Tuesday's Top 10: The chicken of government debt or the egg of slow growth; It's Japan vs Korea in the currency wars; NZ house prices 61% over-valued; Auckland a land bankers' paradise; How private equity deals hurt companies; Dilbert

Here's my Top 10 links from around the Internet at 10 am today.

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 on whether government debt slows growth or is caused by slow growth at #1.

1. The chicken or the egg? - Does slow growth cause high government debt? Or does high government debt cause slow growth?

This is a question that has dominated economic debate over the last four years or so.

The academic research by Reinhart and Rogoff from 2008 and 2009 seemed to have settle the debate by saying the debt caused the slow growth, rather than the other way around.

The huge kerfuffle over a bad spreadsheet used by Reinhart/Rogoff has reopened the debate.

Here's University of Michigan Economics Professor Miles Kimball and student Yichuan Wang concluding at Quartz that it was the slow growth that caused the debt.

And they have a fancy chart below to back up their argument.

It's worth debating this. Remember, our government is completely focused on government debt reduction, even though at under 30% of GDP it is vastly lower than the 90% threshold referred to by Reinhart and Rogoff as the tipping point for slowing growth.

Here's Kimball and Wang:

Here is what we did to focus on long-run effects: to avoid being confused by business-cycle effects, we looked at the relationship between national debt and growth in the period of time from five to 10 years later. In their paper “Debt Overhangs, Past and Present,” Carmen Reinhart and Ken Rogoff, along with Vincent Reinhart, emphasize that most episodes of high national debt last a long time. That means that if high debt really causes low growth in a slow, corrosive way, we should be able to see high debt now associated with low growth far into the future for the simple reason that high debt now tends to be associated with high debt for quite some time into the future.

Here is the bottom line. Based on economic theory, it would be surprising indeed if high levels of national debt didn’t have at least some slow, corrosive negative effect on economic growth. And we still worry about the effects of debt. But the two of us could not find even a shred of evidence in the Reinhart and Rogoff data for a negative effect of government debt on growth.

2. Don't turn off the drip just yet - Reuters reports global manufacturing is still struggling, meaning it's too early to 'taper' the money printing and bond buying.

3. 'The gold bubble has burst' - Here's Nouriel Roubini at Project Syndicate with 6 reasons why he thinks the gold price is likely to slump below US$1,000/oz by 2015.

4 'China's silent army' - This looks like an interesting book.

The first book to examine the unprecedented growth of China's economic investment in the developing world, its impact at the local level, and a rare hands-on picture of the role of ordinary Chinese in the juggernaut that is China, Inc.
 
Beijing-based journalists Juan Pablo Cardenal and Heriberto Araújo crisscrossed the globe from 2009-2011 to investigate how the Chinese are literally making the developing world in their own image.  What they discovered is a human story, an economic story, and a political story, one that is changing the course of history and that has never been explored, or reported, in depth and on the ground.  The “silent army” to which the authors refer is made up of the many ordinary Chinese citizens working around the world - in the oil industry in Kazakhstan, mining minerals in the Democratic Republic of Congo, building dams in Ecuador, selling hijabs in Cairo - who are contributing to China's global dominance while also leaving their mark in less salutary ways. 

5. 'It's every country for themselves' - The Koreans are getting very grumpy about Japan's money printing to devalue the yen.

In response, the Japanese are telling the Koreans it's every country for themselves. Fair enough. We can't say we weren't told.

Here's FTAlphaville with the exchange:

Here’s Koichi Hamada, an economic adviser to Japanese Prime Minister Shinzo Abe, telling South Korea to get in the game and stop moaning:

“Each country can take care of itself through its own monetary policy,” Hamada, 77, said in an interview in Tokyo yesterday. South Korean officials “shouldn’t blame the Japanese central bank, they should demand the Korean central bank have a proper monetary policy,” he said.

6.  Auckland is a land banker's paradise - So says Macrobusiness' Leith van Onselen in this well argued piece referring to Anne Gibson's Weekend Herald article about the NZ$111 million in profit that the Yi Huang Trading Company is sitting on from land banking in Manukau. 

