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Bernard's Top 10 at 10: Why the world faces endemic deflationary forces; How America's 'Dirty Politics' created 'Partyism'; China's balance sheet recession; John Oliver on Steven Joyce; Dilbert

Bernard's Top 10 at 10: Why the world faces endemic deflationary forces; How America's 'Dirty Politics' created 'Partyism'; China's balance sheet recession; John Oliver on Steven Joyce; 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 read is #8 on why China's latest money-printing exercise may not work so well. #9 is a cracking rant on why Britain's middle classes should revolt (but aren't).

1. A deflationary drag - It seems everyone is regularly surprised these days by just how persistent and endemic the deflationary pressures in the Global Economy are.

Everywhere you look, prices are under pressure or falling.

This is not surprising to those who have been working in manufacturing for the last couple of decades. The globalisation of supply chains and the increased use of new technology is putting intense pressure on prices and forcing companies to innovate to improve productivity and reduce unit costs.

Now something similar is happening in many of the services sectors, which were previously immune to competition from the rest of the world.

One theory is that services sectors such as financial services, health and education are about to be lifted into the global economy via mobile devices and the cloud.

One fresh and good example is the release of the iPhone 6, which now has a NFC chip useful for contactless payments and its Apple Pay service.

Globalisation is coming to the payments sector faster than many might have thought.

Here's a useful backgrounder from BusinessSpectator and some useful insight into what Apple is planning to do to banks:

A worrying development for the banks in these stories are reports Apple are negotiating with the credit card companies to reduce and possible even eliminate merchant fees. To make matters worse, The Financial Times reports this week that Apple are demanding the banks pay for the privilege of being involved in the Pay service.

If nothing else, Apple’s reported demands illustrate how the balance of financial power is shifting from the banking industry to the technology sector; a development that will trouble many of the world’s high paid bankers.

Another aspect of these developments is how the technology companies are using their deep pockets and healthy cashflows to move into other traditional banking areas that modern financial institutions have neglected.

2. Surprise, surprise - A lot of people are watching China at the moment and occasionally believe China's leaders when they say they are keen on economic reform and that they won't 'prime the pumps' to try to keep GDP growth on track around 7.5%.

I'm a sceptic about China's leaders suddenly getting the real old time capitalist religion and letting the chips fall where they may. The chart below already shows China's proxy GDP (which includes more measureable measures such as train movements and power production) is dipping towards 5%, but I doubt China's leaders will just let it happen. They're activists, rather than free market pacifists.

Here's the FT with a report on how China's banks are about to lower interest rates on mortgages to boost the flagging real estate market:

China’s big four state-owned banks will allow people to enjoy the discounted rate available to first-time homebuyers, even if the buyer already owns a flat, the official Shanghai Securities News said, citing an unnamed person at a major bank.

The banks will also increase that discount to as much as 30 per cent off the central bank’s benchmark, up from 15 per cent previously, the newspaper reported.

“If confirmed, this will be the first time in the past half year that the central government announces supportive measures – not just the local governments – raising some people’s hope that there may be more central government support if the housing market does not recover,” Du Jinsong, a property analyst for Credit Suisse in Hong Kong, wrote in a note.

Local governments in recent months have relaxed home purchase restrictions in place since 2010 in response to public anger over soaring prices.

3. A divided America - We've just had a fairly tribal election campaign where the insults flew thick and fast. We discovered some pretty ugly things go on and are said beneath the surface.

It seemed alien and just plain wrong in a country like New Zealand, where there are few degrees of separation and we have a history (mostly) of clean and rational debate about political issues.

The thesis in 'Dirty Politics' is that Cameron Slater et al are trying to introduce US-style money-driven 'attack politics' to shift the centre of gravity in politics. Deeply personal attacks on rivals and the blurring of the personal and political boundaries are all par for the course, Nicky Hager posits, with a cache of emails to back it up.

