by German Chancellor Angela Merkel and European Central Bank President Mario Draghi are in Koo’s eyes akin to the treatment of diabetes sufferers, who must eat carefully and exercise to improve their long-term health.

The trouble is Europe’s cash-strapped peripheral countries have the economic equivalent of pneumonia, which is more deadly and is best beaten by ensuring ample nourishment, said Koo. To the 58-year-old former Federal Reserve economist that means greater fiscal stimulus if the euro crisis is to end soon.

“The patient can have both, but doctor has to cure the pneumonia first even if the treatments contradict those required for the diabetes,” Koo said in an interview in Tokyo yesterday. “In Europe, austerity is the only game in town.” The advice goes to the heart of Koo’s theory that like their Japanese counterparts in the 1990s, policy makers in Europe are failing to see that their region is suffering from a “balance-sheet recession.”

10. Totally Clarke and Dawe on the week in Australian politics that had everything. Dawe interviews What Amess.