Tuesday's Top 10 with NZ Mint: Where are the jobs? It's the economy stupid; Helicopter money for Europe?; 'Don't pull away the punchbowl just yet'; Dilbert

Here's my Top 10 links from around the Internet at 1 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 is #2 with more heresy on money printing.

1. Where are the jobs? - The WSJ looks at the frustratingly slow pace of jobs growth in recent years.

The same questions are being asked here. 

This is far from a normal recovery and, if anything, the depth of the problem is disguised by large numbers of people simply giving up looking for work they can't find.

The WSJ reports on a variety of research that looks at whether something is broken in the US job market.

It concludes the real problem is the slow rate of economic growth, rather than any structural flaws.

Here's the WSJ:

Various papers have attributed the slow pace of job growth to the weak housing market, the downturn in specific industries and the long-run decline in the share of the population that’s working.

Others, however, have argued that there is little evidence for structural problems, and have said weak hiring is due to something much simpler: the slow pace of overall economic growth.

In other words, both new papers suggest, it isn’t unemployment benefits or other specific factors that are holding back hiring. It’s the economy, stupid.

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2. Helicopter money for Europe? - Lucrezia Reichlin, Adair Turner, Michael Woodford debate in this VoxEu piece whether Europe should also start US and Japanese style money printing programmes to restart growth, and in particular whether it should be money given directly to the public, or just handed over the banks and investors to buy government bonds.

The Bank of Japan has recently engaged in bold action, announcing that it will double the monetary base and its holding of government bonds in the next two years.

• Some think that quantitative easing will fuel the next financial bubble and that exiting will create financial instability (see Stein 2013).
• Others think that more should be done to sustain the real economy.

Adair Turner has recently put a different option on the table (Turner 2013): "helicopter money" or permanent money creation. This is an idea that was originally discussed by Milton Friedman (Friedman 1948) and more recently by Bernanke in relation to the zero lower bound problem in Japan (Bernanke 2003). As Bernanke has suggested it can be implemented via transfers to households and businesses via a tax cut coupled with incremental purchases of government debt, so that the tax cut is in effect financed by money creation.

Although the idea has been around a long time it is a taboo today. Non-standard monetary policies in response to the recent crisis have all led to an increase in the size of central banks’ balance sheets but in the recent experience no central bank, including the Bank of Japan, has purposefully increased the monetary base and committed to keep this additional money in circulation permanently. The idea, however, gets some support from academia.

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3. Chinese local government debt - Here's the FT's George Magnus talking about the weak link in China's economic growth chain -- heavily indebted local governments. 

The structural slowdown in China’s economy is starting to cause waves in Beijing, prompting trenchant questions about what the government should do about it. Premier Li Keqiang has recently played down the expectation that there is much the government could or should do, saying that China must rely more on “market mechanisms”. This is, in effect, an acknowledgment of a contradiction in China’s economic model.

Local governments and state enterprises, pillars of that model and its investment-driven growth, have become the agents of both the downswing in growth and increased concerns about financial risk. Fixing this problem, as Mr Li suggested, would be transformational, if the party can do it. Driven by vigorous internal competition and a considerable degree of political autonomy, local governments play a pivotal role in promoting local economic, investment and political interests, and delivering economic growth. Despite strong demands for greater provision of public services, local officials are incentivised by reward and patronage to focus on gross domestic product. Local government spending, however, is having less traction with the economy.

Local government borrowing has tripled since 2007, doubling as a share of GDP to about 30 per cent. Their finances have been weakened by rising social spending, faltering revenues from land sales, diminishing or negative returns on their investments and deteriorating cash flows. They are having to borrow more to refinance maturing debt, service existing debt and replenish working capital. Many wonder if Chinese local governments might be the next “subprime”.

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4. Slow motion crisis - This New York Times piece on the shriveling acquifers beneath America's richest farmland is sobering. HT pdk

The land, known as Section 35, sits atop the High Plains Aquifer, a waterlogged jumble of sand, clay and gravel that begins beneath Wyoming and South Dakota and stretches clear to the Texas Panhandle. The aquifer’s northern reaches still hold enough water in many places to last hundreds of years. But as one heads south, it is increasingly tapped out, drained by ever more intensive farming and, lately, by drought.

Vast stretches of Texas farmland lying over the aquifer no longer support irrigation. In west-central Kansas, up to a fifth of the irrigated farmland along a 100-mile swath of the aquifer has already gone dry. In many other places, there no longer is enough water to supply farmers’ peak needs during Kansas’ scorching summers.

And when the groundwater runs out, it is gone for good. Refilling the aquifer would require hundreds, if not thousands, of years of rains.

