Here's my Top 10 links from around the Internet at 10:00 am today in association with NZ Mint.
Bernard will be back with his version tomorrow.
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.
1. Can Europe survive the rise of the rest?
Oxford professor Timothy Garton Ash says the five great drivers of European unification since the 1950s have now either disappeared or lost much of their energy.
But he says, the 21st-century world will be one of giants: weary old ones, like the United States and Russia, and hungry new ones, like China, India, Brazil and South Africa. You do not need to accept the most apocalyptic forecasts of European decline to acknowledge that Europe is unlikely to remain the world’s largest economy for long. In such a world, even Germany will be a small- to medium-size power.
He thinks there is a chance the European ship can be re-floated, but worries young Spaniards or Greeks can't see the point. Europe needs to do two things that look unlikely; co-operate, and act.
Who won the most medals at the Olympics? Europe. Who has the largest economy in the world? Europe again. And where do most people want to go on holiday? Europe, of course. On many measures of power, the European Union belongs with the United States and China in a global Big Three. Yet say that to officials in Beijing, Washington or any other world capital today and they would probably laugh out loud. As European leaders stagger into yet another round of crisis summitry, this potential superpower is widely viewed as the sick man of the developed world.
2. Economics in denial
Former ECB boss Trichet has appealed for inspiration from other disciplines – physics, engineering, psychology, and biology – to help explain the phenomena he had experienced as a central banker at the heart of the storm; he felt let down by economics. It was a remarkable cry for help, and a serious indictment of the economics profession, not to mention all those extravagantly rewarded finance professors in business schools.
So far, relatively little help has been forthcoming from the engineers and physicists in whom Trichet placed his faith, though there has been some response. Robert May, an eminent climate change expert, has argued that techniques from his discipline may help explain financial-market developments. Epidemiologists have suggested that the study of how infectious diseases are propagated may illuminate the unusual patterns of financial contagion that we have seen in the last five years.
These are fertile fields for future study, but what of the core disciplines of economics and finance themselves? Can nothing be done to make them more useful in explaining the world as it is, rather than as it is assumed to be in their stylised models?
Fortunately, others in the profession do aspire to relevance, and they have been chastened by the events of the last five years, when price movements that the models predicted should occur once in a million years were observed several times a week. They are working hard to understand why, and to develop new approaches to measuring and monitoring risk, which is the main current concern of many banks.
These efforts are arguably as important as the specific and detailed regulatory changes about which we hear much more. Our approach to regulation in the past was based on the assumption that financial markets could to a large extent be left to themselves, and that financial institutions and their boards were best placed to control risk and defend their firms.
These assumptions took a hard hit in the crisis, causing an abrupt shift to far more intrusive regulation. Finding a new and stable relationship between the financial authorities and private firms will depend crucially on a reworking of our intellectual models. So the Bank of England is right to issue a call to arms. Economists would be right to heed it.
3. Indescribable complexity
We freely criticise politicians who can't manage through our problems, and yet we vote for the ones who can articulate a plausible, simple solution to these issues. But it is all hubris, says Donald Boudreaux. People who do understand (ie: you!) can't get elected. A detailed and complex solution never won any attention, let alone a vote.
A market economy is indescribably vast and complex - its success depends on so many intricate, changing details all somehow being made to work smoothly together that the “facts” that are essential to its thriving cannot be catalogued with anywhere near the completeness that can be achieved by a 21st-century scientist studying and cataloging the “facts” that enable sparrows to fly. A sparrow is complex compared, say, to a limestone rock. Compared to the modern market economy, however, a sparrow is extremely simple.
Nevertheless, too many people, including politicians, continue to believe that because they can observe a handful of bulky facts about the economy, they can thereby know enough to intervene into that economy in ways that will improve its operation. That belief, though, is hubris. It’s very much like believing that you’ll fly if you simply strap on a pair of wings and commence to flapping madly.
4. Lets get one thing clear
A lot has been said about the pros and cons of financial globalisation. But what exactly is ‘financial globalisation’? Francisco Ceballos, Tatiana Didier, Sergio Schmukler, argue that we can’t be clear about the pros and cons of financial globalisation unless we are clear on what it actually is.
Financial globalisation – and de-globalisation – is a topic at the heart of the financial reform policies being discussed in reaction to the global crisis and more recently the Eurozone crisis. Academic attention, however, goes back much further, sparked by heightened financial globalisation and transmission of shocks and crises.
Yet despite all this attention, the concept ‘financial globalisation’ remain somewhat elusive and its measurement problematic. There are at least two interconnected, albeit essentially distinct dimensions of financial globalisation.
• Financial diversification, that is, the cross-country holdings of foreign assets and liabilities; and
• Financial offshoring, that is, the use of foreign jurisdictions to conduct financial transactions.
While the former focuses on who holds the assets, the latter deals with where the assets are transacted.
