Tuesday's Top 10 with NZ Mint: Austerity doesn't work when everyone does it at the same time; QBE eyes offshoring 3,000 jobs; 'The Italians are revolting'; China's netizens revolt too; Dilbert

Here's my Top 10 links from around the Internet at 11 am 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 today is #1 from Paul Krugman on why austerity isn't working. Cue Italian voter revolt at the austerity imposed by its German creditors.

1. The problem with austerity - Paul Krugman points out in his NY Times blog that austerity and politics are driving markets and economies right now, in all the wrong directions.

Italian election results now coming through shouldn't really surprise too many in the markets.

Yet markets are acting surprised.

Voters don't like austerity.

Austerity doesn't work when everyone does it at the same time. It's true within countries and it's certainly true when many countries all attempt to do it at the same time.

That's what is happening in Europe.

With southern Europe, northern Europe, Britain, America (and New Zealand) all trying to cut and tax their way to growth, there's no suprise it's not working and the voters don't like it. Politics rule all in the end. Even bond vigilantes.

Slow motion replay. Meet trainwreck. Here's Krugman:

Consider how things were supposed to be working at this point. When Europe began its infatuation with austerity, top officials dismissed concerns that slashing spending and raising taxes in depressed economies might deepen their depressions. On the contrary, they insisted, such policies would actually boost economies by inspiring confidence.

But the confidence fairy was a no-show. Nations imposing harsh austerity suffered deep economic downturns; the harsher the austerity, the deeper the downturn. Indeed, this relationship has been so strong that the International Monetary Fund, in a striking mea culpa, admitted that it had underestimated the damage austerity would inflict.

Meanwhile, austerity hasn’t even achieved the minimal goal of reducing debt burdens. Instead, countries pursuing harsh austerity have seen the ratio of debt to G.D.P. rise, because the shrinkage in their economies has outpaced any reduction in the rate of borrowing. And because austerity policies haven’t been offset by expansionary policies elsewhere, the European economy as a whole — which never had much of a recovery from the slump of 2008-9 — is back in recession, with unemployment marching ever higher.

2. Even the Tories are saying austerity isn't working - Here's the chief economic adviser to London Mayor Boris Johnson saying Britain needs to pull itself out of the austerity death spiral.

 The UK needs three things – to spend, lend and change. The economy is suffering from a lack of demand. There needs to be more spending by the Government on both infrastructure and construction and people and firms with the ability to spend need to be given the confidence to do so. There has to be more lending by the banks. And the supply side of the economy needs a helping hand and thus there has to be change – which is all part of repositioning the UK in the changing global economy.

3. Here it comes - The very strong New Zealand and Australian dollars make it profitable to outsource services jobs. The Internet makes it very possible.

Now it's happening in earnest in Australia where the AFR reports QBE is planning to outsource 3,000 jobs to the Philippines. A whole wave of job losses are approaching, particularly in telecommunications, financial services, medical services, legal services and educational services. 

QBE has more than 16,000 employees in 52 countries and more than 4300 Australian staff in its Australian underwriting business.

The QBE document shows that it is planning a “group shared services centre” (GSSC) in Manila. It says the “captive-based GSSC back office” in Manila would include finance, procurement and information technology operations. The plans, to be phased in over the next three years, would also include Australian, European and North American claims functions in the back office. The plan is yet to receive final approval from the QBE board.

In an email to Australian staff on Monday, QBE Australia chief Colin Fagen said the insurer would use its global footprint to achieve profit growth.

4. Italian deadlock - Further to #1 above, here's the latest detail on the Italian deadlock that has freaked out global markets this morning. What did the markets think would happen? That voters would love the spending cuts and economic contraction that the bond investors love?

More than half of Italian voters voted for politicians such as comedian Beppe Grillo and comedian Silvio Berlusconi that want Italy to pull out of the euro.

A huge protest vote by Italians enraged by economic hardship and political corruption pushed the country towards deadlock after an election on Monday, with voting projections showing no coalition strong enough to form a government. With more than two thirds of the vote counted, the projections suggested the center left could have a slim lead in the race for the lower house of parliament.