I'm not sure (yet) that this Americanisation of New Zealand Politics has actually happened or been successful. At least two political parties (one on the left and one on the right) just failed to spend their way into Parliament and two of the central figures in Dirty Politics (Jason Ede and Judith Collins) lost their jobs.

But we should be wary about copying the Americanisation of politics because American politics is very ugly and has created a highly partisan media and politics. Congress is now utterly dysfunctional and captured by special interests.

Here's a little sliver of what that does. Bloomberg reports researchers have found that 'Partyism' is now more powerful than 'Racism' in the way American parents think about who their children should pair up with.

In 1960, 5 percent of Republicans and 4 percent of Democrats said that they would feel “displeased” if their son or daughter married outside their political party. By 2010, those numbers had reached 49 percent and 33 percent. Republicans have been found to like Democrats less than they like people on welfare or gays and lesbians. Democrats dislike Republicans more than they dislike big business.

4. Why growth is slow - One driver of economic growth is the way that couples pair up to form households and have babies. It drives borrowing, spending and all sorts of good GDP-producing behaviour.

But what happens when that household formation doesn't happen?

This chart below and this piece in WSJ Realtime on US houshold formation tells the story:

Additional calculations of the same annual survey from Jed Kolko, chief economist atTrulia, show that the U.S. population grew by 2.3 million last year. If household formation continued at the rate of the past few years, the U.S. would have added 1.2 million households last year. Instead, Mr. Kolko’s calculations show it added just 425,000—and nearly all of them were renter households.

Mr. Kolko found that the share of young adults living with their parents ticked downlast year, which is good news. The bad news: They didn’t form their own households, perhaps moving in with other relatives or friends. This helps explain why the homeownership rate for 18-to-34-year-olds continued to fall last year.

Homeownership rates can fall when household formation increases because the pool of renters grows faster than the pool of owners. But the data released last week suggests that this relatively benign explanation of falling homeownership rates can’t explain the drop in homeownership last year, a troubling sign.

5. China's outbound investment slump - Jamil Anderlini has written at FT.com about the anti-corruption crackdown in China (that even extends to New Zealand) and how it's beginning to affect outbound investment flows from China.

Chinese outbound investment has fallen sharply in the first half of the year, reversing nearly a decade of rising spending as overseas dealmaking becomes the latest casualty of the country’s strident anti-corruption campaign.

By the end of June, Chinese companies had spent a combined total of $39bn on overseas mergers, acquisitions and greenfield projects, down from $46bn in the same period a year earlier, according to figures from the Heritage Foundation, which closely monitors Chinese investment flows.

6. The revival of nationalism - Even as globalisation gathers steam into whole new areas (see #1 above), the forces of nationalism are growing, at least politically, as we saw in our own election with New Zealand First and Conservative capturing a combined 13% of the vote.

Here's Gideon Rachman with a few sensible words on the topic:

What accounts for this strange global resurgence of nationalism when so many economic and technological forces push in the opposite direction?

One answer is that the prophets of globalisation probably always underestimated the residual power of nationalism. If you spend your time in airport lounges and at international conferences, it becomes easy to forget that most people lead lives more rooted in a particular place. Indeed the disorientating effects of globalisation probably encourage people to look for reassurance and meaning in things that are more local or national, whether it is a common language or a shared history. Suspicion of globalisation and international finance also received a huge boost after the economic crisis of 2008.

7. Dirty Politics China style - This Op-Ed in the New York Times by Murong Xuecun is startling in its revelations about how dissidents outside of China are targeted by various Government organs online.

The Communist Party has come to perceive the freewheeling nature of the Internet a life-and-death issue. While fortifying the Great Firewall to keep undesirable information out of the country, it has also closed a huge number of blogs and increased censorship. In case that wasn’t enough, the government has spent handsomely enlisting a huge number of paid online commentators — professional Internet trolls, numbering possibly in the hundreds of thousands — to create enough noise to interfere with normal online discussion and thereby promote the interests of the Party. They pretend to be independent online but are paid to follow orders.

