Thursday's Top 10 with NZ Mint: Graeme explains why his hands are still off the wheel (but getting closer); How China's new leaders are letting its economy slow; 4 unexpected responses to QE withdrawal; Dilbert

Here's my Top 10 links from around the Internet at midday 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 speech is #1-5 from Graeme Wheeler. He does a nice job of explaining why he hasn't done much, but how he might do a bit more. His hands are awfully tied up.

1. Please scale it up - Reserve Bank Governor Graeme Wheeler poppped out an interesting and useful speech this morning explaining the gordian knot the Reserve Bank is tied in.

The New Zealand dollar is 18% over its 15% average in real effective terms. 

That's helping to keep inflaiton low and allowing mortgage rates to be stuck at 50 year lows.

That is in turn helping to drive up house prices and create risks for our financial system.

But the RBNZ's blunt instrument of the Official Cash Rate has limited use here. 

Cutting the OCR to bring down the currency would just worsen the house price inflation and prudential stability problem.

Increasing the OCR could push up the currency.

So what to do? The Reserve Bank is creating some macro-prudential policy tools to supplement its OCR and Wheeler rattled his sabre again today about using them. He also talked more about scaling up the so-far limited exchange rate intervention.

Here's the key section on that:

In assessing whether to intervene in the exchange market, we apply four criteria. These are whether the exchange rate is at an exceptional level, whether its level is justifiable, whether intervention would be consistent with monetary policy, and whether market conditions are conducive to intervention having an impact. This last factor is especially important given the volume of trading in the Kiwi. (In the most recent survey – April 2010 – by the Bank for International Settlements, the Kiwi was the tenth most traded currency in the world with daily turnover of spot and forward exchange transactions totalling around USD $27 billion.)

In recent months we have undertaken some foreign exchange transactions to try and dampen some of the spikes in the exchange rate. But we are also realistic in respect of potential outcomes given the strength of the foreign demand for the New Zealand dollar relative to the scale of our intervention capacity. We can only hope to smooth the peaks off the exchange rate and diminish investor perceptions that the New Zealand dollar is a one-way bet, rather than attempt to influence the trend level of the Kiwi. But we are prepared to scale up our foreign exchange activities if we see opportunities to have greater influence.

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2. Relying on the Auckland Accord - Wheeler mentions the so-called Auckland Accord in the speech as one of the responses to the supply shortages in Auckland, which are combining with those demand drivers of low interest rates to create double digit housing inflation.

But he also pointed to this chart below showing just how indebted New Zealand households are.

At the moment the assumption is that first home buyers and investors will gear up yet more to buy the 39,000 houses to be built in Auckland over the next three years. That would be an extra NZ$16 billion or so of debt to the NZ$180 billion of mortgage debt already sitting on top of the household sector. That would lift the debt to disposable income ratio to closer to 160% from 145% now. 

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3. How much more deleveraging to come? - The Governor also made the good point that New Zealand households haven't really done much deleveraging and, if anything, have stopped and are now releveraging.

Consequently, the share of mortgage lending to clients with deposits less than 20 percent of the value of the house now comprises around 30 percent of new lending across the five major banks – up from around 23 percent in October 2011. Households remain highly levered with household debt around 145 percent of household disposable income. The correction in the debt ratio after the global financial crisis was gradual relative to the build up over the 15 years prior to the global financial crisis, and the ratio has recently picked up.

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4. Maybe he might even use them - At the end of last year Graeme Wheeler said that even if he had macro-prudential tools he wouldn't use them.

He's rattling his sabre a lot more now.

Macro-prudential instruments directed at the financial sector risks arising from the housing sector have been deployed in several countries (eg., Canada, Israel, Korea, Norway, and Sweden), with weight often put on restrictions around the level of high LVR lending. While there are important design issues to address in devising such measures, the empirical evidence to date suggests that during episodes of quickly rising real estate prices, LVR limits can help reduce the incidence of credit booms and decrease the probability of financial distress and sub-par growth following the boom.

One should be cautious in predicting the size of the impact of such measures when house prices are increasing rapidly, but we believe that macro-prudential instruments could have played a useful role in building up capital buffers and reducing credit demand and asset price pressures in the housing price boom of 2003-2007.