But no party or likely coalition appeared likely to be able to form a majority in the upper house or Senate, creating a deadlocked parliament - the opposite of the stable result that Italy desperately needs to tackle a deep recession, rising unemployment and a massive public debt.

Such an outcome has the potential to revive fears over the euro zone debt crisis, with prospects of a long period of uncertainty in the zone's third largest economy.

5. The working wage - Gareth Morgan and Susan Guthrie have written an excellent piece on youth rates. 

In any market the price of the next best alternative is the price that counts. The labour market for youth is no different. Any kid wanting a job has the option of working at the same rate or slightly lower than they last person employed. That means all kids – not just foreign students – have to be prepared to work at these sweatshop rates or else forego work. And kids are working but they’re getting exploited doing it.

We’ve heard anecdotes about youth workers – ordinary kiwi kids – being employed without written contracts; working for weeks serving customers alongside paid staff and contributing fully to the revenue of the business only to be told they their work days are unpaid “training days”; working long shifts without breaks which flies in the face of health and safety laws; being dismissed without a fair process; the list goes on. All the conditions we have listed breach current employment law. Are these kids likely to take complaints to the Department of Labour (now buried within the new Ministry of Business, Innovation and Employment)? And risk getting branded a troublemaker? Yeah right.

The knee jerk reaction of many readers to this will be – “So what? The kids are getting experience and references, the willing ones are getting ahead. And it’s creating work”. The so what is this – society has decided what the minimum wage should be, if you don’t like it get society to change its mind. If we want a country of entrepreneurs who can only get ahead not by being smarter at how they use their staff, but by cheating society’s laws then we’re on the right track.

6. Why Economists need to embrace Big Data mining - Carnegie Mellon statistician Cosma Shalizi talks in this Inet video about the way economists are creating flawed models and should learn a few tricks from data miners. HT dh in yesterday's comment stream.

Cosma Shalizi urges economists to stop doing what they are doing: Fitting large complex models to a small set of highly correlated time series data. Once you add enough variables, parameters, bells and whistles, your model can fit past data very well, and yet fail miserably in the future. Shalizi tells us how to separate the wheat from the chaff, how to compensate for overfitting and prevent models from memorizing noise. He introduces techniques from data mining and machine learning to economics -- this is new economic thinking.

7. Why bond yields will stay low - Here's the contrary view from Gluskin Sheff's David Rosenberg (via BusinessInsider) to all those people picking higher interest rates and a bond market blowup.

In his latest report David Rosenberg writes that "the era of consumer frugality ostensibly never went away despite a 125 percent four-year rally, in the equity market". The recent payroll tax hike has delivered an 8 percent blow to discretionary spending for those making $40,000, and this is causing 46 percent of the population to curb spending, according to the NRF.

"With all this, and knowing that there is over an 80 percent correlation between booths Fed policy and underlying inflation and the direction of bond yields, I fail to see the bear case for the fixed-income market, and find the argument that the reason to be negative is because rates are so low to be highly unimpressive. Like anything else, motion will be caused by some force. And I don't see the secular forces that brought yields to where they are today to be changing anytime soon."

8. The drama in China's real estate records - Tealeaf Nation reports on how netizens in China are protesting against moves to stop people searching real estate records to find corrupt officials owning more than 1 properties...

The corrupt officials in some cities have banned the searches...

In an opinion poll conducted by Sina, 87.7% of participants opposed the ban. The sharp contrast between the government's justification of the ban and Web users' objection to it mirrored the public's long-standing mistrust of the state, but was also exacerbated by the circumstances under which the regulation was put forward.

The last several months have seen many grassroots anti-corruption campaigns online. Officials and their relatives whose real estate assets apparently exceeded what their legal income could conceivably acquire were variously called "house uncle," "house sister," "house wife" and "house grandpa" by Web users as they were identified and condemned. In most cases, the government caved to public pressure and investigated these individuals. Multiple officials have been removed and legal processes against them have begun. In the absence of effective top-down supervision and limited opportunities for political participation, many regard online sleuthing as a last resort for citizens who want to oversee their civil servants.

