Tuesday's Top 10 with NZ Mint: Hyundai vs Toyota in the currency wars; The trainwreck that is Europe; A coding cri de coeur; Dilbert

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 to bernard.hickey@interest.co.nz.

See all previous Top 10s here.

My must read today is #6 on the risks of a debt bust in China slowing its growth substantially.   

1. The devil in the details - So what happens when you can't print money to quietly default on your debts through inflation?

How do you restructure the debt? Who takes the hit of revaluation? When can people declare bankruptcy?

How dirt poor do they have to be before they can declare themselves bankrupt? Can the banks keep chasing you after you've handed in the keys.

Who designs how much is dirt poor in a modern society?

These are the questions Ireland is asking itself these days.

Ireland couldn't print its own money because it was part of the euro and decided, disastrously, to bail out its banks with taxpayers' money rather than impose the cyrstallisation of those losses on German and French banks who held the senior bonds of the Irish banks. 

Here's the FT with the detail:

On Thursday the country’s Insolvency Service set out monthly spending limits for people seeking debt deals from their creditors, highlighting the impact austerity is having on Irish spending habits. A single person will be allowed just €247.04 a month for food, €57.31 for heating and €125.97 for “social inclusion and participation”, an expenses category that includes tickets for sporting events and the cinema.

The guidelines mark Ireland’s first attempt to quantify acceptable living standards when people declare bankruptcy or reach an insolvency arrangement with creditors under its new insolvency regime. Banks will also use the guidelines as they begin restructuring tens of thousands of home loans over coming months.

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2. Here comes the tax man - One of the reasons online shopping has become popular is it is often tax free. The increase in the GST rate here from 12.5% to 15% certainly accelerated the use of offshore online retailers.

America was the first place where retailers realised they could game the patchwork of state sales taxes there. Amazon set up its massive warehouses in low or no sales tax states.

But cash-strapped states and central governments are gradually cracking down on these multi-national tax avoiders.

Here's the latest move to do it in America, courtesy of the Washington Post.  

The days of tax-free online shopping could finally be numbered. The Senate is planning to vote on a bill as soon as Monday that would give states the authority to collect sales taxes on all Internet purchases, handing local governments as much as $11 billion per year in added revenue that they are legally owed — but that hasn’t been paid to them for years.

Since before the dawn of Internet shopping, the basic rule was that as long as a retailer didn’t have a physical presence in the state where the consumer was shopping, the company wouldn’t have to collect a sales tax. Technically, shoppers are supposed to track these purchases and then pay the taxes owed in their annual tax filings. (Few people, however, do this or are even aware of it.)

The result: Online retailers have been able to undercut the prices of their non-Internet competitors for years. Over time, shoppers learned they could browse products in the aisles of a Best Buy, only to click “purchase” on their smartphones for a tax-free deal from an Internet retailer.

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3. Japan's ugly Tsunami of money - Here's Liam Halligan at the Telegraph pointing to the tensions brewing between South Korea and Japan over the massive surge in Japanese money printing that has inflated the value of the won vs the yen by 20% in just a few weeks. 

Car buyers here will have noticed too the sharp drop in Japanese new car prices in the last month or so, vs the relatively high (now) cost of Hyundais and Kias.

Here's Halligan quoting the obviously uncomfortable Hyun Oh-Seok, the South Korean finance minister, on the fringes of last week’s G20 summit in Washington.

“Japan’s economic policies are doing their part to help the world economy recover,” he said. “But if this causes problems and then the problems cause new responses from partnering nations, for example a currency war, the world economy will have a hard time”.

Despite Hyun’s careful phrasing, there is no “if” about it. South Korea already has “problems” with “Japan’s economic policies”.

Japan is late to the QE table, but with Abe having ordered the ultraconservative Bank of Japan to flood the world with freshly created currency, Tokyo is making up for lost time. That has led to outrage in some quarters, not least South Korea, where exports account for half of national income. The country’s vehicles and electrical goods, in particular, compete head-to-head on global markets with more established Japanese products.

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4. 'The mixture of naievety and venality behind it' - John Kay writes a typically thoughtful piece on the meaning of bitcoin and the difference between a market or trading price and actual value. 

There are many who say it doesn't matter what price is paid for a house and that the transacted price automatically means that's what it is worth.  Let's not bother ourselves with the multiples of prices to incomes or rents. So old fashioned. Kay has another view.

Kay questions that assumption here:

The Bitcoin story stumbles towards its inevitable sad conclusion, and we will probably never penetrate the mixture of naivety and venality that lies behind it. But these events prompt reflection on the relationship between price and value. The growth of the trading culture has encouraged the belief that the only measure of value is what someone is willing to pay. The terms “fair value” and “market price” are today used almost interchangeably. But this is a mistake.

The fundamental value of an asset is derived from the cash or earnings or utility the asset generates. Prices can deviate from fundamental value because future cash or earnings or utility are uncertain, or because of momentum – the belief that overvalued or undervalued assets may become yet more overvalued or undervalued. But there are few cases where prices are forever divorced from fundamental values – that was the lesson of tulips, dotcom stocks and collateralised debt obligations.

