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 how life in China has changed because of Xi Jingping's anti-corruption drive.
1. 'Continue the beatings until morale improves' - Those wondering why the Greeks are so grumpy and why they were desperate enough to vote in a bunch of radical leftists should read this Paul Krugman piece.
Continued austerity, as recomended by ze Germans, simply drove Greece from a bad recession into a depression that worsened its debt load with every year of falling GDP.
Cutting spending works to reduce debt when you're a household and everyone else is increasing spending and your debt means little to them.
Doing it as an entire government when the rest of the economy (both Greek and European) is also doing it is tantamount to economic suicide.
Now the political pigeons are coming home to roost on the German strategy and the new Greek Government is about to expel a few deposits on the financial strategists underneath the German pedestal.
Krugman adroitly demonstrates the economic drivers behind this political decision. He points out the architects of the troika's austerity plan originally forecast only a slight rise in unemployment and then recovery. How wrong they were.
What actually transpired was an economic and human nightmare. Far from ending in 2011, the Greek recession gathered momentum. Greece didn’t hit the bottom until 2014, and by that point it had experienced a full-fledged depression, with overall unemployment rising to 28 percent and youth unemployment rising to almost 60 percent. And the recovery now underway, such as it is, is barely visible, offering no prospect of returning to precrisis living standards for the foreseeable future.
What went wrong? I fairly often encounter assertions to the effect that Greece didn’t carry through on its promises, that it failed to deliver the promised spending cuts. Nothing could be further from the truth. In reality, Greece imposed savage cuts in public services, wages of government workers and social benefits. Thanks to repeated further waves of austerity, public spending was cut much more than the original program envisaged, and it’s currently about 20 percent lower than it was in 2010.
Yet Greek debt troubles are if anything worse than before the program started. One reason is that the economic plunge has reduced revenues: The Greek government is collecting a substantially higher share of G.D.P. in taxes than it used to, but G.D.P. has fallen so quickly that the overall tax take is down. Furthermore, the plunge in G.D.P. has caused a key fiscal indicator, the ratio of debt to G.D.P., to keep rising even though debt growth has slowed and Greece received some modest debt relief in 2012.
2. 'Fiscal water-boarding' - That's the way one Greek politician has described the German led attempt to make Greece cut its way back to economic health. The market reaction in Europe to the election of Syriza was remarkably relaxed. Everyone in markets just assumes the Greek politicians will do what they're told by the Europeans. It may not be that simple
Ambrose Evans Pritchard and a few others are not so sure of a relaxed outcome, particularly because there are some hefty cash calls coming up pretty quickly. Syriza has pledged not to pull out of the euro, but that has removed any remaining leverage Greece has.
Greece must repay €3.4bn to the International Monetary Fund in February and March. Tax revenues have collapsed as Greeks preempt what they hope will be a repeal of austerity taxes. “There is only €1.9bn left in the cash kitty, and the government has spending costs of $2.5bn coming up. Somebody needs to lend the country money soon,” said Megan Greene, from Manulife Asset Management.
The Greek media reports that capital flight last week reached €10bn as it became the clear that the amalgam of Maoists, ex-Leninists and radical socialists known as Syriza would win the election. Barclays estimates the outflow at €20bn since early December, roughly 12pc of GDP.
The European Central Bank is for now stepping into the breach. Liquidity support for Greek banks spiked to €54bn at the end of December, and is rising fast. If the ECB were to pull the plug, Greece would spiral into a systemic crisis immediately. Yet that could in theory happen as soon February 28 when the temporary extension on Greece’s bail-out package expires. The final drama will occur in July and August when Greece has to repay €7bn to the ECB.
3, Bracing for US rate hikes - After years of US money printing and near zero percent official rates, the global economy has not had to deal with a rise in US interest rates for almost a decade. The last US discount rate hike was in May 2006 from 5% to 5.25%. It is currently 0.25%.
Lots of people are thinking about about what a rate hike would do. Some still wonder whether it will actually happen. Rabobank, for example, doesn't see the Fed hiking until the fourth quarter of this year. Most others are still grouped around the middle of the year.
The Bank of England Governor, Mark Carney, is particularly worried about what might happen to all those emerging market countries and companies that borrowed in US dollars during and after the crisis. They owe US$9 trillion. That's trillion with a t.
Here's Ambrose with Carney's words from Davos:
"We are particularly concerned about an illusion of liquidity that has existed in a number of financial markets. I would say that illusion of liquidity is gradually being disabused," he said, adding that the so-called 'flash crash' in the US Treasury market last October was a wake-up call even if the "bouts of losses" have been small so far.
Mr Carney said the global authorities have clamped down on excess leverage and the sort of behaviour by banks that caused the financial crisis seven years ago, but new worries have emerged.
"The big question for us now is about liquidity cycles that come from fund managers that don't have leverage. It's $35 trillion of mutual funds that invest in relatively illiquid securities," he said.
Global watchdogs say the scale is so large -- and subject to "clustering" and crowd psychology - that these funds may all rush for the exits at the same time in a crisis and amplify the effects.
4. China's big numbers - With all the talk of China's GDP growth falling to a 24 year low, it's easy to forget that the base of China's GDP is now much higher than it use to be so a smaller percentage increase of a big base is actually bigger in nominal GDP terms than a large percentage growth of a small base.
