Bernard's Top 10: What's so bad about 'Grexit'?; 'Just forgive the debt for the poorest'; NZers are rockstar gamblers;Unending money printing and currency wars; Clarke and Dawe

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 #4 on the thinking behind Grexit. It's illuminating on the joys of having your own currency and central bank. #6 on China's long game is fun too.

1. Debt forgiveness - The Greeks are hoping to catch a break at the moment with their plan for debt restructuring, but the idea of mass debt forgiveness, which is an ancient tradition, hasn't gotten a lot of traction as a public policy idea.

Except in Croatia.

The Government there this week started wiping the debts of its poorest 317,000 people who have debts that stop them from having a bank account.

It applies to people with debts of less than US$5,100 and a monthly income of below US$138. That makes it very targeted and only for the poorest, but a fascinating idea.

The Croats have done their sums and worked out that the financial freedom to earn and bank and spend will actually make the policy pay for itself.

It's extraordinary in quite a few ways.

And thought provoking. I'm not suggesting it for here, but it's worth thinking about around the issue of debt and poverty and, more broadly, economic growth.

Here's the details via the Washington Post:

Although the program is expected to cost between 210 million and 2.1 billion Croatian kuna ($31 million and $300 million), according to conflicting reports by Austrian press agency APA and Reuters, the Croatian government expects economic long-term benefits that will outweigh the short-term investment. Prime Minister Zoran Milanovic has convinced multiple cities, public and private companies, the country's major telecommunications providers, as well as nine banks to clear some of their citizens of their debt. The government will not refund the companies for their losses.

Overall, the debt of all Croats amounts to $4.11 billion -- and the debt that is about to be wiped out accounts for about 1 to 7 percent of that. However, for those who are eligible the agreement will make a significant difference by enabling them to gain access to their bank accounts. By reducing debt by less than 10 percent, Croatia frees nearly 20 percent of the country's debtors from their obligations.

2. What would retail sales and savings be? - If New Zealanders didn't gamble so much money away. This Economist chart showing New Zealanders are the fourth highest gamblers in the world after Australia, Singapore and Finland surprised me.

3. Yet more money printing - The Americans have just stopped, but the Europeans are just starting and the Japanese will never stop.

Now it's clear that China is getting ready to ease its monetary policy to pump more cash out into the world to offset a sharp slowdown in lending by the 'shadow banks'. The authorites have cracked down on these shadow banks over the last year, but now they're realising it has slowed money creation and economic activity.

So the People's Bank of China is expected to push hard on the pump. Here's the FT with the latest on China's shadow banks:

Data released last month by the People's Bank of China show that credit creation from all sources fell 6 per cent in 2014 from a year earlier, only the third annual decline since collection of data on “total social finance” started in 2002. This fall reflects the slowing growth of non-bank lending, analysts say.

The regulatory push against risky practices has set the stage for targeted monetary loosening, following GDP data showing China growing at its slowest pace in 24 years in 2014. The drive “should help provide [the PBoC] with more flexibility on future monetary policy with less concern on the potential negative ‘side effects’ if further easing is needed,” Richard Xu, China financials analyst at Morgan Stanley, wrote last month. Indeed, the central bank in January confirmed market rumours that it had recently injected fresh cash into the banking system via its newly created medium-term lending facility.

4. 'They should try 'Grexit' - So says Roger Bootle in this well argued piece. The Greeks themselves don't want 'Grexit', but they may get it anyway because the Germans think the eurozone is now safe from contagion. Good luck with that.

To prevent a banking collapse, the Bank of Greece would have to replace the euro with a new Greek national currency, call it the new drachma. Not only would this enable the Greek central bank to support the banking system but Greece would also, once again, have an exchange rate between its money and everyone else’s. And that exchange rate would undoubtedly drop considerably. “With one bound, he was free” etc, etc.

But not quite. Although coming out of the euro and letting its new currency fall dramatically on the exchanges would, in my view, give Greece a realistic chance of escaping from its current dreadful situation, in the first instance the effects of euro withdrawal could be decidedly unpleasant.

The point of having your own currency is to effect a change in domestic prices relative to prices abroad. The first element in the process bringing about this result is a rise in the price of imports, reflecting the weaker currency. If the new drachma fell by 30 or 40pc, which I think is fully plausible, then there would be a very substantial rise in the price level.