5. 'Don't pull away the punchbowl just yet' - Here's Ambrose Evans Pritchard at The Telegraph reporting on how worried monetarists are about the early withdrawal of stimulii of years of near 0% interest rates and money printing.

Monetarists across the world have warned that the International Monetary Fund and the Bank for International Settlements are making an historic error by calling for a withdrawal of emergency stimulus before the global economy has fully recovered.The two watchdogs launched broadsides against central bank largess last week. The BIS -- the forum of central banks -- was particularly blunt, seeming to imply that quantitative easing "does not work".

Critics say this risks undermining the credibility of radical measures when more may yet be needed. They fear central banks could repeat the mistake made in 1937 when the Federal Reserve lost its nerve and tightened too soon, tipping America back into depression.

"The BIS and the IMF are deeply misguided and risk doing the world a grave disservice. The biggest threat right now is irrational fear of bubbles among central banks," said Lars Christensen, a monetary theorist at Danske Bank. "How can they criticize the Bank of Japan for pulling the country out of 15 years of deflation and the longest asset price collapse in modern history?"

Mr Christensen said deflationary forces are stalking the global economy, making it essential to offset budget cuts with monetary stimulus.

6. Tax evasion whistleblowers - Politicians and tax collectors around the cash-strapped developed world are baying for big multinationals to pay more tax in their jurisdictions. The battle in Britain over Google's payment of virtually no tax there for a decade is coming to a head.

Now a former Google employee is about to spill the beans on Google's tax ...er.. 'reduction' techniques.

Barney Jones, a 34-year-old former Google advertising executive and devout Christian, said he had given the Public Accounts Committee a file of more than 100,000 documents detailing the company’s operations.

He said the company’s line that London staff support and encourage sales rather than sell was “scandalous”.

“When I was at Google our job was to find advertisers, to close the deals [and] to get them to sign bits of paper saying they were committing to spend in the UK," said Mr Jones.“Google has pulled the wool over the eyes of HMRC.”

7. The Cyrprus virus - Portugal's banks are worried about being infected by fear about a Cypriot 'solution' being used elswhere.

Portugal’s top bankers have called on Europe’s leaders to stop “playing with fire” and moderate their stance towards the eurozone periphery, or risk instilling alarm among bank depositors in future.

 

In separate interviews, the heads of the country’s two biggest banks – Millennium BCP and Banco Espírito Santo – said they were concerned that the precedent set by Europe’s treatment of Cyprus’s recent troubles had increased nervousness across the eurozone to dangerous levels.

 

8. 'We made people richer, but have we helped regular people?' - That's the question Federal Reserve of Dallas Governor Richard Fisher is asking in this Reuters article.

"We've made rich people richer...," Dallas Fed President Richard Fisher said on CNBC television. "Question is what have we done for working men and women in America?"

Fisher, who has long opposed the Fed's bond-buying program and wants to reduce it, added he expects real gross domestic product growth of more than 2.5 percent by year end.

9. Diminishing returns from QE - FTAlphaville's Izabella Kaminska looks at the smaller and smaller returns from each extra dollar or yen or pound of money printing. 

FT Alphaville has been arguing for a while, there is now a notable, if not dangerous, diminishing return associated with any more quantitative easing. More QE in any capacity is thus simply not an option.

All the central bank can do at this stage is go down the pure helicopter, negative rates or the digital cash issuance route — and none of these options come without risk, or paradigm changing significance.

Luckily, the QE and Jedi mindtricks we have had already may have been enough to get us out of the danger zone.

She then summarises thus (and very well):

Employment is still to recover completely. Corporates are still not investing. And commodities are now on the decline. It is for this reason that QE exit is unlikely to have inflationary consequences.

In fact, recovery has been almost fully focused on asset classes like equities, risky debt, housing, and corporate margins.

It is, in a sense, as if an economic reset has taken place focused on the elimination of jobs, the easing in commodity supply and the contraction of output.

Just because equities and housing have recovered — because enough money has flown into these sectors to bring them back on track — doesn’t make-up for the fact that a large part of society (a lot of it on the youth side) that has been completely disenfranchised from the economy.

QE may have done its job as far as propping up the financial sector goes but… for the economy to really recover, and for it to avoid another massive shock, there is still an urgent need to redirect much of the liquidity that’s been created — currently chasing risk assets — to those frozen out of the economy more permanently.

 

It may consequently be time to start talking about concepts like basic income, digital e-money or debt jubilees.

The risk of not doing so is unfortunately the risk of permanently splitting the economy into two distinct parts. One, the financialised economy that owns most of the productive assets; the second, the collaborative shadow economy which is now working furiously at making the most of what it’s got.

10. Totally Stephen Colbert on Asparagus 

(Adds quotes, cartoon)