This huge corps of Internet commentators — popularly called the 50-Cent Party, because they were reportedly paid 50 fen (about 8 U.S. cents) for each post — praises and defends the government, while launching extreme personal attacks on government critics. Until recently, however, the influence of the 50-centers was limited to commenting on China-based websites. Smear campaigns like this have been common on Chinese sites. Only a year ago, it seemed there were just a few isolated trolls on banned, foreign-based sites like Facebook and Twitter. Now the 50-centers are spreading their vitriol beyond China. Fake accounts on Twitter spewing Beijing’s party line have been proliferating.

8. China's balance sheet recession - Gabriel Wildau writes here about the risks that China's recent money printing exercise may not work, as the ones in America and Britain also didn't work well to boost the real economy (as opposed to just boosting asset prices).

‘Mini-stimulus’ measures launched since April have focused on increasing the supply of money and credit. Last week the central bank moved to inject $81bn into the banking system via loans to the five biggest banks. That followed targeted cuts to the required reserve ratio for small banks and a loosening of the regulatory loan-to-deposit ratio that gave banks greater freedom to expand lending.

Authorities want banks to channel those funds into the real economy, but bankers and analysts say that weak credit creation in recent months is due more to lack of demand from borrowers than to constraints on bank lending.

That raises the spectre that China may slip into a so-called “balance-sheet recession”, the kind of economic slump in which monetary policy loses its effectiveness because highly indebted companies concentrate on paying down debt and remain unwilling to borrow even when interest rates fall. Weak demand for goods amid a slowing economy further depresses appetite for investment.

9. When will the middle classes revolt? - This the headline I never thought I'd read in The Daily Telegraph, but here it is. The article from Alex Proud is well worth a read.

Why aren’t the middle classes revolting? Words you probably never thought you’d read in the Telegraph. Words which, as a Gladstonian Liberal, I never thought I’d write. But seriously, why aren’t we seeing scenes reminiscent of Paris in 1968? Moscow in 1917? Boston in 1773?

My current fury is occasioned the Phones4U scandal (and it really is a scandal). Phones4U was bought by the private equity house, BC Partners, in 2011 for £200m. BC then borrowed £205m and, having saddled the company with vast amounts of debt, paid themselves a dividend of £223m. Crippled by debt, the company has now collapsed into administration.

The people who crippled it have walked away with nearly £20m million, while 5,600 people face losing their jobs. The taxman may also be stiffed on £90m in unpaid VAT and PAYE. It’s like a version of 1987’s Wall Street on steroids, the difference being that Gordon Gecko wins at the end and everyone shrugs and says, “Well, it’s not ideal, but really we need guys like him.”

10. Totally John Oliver and Steven Joyce's 'pretty legal' defence. Much mirth at our accent. Fair enough.

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12 Comments

#3 Agree except divided 3 ways, both political parties are on the right of centre having been bought by corporates.  The third way is then the people, who are deluded if they think either party cares about them, unless its the 1%.

Which leads to #9.

regards

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Well said.  Can sheep revolt?

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#3.  the publication date of the 'Dirty Politics' book convincingly nails Hagar as a practitioner of dirty politics.

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#3.  "Partyism" and Republicans/Democrats.  Yes that is a truely strange thing.  When I go to the United States I encounter this and I just don't get it.  People clearly see themselves born into a tribe.  And are not going to change that in their lifetime.  It's more than a vote preference.

I really can't see any parallel in New Zealand even for people who I would call voters committed voters for one party..

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Gets reinforced by what they watch and read (now on "smart"phones), e.g. Fox News.

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KH

Hang around for a bit. I've never seen such tribalism in the last few years that I've seen recently. People are being vilified as being 'from the left/right' much more regularly than used to be the case. They are being personally attacked and the mechanisms of government are regularly being used to assist in the cause of painting everyone as one tribe or the other.

