Here's my Top 10 links from around the Internet at 10 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 article today is #5 on the flood of dirty money spreading out of China. Where's it going?
1. The rest of the world is changing - New Reserve Bank Governor Graeme Wheeler may have set out his stall as an ultra-orthodox inflation-targeting central banker on Friday, but the rest of the world is questioning this bedrock upon which New Zealand's policy makers are sitting.
Here's Anatole Kaletsky at Reuters reporting on the debate happening in Britain about quantitative easing, 'helicopter money' and the like.
It's as if New Zealand is in another world where nothing has gone wrong and our policy makers can plough on with their tools intact.
That's not the approach in Europe or the United States.
Eventually this debate and the economic problems underpinning it will come here. The Reserve Bank and Treasury are in their Alice in Wonderland rabbit hole for now. Eventually they'll be forced out, but how many jobs will be lost and much production will be sacrificed.
We were cushioned and veiled from the reality of the 2008 crisis by China's rearguard action, which is now ending.
When will our Treasury and Reserve Bank catch up? Have they lost their Internet connections to the rest of the world?
This week an even more radical debate burst into the open in Britain. Sir Mervyn King, governor of the Bank of England, found himself fighting a rearguard action against a groundswell of support for “dropping money from helicopters” – something proposed by Milton Friedman in 1969 as the ultimate cure for intractable economic depressions and recently described in this column as “Quantitative Easing for the People.”
King had to speak out because the sort of calculations presented here last summer started to catch on in Britain. The BoE has spent £50 billion over the past six months to support bond prices. That could instead have financed a cash handout of £830 for every man, woman and child in Britain, or £3,300 for a typical family of four. In the United States, the $40 billion the Fed has promised to transfer monthly, with no time limit, to banks and bond funds, could instead finance a monthly cash payment of $500 per family – to be continued indefinitely until full employment is restored.
Two weeks ago the British debate on QEP reached a crescendo in a daring speech by Lord Adair Turner, chairman of the Financial Services Authority, and one of the two leading contenders to replace King as governor of the BoE. Turner is a former management consultant famous in Britain for finding imaginative solutions to apparently insoluble issues, from climate change policy to reform of the National Health Service. While he stopped short of publicly endorsing “helicopter money,” Turner hinted strongly in that direction with a call for “still more innovative and unconventional” thinking since QE no longer seems to work. His speech was followed by a spate of editorials in the Financial Times, the BBC and other media outlets about helicopter money and the need for serious BoE thinking about such radical ideas.
Kaletsky then goes on to talk about THAT IMF paper revisiting Chicago:
Which brings us to an even more radical proposal, closely related to the QEP debate, that emerged recently from the IMF. In a research paper that has gone viral among economists, Jaromir Benes and Michael Kumhof, two senior IMF staffers, describe a reform of monetary management that could potentially restore all the output lost in the Great Recession and simultaneously eliminate the government debt burdens of the United States, Britain and most European countries.
These miracles could be achieved without painful tax increases or spending cuts, by restoring to governments the exclusive right to create money they gradually lost to commercial banks. The monopoly right to create money generates a “seignorage tax,” whose capital value is roughly 100 percent of the U.S. gross domestic product, according to the IMF calculations. Transferring this enormous benefit from banks back to governments would allow most national debts to be paid off.
The radical idea of depriving banks of their money-creating function, like the idea of helicopter money, was first proposed by conservative Chicago economists – Henry Simons and Irving Fisher – in 1936. A distinguished conservative pedigree will not make the loss of seignorage rights acceptable to bank lobbyists any more than it makes helicopter money acceptable to conventional central bankers. But if global economic stagnation continues, public patience with conventional responses will run out – and ideas that now seem revolutionary may become conventional wisdom.
2. What Bo's fall means for China - John Garnault from the Sydney Morning Herald is a close observer of China from an Australian point of view, so it's useful for us. He has written an e-book called The Rise and Fall of the House of Bo
The purge of Bo Xilai has been so far mild compared with the days when political rivals were tortured, exploded in plane crashes or imprisoned and left to die in their own vomit.
The novelty of this one is that it is being acted out in the midst of China's information revolution and in front of an increasingly prosperous, educated and sceptical population.
The political explosion of Bo Xilai is blowing open the black box of Chinese politics and laying bare a world of staggering brutality, corruption, hypocrisy and fragility. For the first time, the webs of power and money that bind and also divide China's red aristocracy are being exposed for the world to see.
The demise of Bo Xilai has opened cleavages in the party along factional, ideological and personal lines. The battle over how to frame his legacy has become a proxy war for China's future. The scars that are opening date back to the Cultural Revolution, when Bo Xilai and his colleagues were coming of age.
4. Is it cyclical or structural? - Bloomberg's Linda Yueh writes at FT.com that China's economic growth slowdown may be structural and the strong growth of the last decade may have ended.
The structural slowdown in China may finally be gaining recognition. In the second 30 years of the “reform and opening” that started around 1980, Beijing anticipates a new trend growth rate that will be considerably below the first 30 years. A growth rate of 7-7.5 per cent is likely to be China’s ‘new normal’ rate for the next few years.
