Bernard's Top 10 at 10: Is a 'weaponised' Fed set to unleash hell in a 'dollarised' world?; What to do about NZ's 'zombie towns'; John Oliver on Inequality; You Huitong and us; Dilbert

Here's my Top 10 items from around the Internet over the last week or so. 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-watch today is #10 from John Oliver on inequality in the United States. Entertaining and informative from someone with out outsiders' view from inside America. Numbers 8 and 9 are also eye-opening on the issue of money laundering, China's banks and Australia.

1. Really? - Ambrose Evans Pritchard at the Telegraph reckons US Federal Reserve Chair Janet Yellen has begun to pivot towards being a hawk that puts up interest rates.

He thinks this will trigger a blistering US dollar rally. His reading is quite different from the rest of the market, who just saw more dovishness from the little lady when she spoke this week.

Here's hoping.

New Zealand exporters could do with some relief.

It's been so long since people predicted a 'blistering US dollar rally' that we've all given up hope. I remember Bill English assuring me and others in December last year that a stronger US dollar (and weaker NZ dollar) was just around the corner.

Since then dairy prices and log prices have fallen more than 30% and the New Zealand dollar has just strengthened. Even now, after yesterday's shock 8.9% fall in dairy prices and yet another weaker than expected inflation figure, the currency is still barely below its post-float highs.

Anyhoo, here's the alternative and hopeful view (yet again):

Since Fed chief Janet Yellen targets jobs above all else, this was bound to force capitulation by the Fed before long. It happened this week in her testimony to Congress. "If the labour market continues to improve more quickly than anticipated, then increases in the federal funds rate likely would occur sooner and be more rapid than currently envisioned," she said.

This is a policy shift. Mrs Yellen has admitted that the Fed misjudged the pace of jobs recovery. The staff did not expect unemployment to fall this low until late next year. The inflexion point has come 15 months early.

Mrs Yellen is not as dovish as believed, in any case. Her lodestar is the "non-accelerating inflation rate of unemployment" (NAIRU), the point at which tight labour markets start to drive a wage-price spiral. She thinks this is near 5.4pc.

When the rate is above NAIRU, she is a dove: when below, she is a hawk. She was one of the first to call for pre-emptive rate rises in 1996 to choke inflation, dissenting from the Greenspan Fed. Nobody thought of her as dovish then.

2. 'We live in a dollarised world' - Ambrose does make the good point however that whatever the US Federal Reserve does (and it still hasn't said whether it will sell back all those bonds it bought) it will have a massive effect on the rest of the world.

Here's why:

We still live in a dollarised world. Charles de Gaulle railed against the "exhorbitant privellege" of US dollar hegemony in the 1960s, but remarkably little has changed since. The BIS says global cross-border lending by banks alone has risen from $4 trillion to $10 trillion over the past decade, and $7 trillion of this is denominated in dollars. This does not include the dollar bond markets.

What Fed now does arguably has more amplified effects than at any time since the end of gold and the collapse of the fixed-exchange Bretton Woods regime in 1971. This is the paradox of 21st century globalisation.

Much of the dollar business is conducted through European and UK banks, leaving them acutely vulnerable to a dollar squeeze. Such episodes can be ferocious. It was a dollar liquidity shock that turned the Lehman affair into a global banking crisis, instantly engulfing Europe in October 2008.

Emerging markets went into a tailspin last year at the first suggestion of Fed bond tapering. There was a sudden stop in capital flows. The "Fragile Five" (India, Indonesia, South Africa, Brazil and Turkey) were punished for current account deficits. The Fed backed down. The storm passed.

3. Healthy debate - FOMC voting member and Richmond Fed President Jeffrey Lacker and Rennee Holtom have written a useful Fed Richmond paper questioning whether the Fed should do emergency lending. He's not a fan and doesn't pull any punches. The bolding is mine.

Here's why:

Experience suggests that the Fed’s activities should be limited. Experience suggests that the Fed’s activities should be limited to more closely align with this original vision. When the central bank utilizes “lender of last resort” powers to allocate credit to targeted firms and markets, it encourages excessive risk-taking and contributes to financial instability.

It also embroils the central bank in distributional politics and jeopardizes the independence that is critical to the central bank’s ability to ensure price stability. The lesson to be learned from the expansive use of the Fed’s emergency-lending powers in recent decades is that it threatens both financial stability and the Fed’s primary mission of ensuring monetary stability

4. Our Futures - New Zealand's Royal Society has studied the Census results produced a major review of the rapidly changing New Zealand population, and the implications of this for the economy, social cohesion, education, and health.

This stood out and feeds in to the 'zombie town' meme unleashed by Shamubeel Eaqub this week:

• New Zealand is regionally diverse and interconnected, with Auckland accounting for over half the population growth between 2006 and 2013. Internal migration has decelerated between regions.
• The implication for New Zealand is a pattern of greater relative growth for Auckland, a few centres with slower growth, and population decline in much of rural New Zealand, with implications for maintaining service levels for an ageing and possibly dwindling population.

5. The recession that hit the young hardest - This FTAlphaville piece looks out the fallout on the various generations' incomes from the Great Recession in the UK.

