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David Chaston the virtues of printing; China to relax bank capital ratios; post peak wood; China and NZ law; 'good news'; stunning waste; Irish growth; Dilbert & more

David Chaston the virtues of printing; China to relax bank capital ratios; post peak wood; China and NZ law; 'good news'; stunning waste; Irish growth; Dilbert & more

Here's my edition of Top 10 links from around the Internet today.

We have a Monday-Wednesday-Friday schedule for Top 10. Bernard will be back with his version this Wednesday. We will have another guest posting on Friday.

As always, we welcome your additions in the comments below or via email to

See all previous Top 10s here.

1. 'Print money and raise interest rates'
A British central banker - well actually an ex-central banker at the Bank of England - says pouring created money (money that does not need to be repaid) into a dying fire of a depressed economy would be the fastest way to get back to 'normal'.

He sees not 'technical reasons' why this won't work.

But he is not a behavioural economist; he is a traditional economist. 

Perhaps he would unleash bizarre incentives in the banking system (?) or similar unexpected behaviour among borrowers and savers.

It is unlikely to be a solution adopted in New Zealand given our economy is trucking along nicely with relatively high interest rates now.

But stressed eurozone economies might be contemplating it (although are unlikely to get German agreement). The Japanese or Chinese could be listening ...

We should indeed seek a swift return to higher interest rates, to remove the dangerous subsidy to high leverage. But paradoxically, the best way to do that, particularly in Japan and the eurozone, would be to deploy a variant of Friedman’s idea of dropping money from a helicopter. Government deficits should temporarily increase, and they should be financed with new money created by the central bank and added permanently to the money supply.

Money-financed deficits would increase demand without creating debts that have to be serviced. This would lift either real output or inflation and allow interest rates to return to normal more quickly. True, banks might amplify the stimulus by creating additional private credit, but they can be restrained with higher reserve requirements.

Orthodox theory sees helicopter money as risky. But current quantitative easing policies are at least as risky, and have produced adverse side effects.

In the UK the Bank of England has bought £375 bln of government bonds to try to stimulate the economy through swollen asset prices and rock-bottom interest rates.

It could instead have created new money to finance a smaller one-off increase in the fiscal deficit. If it had done so, a return to normal interest rate disciplines would now be nearer.

2. Easier money
Chinese banks need to keep about 20% of their deposits as capital reserves - the equivalent in New Zealand is about half that - but now there are moves afoot to reduce the cover. Chinese banks are already among the world's largest. Reducing their reserve ratio will give them much more fire-power, and for free.

"Clearly, the increase in Shibor despite the rate cut shows fund tightness,” said Zhou Hao, a Shanghai-based economist at Australia & New Zealand Banking Group. “Bank balance sheets are already tight and they need funds to ease the thirst. The reduction in reserve ratios is likely to take place this month and more will come in the coming year."

3. Post peak wood
When societies used wood for shelter and fuel, forests suffered. When alternative materials and fuels came along things improved, as this German study shows. Going back to the 'old ways' (green philosophy) would come with a harsh consequence if everybody did it. Developing countries need to make the transition to improve the world's carbon sinks.  (Click image above - or here - to animate.)

"More than 100 years ago, timber was used for almost everything: as fuel wood, for metal production, furniture, house construction. Hence, at around 1900 there was hardly any forest areas left in Europe. Especially after World War II, many countries started massive afforestation programs which are still running today," Fuchs told The Washington Post.

As a result, Europe's forests grew by a third over the last 100 years. At the same time, cropland decreased due to technological innovations such as motorization, better drainage and irrigation systems: Relatively fewer area was needed to produce the same amount of food. Furthermore, many people migrated from rural to urban areas, or overseas.

Fuchs' fascinating conclusion: Forests and settlements grew at the same time and Europe is a much greener continent today than it was 100 years ago. A closer look at different regions and countries reveals Europe's recovery from the deforestation of past centuries.

4. Are we obstructing China's graft sweep?
China doesn't like our legal system and is frustrated our judges won't co-operate with them when they want something.

There is a cultural and social tension rising here.

China is going after its corrupt officials and doesn't understand why we insist on due legal process when they want them extradited after they have been discovered here.

How they look at how we protected and shielded Kim Dotcom is anyone's guess.

Should we automatically hand over someone accused by China (or Germany) even though they have committed no crime here? How do you feel about sheltering offshore corruption?

I suspect our legal systems are about to be tested by these types of cases. The Chinese President is setting up the issue:

Mr Xu called on western nations that have refused to sign formal extradition treaties with China to rally to the cause. Their often “cumbersome” legal procedures and biased judges were obstructing Operation Fox Hunt, he said.

“In some countries, judges who sometimes don’t understand or even have prejudices against China refuse to co-operate.”