5. Big problems in big China - The Australians just cut their cash rate because of a slump in demand for iron ore and coal from China, which is due to a sharp slow down in construction, which is in turn because of signs of over-supply and falling prices in the apartment market, particularly in the smaller cities.

That means there's a bunch of property developers are either about to go bust or are now going bust, whether it's quietly or loudly.

Here's Josh Noble with the tale of Kaisa's demise. It's one of the biggest apartment developers in China:

Kaisa said on Sunday that, because of its “distressed debt position and financial difficulties”, the proceeds from the sales would be used to increase cash flow and “secure the company’s daily operations”. Kaisa has about $2.5bn of offshore debt outstanding.

Kaisa’s troubles began at the start of December when the local government imposed a sales ban at some of the company’s projects in Shenzhen.

The departure of the chairman and biggest shareholder Kwok Ying-shing soon after then triggered a bank loan repayment, which the company missed. Kaisa subsequently failed to pay a coupon on its offshore bonds, prompting local creditors to ask the courts for freeze its assets across China.

A number of other developers have since announced they too are the subject of sales bans at some projects in Shenzhen.

The rapid escalation of problems at Kaisa has rattled Asian bond markets, cutting off a vital funding route for many of China’s highly indebted property companies.

6. Speaking of China - New Zealand takes a very benign view of China's ambitions, as has much of the world since Nixon 'opened up' China to the world in the 1970s.

A new book from a Mandarin speaking US foreign policy expert that says China is playing a long game to take over the world looks like a fascinating read. It could be a hawkish call to arms for the Americans, but it seems to have lots of new details from behind the scenes.

For more than four decades, Chinese leaders lulled presidents, cabinet secretaries, and other government analysts and policymakers into falsely assessing China as a benign power deserving of U.S. support, says Michael Pillsbury, the Mandarin-speaking analyst who has worked on China policy and intelligence issues for every U.S. administration since Richard Nixon.

The secret strategy, based on ancient Chinese statecraft, produced a large-scale transfer of cash, technology, and expertise that bolstered military and Communist Party “superhawks” in China who are now taking steps to catch up to and ultimately surpass the United States, Pillsbury concludes in a book published this week.

The Chinese strategic deception program was launched by Mao Zedong in 1955 and put forth the widespread misbelief that China is a poor, backward, inward-looking country. “And therefore the United States has to help them, and give away things to them, to make sure they stay friendly,” Pillsbury said in an interview. “This is totally wrong.”

7. Wrong again - The surprisingly weak inflation and now talk of rate cuts here is again raising questions about all the economists who predicted fast rising interest rates, and therefore said fixing for long terms was a good idea. To be fair they were wrong the other way around from 2002 to 2008.

Rodney Dickens has an excellent paper of his own on the issue of forecasting interest rates and fixing.

This chart tells the story of how economists were surprised by how much and how high interest rates rose from 2002 to 2008 and then how little they rose after 2008.

I'm sure people will throw my 30% house price fall prediction back at me (fair enough), but I've consistently thought for the last four years since all the money printing started that interest rates would stay lower for longer than many thought.

When central banks and Governments bailed out banks and started printing money to offset endemic deflation, this changed the equation on both interest rates (low and falling) and asset prices (high and rising). That willingness to ignore moral hazard and conventional monetary thinking certainly blew my 30% prediction out of the water. Just imagine if the central banks and Governments had not acted in the way they did from 2008 until now.

8. More currency wars - Further to the theme of unending central bank money printing and currency wars, the Danish central bank disclosed overnight it had intervened heavily to keep the kroner down amid capital flight out of the Euro zone into anything nearby that isn't falling..

The Swiss gave up in the end. Let's see how long the Danes last, and everyone else for that matter once the Europeans and Chinese get going again.

9. Differing perspectives - American Sniper is packing out movie theatres everywhere, but this account by another American sniper in Salon is a sobering antidote.

When I heard of the bigoted reaction some Americans had after watching the film, I was disgusted, but not surprised. Audience members are mistaking Chris Kyle’s view of the war as “the” story about the war. No wonder someone tweeted that the movie made them “want to go kill some ragheads.” It’s sad that such a nearsighted portrayal of Iraqis has caused more people to fear Arabs and glorify violence against them.

10.  Totally Clarke and Dawe on Tony Abbott's knighthood for Prince Phillip, which may turn out to be a career ending decision. And not for Prince Phillip.