Here's my Top 10 links from around the Internet. 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 today is #9 on how central banks are fighting deflation to protect debtors, but may lose against the deflationary power of the rise of machines.
1. China's change - China is now clearly New Zealand's largest export partner and quite possibly New Zealand's largest trading partner, depending on the month of the year.
Yet we still pay hardly any attention to the big news coming out of China in the last couple of weeks.
Why wasn't the following on the front page of the New Zealand Herald or the top of the TVNZ news bulletin?
Last week China's central bank announced after third plenum that it no longer saw many benefits from stockpiling US dollar assets, and US Treasuries in particular. This has been crucial to China's mercantilest model of the last couple of decades.
China deliberately held down its currency and helped vendor-finance US consumption and importing of Chinese manufactured exports to build up large trade and current account surpluses, which it then recycled into huge reserves of US Treasuries.
Now it is saying this currency manipulation and building up of foreign currency reserves needs to end.
The implications are large if the Chinese actually follow through with this promise. Will the US Federal Reserve have to keep printing even more money to buy the US Government bonds not being bought by the Chinese? Will China really pivot its economy to a more consumption and services led economy and away from investment and exports?
I welcome discussion in the comments below.
Meanwhile, here's the detail via Bloomberg:
The People’s Bank of China said the country does not benefit any more from increases in its foreign-currency holdings, adding to signs policy makers will rein in dollar purchases that limit the yuan’s appreciation.
“It’s no longer in China’s favor to accumulate foreign-exchange reserves,” Yi Gang, a deputy governor at the central bank, said in a speech organized by China Economists 50 Forum at Tsinghua University yesterday. The monetary authority will “basically” end normal intervention in the currency market and broaden the yuan’s daily trading range, Governor Zhou Xiaochuanwrote in an article in a guidebook explaining reforms outlined last week following a Communist Party meeting. Neither Yi nor Zhou gave a timeframe for any changes.
2. 'Worshipping the golden calf' - In his first big written text of his papacy, the new Pope has had a good old swipe at the global financial system, our love of consumerism and the rise of inequality.
BusinessInsider has the highlights:
On the failure of traditional economic dogmas: “…some people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world. This opinion, which has never been confirmed by the facts, expresses a crude and naïve trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system. Meanwhile, the excluded are still waiting.”
On exploding inequality: “While the earnings of a minority are growing exponentially, so too is the gap separating the majority from the prosperity enjoyed by those happy few.”
On the world’s obsession with money: “We have created new idols. The worship of the ancient golden calf (cf. Ex 32:1-35) has returned in a new and ruthless guise in the idolatry of money and the dictatorship of an impersonal economy lacking a truly human purpose.”
On the dangerous mix of inequality and consumerism: “it is evident that unbridled consumerism combined with inequality proves doubly damaging to the social fabric”
3. Capital's rising share - It turns out the share of New Zealand's national income going to Capital (blue line) versus that going to Labour (red line) is rising again after a decade or so through the 2000s when it stalled.
Here's the chart via Bill Rosenberg at the CTU and a useful Radio NZ piece:
4. 'The Young are doomed and only the old can save them' - Here's Chris Cook at the FT with a look at the British situation around distribution of wealth via the age cohorts.
A lot is meant to happen before you are 35. It used to be that parents were a few years into their duties at least. No longer. Family formation is being delayed – sadly, often for too long. High housing costs and weak wages mean young people may not feel able to have the family lives that they would want.
Second, a world of ever-escalating house prices will embed inequality. House price rises show up as a cost for those who do not own housing and an increase in wealth (and perhaps income) for those who do. Unfairness between generations drives unfairness within them. If the only people who can afford to buy housing are the children of people who bought housing, it creates an unbridgeable divide between the haves and the have-nots.
Finally (contra the grumbling), the median young Briton is better educated than their parents. Unlike their elders, they may also have borrowed to put themselves through university. They may have accepted low wages for a long spell to get on-the-job training. It is galling that these young people still expect to have lower living standards than their feckless parents.
