Tuesday's Top 10 with NZ Mint: How bigger shadows caused the crisis; IEA says crude oil peaked in 2006; 10 reasons never to buy stocks; FTA threatens Pharmac; Dilbert

Here's my Top 10 links from around the Internet at 2 pm  in association with NZ Mint.

I'll pop the extras into the comment stream. See all previous Top 10s here.

I welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz.

Nine Inch Nails and David Bowie my favourite today.

1. Today's must read - This piece from Peruvian economist Hernando de Soto at Bloomberg BusinessWeek is a fascinating and fresh insight into what went wrong in the global financial system.

He makes the point that the growth of various shadow financial markets and trading has undermined trust in the global banking and economic system.

He says nothing has been fixed and this is all underming the systems for credit creation, securities trading and capital allocation across the world.

De Soto also points out the use of off balance sheet vehicles is partially responsible for the crisis.

If you read one long story today, make it this one. HT Donald via email.

Here's a taste of his view that the common set of economic facts relied on for centuries is breaking down:

Over the past 20 years, Americans and Europeans have quietly gone about destroying these facts. The very systems that could have provided markets and governments with the means to understand the global financial crisis—and to prevent another one—are being eroded. Governments have allowed shadow markets to develop and reach a size beyond comprehension.

Mortgages have been granted and recorded with such inattention that homeowners and banks often don't know and can't prove who owns their homes. In a few short decades the West undercut 150 years of legal reforms that made the global economy possible.

The results are hardly surprising. In the U.S., trust has broken down between banks and subprime mortgage holders; between foreclosing agents and courts; between banks and their investors—even between banks and other banks. Overall, credit (from the Latin for "trust") continues to flow steadily, but closer examination shows that nongovernment credit has contracted. Private lending has dropped 21 percent since 2007.

Outstanding loans to small businesses dropped more than 6 percent over the past year, while lending to large businesses, measured in commercial loans of more than $1 million, fell nearly 9 percent.

2. Independent life forms? - Are corporates responsible for their actions? Are they responsible to the country they are based in? Do they have a responsibility to their customers and employees as well as their shareholders.

Questions such as this are increasingly being asked as a group of increasingly large and increasingly stateless corporates roam the planet looking for ways to cut costs and employee numbers in their home countries while boosting profits and not paying taxes.

Google, GE, Barclays, Vodafone and Tesco come to mind. For example, Google made over A$740 million in revenue in Australia last year, but paid just A$1 million in tax because it funnels much of its international revenue (including from New Zealand) through a tax haven in Ireland. See Jeffrey Sachs below for why this is so bad.

Here Barbara Ehrenreich at Alternet talks about how Wal-Mart won the rights of a citizen to lobby politicians but has avoided its rights as a citizen not to discriminate against women and others.

This is one of the reasons why I think the current version of multinationalist corporatism will struggle to win the hearts and minds of voters, employees and shareholders...in the long run. HT Troy via email.

Here's Ehrenreich: 

What is Wal-Mart -- in a strictly taxonomic sense, that is? Based on size alone, it would be easy to confuse it with a nation: In 2002, its annual revenue was equal to or exceeded that of all but 22 recognized nation-states. Or, if all its employees -- 1.4 million in the U.S. alone -- were to gather in one place, you might think you were looking at a major city. But there is also the possibility that Wal-Mart and other planet-spanning, centi-billion-dollar enterprises are not mere aggregations of people at all. They may be independent life-forms -- a species of super-organisms.

This, anyway, seems to be the takeaway from the 2010 Citizens United decision, in which the Supreme Court, in a frenzy of anthropomorphism, ruled that corporations are actually persons and therefore entitled to freedom of speech and the right to make unlimited campaign contributions. You may object that the notion of personhood had already been degraded beyond recognition by its extension, in the minds of pro-life thinkers, to individual cells such as zygotes. But the court must have reasoned that it would be discriminatory to let size enter into the determination of personhood: If a microscopic cell can be a person, then why not a brontosaurus, a tsunami, or a multinational corporation?

