Thursday's Top 10 with NZ Mint: Why doubling Japan's money supply won't fix its demographic drag; How aging economies can grow old with dignity; Target 3% unemployment; Time-lapsed NZ; Dilbert

Here's my Top 10 links from around the Internet at 10.30 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 is #1 from Ed Hugh on why money printing may not be enough to combat the demographic drag of ageing in Japan, and anywhere else. HT Andyh. A cracker. Cheers. See you on the other side of the lockup.

1. The problem with ABEnomics - Ed Hugh has an excellent piece at Economonitor on why the near doubling of Japan's money supply may not necessarily create the desired inflation. HT AndyH from the comments in yesterday's Top 10.

He makes a particularly good point about a lack of demand.

He also points out the pressures on Japanese companies profit lines as imported raw materials costs rise but they are still unable to increase prices of their finished manufactured goods on global markets.

Hugh's piece also points out any surge in spending is only coming from the top 20% in Japan who are experiencing the wealth effect from the 65% rise in Japanese stocks over the last six months.

This goes to the heart of the problem with the current 'print-it-and-they-will-come' strategy. 

It benefits the very rich mostly and does nothing to address the core problem of a lack of demand from heavily indebted lower to middle income groups who have stagnant real wages, or no wages at all.

Here's Hugh. It's long but well worth a read. He points out Japan's problems are largely demographic. It has an ageing and declining population.

The thing is this, given all the doubt about the real roots of Japan’s problem, and the fact that it may well be permanent – as working age population slides there might be a permanent, structural excess of supply over demand – is it really justified to run such a high risk, all-or-nothing experiment?  What makes people nervous is the thought that if the central bank can’t deliver on its promise then a loss of confidence might ensue, and all those dubious risky asset positions might unwind suddenly, just like an earlier set did in 2008.

Seki Obata, a Keio University business school professor who in January published a book “Reflation is Dangerous,” argues exactly this, that “Abenomics” is exposing Japan to considerable risk without any clear sense of what it can accomplish. Obata also makes the extremely valid point that there is simply no way incomes can rise across the entire economy because the baby boomers are now retiring to be replaced by young workers with only entry-level wages. Japan’s overall consumer spending power will therefore fall, rather than rise as Abe hopes.

“Individual companies may offer wage increases, but because of demographics it is simply impossible to increase the total amount that is paid out in wages,” says Obata. “On the contrary, that amount will shrink.”

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2. It's always, always about demography - Ed Hugh then makes this slightly ominous point about the rest of the OECD facing similar demographic drags as Japan. He also, rightly, says we need to do much more to help the young increase productivity (ie train them for a real job) and have families.

Perhaps the most important thing which the whole Abenomics episode has brought to light is the urgent need to bring the existing corpus of economic theory somehow up to date with our modern realities. Despite all the talk of policies for “growth, growth, growth” a simple look at the population outlook in OECD countries, and especially the potential work force numbers means at some point or another economic growth will turn broadly negative.

The real point is there is an experiment being conducted in Japan, but the experiment isn’t Abenomics (which I suspect won’t work, and could end very badly). No, the experiment is about learning to grow old with dignity, not as individuals, but as societies. It is about managing debt in a time of deflation, about giving opportunities to the young, even while the force of the ballot box rides with the old, and about finding ways to ease that rate of work force decline to give some additional room to allow productivity to help, which means again helping the young, since they are the ones who start families.

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3. Huawei's secret - Rod Oram has a good piece here at Stuff on how China's Huawei has grown so fast and so internationally. One of the keys is not to be listed on the stock market and to be owned by its workers.

Being employee-owned helps the company to focus long term. Huawei is not distracted, like many western companies, Ren said, by the sharemarket's hefty demands for short-term investment returns.

"We can control and mange our lust, our greed. Instead we provide a good service for our customers and make reasonable money."

Of Huawei's 150,000 staff, half own shares. They have to be Chinese nationals but allowing other citizens to participate is under consideration, a company spokesman said. Employees have to be with the company for at least two years, and they and their teams have to be performing well to be invited to buy shares. This has been a good source of capital for the company.

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4. Target 3% unemployment instead - Chris Farrell writes at Bloomberg Businessweek that the US Federal Reserve should be targeting 3% unemployment, not the 6.5% is currently aiming at. 

Can you imagine the amount of money printing they would have to do (and for how long) if they did?

Here's Farrell:

Full employment was once defined as somewhere between 1 percent and 2 percent, a figure that reflects the normal ebb and flow of the workforce as people leave jobs seeking better opportunities. In the U.S. a full-employment economy more realistically is closer to the 3 percent to 4 percent mark, a level reached only a handful of times during the past half-century, in the 1950s, the latter part of the 60s and during the heady years of the dot.com boom in the 90s.

Try this thought exercise: How do you think Wall Street money mavens, mainstream economists, institutional investors and other elites would react if the Fed said its unemployment rate target isn’t 6.5 percent. Nor is it 5.2 percent to 6 percent. It’s 3 percent to 4 percent. A catastrophic ambition, right?  A cottage industry of reports would come out predicting a coming hyperinflationary storm. The murmuring movement among conservative lawmakers and their think-tank allies to mandate that the Fed consider only price stability in its policymaking would gain momentum and go mainstream.