These problems are too serious for (usually older) people to wave away. Nor are they easy to solve at a stroke. Part of the problem is that global competition and automation have removed a lot of decent starting jobs. But there are ways to help. We could subsidise employment and education for the young a bit more. Tax and planning law could be reformed to create incentives to build new housing. None of the obvious pro-young ideas is simple, but none is even on the agenda. Politics tends to pander to the old.
The glut of savings, then, has become a constraint on current demand. But since it is connected to weak investment, it also implies slow growth of prospective supply. This difficulty predates the crisis. But the crisis has made it even worse.
So what is to be done? One response to an excess of desired savings over investment would be even more negative real rates of interest. That is why some economists have argued for higher inflation. But that would be hard to achieve, even if it were politically acceptable. Another possibility, stressed by Andrew Smithers inThe Road to Recovery, is to tackle obstacles to corporate investment head-on. His biggest villain is the “bonus culture”, which encourages management to manipulate stock prices, via buybacks, rather than raise productive investment.
Yet another possibility, discussed by Mr Summers and supported by many economists (including myself), is to use today’s glut of savings to finance a surge in public investment.
Despite these signs of rude health, even some of China’s biggest property moguls appear to be growing uneasy. Wang Shi, the chairman of China Vanke, the country’s largest residential-property firm by volume, has called the market a bubble. Wang Jianlin, the country’s richest man and the chairman of Dalian Wanda, a property giant turned entertainment firm, acknowledges that parts of the country may be experiencing a property bubble, though he thinks it “controllable”. Li Ka-Shing, a Hong Kong tycoon who has long been bullish on China, has started to sell his mainland holdings.
7. The real problem - Matthew Klein muses over at Bloomberg about the problem of the savings glut, low investment and secular stagnation. He essentially suggests QE for the people. Fair enough. Another option is a Guaranteed Minimum Income -- Big Kahuna style.
It seems more likely that the real problem is the dramatic concentration of wealth and incomesduring the past 30 years. Those who have much more than they can ever hope to spend don't increase their consumption by much when their incomes increase. Instead, they tend to save the extra dollars. Many others tried to compensate for their stagnant incomes by borrowing more and more. That enabled spending but created the danger of excess indebtedness.
One solution would be for the government to expand its existing role as a financial intermediary. It could sponsor special savings accounts that would be protected against inflation but limited in size, as Steve Randy Waldman has suggested. Anyone who wanted to hold additional safe assets could always buy bonds, although those wouldn't be protected against inflation. Meanwhile, the government could disburse direct cash payments to households to reinvigorate a weakened economy (like now). This combination would enable regular people to spend without incurring too much debt and save without having to worry about the threat of wealth confiscation through deflating bubbles or negative rates. This might be a better deal than the current suggestions on offer.
8. The robots are here - Tyler Cowen has written a great piece in Politico about the rise of the machine.
Nearly 60 years after Asimov anticipated a decidedly dramatic intrusion of machines into our politics, we may not (yet) be offloading our democratic responsibilities to computers, but we are empowering them to reshape our economy and society in ways that could be just as profound. The rise of smart machines—technologies that encompass everything from artificial intelligence to industrial robots to the smartphones in our pockets—is changing how we live, work and play.
Less acknowledged, perhaps, is what all this technological change portends: nothing short of a new political order. The productivity gains, the medical advances, the workplace reorganizations and the myriad other upheavals that will define the coming automation age will create new economic winners and losers; it will reorient our demographics; and undoubtedly, it will transform what we demand from our government.
9. A war against deflation - Alan Kohler has written a surprising piece here at Business Spectator about deflation and central banks. He argues they are fighting against deflation because the indebted hate deflation. Yet they may be fighting a losing battle because a digital revolution is driving through increased productivity and therefore creating deflation, just as the industrial revolution created deflation.