5. The trainwreck that is Europe - We all tend to forget that the Eurozone is actually the world's largest economic zone. It is in recession and it's getting worse.

Here's Ambrose Evans Pritchard from the Telegraph with a nice wrap of how much of a trainwreck it is and how little prospect of resolution there is. The IMF has pointed out that 25% of the bonds in Europe have to be restructured (ie big haircuts for banks et al)

Steen Jacobsen from Saxo Bank accused EMU leaders of dangerous complacency. “Nothing they say is true. Reality has never been further away. It's scary,” he said. “We think the eurozone is in far worse shape than they realize. We will see contraction of 1pc this year but it could be as bad as 2pc."

Citigroup cut its forecasts drastically, warning that EMU will shrink both this year and next, with a quasi-slump dragging on until 2017.

It said Italy would contract 1.6pc in 2013 and 1.2pc in 2014, and eke out growth of just 0.2pc in 2015. By then public debt will have risen to 142pc of GDP. “Some form of debt restructuring via maturity extension or interest rate reduction may be likely over time,” said chief economist Willem Buiter.

6. Keep any eye on China - Here's Patrick Chovanec writing at Chinafile on how quickly China's economy is slowing and what Beijing should do about it. 

He's not so confident.

Instead of reining in credit to try to curb over-investment, Chinese authorities have allowed a renewed explosion in credit in an effort to fuel a new investment stimulus. In the past six months, they pumped in RMB 10 trillion ($1.6 trillion) in new credit—$1 trillion in the first quarter of this year alone, 1/3 more than in the first quarter of 2009, the peak of the stimulus lending boom. Except this time around, almost half of the new funding took the form of risky, off-balance sheet “shadow banking” instruments that China’s new securities regulator, Xiao Gang, has likened to Ponzi schemes.  

The fact that this onslaught of new investment funding produced only a modest bump at the end of 2012, followed by a renewed slide, indicates that China is facing a steep decline in returns to credit expansion. In other words, it’s getting less and less GDP bang for its stimulus buck, as more and more credit and fiscal resources get locked into rolling over bad debt.

In March, China’s top planning bureau, the NDRC, laid out the state of the Chinese economy using the exact terms I’ve been using for over year to describe a “hard landing” scenario: “The foundation for economic turnaround is not firm,” the NDRC wrote. “Consumption is unable to provide a very strong impetus to economic growth, enterprises are less able and willing to invest, and external demand will not change for the better in the near future.”

Many analysts say China engineered a “soft landing” last year, but they’re wrong.  The Chinese economy was coming in for a landing (by reining in runaway credit growth), but then it started to look like it was going to be a hard one, and they waved off (by opening the credit spigots again).  Now they’re coming around for the another try, with bank regulators promising to crack down on the reckless explosion in shadow financing that has already produced a number of defaults.  We’ll see, in the months ahead, whether China’s leaders are serious about reining in risk and forcing a real economic adjustment, or whether they’re hopelessly addicted to a credit-fueled investment binge. But they can’t keep flying around forever. The meager returns to China’s latest credit splurge suggest that the fuel in China’s gas tanks is running out. The engines are already starting to sputter. Their instincts are to pull up, when they really should be landing the plane.

7. More on China's debt worries - Here's Caixin with an editorial about local government debt (Local Government Financing Vehicles (LGFVs) in China.

The government must rein in the growth of LGFVs if the economy is to grow sustainably. Authorities should curb the amount of debt, audit the system, and check the debt structure of local governments and their solvency. Given the danger of moral hazard, the central government should also stop local governments from intervening in small-scale defaults. Their interference would see the automatic extensions of loan deadlines, and some state-owned enterprises may end up paying the debts of others. We'll end up with not only companies that are "too big to fail," but also, ridiculously, those that are "too small to fail." This would only feed the debt balloon.

Letting some companies go bust would, in fact, improve the market pricing of risk premium, the interest rate structure and the bond rating system.

The media plays a key role in the monitoring of local government debt, and it must be allowed to do its job. Some local governments have tried to stonewall media inquiries on the pretext of safeguarding the financial environment. The opposite is in fact true. Without the media raising awareness about potential problems, the system would face graver dangers.

8. Even the IMF doesn't know how it's going to turn out - FT reports the IMF has been saying over the couple of days that it's worried about the unintended consequences of massive money printing. 

Lorenzo Bini Smaghi, the former member of the European Central Bank’s executive board, captured the mood at the IMF’s spring meeting, saying: “We don’t fully understand what is happening in advanced economies.”

The IMF cited three new risks that were all potentially associated with easy money. In the US it sees lax underwriting standards on corporate borrowing at a level normally associated with a late stage in a boom-bust credit cycle.

It also sees easy money policies spilling over to emerging economies, particularly in the form of foreign currency borrowing by emerging market corporates, leaving those companies vulnerable to foreign currency risks and emerging markets sensitive to hot money international capital flows.

Third, it worries that the exit from monetary easing could lead to a surge in market interest rates that could destabilise credit markets and the US economy.

10. Totally Jon Stewart on gun control, or the lack of it.