Here's Professor James Laurenceson at BusinessSpectator crunching the numbers to show that China's GDP growth in nominal US dollar terms is actually likely to be just under a record high this year, despite a possible slip in GDP growth below 7%. China's economy would grow by the equivalent of over three NZ GDPs in a year even with that slower rate.
China began 2013 with an $US8.3 trillion economy. During the year it grew by 7.7 percent in local currency terms. At the same time, the renminbi appreciated by nearly 2 per cent. This meant that by the time 2014 rolled around, the economy had added $US643 billion.
Last year the pace of growth eased to 7.4 percent. But the economy started out bigger. That alone was enough to see more renminbi pressed into service than in the year before. On top of that the renminbi appreciated by another 1 per cent. The result was that China’s economy swelled by $US673bn in 2014.
5. But not with steel - Despite the Chinese economic growth, there is definitely actual contraction in property construction in large parts of the country, as evidenced by the slump in iron ore prices to below US$65/tonne and in this FT report that Chinese steel production actually contracted for the first time in two decades last year. This is not making the Australians happy and is no doubt a factor behind the growing calls for rate cuts across the Tasman.
So China is now very keen to start exporting its surplus steel. This is another factor driving down prices for many manufactured goods globally -- surplus Chinese production capacity.
Amid a “new normal” of slower growth at home, an uncertain outlook overseas and slumping commodity prices, China’s industrial champions — often the largest employers and taxpayers in the regions where they are based — are desperate for new business.
But rather than allow them to fail, Beijing has seized on a solution. The “One Road, One Belt” strategy aims to create new markets for Chinese goods by boosting Chinese infrastructure investment in less developed trading partners.
“One Road” refers to the 21st century Maritime Silk Road initiative, which seeks to extend China’s trading might and infrastructure investment into Southeast Asian nations and further afield to south Asia and Africa. “One Belt” refers to the Silk Road Economic Belt, which extends into central Asian nations.
6. Show us the insurance cuts - The unheralded merger (at least in New Zealand) of two of the world's five largest reinsurers (Axis Capital and PartnerRe) is touted as the response to a slump in reinsurance rates to their lowest levels in two decades as very low interest rates spark a rush for yield in catastrophe bonds.
When is that going to be passed on to New Zealanders in the form of lower insurance rates? Or has the consolidation of more than half of some insurance categories into the hands of one insurer (IAG) been a factor stopping those price cuts being passed on? The price increases immediately after the Christchurch earthquakes were certainly passed on. The FT reports reinsurance rates have fallen 10% in the last year.
The CPI figures for the December quarter from Statistics NZ show insurance prices rose 2.9% in the December quarter from a year ago. That does not compute on the face of it.
7. Intergenerational wealth transfer - John Kay has a thoughtful look here at the effects of property price inflation on intergenerational wealth.
The housing stock is by far the largest element, by value, in our national assets — amounting to about 2.5 times national income. That means a 1 per cent rise in house prices is equivalent to a transfer of wealth of about 2.5 per cent of national income to those who already own houses from those who might buy them in the future. The intergenerational effects of last year’s rise of 10 per cent in UK house prices therefore swamps anything the chancellor of the exchequer might have done to eliminate the budget deficit.
While homeowners will take some of that in equity release for round-the-world cruises, more is likely to be passed to children and grandchildren through inheritance. Much of that inheritance will be received by households whose members are themselves in their fifties and sixties — so that high house prices do less to fund round-the-world cruises for the elderly than to fund round-the-world cruises for their children. Inequality in one generation is thus transmitted into inequality in the next.
Two decades ago, the American economist Laurence Kotlikoff proposed a structure of “intergenerational accounting” to enable us to better understand the ways in which our actions today impinge on the welfare of generations to come.
8. 'There's no one left to bribe!' - China's anti-corruption drive has had all sorts of bizarre unexpected consequences. Sales of luxury watches, whiskey, handbags and even vouchers for foreign baby formula have slumped over the last year as officials and their bribers run scared because of Xi Jingping's campaing to catch the 'tigers and the flies'.
Bloomberg has a look at a new problem in China. There's no one left to bribe when you really need to. Maybe New Zealand needs a much better bribing culture to get around all the council rules under the RMA. Just kidding. Sort of. We could have done with the rampant, unchecked development that China had.
Four months after the new school year started, Chen Jin is still trying to enroll her daughter in a top middle school in her city of more than 10 million people in northern China. The problem: No one to bribe.
In previous years, people with money or connections could bypass residency restrictions and send their kids to the most prestigious public schools. This school year officials aren’t rising to the bait, as education authorities take President Xi Jinping’s anti-corruption campaign to heart.
“I will not give up,” said Chen, whose 12-year-old daughter attends another public school near home in Shijiazhuang in Hebei province. She said she’s prepared to offer as much as 100,000 yuan ($16,000). “There must be a way.”
9. Extraordinary - The Apple profit numbers this morning are off the charts incredible. They say so much about our new world, right from the amazing adoption of smart phones to the growth of the cloud economy and the inability of countries to tax that new economy.
Apple made a record profit (for any company) of US$18 billion in 90 days and now has a cash pile of US$178 billion. That's just slightly less than New Zealand's GDP.
10. Totally John Oliver with a half hearted apology about a movie about a book, in which he auditions for 50 Shades of Grey.
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