But Wal-Mart's defense against a class action charging the company with discrimination against its female employees -- Dukes v. Wal-Mart -- throws an entirely new light on the biology of large corporations. The company argues that with "7 divisions, 41 regions, 3400 stores and over one million employees" (in the U.S., as of 2004, when the suit was first launched), it is "impossible" for any small group of plaintiffs to adequately represent a "class" in the legal sense. What with all those divisions, regions, and stores, the experiences of individual employees are just too variable to allow for a meaningful "class" to arise. Wal-Mart, in other words, is too big, too multifaceted and diverse, to be sued.

3. Oil production peaked in 2006 - ABC reporter Jonica Newby interviewed reclusive International Energy Authority (IEA) chief economist Faith Birol, who said that crude oil output peaked in 2006... HT Chris.

Here's the SMH version.

And here's the transcript of the interview

Dr Jonica Newby
This is the headquarters of the International Energy Agency. It puts together the forecasts on oil production over the next 20 years - and it's the body many governments, including our own, look to for accurate advice.

NARRATION
This multi- government agency is the voice of the mainstream. And I'm here to meet the man at the top ... 
.... who just 5 years ago was confidently saying oil production will rise to 120 million barrels a day by 2030. But now?

Dr Fatih Birol
When we look at the oil markets the news is not very bright. We think that the crude oil production has already peaked in 2006 

NARRATION
Hang on - did you get that? Crude oil production for the world peaked in 2006. 

Dr Fatih Birol
The existing fields are declining sharply in North sea, in United States, in Gulf of Mexico. Just to stay where we are today we have to find four new Saudi Arabia's, this is a tall order.

4. Remember this? - John Key told the Wall Street Journal in March 2009 that "You can't spend your way out of a crisis."

Here's what he said back then.

"We don't tell New Zealanders we can stop the global recession, because we can't," says Prime Minister John Key, leaning forward in his armchair at his office in the Beehive, the executive wing of New Zealand's parliament. "What we do tell them is we can use this time to transform the economy to make us stronger so that when the world starts growing again we can be running faster than other countries we compete with."

That idea -- growing a nation out of recession by improving productivity -- puts Mr. Key and his conservative National Party at odds with Washington, Tokyo and Canberra. Those capitals are rolling out billions of dollars in stimulus packages -- with taxpayers' money -- to try to prop up growth. That's "risky," Mr. Key says. "You've saddled future generations with an enormous amount of debt that then they have to repay," he explains. "There is actually a limit to what governments can do."

Two weeks ago the government borrowed a record NZ$1 billion in one week and is set for a budget deficit of around 8% of GDP. That's Portugal-Irish-UK-US size deficit. And only a third of it is linked to the earthquake.

5. Ten reasons never to buy stocks - Here they are from James Altucher.

Here's my favourite.

Some trading firms set up their operations right next to the buildings with the computers that process all the trades on the exchanges. They then pay for high speed cables to go right into these exchanges so their trades get their before yours. These guys make a lot of money in the markets by getting in the middle of every bid-ask faster than anyone else can. Its a race to the bottom but billions are made.

So we see now the way to huge wealth is to either trade in millionths of a second or to hold huge blocks of your net worth in one stock for years. This is not a good strategy for 99.9% of people.

6. It's started - The US pharmaceutical lobby has started applying pressure to castrate Pharmac in the Trans Pacific Partnership free trade deal talks with New Zealand. Here's a US Inside Trade newsletter report on the lobbying that has started.  

Regular readers will know I think there is no point in New Zealand even trying to do a 'free' trade deal with America. We won't get any extra dairy access (it may even be more restricted) and we will have to give up Pharmac and impose a whole bunch of intellectual property controls on internet usage.

Here's what the US lobbyists are up to behind the scenes.

U.S. drug companies are eager to include transparency and due process requirements found in the Korea-U.S. free trade agreement (KORUS) in a final Trans-Pacific Partnership (TPP) deal, partly in order to impose new disciplines on the New Zealand government and help them to sell drugs in New Zealand.

The Pharmaceutical Research and Manufacturers of America (PhRMA) is flagging New Zealand's Pharmaceutical Management Agency -- which is responsible for negotiating pricing and managing reimbursement for drugs within New Zealand's national pharmaceutical budget -- as a problem that >needs to be addressed in the TPP talks.

This New Zealand agency -- known as PHARMAC -- has a "sole focus on driving down costs" that "comes at the expense of the respect for intellectual property, transparency to the public and patient access to >better health outcomes," PhRMA argues in an April 2011 lobbying document obtained by Inside U.S. Trade.