Even though it remains unclear how many of these cases began with use of the official information system, many Web users believe that the new prohibitions are intended to counter the burgeoning sleuthing movement. Netizens perceive policymakers' denial of this connection as nothing more than a lie.

9 China's hottest real estate market collapses - Here's France24 with the detail of Phoenix Island's collapse.

 It was billed as China's Dubai: a cluster of sail-shaped skyscrapers on a man-made island surrounded by tropical sea, the epitome of an unprecedented property boom that transformed skylines across the country. But prices on Phoenix Island, off the palm-tree lined streets of the resort city of Sanya, have plummeted in recent months, exposing the hidden fragilities of China's growing but sometimes unbalanced economy.

A "seven star" hotel is under construction on the wave-lapped oval, which the provincial tourism authority proclaims as a "fierce competitor" for the title of "eighth wonder of the modern world".

But the island stands quiet aside from a few orange-jacketed cleaning staff, with undisturbed seaside swimming pools reflecting rows of pristine white towers, and a row of Porsches one of the few signs of habitation.

Chinese manufacturers once snapped up its luxury apartments, but with profits falling as a result of the global downturn many owners need to offload properties urgently and raise cash to repay business loans, estate agents said.

10. Totally Jon Stewart on the Tyranny in Texas. It seems Texans see Abraham Lincoln as similar to a certain German dictator who's name can set off spam filters.


We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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Regarding the idea that Austerity does not work...
I find it bizarre that austerity and the idea of growth is being used in the same sentence,.
To use an analogy....  If I am overwieght because I've been eating too much.... if I really do want to lose wieght ...I am going to have to diet.
Same with overconsumption and excessive credit growth.... to unwind that .... GDP will have to shrink.
The key question is how do we deleverage with the minimum of pain and suffering..???
Just as there are many ways to diet... there are also different ways to deleverage...
Ray Dalio uses the terms Ugly deleveraging and Beautiful deleveraging.
The factors that determine the kind of deleverging are: 1/ debt reduction/default...2/ Austerity...3/ wealth transfer (tax).. ( savers to borrowers)  and 4/ debt Monetization.
It is all about reducing the debt/income ratio
If all of these factors are used wisely ...then we can have a deleveraging process that is less painful.
If there is not some kind of balance between these factors....  well... things could become ugly.
At the highest policy/decision making levels I have not heard these things being discussed.... in a wholistic sense.
We cannot defy reality...   and the reality is that much of the global GDP growth over the last 40 yrs has been generated by massive amounts of credit growth....AND..we have very..almost...reached the limits of our ability sustain more debt.
New Zealand will be facing these problems after we go thru our current credit cycle growth phase.... and that credit growth will generate economic growth... and our Politicians will be lauded as wonderful economic managers...  :)
Then ...when the world has its next  shock...NZ will be between a rock and a hard place...and we will probably experience an "ugly" deleveraging...
I'd like to say that all this is just my view... but I'm not smart enuf....  I simply agree with Ray Dalios' point of view

But what happens, Bernard, when the non-austerity approach is taken? 'Money' is loaned, returns are expected, growth is anticipated. Given that horseshit trading (upping the 'value' of existing items is horseshit) only does ponzis, the reboot requires more real stuff to be done. That requires more work to be done. Which requires a greater supply of energy.
Sorry to harp on, but it seems we do a HT to energy, then we get right back to the comfort-zone talk about deckchairs. This problem won't go away, not ever. Austerity will therefore be thrust upon us, won't be a choice. Intelligent anticipation would beat this idiot economist's argument about which approach is appropriate, by re-defining the goal-posts.

Quite agree PDK and Roelof, these countries (Spain, Greece etc,) are simply facing the inevitable consequences of  consumption in excess of production. Sure some of the governments could prop up consumption with more borrowed money but that will lead to an even bigger mess down the track.
Clever clogs Boris thinks he's got the answer to everything - it doesn't take a genius to figure out you've got some serious issues when total credit market debt is 500% of GDP. Nor can you escape the reality that the UK is now heavily dependant on imported food, energy and almost all hard commodities, any attempt to drive the pound lower is just further impoverishing the people. They're running a triple deficit - trade, current account and government - and the answer is to borrow more? Is this the best they can come up with - complete and utter nonsense from a desperate man.