Chinese fugitives often seek refuge in countries such as the US, Canada, New Zealand and the UK, where authorities are not obliged to honour Beijing’s extradition requests but can do so on a case-by-case basis.

5. Draining away?
The push by ECB boss for full-blown QE - and the resistance by Germany & Friends - reinforces the notion that they are playing a very high-stakes game. And there is not certainty it will end well. Ambrose Evans-Pritchard has penned another apocalyptic warning:

Let me be clear, I have no criticism of Mr Draghi. He has worked wonders, given the political constraints. His management of the ECB has been nothing less than heroic.

I agree fully with the logic – though not the purpose – of his cri de coeur in Finland a week ago. The ultimate success of EMU, he said, “depends on the acknowledgment that sharing a single currency is political union, and following through with the consequences”.

Or put another way, once you have launched a monetary union, you have automatically launched a political union too. That is what EMU means. The euro means a single government and a European superstate, and implicitly the abolition of Germany as a fully sovereign independent state. To pretend otherwise is intellectually infantile. To resist this truth - yet to proceed doggedly with EMU anyway - merely condemns Europe to rolling crises and permanent depression.

Mr Draghi is absolutely right about this, which is why those of us who were eurosceptics at Maastricht – and I wrote the leader for the Daily Telegraph on the night of that infamous treaty exactly 23 years ago – always opposed EMU with inflexible determination, and why we have great sympathy for those in Germany who wish to pull out of EMU in order to save their own sovereign state before it is too late. 

6. How to lose two-thirds of your readers
Here is something a little unsettling. It may help explain the reactions of a number of our commenters - "if it isn't bad, its not real".

In what turned out to be a rather disheartening social experiment, the Russian news site City Reporter only reported good news to its readers for an entire day.

The site brought positive news stories to the front of its pages and found any and all silver linings in negative stories (“No disruption on the roads despite snow,” for example). The result was a smorgasbord of sunshine, lollipops, and rainbows—that absolutely no one wanted to read. The City Reporter lost two-thirds of its normal readership that day, according to a post by one of the editors on Facebook.

For anyone familiar with the old newsroom adage “If it bleeds, it leads,” this shouldn’t be too shocking. But the City Reporter’s experiment is an indication that our fascination with negativity may be even more pervasive than we thought.

There is no shortage of psychology studies explaining why we love to read and watch bad news. Our brains make us do it. Negative events are more memorable and emotionally impactful than good ones. And the media only give the people what they want.

We cover quite a bit of 'good news' - it is hard not to in New Zealand these days. Imagine what our traffic would be if we didn't do that ... ;)

7. Humongous waste
In a stunning indictment (and an equally stunning piece of research), a couple of Chinese academics have suggested that the Chinese 'stimulus' programs over the past five years have resulted in gargantuan waste. 

It is waste that is worth almost 9 times New Zealand's whole GDP over the same period.

In fact, another observer says that is about 5% of GDP, skimmed right off the top.

It is brave stuff from inside China. This from Jamil Anderlini of the FT in Beijing:

"Ghost cities" lined with empty apartment blocks, abandoned highways and mothballed steel mills sprawl across China’s landscape – the outcome of government stimulus measures and hyperactive construction that have generated US$6.8 tln in wasted investment since 2009, according to a report by government researchers.

In 2009 and 2013 alone, "ineffective investment" came to nearly half the total invested in the Chinese economy in those years, according to research by Xu Ce of the National Development and Reform Commission, the state planning agency, and Wang Yuan from the Academy of Macroeconomic Research, a former arm of the NDRC.
The bulk of wasted investment went directly into industries such as steel and automobile production that received the most support from the government following the 2008 global crisis, according to the report.
Mr Xu and Ms Wang said ultra-loose monetary policy, little or no oversight over government investment plans and distorted incentive structures for officials were largely to blame for the waste.

8. A gigantic change
China's growth has been the envy of the developed world. But now it's slowing. However I did a double-take recently when I saw the Irish industrial production numbers. They are up +38.5% in the year to October. Now that is a serious rebound. This is from the Irish Times:

“We expect the global economy to pick up speed in the coming year and demand for Irish goods in general should increase as a result, with currency developments, particularly in relation to the euro/dollar a huge plus,” he said.

“Ireland is better placed than most to take advantage of an upturn in the world economy. The industrial output figures are also now clearly fitting better with the Irish manufacturing PMI, which has been in expansionary territory for the eighteen months up to November, with the latest figure just shy of the 15-year high hit in August,” he added.

9. US dollar still king
Even though the share of world GDP by the US is now less than 20%, the US dollar is by far the most widely used currency for international trade, and by far the the most preferred for holding international reserves. We might trade with many other nations but we really don't want their local currency; we all seem to only want US dollars. Despite its travails, the US dollar is key, knocking back weak challenges from the euro and the Japanese yen.