When the economy last grew at such a slow pace during the 2008/9 global crisis, unemployment spiked and an estimated 20m workers lost their jobs. This time, employment has held up. Tsinghua University professor and former PBOC adviser David Li has pointed out that employment growth is in the region of 11m in the first 9 months of the year versus the normal target of 9m jobs for the entire year.
Along with getting closer to the technological frontier, which is associated with a growth slowdown as the “catch up” phase begins to end, another reason for China is demography. RBS’s Louis Kuijis, the former Beijing-based World Bank economist, estimates that the working-age population is growing at 0.5 per cent per annum, a third of the previous pace when an 8 per cent growth rate was thought to be necessary to maintain employment. He infers that the trend growth rate may now be around 7.5 per cent.
5. China's dirty money - There's an awful lot of it. Reuters reports Global Financial Integrity reckons US$3.79 trillion has been smuggled out of China in the last decade.
And the outflow - much of it from corruption, crime or tax evasion - is accelerating. China lost $472 billion in 2011, equivalent to 8.3 percent of its gross domestic product, up from $204.7 billion in 2000, Global Financial Integrity, a research and advocacy group that campaigns to limit illegal flows, said in a report on Thursday.
"The magnitude of illicit money flowing out of China is astonishing," said GFI director Raymond Baker. "There is no other developing or emerging country that comes even close to suffering as much in illicit financial flows."
The lost funds between 2000 and 2011 significantly exceeded the amount of money flowing into China as foreign direct investment. The International Monetary Fund calculated FDI inflows at roughly $310 billion between 1998 and 2011.
6. A Finnish parallel currency? - Gillian Tett at FT.com writes about talk of a parallel currency for Finland, which is current part of the euro-zone.
As the eurozone crisis rumbles on, some Finnish business and government officials are quietly mulling the logistics of leaving the currency union.
Nobody in Finland expects this to happen soon, if ever; indeed, most policy makers are strongly opposed to the idea. Particularly since many also hope the crisis is dying down, but as Heikki Neimelaeinen, chief executive of the Municipal Guarantee Board says: “We have started openly discussing the mechanism of euro exiting, without indicating that we will initiate such a process.” And this, in turn, is sparking some curious economic debates.
Take a look, for example, at a recent research paper from Nordea, the Nordic bank. This paper looks at the question of what might happen if Finland ever decided to run a so-called “parallel currency” system. The idea behind this, as Nordea explains, is that at times of stress it can sometimes seem beneficial for countries to maintain more than one currency unit. Most notably, if a country is trying to leave one currency, keeping that as legal tender alongside a second currency for a period can ensure a country honours its old contracts – and thus avoids a technical default.
7. The need for healthy capitalism - Here's Hugo Dixon at Reuters talking about how the crisis is not the result of too much freedom. Instead, it was the distortion of free enterprise that was the problem. He diagnoses four sicknesses.
Sickness number one was Alan Greenspan’s habit of lowering interest rates at the first sign of trouble during the pre-crunch era. Investors dubbed this the “Greenspan put”. The theory was that, since the U.S. Federal Reserve would always ride to the rescue, it made sense to take high risks. Fear was numbed and greed left untrammelled. The natural balance of a healthy organism was distorted.
The second malady was caused by an excessive willingness to bail out bankrupt banks. In a well-functioning free market, investors would bear the consequences of poor decisions. If a bank teetered on the brink, shareholders would be wiped out and bondholders would suffer. But, with the exception of Lehman Brothers and a few much smaller cases, bondholders were bailed out instead of being bailed in.
The third illness is caused by the heads-I-win-tails-you-lose bets that financiers and traders were able to enjoy during the upswing. If everything went well, they made a fortune; if everything collapsed, taxpayers picked up the pieces. Not surprisingly, they spun the roulette wheel. Such privatisation of gains and socialisation of losses is not healthy capitalism. It is a caricature of the free market.
The fourth disease is caused by distortions in the tax system. The most egregious is the ability of companies in most of the world to deduct interest costs before calculating the profit on which they have to pay tax. Payments to shareholders, by contrast, are typically not tax-deductible. This skewed playing field incentivises companies to leverage themselves up to the gills. That happened during the bubble particularly with banks, private equity groups and real estate businesses – all of which then got into trouble.
8. Publish and be arrested - The Guardian reports a Greek journalist who published a here-to-fore secret list of wealthy and influential Greek tax evaders has been arrested. The influential Greeks are not happy.
Kostas Vaxevanis, editor of the Greek magazine Hot Doc, published the so-called "Lagarde list." It's an electronic file given in 2010 by then French finance minister Christine Lagarde to the Greek government. Vaxevanis, who argues that he was exercising press freedom by publishing the list, was arrested for breaching Greece's data privacy law by revealing citizens' private information, according to a police spokesman.
It names 2,000 Greeks with Swiss accounts who are regarded as potential tax evaders. Yet the Athens government is alleged to have failed to take any action in the two years since it received the information.
9. Tom Traubert's Blues - By Tom Waits. Best Waltzing Matilda I've heard
10. Totally Jon Stewart on how Mitt Romney picked winners and losers while at Bain Capital.
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