This is a function of the blogosphere and the role of money in paying for atttack bloggers.

Simply read Whaleoil and The DailyBlog to understand what is at stake and where we're going.

It is deeply frustrating and depressing. 

But, frankly, there is is no business model for anything else. 

Good luck people. 

cheers

Bernard

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Re: #1 - The technology innovation in the payments system should be beneficial to individuals. However don't underestimate how banks will react to competition to their monopoly in this area.  

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When I first saw this headline, I was sure it said:   "Why the relatively high NZ OCR rate is unjustified and unsustainable in the face of global Deflation"  

Why the NZ exchange rate is unjustified and unsustainable   The Reserve Bank considers the level of the exchange rate is unjustified and unsustainable, and that it is susceptible to a significant downward adjustment, Governor Graeme Wheeler said today.   Our exchange rate is a plaything of international investment/trading/FX not based on any economic fundamentals of GDP, production etc.    
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#7 It's happening here too: from Russel Brown;

 

Further to my earlier comment about Jordan Williams, Carrick Graham and the Fizz lobby group – it’s much worse than I thought.

As this February blog post by Eric Crampton explained, the whole thing involved what is clearly a false-flag Twitter account (@Fizz2030) that purported to speak for the Fizz researchers (they were completely unaware of it) and posted increasingly provocative messages for Williams and Graham to tout around.

On this basis, there was a threatening legal letter from Jordan Williams, an official complaint to Otago University and a public warning from Carrick Graham to “be careful”. All aimed to intimidate and silence. I’m not inclined to congratulate those responsible for a successful “parody” account like Eric did – this wasn’t a parody, it was aimed at undermining and discrediting scientists.

The whole thing appears to be a carefully-constructed effort to smear a group of health and nutrition researchers on behalf of a paying client.

These people are scum.

 

http://publicaddress.net/system/cafe/onpoint-sunlight-resistance/?i=75#…

 

 

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#3 More local intrigue - just reported today by Felix Marwick;

 

Felix Marwick: Inquiry into SIS documents released to Cameron Slater

And finally, and I have no idea if anything sinister happened or not, I did find it mysterious that all the email correspondence I'd saved on my computer regarding my IGIS hearing mysteriously went missing while I was out of the office covering the election campaign.

 

http://www.newstalkzb.co.nz/auckland/opinion/felix-marwick-sis-slater-2…

 

 

 

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#3 And the Dirty Politics continues this time David Farrar (Kiwiblog) tipped off by Anne Tolley's (Minister of Police and Corrections) press secretary about bad news (i.e., the truth) about to be published elsewhere.

 

After the revelations of Dirty Politics, it might have been assumed these practices were halted. It seems that they haven’t been. Cameron Slater said to me last week on Twitter ‘wait until you see Dirtier Politics’. The worst, it would seem, is yet to come.

Can somebody, anybody, in the media please ask the Minister of Police and Corrections, or even better the Prime Minister, if they continue to think that this is acceptable practice? Are they happy establishing two tiers of information flow: a secret and efficient one for propaganda and a slow and risky one for the truth?

Please ask them if academics and journalists should have to hide our identities when asking for government information so that it’s not leaked to people like Slater and Farrar?

These seem to be reasonable questions, the answers to which have grave ramifications. I implore the Forth Estate to ask them.

 

http://www.jarrodgilbert.com/blog/just-because-youre-paranoid-doesnt-me…

 

 

 

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Exciting new state security laws being introduced over in Australia- look to it being a criminal offence for journalists to report what the security agencies are doing (no public interest protection clauses).

http://www.smh.com.au/digital-life/consumer-security/new-laws-could-giv…

Before anyone begins rambling about the recent Australian terror raids- That was done without needing these laws on the books, and these laws have been being planned for some while- there were public submissions through August.

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