In its document, PhRMA goes so far as to state that New Zealand ranks >fourteenth out of the 19 countries that comprise the Organization for Economic Cooperation and Development (OECD) when it comes to deaths from >treatable conditions, implying that New Zealand could benefit from >greater access to U.S. brand-name drugs. The "deficiencies" of PHARMAC highlight the need for "transparency and >basic due process in the pricing, reimbursement and regulation of >pharmaceutical products and medical devices" in a final TPP deal, it adds. 

And here's Pharmac denying via RadioNZ that its policies lead to preventable deaths...

7. 'The world is drowning in corporate fraud' - Columbia University Economics Professor Jeffrey Sachs writes at Project Syndicate that corporate money is corrupting politics and markets all over the world.

Hardly a day passes without a new story of malfeasance. Every Wall Street firm has paid significant fines during the past decade for phony accounting, insider trading, securities fraud, Ponzi schemes, or outright embezzlement by CEOs. A massive insider-trading ring is currently on trial in New York, and has implicated some leading financial-industry figures. And it follows a series of fines paid by America’s biggest investment banks to settle charges of various securities violations.

There is, however, scant accountability. Two years after the biggest financial crisis in history, which was fueled by unscrupulous behavior by the biggest banks on Wall Street, not a single financial leader has faced jail. When companies are fined for malfeasance, their shareholders, not their CEOs and managers, pay the price. The fines are always a tiny fraction of the ill-gotten gains, implying to Wall Street that corrupt practices have a solid rate of return. Even today, the banking lobby runs roughshod over regulators and politicians.

We will also need a new kind of politician leading a new kind of political campaign, one based on free online media rather than paid media. When politicians can emancipate themselves from corporate donations, they will regain the ability to control corporate abuses.

Moreover, we will need to light the dark corners of international finance, especially tax havens like the Cayman Islands and secretive Swiss banks. Tax evasion, kickbacks, illegal payments, bribes, and other illegal transactions flow through these accounts. The wealth, power, and illegality enabled by this hidden system are now so vast as to threaten the global economy’s legitimacy, especially at a time of unprecedented income inequality and large budget deficits, owing to governments’ inability politically – and sometimes even operationally – to impose taxes on the wealthy.

8. Watch out for a European blowout - The drums are beating for more trouble in Europe. Bond yields in Portugal, Ireland and Greece are through the roof.

Now Reuters reports he ECB is talking about another attempt to 'extend and pretend' in Greece. My favourite quote is below: "Paying the bill hurts."

European Central Bank policymaker Nout Wellink said on Monday that he was open to the idea of extending maturities on Greek debt, becoming the first senior ECB official to admit that possibility publicly.

Wellink, a member of the ECB's Governing Council, said he opposed any cut in the principal of Greek bonds. But in contrast to other ECB policymakers, who have rejected any talk of debt restructuring as dangerous, he added that it might make sense to extend deadlines for repaying the principal.

"Restructuring is essentially saying: 'Send me the bill. We feel sorry for you.' You shouldn't do that. Paying the bill hurts," Wellink said, taking questions from students at Tilburg University in the Netherlands.

9. China's ageing population - Caixin reports on fresh figures showing China's population is about to start ageing, and quite quickly. That could slow growth there unless there's a quick shift from production to consumption. One to watch for us. China dominates our economic outlook.

The emergence of negative growth in the total working-age population, which some demographers predict will happen as early as 2013, is likely to contribute to slower economic growth and higher inflation, according to analysts.

However, they said the demographic shift from a rural surplus of labor to a deficit will help to accelerate the transformation of the growth model from one which is export- and investment-led to one driven by services and consumption.

The latest census data, released by the National Bureau of Statistics on Thursday, showed that the proportion of the population aged between 0 and 14 fell to 16.6 percent in 2010 from 22.9 percent in 2000. Meanwhile the number of people aged 60 and above grew to 13.3 percent from 10.3 percent.

10. Totally irrelevant video - Trent Reznor and David Bowie sing Hurt in 1995. This before the Johnny Cash version. The thin white duke knows a good song when he hears it.

I'm including it here simply because I like the song.