Tuesday's Top 10 with NZ Mint: The Death of Paper Money; Aussie wage growth surging; NZ housing slump 'not over yet'; Dilbert

Here are my Top 10 links from around the Internet at 10 to 1pm brought to you in association with New Zealand Mint for your luncheon reading pleasure.

I welcome your additions and comments below, or please send suggestions for Wednesday's Top 10 at 10 via email to bernard.hickey@interest.co.nz.

I'll pop any surplus suggestions I get into the comment stream under the Top 10.

1. Our housing slump isn't over yet - Three economists have written a paper for VoxEu that looks at housing booms and slumps all around the world over the last 30 years and tries to work out if slumps are over. The include New Zealand in their comparisons.

They do some fancy econometrics and have come up with a table estimating whether a slump is likely to be over.

The lower the number the least likely the slump is over. They say the chances that New Zealand's slump is over is negligible, while its clear the US slump is almost over.

Table 2 uses the latest data for 2010Q1 on GDP growth and mortgage interest rates to estimate the likelihood that housing slumps in different countries will now come to an end. The countries where this is most likely are Germany, Japan and the U.S. Germany never saw much of a housing bubble and has now registered relatively strong GDP growth.

Japan has seen a very large house-price decline, has low mortgage rates, and has recently shown signs of stronger growth. Similar conditions make for a 13 per cent probability that the U.S. housing slump will end in the current quarter.

The model also points to a statistically significant probability of housing slumps now ending in Finland, France and New Zealand, but the likelihood of this happening in the last two countries is so small as to be economically negligible. 

2. Beware the mortgage belts - I worked as a political reporter for Reuters in Canberra in the mid 1990s and eventually understood that the 'mortgage belt' marginal electorates of Sydney and Melbourne were crucial in any general election result. Voters in these electorates are often young families who aspire to own their own homes or do own their own homes, thanks to enormous mortgages.

Interest rates are an intensely political issue because of that.

It's worth watching what happens in the next couple of weeks in Australia as the Reserve Bank wonders whether it should increase interes rates in the middle of the election campaign.

The RBA's rate hikes since October may well have been the final straw for Kevin Rudd. I'm reminded of this looking again at an old story on the Sydney Morning Herald from Stuart Washington about the exact impact of rate hikes during the 2007 election campaign that cost John Howard his job.

Does John Key understand the politics of interest rates in New Zealand in an environment where more and more people are on variable rates and more people are incredibly indebted?. He may be in for a surprise come October or November next year.

VOTERS in electorates recording the highest rates of home repossessions voted more strongly for Labor than areas not facing the same home-loan pressures, according to figures on the influence mortgage stress had on the federal election result. The data offers the first firm evidence that mortgage stress and six interest rate rises were a key influence in seats covering Sydney's west, south-west, the Hunter and the Central Coast.

In a Herald analysis of lower house seats in NSW and the ACT, high home-repossession rates were a better indicator of Labor receiving a stronger vote than either high unemployment rates or lower average incomes. The top 10 home repossession electorates were identified in a study by the credit ratings agency Fitch Ratings at the request of the Herald.

3. Should we trust the big US banks? - This FT.com story suggests not. It turns out they under reported US$400 billion of derivatives exposures.

As many as five US banks failed to report hundreds of billions of dollars in credit derivatives bought from foreign counterparties during 2009, leaving those risks below the radar of regulators in the US and Europe.

The banks’ underreported exposures to credit default swaps came to light as the US Federal Reserve and the Bank for International Settlements were preparing first-quarter reports of the industry’s lending and risk activities. It was revealed as a footnote to the BIS report’s lengthy tables.

The Fed, following a review of its quarterly report on cross-border risks, discovered that the group, which included Goldman Sachs, Morgan Stanley, American Express and CIT, only submitted claims on credit derivatives up to the amount where there was a corresponding position to hedge against. The additional risks, which totalled $400bn in the first quarter, were left out.

4. 'Someone else will fix it' - This is the great conundrum in a global economy where everyone wants to devalue their currency to export their way out of trouble. If everyone relies on everyone else's demand, where does the demand come from? At the moment everyone seems to assume that China will be the pot at the end of the rainbow. Meanwhile, the Chinese think it is someone else, judging by their continual investment in infrastructure and exporting capacity, as opposed to domestic consumption.

Bloomberg reports here on a slowing global growth outlook and makes the point low in its article. The problem is known as the "Fallacy of Composition." HT Chris via email.

The new normal for the world economy may be arriving as the U.S., Europe and China all decelerate simultaneously. After policy stimulus and inventory-rebuilding pulled the major economies out of recession with 5 percent growth in the first quarter, they are slouching toward a weaker expansion, even as they show signs of dodging a double-dip.