The BIS has been looking at why.

10. High demand
"Hospitals report that the hearts of bankers are in strong demand by transplant patients, because they’ve never been used." - the Torygraph

And one for MortgageBelt ...

Einstein dies and goes to heaven only to be informed that his room is not yet ready. "I hope you will not mind waiting in a dormitory. We are very sorry, but it’s the best we can do and you will have to share the room with others" he is told by the doorman.

Einstein says that this is no problem at all and that there is no need to make such a great fuss. So the doorman leads him to the dorm. They enter and Albert is introduced to all of the present inhabitants. “See, Here is your first room mate. He has an IQ of 180!"

"That’s wonderful!” says Albert. “We can discuss mathematics!"

"And here is your second room mate. His IQ is 150!"

"That’s wonderful!” says Albert. “We can discuss physics!"

"And here is your third room mate. His IQ is 100!"

"That’s wonderful! We can discuss the latest plays at the theater!"

Just then another man moves out to capture Albert’s hand and shake it. "I’m your last room mate and I’m sorry, but my IQ is only 80."

Albert smiles back at him and says, "So, where do you think interest rates are headed?"

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RE #2 - Chinese banks need to keep about 20% of their deposits as capital reserves - the equivalent in New Zealand is about half that..
Got any proof that the RBNZ demands a fraction of deposits are held as reserves? 
The Fed certainly makes a public declaration in the form of H3

Yes David the reserve requirement on deposits is zero! Nada! Capital is woefully low too. How many liquid cash like equivalents will be worth 100% in a crisis? Stress tests are meaningless.

#4 - Yes indeed, what an interesting comparison

When Leo Gao swiped $10 million from Westpac Bank in Rotorua and laundered it out of New Zealand, the NZ authorities requested his extradition from China back to New Zealand and hey presto, the Chinese authorities responded promptly, but funnily enough we don't reciprocate in the same way. Imagine the response next time we want help

Likely easier for them to leave it to us to take him down.....

#4, They are such tiresome bullies,The sticky point is the humanitarian lobby that, with less regard that there may have been a crime committed, is squeamish about the percieved harsh treatment of anyone going to China in this way, like they did not come here with their expressly because it was difficult for them to be returned...( Oh dear, can't see them suffer like that just for that offence, better to let the nice dears stay here, where they're safe from those nasty people...)
See stories of trying to get your kids back from some places after the soon to be ex takes them on a "holiday" to see relatives and you will find it similar.
NZ approaches to the Chinese legal system are treated with little respect, zero transparency and no latitude. Maybe they should be told that as long as this persists that they should expect the reciprocal.

#6, good news about new developments or service improvement is fine as it presents benefit and opprtunity, but effusive, gushing "glorious leader" type, designed to simply displace poor outcomes or displace attention is very quickly identified and dropped by smart people.
EG: Improved rail services, corruption reduced Vs. Mayor opens flower show, weather happens as per normal, but no-one dies.

Re number 1; and printing money to fund fiscal deficits even when interest rates are above zero: A couple of us have been advocating exactly that for NZ for some time, given the damage done by an "unjustifiably high" exchange rate, and separately by an Auckland housing and other asset bubbles. It is good to see a reputable economist boh confirm there is no good reason not to do this, and advocate for it.
Related to the idea is the following article in the Telegraph, where the Lib Dems have pointed out the obvious, that the conservatives in the UK have no credible plan to balance their fiscal budget, and that if they were to, the austerity implied would have very serious negative impacts on the economy. So to fund an inevitable deficit, they can either borrow from their own people- a vicious cycle; borrow from foreigners- a loss of wealth in short order; or print and pay for the difference. 
Printing would not always be the best idea, but when inflation is very low, then it seems easily the best option.
Lib Dems and Conservatives differentiate themselves in the UK.

#1 - Trying to get back to the way things were. Believing the world has not changed.
#4 - "How they look at how we protected and shielded Kim Dotcom is anyone's guess."
Hands up all those people, including all our government and justice people, who have never broken copyright law?
How many of you never ever owned a cassette tape recorder and so never ever recorded music (Illegally)?
How many of you never ever owned a Beta or VHS video recorder and never ever recorded TV programs or anything else even though all this was also illegal?
David, are you amongst the lilly white honest ones?
#5 - Political union was always the goal. America can control the EU easier than it can control individual countries.
So, no supprises there.
#6 - Most countries have a political system that originated from the British system. This sytem started some 800 or 900 years ago. In all that time it has fixed or repaired nothing.
It has not solved
Booms and busts
Drugs, Crime and murder
Crony Capitalism
Enviromental destruction
and on and on
It has been a big failure
So when failed governments have got the world is a mess how can you write good news?
#7 - Talk about China wasting money - We keeps fighting to hold the Olympic games which is also a big waste of money. Buildings running into decay afterwards.
#10 - Well, thanks for #10. We do like a laugh.

