Top 10 at 10: US consumer confidence better; US debt 'exploding'; German banks like 'grenades'

Here's my Top 10 at 10 am. I welcome your additions in the comments below. KAL in The Economist is my  cartoon pick for today. Dilbert is lower. Sleeping is good. 1. US consumer confidence rebounded more than expected, but home sales remained very weak. The Dow rallied, the WSJ.com reports. 2. South Africa's economy entered recession in the March quarter when GDP fell an annualised 6.4%, its biggest fall since the apartheid days of 1984 and its first recession since 1992, the WSJ.com reports. 3. Martin Wolf at FT.com points out just how sick Europe is, and Germany in particular. 4. GM's bondholders have rejected a last minute debt for equity swap and GM is set to go into Chapter 11 bankruptcy protection within hours, CNBC reports. 5. Robert Gottliebsen at BusinessSpectator points out that Westpac and Commonwealth Bank of Australia (which owns ASB here) have taken a strategic decision to grow market share in mortgages and are offering cut price deals. He worries they are pumping more money into an overvalued market that could cause problems in the future. New Zealand's Ralph Norris is the chief protagonist, it seems.

If, in two years' time, these low-deposit loans do not deliver substantial defaults, then the two aggressive chief executives "“ CBA's Ralph Norris and Westpac's Gail Kelly "“ will have been proved right. Accordingly they will be shareholders' heroes and ANZ and the NAB will have made disastrous calls and will have to claw their way back in the mortgage market. However, the reverse will also apply. If ANZ and NAB have made the right call then their CEOs will be the heroes. There are big stakes involved for all the banks and their chief executives.

6. Americans, and the rest of the world, should get used to a long period of sub-par growth from America because American consumers are changing their big-spending ways in a big way. That's the view from the world's biggest bond fund PIMCO and celebrity economist David Rosenberg in this Bloomberg piece.

The U.S. financial crisis and recession have produced lasting shifts in consumer spending and savings reminiscent of the 1950s that may crimp profits and productivity, said David Rosenberg, chief economist at Gluskin Sheff & Associates Inc. in Toronto and former chief North American economist at Bank of America Corp. "This is going to be a new era of frugality," Rosenberg said. "This isn't some flashy two- or three-quarter deal. This is a secular change in household attitudes."

7. Expoloding debt threatens America, says Stanford Professor of Economics John Taylor in this FT.com comment piece.

Under President Barack Obama's budget plan, the federal debt is exploding. To be precise, it is rising "“ and will continue to rise "“ much faster than gross domestic product, a measure of America's ability to service it. The federal debt was equivalent to 41 per cent of GDP at the end of 2008; the Congressional Budget Office projects it will increase to 82 per cent of GDP in 10 years. With no change in policy, it could hit 100 per cent of GDP in just another five years. "A government debt burden of that [100 per cent] level, if sustained, would in Standard & Poor's view be incompatible with a triple A rating," as the risk rating agency stated last week. I believe the risk posed by this debt is systemic and could do more damage to the economy than the recent financial crisis. To understand the size of the risk, take a look at the numbers that Standard and Poor's considers. The deficit in 2019 is expected by the CBO to be $1,200bn (€859bn, £754bn). Income tax revenues are expected to be about $2,000bn that year, so a permanent 60 per cent across-the-board tax increase would be required to balance the budget. Clearly this will not and should not happen. So how else can debt service payments be brought down as a share of GDP? Inflation will do it. But how much? To bring the debt-to-GDP ratio down to the same level as at the end of 2008 would take a doubling of prices. That 100 per cent increase would make nominal GDP twice as high and thus cut the debt-to-GDP ratio in half, back to 41 from 82 per cent. A 100 per cent increase in the price level means about 10 per cent inflation for 10 years. But it would not be that smooth "“ probably more like the great inflation of the late 1960s and 1970s with boom followed by bust and recession every three or four years, and a successively higher inflation rate after each recession. The fact that the Federal Reserve is now buying longer-term Treasuries in an effort to keep Treasury yields low adds credibility to this scary story, because it suggests that the debt will be monetised. That the Fed may have a difficult task reducing its own ballooning balance sheet to prevent inflation increases the risks considerably. And 100 per cent inflation would, of course, mean a 100 per cent depreciation of the dollar. Americans would have to pay $2.80 for a euro; the Japanese could buy a dollar for Y50; and gold would be $2,000 per ounce. This is not a forecast, because policy can change; rather it is an indication of how much systemic risk the government is now creating.

8. Nathan Lewis at The Daily Reckoning challenges the established view that Japan allowed zombie banks to extend the bursting of a property bubble into a decade-long recession.

Everyone's a Japan expert these days. It is a morality tale, supposedly, of banks and government "refusing to deal with the problem" "“ the problem is usually "bad debt" "“ resulting in endless stagnation. It is a total fantasy. There is certainly a lesson to be learned from Japan, but it is not the one that most people think. The lesson is: keep your money stable, and taxes low. When Japan was on the gold standard in the 1950s and 1960s, and reduced taxes steadily, it was the growth wonder of the world.

9. Tyler Durden at ZeroHedge points out that a bomb is about to go off in the market for Commercial Mortgage Backed Securities (CMBS) market in the United States because Standard and Poor's is preparing to downgrade dozens of such securities. 10. This news article from Ambrose Evans-Pritchard at The Telegraph has caused quite a stir. He quotes the head of Germany's Financial Regulator saying the toxic debts of Germany's banks could blow up "like a grenade" unless the banks use the bad banks being created by the government there.

Jochen Sanio, BaFin's president, said the danger is a series of "brutal" downgrades of mortgage securities by the rating agencies, which would eat into the depleted capital reserves of the banks and cause broader stress across the credit system. "We must make the banks immune against the changes in ratings," he said. The markets will "kill" banks that try to go it alone without state protection, warning that banks have €200bn (£176bn) of bad debts on their books. "We are pretty sure that within a month or two our banks will feel the full force of the sharpest recession ever on their credit portfolios," he said, speaking after the release of BaFin's annual report last week. An internal memo by the regulator's office suggested that likely write-offs may reach €816bn, twice the entire reserves of the country's financial institutions. This figure included a broader array of "problematic" assets. Hypo Real topped the secret list with €268bn in credit risk, followed by HSH Nordbank at €105bn, and Commerzbank at €101bn.