Spot on Kiwidave.
In many ways it is the best they can come up with - the alternative would be to tell the public the real situation - but the public would not want to hear anyway.

Who said money had to be loaned? That's how the current, and broken, system works. There has to be deleveraging to wipe out the bad debt in the system. That will cause a contraction in GDP, potentially quite severe in some places, with the resulting unemployment. If left unchecked, this leads to a depression. A depression now would make the 1930's look like picnic. QE has certainly worked to prevent that but really it's just about holding the water back. 
So while we drain the system of the bad debt, we can simply introduce new money, NOT debt, into the system as a balancing agent. This new money will come in, NOT as loans, but as direct new expenditure on public services. 
This is finally being talked about in the UK, which is nice, since I first mentioned it there back in 2001.
As Roelef notes, we need to prepare for this now, starting with abandoning the silly asset sales. It's all here and its very simple to put into practice. 

I think eventually the only way out will be Keen's general debt jubilee, with a universal payout to every adult  with compulsory debt retirement be it mortgage, student, consumer debt. But it will have to be acompanied by a complete change in the tax system, reregulation of banks, 100% reserve banking, separation of the payment system and current accounts from trading banks and the introduction of Public Credit. ie A total reset but not a return to the current way of doing things. 

I think you are correct there but that's probably stage 2. We have to move through Stage 1 now, which is changing we way we view and understand money and debt. Once we see the results of monetary dialysis, then we can look to tackle the major underlying structural reform. We cannot leap there in one go though. In the meantime, my colleague, Lowell Manning has prepared a NZ version of permanent debt reduction:

Very good. Unfortunately both Labour and National are wedded to the model of the last 30 years and want no real change to the status quo. The Greens do but under their new guise don't wont to be perceived as "reckless hippies" or too unorthodox. Even the Greeks with all their woes could not bring themselves to dispense with orthodox economics even though it has brought them a depression. Fear of the unknown is a powerful barrier to change.

Well put.

Very good piece on the US tight (shale) oil 'revolution':
Good to see some decent analysis of the real situation.

Yes. Austerity is like eating well and properly.   Not always easy so lets not do it.  Keep drinking that Coke and stodge food. 
Don't mind if one can't walk 100 meters at the age of 55.  Don't mind if the eyesight fails at age 65 when the diabeties has it's effect.   

Re. #1 & 2 -  I will repeat my comment from yesterday's 90 seconds at 9 am.
There is no austerity by the Bristish Gov't, it'a myth perpetuated by the Gov't and the MSM.  The UK  PSBR, Public Sector Borrowing Requirement, has grown larger under the current Conservative Gov't than it was under the previous Labour Gov't.  How can anyone claim that the UK Gov't has an austerity programme when public spending has actually been increased.  It seems that a lie told often enough eventually becomes the reality.  

"LONDON — The British government on Wednesday unveiled the country’s steepest public spending cuts in more than 60 years, reducing costs in government departments by an average of 19 percent, sharply curtailing welfare benefits, raising the retirement age to 66 by 2020 and eliminating hundreds of thousands of public sector jobs in an effort to bring down the bloated budget deficit."
"Public spending in 2011-12 was £694.89bn - compared to £689.63bn in 2010-11. That may look like an increase but once inflation is taken into account, it is a real-terms cut of 1.58%, or £10.8bn."
of course when there are more un-employed there is more in benefits to pay out....

The first chart shows that the UK Gross National Debt has increased from 0.53 trillion to 1.16 trillion between 2008 and 2013.  The GND has increased every single year.

Faulty scoping in the math, Misty.
If there were unlimited chances to grow, you wouldn't have to blame another entity. The fact that you do, prima facie suggests that there's a limit, and that you're competing under it. Work out what the limit is, and then what it's linchpin driver is.
First principles - best way really.        :)