Global growth may average 3.25 percent to 3.5 percent in the next three to five years, well below the 4.7 percent pace of the five years leading up to the 2008 slump, estimates Stephen Roach, non- executive chairman of Morgan Stanley Asia.The U.S. isn’t the only country looking to foreign sales to support its domestic economy.

Chinese central-bank adviser Zhou Qiren told Japan’s Asahi newspaper last week that his nation will let the yuan weaken if exports fall sharply. Japanese Trade Minister Masayuki Naoshima said July 21 that the yen’s gains threaten his economy.

Germany relies on exports for about 40 percent of GDP, putting Europe’s largest economy in position to gain from the euro’s 10 percent drop against the dollar this year. The “fallacy of composition” -- too many countries counting on overseas sales to power their economies -- represents a downside risk to worldwide expansion, El-Erian said.

With foreign opportunities limited, governments may have little option but to begin restructuring to find other drivers of growth and sources of productivity, said Marco Annunziata, chief economist at UniCredit Group in London.

In Europe, that means making it easier to fire and hire workers and opening up markets to more competition, he said. What’s needed in the U.S. is quick action to reform Social Security and health care to reduce their drain on the Treasury. None of that will be easy. “It’s going to take a long time,” Annunziata said.

“We face several years of very slow increases in living standards and sustained higher unemployment.”

5. Aussie wages rising faster - News.com.au reports that average Australian wages are expected to rise 5.4% per year for the next three years and unemployment is due to fall below 5%.

Is there any sense of urgency or danger or concern being shown by John Key's government about this? The migration tide turned back to another exodus a few months ago and figures like this show the intensity of the pull will get worse.

Clarius Group Chief Operating Officer Kym Quick said the findings presented significant challenges ahead for employers and policy makers.

"The developments have some implications on interest rates, the population growth debate and decisions about temporary skilled worker visas," Ms Quick said.

"Currently there is a shortage in eight of the 20 skilled professional, associate professional and trades occupations measured in the index and a further two are on the cusp of a shortfall." Ms Quick said the shortages were in the construction, engineering and building professions, and trade occupations in particular. She said there was currently a shortage of 6300 construction tradespersons.

6. Supply side madness - Martin Wolf has written a blog at FT.com that is profoundly interesting and worrying. He points out the political situation in America is heading towards even bigger budget deficits driven by Republicans who still believe in supply side madness where deficits don't matter and tax cuts for the rich are the thing to do. A must read today I reckon. HT Blair Rogers via Twitter.

With one party indifferent to deficits (Republicans), provided they are brought about by tax cuts, and the other party relatively fiscally responsible (well, everything is relative, after all), but opposed to spending cuts on core programmes, US fiscal policy is paralysed.

I may think the policies of the UK government dangerously austere, but at least it can act. This is extraordinarily dangerous. The danger does not arise from the fiscal deficits of today, but the attitudes to fiscal policy, over the long run, of one of the two main parties. Those radical conservatives (a small minority, I hope) who want to destroy the credit of the US federal government may succeed.

If so, that would be the end of the US era of global dominance. The destruction of fiscal credibility could be the outcome of the policies of the party that considers itself the most patriotic. In sum, a great deal of trouble lies ahead, for the US and the world.

7. The problem with global imbalances - Most people think the Chinese caved in to American pressure to float the yuan. But maybe China floated the yuan to avoid a flood of incoming capital pushing up its inflation rate. I'd go with the latter explanation. This Bloomberg story suggests the same.

A “fixed” yuan exchange rate caused excess capital in China’s financial system that may stoke inflation, making it difficult to manage the economy, central bank Deputy Governor Hu Xiaoliansaid today. China pegged the yuan at around 6.83 per dollar for two years before abandoning the regime on June 19 and has allowed the currency to appreciate 0.7 percent since then. The policy swelled foreign-exchange reserves to a record $2.45 trillion in June, the world’s largest, as the central bank mopped up dollars and flooded the market with yuan.

“With China’s rapid economic growth, foreign-exchange inflows have accelerated, and increases in financial liquidity create potential risks of heightened inflation expectations and speculation in assets,” Hu wrote in a statement on the People’s Bank of China’s website. The independence and effectiveness of China’s monetary policy has been “severely challenged.”

8. Gold price to Dow - This chart below has been produced by Kondratieff cycle experts LongWave Group in their 'Winter Warning'. It measures the gold price as a percentage of the Dow.  I'm no Kondratieff fan, but here it is for those who are.