Big mistake. A 3 percent to 4 percent unemployment rate is a reasonable goal for policymakers to embrace. After all, a Main Street definition of a good economy is when a worker can walk into the boss’s office and demand a 5 percent to 10 percent raise—and get it. A bad economy is when the boss says, walk. The conventional wisdom that says such a low unemployment rate policy isn’t feasible because of inflation is wrong, deeply wrong.

5. Inflation and unemployment - Farrell makes a great point about how a generation of policy makers who were educated in the 1970s and 1980s are still fighting the battles of the 1970s and 1980s and seem to care less about uenmployment. The damage of such long term unemployment is huge.

What counts is that the Fed maintains the credibility of its commitment to a target rate of 2 percent inflation. Seared by the experience of the 1970s, the Fed and the wide network of monetary mandarins in academia have developed a deeper understanding of its inflation-fighting toolkit. The result: the underlying trend toward subdued inflation over the past three decades.

At the same time, the human toll from long spells of unemployment is too high. When you’re unemployed, it’s hard to pay bills, but the damage runs much deeper. People lose purpose. Their health deteriorates. Families break apart. Laid-off workers can’t save for retirement and borrow too much to stay afloat. Work nourishes our sense of belonging to a much larger community. “How do we connect the disconnected?’ wonders Crystal Palmer, a lifelong public housing resident in Chicago and an employee at the Henry Horner public housing project. “That’s the key to success in this community and any other community.”

6. Targeting housing bubblers - World banker Otaviano Canuto has a useful piece here at Economonitor on how central banks should care more about asset bubbles, and housing bubbles in particular, than they used to.

No doubt, this is the sort of thing our Reserve Bank is thinking about a lot as it watches and reacts (too slowly in my view) to the new Auckland housing boom.

If the global financial crisis — and the events that led up to it — have taught us anything, it is,“No complacency with asset price booms”. We know first hand the dire consequences of bubbles, so it is clear monetary policy makers can no longer passively observe the evolution of asset prices. If an economy is to pursue macroeconomic and financial stability, they should coordinate with financial supervisors – in an economic marriage of convenience – to ensure financial regulation and monetary policies are complementary, and implemented in an articulated way.

In a just released Economic Premise – Asset Prices, Macroprudential Regulation, and Monetary Policy – we approach some of the questions often made on how to go about reviving that policy marriage. If you are interested in our fuller account of issues regarding macroprudential regulation and monetary policy, see here.

First, should monetary policy makers consider asset prices, together with output and inflation trends, when taking decisions about interest rates? Should they use interest rate hikes to burst bubbles before they inflate fully? The emerging consensus is that credit-fueled bubbles (e.g., real estate) should be differentiated from equity-type bubbles. While the former frequently carry with them the seeds of systemic crises, the latter often has more bounded adjustment corrections.

Second, what is macroprudential regulation, and why should it be coordinated with monetary policy? Macroprudential regulation corresponds to rules that make the incentive structure for individual firms coherent and consistent, so externalities – effects of one’s decisions on others – are internalized. The idea is to design a set of principles and rules that can reduce each institution’s contribution to systemic risk. Thus, this set would smooth the financial cycle, i.e. reducing the systemic risk that inherently builds up in booms, and has damaging consequences in slumps, since leverage, risk taking, credit, and asset prices are pro-cyclical and crises typically follow booms.

7. Europe's household debt now higher than US - Gillian Tett has an excellent article at the FT about how the lines of household debt across the Atlantic have just crossed. The interesting thing here is that Europe's household debt at 110% of income is now higher than US household debt at 105%. 

Guess what New Zealand's household debt to disposable income is? Over 140% and climbing again.

Europe hasn't even started deleveraging. And neither have we. 

There is another, more pessimistic, side to that IMF chart too: this healing has notably not occurred in Europe. Earlier this week Willem Buiter, Citigroup chief economist, pointed out that eurozone banks and governments have not really deleveraged yet and called for radical debt restructuring and bank recapitalisation. However, the IMF data show this point applies to eurozone households too.

It is true that the IMF chart is partly skewed by the wider decline in growth and income. And the eurozone average conceals some big regional differences: although German consumers are not highly leveraged, households in places such as Spain, Greece and Ireland have much more debt.

But the key point is this: the widespread defaults and debt write-offs that have occurred in America have not really been echoed on anything like the same scale in Europe. As Mr Buiter notes, this partly reflects the under-capitalisation of banks: since they do not have the capacity to swallow losses, they keep ever-greening loans. As in Japan 15 years ago, the result is zombie lenders and borrowers.

8. Totally beautiful time-lapse video of New Zealand landscapes. Couldn't resist it. Send it to friends and family overseas.

Dark Cloud : White Light from Joseph Michael on Vimeo.

9. Spain's road to nowhere - Here's the Daily Mail with the ugly details. HT Brendan via email.

Stretching into the distance under grey skies, the only signs of life on this deserted Spanish highway are the occasional lone cyclist or pack of stray dogs. The MP-203 in Madrid has remained unfinished for six years - despite initial investment of 70 million euro in the shelved project in recession-hit Spain. Weeds can be seen growing on the surface of the abandoned route today, as it emerged the Eurozone has slumped into its longest recession ever.

10. Totally Jon Stewart on the IRS and Benghazi kerfuffles and Prince Harry's visit to America.

And Part II