5. China's growing economic crisis
Bloomberg's William Pesek says if China isn’t a gigantic bubble economy, it’s one made up of many smaller bubbles - property, stocks, exports. These are the result of spending-induced growth and imbalances that might breed trouble down the road, including inflation and a bad-loan crisis. More here »
One problem is that China has run out of obvious ways to kick-start its $7.3 trillion economy. It was easy in 2008: Pump tens of billions of dollars into a sweeping stimulus project and 10 percent growth followed. China’s success gave markets the impression that its leaders could wave some magic wand and growth would be the result.
Magic is in short supply now. Local governments are cash- strapped and awash in debts that could turn bad. The euro zone seems locked into permanent-crisis mode while the U.S. is bogged down with debt, economic stagnation and political paralysis. China proved it can live for a few years without U.S. and European customers, but not forever.
6. If they don't build houses, what should they build?
One natural question to ask about the widespread notion that China is engaged in too much residential investment and transportation infrastructure projects is: What else should they be building instead? Yichuan Wang thinks he has the answer, but I think his argument underscores what's unsustainable about the current Chinese direction:
I want them to start building leaf blowers, so we don't have so many Chinese people in the low productivity position of sweeping streets. I want them to start building farm equipment, so we don't have so many Chinese farmers tending the fields. I want them to build more laundry machines, to free the rural Chinese from scrubbing clothes on washboards. I want them to build electric stoves, so my Grandpa can put away the coal fired outside oven. I want them to build computers that can deliver cheaper education to the masses.
Instead of just focusing on "building," I want them to invest in human capital, so productivity can be at a level that we don't need "make work" jobs. I want them to build more schools and hire better teachers, so classes aren't as large and you're not damned if you can't make it in a top elementary school. I want productivity to be high enough that high end stores don't need more clerks than actual customers.
7. China Inc's debacle in the outback
We should not forget that when 'we' sell 'our' assets to foreigners, they get the assets but we get their money. We have a tendency to assume that the foriegners are smart and we are dumb - the modern version of 'cultural cringe'. But that is rarely the case. There is a time to hold and a time to fold.
I vividly recall the wholesale buyup of California famland in the 1970's and '80s by 'the arabs with their petro-dollars' and the painful handwringing that ensued. The Arabs got the land, the locals the money. It was the end of the world as we know it. But nobody recalled those fears when farmland prices tanked and the Middle East investors sold out at distressed prices a few years later. The locals had the land back, and much of the money too.
Something similar may be going on in Australia; Australians have the money and the Chinese are holding a distressed asset. We tend to focus on the local losers, but there are winners too and many of them are locals. Reuters reports:
In 2006, foreign mining giants were jacking up prices of the iron ore needed by China's voracious steel industry. At the urging of Beijing, Yung and CITIC Pacific negotiated the rights to exploit a vast deposit of low-grade ore in the red-rock landscape of Australia's remote northwest Pilbara region.
The multibillion-dollar deal seemed to be a coup for China's resource-hungry economy. But Yung and Beijing are now paying a heavy price.
A few kilometres down a dirt track off the North West Coastal Highway, beside a towering pile of red tailings, the company has dug itself into what increasingly looks like a bottomless pit.
8. Caught in the crossfire - unintended consequence #87,374
There is no doubt that we want our banking system cleaned up of criminals. Everyone agrees. In the US the FDIC has issued new rules that require banks to fire people with criminal convictions, and banks there have been doing that.
The regulatory rules forbid the employment of anyone convicted of a crime involving dishonesty, breach of trust or money laundering. Not to fire such people risks huge fines and reputational damage. But some long-serving employees with teenage-prank convictions are being caught up in the move to tighter standards. Reuters reports:
Wells Fargo Home Mortgage has fired a Des Moines worker over a 1963 incident at a Laundromat involving a fake dime in the wake of new employment guidelines. Richard Eggers, 68, was fired in July from his job as a customer service representative for putting a cardboard cutout of a dime in a washing machine nearly 50 years ago in Carlisle, IA.
9. The cost of hunger
Food prices are racing higher; up 10% in July, according to the World Bank. Social unrest is the big worry. The severe drought in the US has been blamed for the rising prices of agricultural commodities. But that is only part of the story: Biofuels, financial speculation and changing dietary habits are also playing a role. The global food supply faces pressure from all sides. Spiegel Online has some useful insights about the real causes:
Many climatologists predict that in a warming world, heat waves like the one in the United States this year will become more frequent and more severe. In a new study, agricultural economists at New York's Columbia University predict that, if the climate models turn out to be true, extreme heat could reduce crop yields in the United States by about 30 percent.
The world must be prepared for the consequences of climate change varying greatly by region, with yields shrinking in some areas and growing in others. Regions of Scandinavia that were once cold and barren will likely turn into breadbaskets. The losers will include current centers of agricultural productivity like southern Spain. The vegetation belt in Africa will also shift, with the Sahara becoming greener and severe droughts becoming more common in the south.
10. Australia dry?
Finally today, a couple of charts showing recent variations from average. El Niño is coming (again, in its normal cycle).
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