Without inflation, borrowers get crushed and don’t spend, because they are keen to reduce debt. Since most people are borrowers these days, the promotion of domestic demand requires some inflation so that the value of debt reduces naturally over time – and thus a lower currency.
That’s why “currency wars” became a thing last year, although it’s turned out to be more a low-level cold war than a hot one.
The real war is between monetary policy and the Digital Revolution – between the world of finance trying to reduce the value of money and therefore debt, and the world of technology pushing for greater efficiency and productivity, to drive prices lower and the value of money higher.
10. Totally Jon Stewart on the sociopathy of some large corporations.
The Daily Show
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19 Comments
1#You cannot expect our media to lead with a story that affects our future when somewhere in the world there is a game of rugby going on between 2 teams of ants on a thrownaway banana skin.
Cynically , the US$ currency has been raped by overprintng , just as a counterfeiter might do .
Its been watered down so much its practically worthless as an asset class
Holding reserves of US$ is actually quite dumb , like any asset class the US$ its not an asset unless there is (A) a yield or (B) an upside in value , neither of which is likely anytime soon.
So the Chinese reaction does not come as a surprise , its only surprising it did not happen sooner.
The big question is what do they do with their surpluses?
I guess holding stockpiles of tangible commodities like Coal , Copper , Iron ore , oil , etc may make more sense , but these also return zero , but at leat its not like holding little rectangular pieces of green paper and promissory notes
(B) in the event of a flight to safety from a major economic downturn then everyone will be buying the USD. On top of that potential huge gain, when was the last time the US re-did its bank notes? ie it might be a better hedge from deflation that some things, short term at least than gold.
You never know.
regards
Holding reserves of US$ is actually quite dumb , like any asset class the US$ its not an asset unless there is (A) a yield or (B) an upside in value , neither of which is likely anytime soon.
US arms vendors demand USD as does the IRS, not to mention certain commodity transactions.
Exactly. Even in 2009 when the centre of the crisis was the US, it was USD that went up. The USD is still the reserve currency and will remain so as long as the US is the dominant military force.
China deliberately held down its currency and helped vendor-finance US consumption and importing of Chinese manufactured exports to build up large trade and current account surpluses, which it then recycled into huge reserves of US Treasuries.
How about?
China printed large sums of it's domestic currency to puchase the USD proceeds gained by local exporters in the US market. US domestic purchases of foreign produced goods were funded with easy credit policies fostered by the US Federal Reserve. The Chinese authorities purchased US Treasuries with the freshly acquired USD. The failure of the Chinese authorities to regularly sterilise local currency creation fostered the explosive domestic growth witnessed over the last two decades and the downward currency manipulation. Does the US ever sterilise monetary injections?
Which age group?
OMG. I'm speechless. Says something about the fact that the OAP is the only benefit where abatements do not apply.
What would you expect in a perversely low interest rate world? Low interest rates support borrowers - governments are the main beneficiaries. We are forced to follow the US on interest rate policy so those nearing retirement have to work for longer. It is not rocket science.
What does the Pope say
Although it is fashionable to cosy up to China these days and ignore their dodgy behaviour in Tibet, industrial espionage, ruining the environment and killing sharks and rhinos, it is not obvious that selling off our farms and companies to overseas investors in general and the Chinese in particular is a particularly sensible move.
http://www.nzherald.co.nz/personal-finance/news/article.cfm?c_id=12&obj…
If the Chinese government lends XYZ Chinese company NZ$100b at a 0 per cent interest rate enabling XYZ to pay a price 25 per cent higher than its locally assessed present value for all the dairy farms in NZ an independent expert would inevitably say "yes, take the money". That would be good wouldn't it.
Depends on whether you really wish to be Shanghaid, is what I say. This is not Tibet.
Yet it might soon be an out post.
Others would say, take the money and run, but where does one turn to, these days.??.
Put it on Xero, or buy a lot of over priced houses or what?.
Or maybe we really should get back to basics.
Employ more Parliamentarians, Economists, Reserve Bank wonders and other non-productive entities, that will learn em.