We are now in the Kondratieff winter and have been since the DJIA peak of 11,750 points in January 2000. Gold is winning the battle versus paper, as it always does in a Kondratieff winter. From the ratio high of 43.85 in July 1999, the ratio is now down to about 8.5 (8 ½ ounces of gold to buy the DJIA).

We can, with the utmost of confidence, predict that the ratio will reach an extreme low; it always does when gold wins the battle. So where is that low going to be? The most obvious relationship is at 1 to 1, where it has been twice before. So that begs the question, at what price are the Dow and gold going to be equal? Let’s go through the exercise. Gold is currently trading around $1,250US per ounce.

Could the Dow drop to that same price level without any increase in the gold price to attain the 1 to 1 relationship? The answer, is obviously, no. A drop by the Dow to 1,250 points would mean that the US economy would

8. The Death of Paper Money - Ambrose Evans Pritchard has written an incendiary piece in The Telegraph about the Death of Paper Money. This is quite something for him to write, given he is an arch deflationist. He has actually been encouraging the Fed and the ECB to print more money.

But this time around Ambrose refers to an out of print book about the Weimar hyper-inflation of the 1920s called "Dying of money: Lessons of the Great German and American inflations" that is strangely popular again. Zerohedge has put the entire book online for those who don't want to pay US$699 for on ebay. ZH is doing its bit for deflation...

Ambrose wonders if a lot of paper is being piled up and doused in petrol waiting for a spark to blow it up...

People’s willingness to hold money can change suddenly for a "psychological and spontaneous reason" , causing a spike in the velocity of money. It can occur at lightning speed, over a few weeks. The shift invariably catches economists by surprise. They wait too long to drain the excess money.

"Velocity took an almost right-angle turn upward in the summer of 1922," said Mr O Parsson. Reichsbank officials were baffled. They could not fathom why the German people had started to behave differently almost two years after the bank had already boosted the money supply.

He contends that public patience snapped abruptly once people lost trust and began to "smell a government rat". Some might smile at the Bank of England "surprise" at the recent the jump in Brtiish inflation. Across the Atlantic, Fed critics say the rise in the US monetary base from $871bn to $2,024bn in just two years is an incendiary pyre that will ignite as soon as US money velocity returns to normal. Morgan Stanley expects bond carnage as this catches up with the Fed, predicting that yields on US Treasuries will rocket to 5.5pc.

This has not happened so far. 10-year yields have fallen below 3pc, and M2 velocity has remained at historic lows of 1.72. As a signed-up member of the deflation camp, I think the Bank and the Fed are right to keep their nerve and delay the withdrawal of stimulus -- though that case is easier to make in the US where core inflation has dropped to the lowest since the mid 1960s.

But fact that O Parsson’s book is suddenly in demand in elite banking circles is itself a sign of the sort of behavioral change that can become self-fulfilling.

Ambrose concludes with the following. BTW this piece is the most popular on The Telegraph at the moment. HT Gertraud via email/

We should be careful of embracing the opposite and overly-reassuring assumption that this is a mild replay of Japan’s Lost Decade, that is to say a slow and largely benign slide into deflation as debt deleveraging exerts its discipline. Japan was the world’s biggest external creditor when the Nikkei bubble burst twenty years ago. It had a private savings rate of 15pc of GDP.

The Japanese people have gradually cut this rate to 2pc, cushioning the effects of the long slump. The Anglo-Saxons have no such cushion. There is a clear temptation for the West to extricate itself from the errors of the Greenspan asset bubble, the Brown credit bubble, and the EMU sovereign bubble by stealth default through inflation.

But that is a danger for later years. First we have the deflation shock of our lives. Then -- and only then -- will central banks go too far and risk losing control over their printing experiment as velocity takes off.

One problem at a time please.  

9. Bigger threat than Terrorism - A former Goldman Sachs executive (!) has written at Naked Capitalism that mad banker bonuses could be a bigger threat to American democracy than Terrorism. Too right.

The current system of trader compensation will continue to decay the heart of Wall Street. Which is a greater threat to the nation — terrorism or the relentless decline of middle income families? Unless we abandon our core values out of unwarranted fear, terror cannot fundamentally change our way of life. The number of people affected by growing income disparity is vast.

When I was a student, income disparity was indicative of an underdeveloped and unstable society. The government appropriately devotes enormous resources to protect our lives and property from terrorism. It is unthinkable that a leader would display any weakness opposing this threat.

Politicians have stiff backbones when it comes to terrorism. In contrast, the government is timid and half-hearted in its approach to the system which perversely rewards a few Wall Street traders with billions of dollars of bonuses, yet allows the foundation to decay.

10. Totally irrelevant video - Some people. This one is called "Bike off Roof Catapult Nutshot." You get the picture.