The young didn't do well:

In their annual survey on living standards in Britain, the Institute for Fiscal Studies and the Joseph Rowntree Foundation suggest that the fastest growing type of inequality over the past five years has been between the young and the old, rather than between the rich and the poor or London and the rest of the country. (There is of course overlap here, and the IFS says the rich-poor divide will soon widen.) This rupture promises to affect the future of Britain’s economy for generations to come.

Twenty-somethings’ toils have been well documented but the report provides fascinating new details about what happened to young people in the labour market.

As the chart below shows, the employment rate for 31-59 year-olds stood up well over the past five years. Contrast that with the rates for 20-somethings, even after one removes those in full-time education, as IFS-JRF do here. The decline began before the onset of the recession but accelerated around 2009.

6. China's 7.5% growth - Statistics out yesterday seemed to show China's growth slowdown stabilising at 7.5%. Scratch the surface though and it's not so promising. It's mostly about the banks and others there turning on the credit tap. 

I've included a few charts below showing how much credit has expanded in China, how other indicators of GDP (truck sales and electricity generation) are not so positive, and how much the rest of the world (including us) now rely on China. You only have to look at this week's GlobalDairyTrade results to see that.

7. America as oligarchy rather than democracy - BBC points here to a Princeton study of who wields power in the United States and who does not. The bolding is mine. Remember: this is a Princeton study.

Multivariate analysis indicates that economic elites and organised groups representing business interests have substantial independent impacts on US government policy, while average citizens and mass-based interest groups have little or no independent influence.

When a majority of citizens disagrees with economic elites and/or with organised interests, they generally lose. Moreover, because of the strong status quo bias built into the US political system, even when fairly large majorities of Americans favour policy change, they generally do not get it.

Americans do enjoy many features central to democratic governance, such as regular elections, freedom of speech and association and a widespread (if still contested) franchise. But we believe that if policymaking is dominated by powerful business organisations and a small number of affluent Americans, then America's claims to being a democratic society are seriously threatened.

8. Keep an eye on this - The big news in China's financial system in the last week has been an extraordinary investigation by China's state-run CCTV into a yuan remittance scheme run by state-owned Bank of China that helps wealthy Chinese citizens shift money into other countries in a way that circumvents China's capital controls. It was called "You Huitong" or "You uncapped."

Almost immediately, Bank of China shut the scheme down. ICBC also shut down its scheme, Business Insider reported.

This is one for our own Reserve Bank to watch. It has just registered a second China state-owned bank, CCB, in New Zealand, having registered ICBC late last year. Again: the bolding is mine.

Here's BusinessSpectator with the story:

CCTV’s serious allegations about the Bank of China -- that it was helping its clients to ‘launder money’ -- has sparked heated debate in the country about massive capital outflows from China, including illicit money that belongs to corrupt officials and businesspeople. Research and advocacy group Global Financial Integrity estimates that between 2000 and 2011, China lost $US3.8 trillion in illicit capital outflows.

Last week China Central Television (CCTV) aired what it called an undercover investigation program that uncovered a little known service called “You Hui Tong”, which allows wealthy Chinese individuals to take part in investment emigration programs in other countries to move cash offshore in amounts that exceed the annual cap of $US50,000.

9. You Huitong and Australia's Significant Investor Visa (SIV) Programme - BusinessSpectator points out the involvement of Australia in the CCTV report on the alleged money laundering.

The SIV scheme (A$5 million in Australian bonds required) looks a lot like the "Investor Plus" scheme that was used by Kim Dotcom to get into New Zealand.

Here's Business Spectator with the damning quotes:

China’s state broadcaster CCTV has launched an extraordinary attack on one of the country’s most powerful government controlled financial institutions – the Bank of China, accusing it of money laundering in Australia, via the country’s Significant Investor Visa Program.

 “We don’t care where your money is from or how you earn it, we can help you get it out of the country,” a Bank of China employee told CCTV. “We don’t care how black your money is or how dirty it is, we will find ways to launder it and shift it overseas for you,” according to a detailed CCTV investigative report.

Australia is a centrepiece of the investigation due to the country’s Significant Investor Visa program, which offers an accelerated pathway for wealthy investors to gain permanent residency by investing $5 million in Australian bonds, funds or a small business.  Chinese nationals account for nine out of 10 applicants since the program was introduced under the former Labor government.

And then this:

The CCTV report accuses the Bank of China of money laundering via a scheme called ‘You Huitong’, translated as You Uncapped, which allows wealthy Chinese to circumvent Beijing’s strict currency controls. “You Huitong is a shadowy business,” CCTV says. “It is unbelievable that such a big bank is violating the law to fill its own pockets.”

Business Spectator understands that some private bankers from Australia’s big four banks have been aware of the ‘You Huitong’ service for a year.

An investigation by Fairfax Media last November reported allegations that a prominent Chinese businessman used his private jet to ferry suitcases of cash and deposited them at a local Bank of China branch in Melbourne.

Anyone using 'You Uncapped' in New Zealand?

Is the Reserve Bank confident that ICBC NZ and CCB NZ are not using this scheme?

10. Totally John Oliver with a useful and fun 14 minutes on inequality in America.