Talking of Popes, Penguins may look like nuns, from a distance but surely no Sister Therasa for sure, up close and personell.
So what is their long term agenda I ask myself. Altruistic??.
Can it be Invasion of the Body Corporate Snatchers, or will it be The Milky Bar Kid for all us non-believers, who believe the worst.
#1 Would China be using this huge USD reserves to buy assets such as farms, mines, properties, companies etc in other countries?
Andy Xie at Caixin:
http://english.caixin.com/2013-11-19/100606806.html
An excerpt:
The cross-border carry trade has a powerful effect on the monetary condition in the recipient country. Rising forex reserves lead to rising money supply. The resulting inflationary pressure supports speculation. Hence, when land prices rise, it seems that speculation is working, which attracts more to follow.
The supply side of the carry trade is, ironically, driven by declining profitability in non-speculative businesses. Many, if not most, private businesses in the eastern part of the country have slowed dramatically. Some have preserved past profits and are looking at loan sharking as a new business. Some are looking to speculation to bet on the recovery of their businesses.
For example, as the property market has struggled in most smaller cities, some developers have gone to loan sharks for funding to bet on land in big cities. They have often borrowed from the local businesses that are shifting from production to lending.
Time to take off the rose tinted glasses re China methinks. Time for the doom laden dark ones it seems. Well it was good while it lasted.
BH, possibly overshadowing all of the above is what AEP points to in his latest piece of ursine journalism.....over at Torygraph.
And its right in our backyard...
I think that that appropriate vid is t'old Union piece: 'Which Side are You on?'
But, apropos the Pope's utterances, I'm not entirely sure that hundreds of millions of rural Chinese would agree with him. Millions of rural Brits were attracted into the factories and tenements of the Midlands, by the early flush of industrialisation, and apart from the occasional Captain Swing or Ned Ludd, most seemed to improve their lot generation by generation. Just look at them now.
Oh, wait. Maybe That's what His Popeness is actually on about - saving hundreds of millions of rural Chinese from becoming the Brit working class.
Man's got a point....
Re Martin Wolf and the desire for negative interest rates. What do I invest in exactly? I know, labour saving equipment, what else. Duh. Why does someone so intelligent fall for this turgid nonsense. Lower interest rates and a surge of liquidity can help save the banking system in a liquidity crisis. It does not follow that the same two remedies can solve all economic ills. It's a snake oil argument. Not to mention that it was probably the suspension of mark to market valuation that really saved the banks. Martin Wolf could do better if he tried harder, remember he did not see the last crisis coming.
http://www.hussman.net/wmc/wmc131104.htm
http://epsilontheory.com/the-18th-brumaire-of-janet-yellen/
RW - you should know by now. Folk like me have been predicting that rates would have to go negative, predicting it here, and predicting it for some years.
It's not rocket science.
If banks continue, post-peak, then it has to be at the expense of somene else. You need to remember that 'labour' is fed by calories, and they are fossil-fuel delivered too; same stuff that underwrites 'wealth'. 'Labour saving equipment' needs to be defined - it it's fossil-fuelled, it's temporary. The only question is whether it's agenuine energy saving - efficiency - and at what point is it on the diminishing-returns scale, if it is.
I guess the reason I am fairly positive is I believe 90% of energy is wasted (eg unnecessary warfare) and that there is a potential supply far in excess of our needs. I do not believe our problems cannot be solved but that they are essentially self inflicted.
Hmmmm - think that one through. Why do they engage in warfare, and is it even not over resources? Why do we not collectively agree to sequester carbon? Because we don't want to stop doing what we're doing, and we're using it all now, to do what we're doing. Wars are still part of 'the economy'. Do less, and your economic growth is gone. How long can the system continue in a non-growth environment?
When a northern hemisphere company, with northern hemisphere customers, is down to offshore exploration off Dunedin, you know the best id behind us. Same as when decrepit Russian trawlers need to go as far as the Ross Sea. The message is there for those who can read it.
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