#6. I think you are a bit tough. Democracy and capitalism do seem to have improved by some margin nearly all the metrics you list, over the last 100 years, even though the population has gone from 1.7 billion to 7 billion people. Even the bust of 2008 until now has paled by comparison with the 1930s. Have read that the streets of London were filled with horse manure, and the Thames was putrid, along with the smog.
Crime is down in nearly all countries. A solid democracy with a free press is the best guard against corruption.
Are there still faults and challenges? Of course. 
But life for most is a lot better than it was 100 years ago.

Stephen L - It was, in large part, Henry Ford who got rid of the horse poo and Edison with his electricity that made most improvements. It was capitalism, not governments that made the big changes.
Look at how Hungry is behaving with its press at the moment.
BUDAPEST — The European Union faces a challenging conundrum. While Hungary has embarked on building Europe’s most controlled media system, the European Commission just agreed in August to provide the country with nearly 22 billion euros of economic assistance.
Hungary has become a disturbing example of how a political elite can roll back democracy, even in the heart of Europe. Leveraging an electorally successful right-wing populism, Prime Minister Viktor Orban has staged an autocratic crackdown on the nation’s press, which the independent watchdog Freedom House now ranks as only “partly free.”
You just cant trust them

#7 Re Chinese waste - interesting when the Chinese do it it's called waste, but in NZ when we individually spend hundreds of thousands extra on housing because of inflated prices caused by land banking, council bureauocracy, non competitive building supplies, and then all the extra bank interest to service this, it's called What?

Some may call it waste - however, contrary to a lot of others, I don''t see these ghost cities as waste, rather as stockpiled investment - like hoarding - it will one day be used - it won't go to waste - it is stored energy - or more specifically oil - wait till the oil runs out - imagine if new zealand had a whole lot of stockpiled and mothballed ready-to-go cities and towns and schools and hospitals and roads and infrastructure
Too many western finger-waggers point the finger and say it will all collapse and end in pain
I dont think so somehow - none of the calamities the western doomsters have been predicting for years have come about

New Zealand housing stock has a “value” of some $NZ716 billion … roughly 3.4 times its GDP.  Under normal housing conditions where only value added costs are needed to develop land and  housing, the value would only be between $NZ252 to $NZ315 billion.
This means there is something in the order of $NZ401 and $NZ461 billions of bubble value (waste/non-productive/ non-value added costs) in New Zealand housing, not to mention the extra unnecessary mortgages taken out  and interest payments made to service these non-value added costs.
Yes of course some of these extra costs are converted into revenue by the owner when they sell, but is only transferred to the next owner. In effect the new owner subsidises the old owner, and as the trend is for older generations to sell to younger generations and with many of the younger being FHB, then those that can least afford it pay the most in the financial burden that is placed upon them.
Yes the Chinese over build is a type of waste, but at least it is visible and as a physical asset it may have some future worth. Of course we wouldn’t do it this way and pay people to build something when there is no market for it. We put them on a benefit and they get paid to produce nothing, and that will never have any future value. Now that is waste.

True Dale. Imagine if the unemployed in NZ had been deployed and trained to build entry level homes a la NZ 1935-1960's? It may not have been "efficient" by current orthodoxy but we would have fewer beneficiaries and no housing shortage. Probably lower prices too and higher ownership rates.

Apart from the over building, the surplus of supply around Dublin, the similarities between Auckland/NZ and Dublin/Ireland are scary. Not quite as extreme but the same elements, especially immigrants bought in to both build houses and to create demand for them. Where are the Polish builders now? Where will our immigrant workers be if things come to a halt? Will NZ govt take bank debt onto its books like Ireland to save the system or risk pariah status with Australia, Britain, US and financial markets? Yes!

I dunno. In my view unless you could have found something better for all of those chinese workers (not to mention the Aussie miners!) to do it doesn't really count as a waste at all. Could you have found better uses for all their time? companies that could've been built, markets that existed to exploit in 2008...? My guess is that the only likely alternative would've been to have masses of chinese workers sitting on their hands, or working in extremely low productivity agricultural/service jobs.

#1 Adair Turner was head of the Financial Markets Authority not Bank of England. He advocates limited public credit; he calls it Overt Monetary Finance (OVT) from memory, similar to what Russel Norman poposed for Christchurch. But of late he has been moving closer to full Public Credit/100% reserve banking like Benes & Kumhof at the IMF, Huber and Robertson of the New Economics Foundation, Martin Wolf at The Economist, and Positive Money.