He makes a good point about lifestyle blocks. I'm not sure unlimited sprawl is the only answer though.

Here's Leith:

It’s not like Auckland and its surrounding areas doesn’t have ample land that could be made available for development. Nearly all of all Auckland’s regional rural land is held as unproductive lifestyle blocks which are in effect super low density urban residential lots appropriate for subdivision. In fact, the number of lifestyle blocks has exploded across New Zealand, increasing by around 75,000 to 175,000 over the past 13 years, and now consuming roughly 873,000 hectares (8,730 sq km) of land, compared with only around 180,000 hectares (1,800 sq km) of land used for urban uses.

In short, it is the Auckland Council that is primarily to blame for land banking and the city’s sky-high land/house prices. If they allowed open competition between land holders and developers, land prices would be much lower and homes would be far more affordable. This isn’t rocket science.

7. So over-valued - This OECD report shows New Zealand's house prices are the fourth most over-valued in the world behind Belgium, Norway and Canada.

Our houses are 61% over-valued relative to incomes and 23% over-valued relative to incomes, the OECD's spreadsheet says.

Here's what the OECD is saying about the category NZ is in:

Where houses appear overvalued but prices are still rising. This is the case in Canada, Norway, New Zealand and, to a lesser extent, Sweden. Economies in this category are most vulnerable to the risk of a price correction – especially if borrowing costs were to rise or income growth were to slow.

Now what if interest rates start rising...

Could that have an effect...

8. What happens when interest rates rise? - We are about to find out in America.

The US 10 year Treasury bond yield has risen around 50 basis points over the last month and now US mortgage rates are over 4% again. 

American households have done a lot more deleveraging than ours, but even so, what will happen when interest rates rise?

That is the big question. Many are confident the Fed will time its exit perfectly and remain a strong 'put' underneath stock, bond and property markets.

Here's WSJ's musings:

The recent spike in rates conjured up fears of a bursting bubble in bonds, a rapid and disruptive increase in interest rates that would produce big losses for individuals and institutions with big bond portfolios and raise borrowing costs across the economy. There were more than a few references this week to 1994, when Alan Greenspan's Fed raised short-term rates after a long hiatus, bond markets around the world tanked and Orange County, Calif., ended up in bankruptcy court.

But the Fed remembers that, too. Fed officials stress almost daily that they won't move abruptly and they aren't going to move unless most policy makers are confident the economy really is doing better.

"We are not sitting in Jan 1994 about to get hit with the first rate hike," David Zervos of investment bank Jefferies wrote clients Thursday. "We still have a long road to recovery and there will be fits and starts. But most importantly, we are not dealing with a Volcker or early 90s Greenspan Fed here," both of whom raised interest rates aggressively at times.

"This is the Ben and Janet show!" he wrote, referring to Mr. Bernanke and Vice Chairwoman Janet Yellen. "These guys have long advertised a policy of not removing accommodation too quickly."

9. Private equity doesn't actually improve company performance - The old lark of gearing up a company to improve its return on equity, slashing costs and then flicking it on to a buyer/stock market after a few years was all the rage from 2005 and 2007 in New Zealand and elsewhere. It's Graeme Hart's modus operandi.

We saw it used with the likes of Mediaworks and Yellow Pages to disastrous effects.

Now a study by a British university has found that private equity (which usually means debt funded) deals actually worsen the performance of a company relative to its peers. The red line below is private equity. The blue line is the rest.

Professor Wood, who is Professor of International Business at Warwick Business School, said: "What we found was the promised productivity gains of a takeover rarely materialised. Rather, there was evidence of private-equity buy-outs reducing the number of workers and squeezing wages, without making the firm more efficient.

"A year before the firms were taken over the average gap between them and the control group in terms of turnover per employee was £29,000. Four years after the buy-out that had widened to almost £89,000."

Professor Wood and his team of researchers found private-equity buy-outs underestimate the importance of the workers they end up making redundant.

10. Totally Jon Stewart on the freedom of the press.