5. Lower for longer? - Despite all of this, the Governor seemed to even suggest he might be able to cut the OCR. He seemed to hold it out as a carrot for governments (or someone) to deal with the supply problems.

For example, if house price pressures abate, all other things unchanged, it would increase the possibility that the OCR could remain at its current level for longer than through this year, which is the time profile built into the forward projections contained in the March 2013 Monetary Policy Statement. Similarly, if housing pressures are much less of a concern and the exchange rate continues to appreciate and the inflation risk looks low, it may create opportunities to lower the OCR.

Macro-prudential measures can be useful in helping to restrain housing pressures, but they are no panacea. This reinforces the importance of progressing measures to enhance productivity in the construction sector, free up land supply, and examine related tax issues. If the house price and credit expansion begin to fuel excessive consumption spending and inflationary pressures, a monetary policy response would become more likely.

6. China's economic reforms - We're getting a lot more detail now about what Xi Jingping is going to do with the Chinese economy. Here's Deutsche Bank's view on the key 4 reforms via Caijing.

Higher taxes and levies on polluting products (e.g., coal) and sectors. 

The reform plan stated that the government would "include products that are heavily polluting and consume natural resources excessively into the consumption tax list", "reform the resource tax system by converting the unit tax on coal to an ad valorem tax", and "establish the strictest environmental protection system". In our view, these messages imply that taxes and levies on coal and pollutants generated by coal burning will likely rise.    
 
Implications: coal consumption growth will likely slow in the coming few years. Clean energies, as a result, should replace coal at an accelerated pace. 

7. The Chinese aren't reacting - The slowdown in Chinese growth would normally trigger a fresh round of investment stimulus. Not this time, writes Bill Bishop via Dealbook.

“Enterprises need to close down backward production and upgrade their industrial structure, and should not expect further economic stimulus measures by the government,” an official from the National Development and Reform Commission, who wished to remain anonymous, told the Beijing-based newspaper [The Economic Observer].

In a sign of how concerned the new administration is about China’s environmental crisis and the constraints it places on the country’s future development, PresidentXi Jinping told senior officials at a study session last Friday that the government should “set and strictly observe an ecological ‘red line’ amid the country’s rapid urbanization in order to protect the environment.”

8. Here we go again - Fortune reports Americans are increasingly borrowing against the inflated value of their stocks in their brokerage accounts to buy apartments....

Borrowing against brokerage accounts hit an all-time high earlier this year, according to data from FINRA, and has continued to go higher. Margin loans outstanding totaled nearly $409 billion at the end of April. That compares to $381 billion back in July 2007, the last time stock-market-fueled lending peaked.

Debt is often seen in bubbles, and loose lending was a key part of what led to the housing bust. So the recent rise in stock market borrowing has some people nervous, especially at a time when the market is already making new highs, and seemingly headed straight up.

9. Four things that might happen next - Matthew Lynn writes at MarketWatch what might happen next as the US Federal Reserve starts withdrawing stimulus. He thinks gold will rise, bank shares will rise, stocks will rise and interest rates will stay low. None of which most would expect.

His argument is the central banks will simply not allow markets to fall, banks to fail and interest rates to spike until the debt burden has been unloaded. He might be right if inflation stays as low as it seems to be.

Everything is a bit too big to fail now.

The conventional analysis is that it is the central banks printing money that is keeping bond yields at their lowest levels in half a century or more. Withdraw it, and yields will spike sharply upwards — after all, without that artificial stimulus, there will be no buyers. Even worse, there will be a flood of bonds on the market as central banks unload the hundreds of billions they have accumulated on their own balance sheets during the last three years. 

The trouble is, it isn’t going to happen.

Central bankers know that the quickest way to trash the economy is to allow bond yields to rise sharply. They are only going to end QE once government and corporate debts are under control, and they certainly are not going to hike interest rates at the same time as they are ending QE.

10. Totally Stephen Colbert on the IRS targeting the Tea Party non-tax payers.

(Updated with more quotes/cartoons)