Friday's Top 10 with NZ Mint: Do the Plutocrats really want a revolution?; Morality and monetary policy; China warns Japan about 'garbage bin' money printing; The penthouse with a gym for cats; Dilbert; Clarke and Dawe

Here's my Top 10 links from around the Internet at 12.30 pm in association with NZ Mint.

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 #7 on how China is a mercantilest country and what that might mean in the long run. It's quite disturbing...

1. The central challenge of our age - The rise and rise of wealth and income inequality is not just threatening the economic recovery.

It's also threatening social and political stability.

Here's John Lloyd writing at Reuters about the growing public anger about how the rich have gotten stonkingly richer in the last decade or so while the poor have gotten poorer and more unemployed around the world.

He's right.

When will the plutocrats and their political representatives realise this state of affairs is not sustainable in any social or political sense?

Do they want to push it to the point of revolution?

Lloyd summarises the last week's moves well:

People who live on low, even middling incomes and who may be or are threatened by being unemployed are becoming more and more angry at the sight of vast wealth, and are ceasing to believe that nothing can be done. The Swiss are not known for their love of irony, but they do love referenda: They had 12 last year, on employment leave, second houses, building society savings, a fixed book price agreement, gambling revenues, healthcare, foreign policy, home buying, a smoking ban, secure housing in old age, music lessons at school and an Animal Diseases Act. Earlier this month, 68 percent of citizens who took part voted for a series of curbs on executive pay, including a ban on golden handshakes and parachutes and bonuses for organizing a takeover or a partial company sell-off. This in the world’s banking capital; moreover, it’s in the state that has struggled to preserve the secrecy of the often-dubious fortunes lodged in its banks.

The European finance ministers are this week debating a vote in the European parliament last week that would limit banker bonuses to a 1:1 ratio with salaries. The British, home to the biggest financial services industry in Europe, are worried that the high-rolling bankers in the City of London will seek new homes: several have said so. One banker told the FT: “This is big stuff. This wrecks the model of keeping salaries low.” (Salaries were kept low, but augmented with bonuses.) But a vote in the European Parliament is likely to be decisive: Something along these lines is now likely.

Dickens’ Tale of Two Cities begins “It was the best of times, it was the worst of times.” In today’s tale of two worlds, it is a time when nothing can be done, it is a time when something must be done. Popular anger and will is beginning to demand that the resignation to vast inequality ends, and something less gross takes its place. This will run on – and on.

2. Morality and monetary policy - Edward Hadas does a great job writing at Reuters about the issue of monetary policy and morality. 

Monetary policy these days is complicated, ineffective, and quite possibly immoral. The complexity is inevitable; there is no simple way to ensure that the supply of money and credit is appropriate in a large modern economy. The ineffectiveness is evident: central bankers let that supply grow too fast before the 2008 financial crisis, and have unable to return monetary conditions to normal since then.

The moral lapses may be subtle, but I believe the lack of attention to the common good in the management of interest rates and the monetary system causes three serious problems.

This section is particularly good.

Central bankers are supposed to keep prices stable. Right now, the monetary system is conspicuously failing to do so. True, fluctuations in the U.S. Consumer Price Index have been fairly modest since 1991; the annual rate of change has varied from a 2 percent decline to a 5 percent increase. However, the prices of houses, oil and most other commodities have moved far more in both directions, often at a dangerously rapid pace. To call that price stability is like a fire department boasting that its record was good because few houses burned down, arbitrarily ignoring numerous factory blazes.

Behind this failure lies a poor moral judgment. The authorities insist that bank balance sheets must be treated as nearly sacrosanct. They refuse to impose losses on lenders, leaving banks to carry on and the economy smothered under a heavy blanket of debt. For the sake of the false good of bank stability, central banks have “abnormalised” the financial system with absurdly low policy interest rates.

3. Hear hear - Bryan Gould says it better than I could over at NZ Herald. 

We have lived with an overvalued currency for so long that we no longer have a proper base mark by which to measure it. What we can do, however, to establish whether the dollar is overvalued is to ask what we might expect to see in an economy that has been fundamentally uncompetitive over a long period.

The answer is that such an economy would exhibit slow rates of growth, high unemployment, low rates of investment and productivity growth, persistent trade deficits, a perennial need to borrow overseas, a propensity to sell off assets - including national assets - into foreign ownership, high levels of import penetration, a weak export sector, and low rates of return on investment and therefore of profitability.

Sound familiar? If we do not recognise these characteristics as the hallmarks of New Zealand's economic performance, it is only because of the resolute refusal of our policymakers to think about our loss of competitiveness, let alone do something about it.

4. The drums of currency wars are beating - Here's more stick wielding via WSJ from the head of China's Sovereign Wealth Fund aimed at Japan's humming money printing machine. 

The Chinese, by dint of their crawling peg to the US dollar, are effectively printing themselves. But they're worried Japan may print faster and more.  And remember, these guys are also rattling sabres over a bunch of rocks in the East China Sea. Or was that the West Japan Sea.

The president of China's giant sovereign-wealth fund warned Japan against using its neighbors as a "garbage bin" by deliberately devaluing the yen, joining growing international griping about a potential currency war.

In unusually strong language, Gao Xiqing, president of China Investment Corp., echoed alarms from Latin America to Europe that the new Japanese government is aiming to boost its exports at other countries' expense via a weaker currency—allegations often leveled at China itself by the U.S. and others.

Mr. Gao's comments in an interview with The Wall Street Journal, among the strongest remarks yet by a senior Chinese official, signaled growing concern in Beijing about the impact on the Chinese economy of a wave of more-aggressive easing under Japanese Prime Minister Shinzo Abe, which the country says is aimed at ending persistent deflation.

5. This is how some people spend their riches - Further to #1 above. This Bloomberg piece on a four storey penthouse in Manhattan explains how imaginative some people can be in trying to spend their cash piles. It has a four storey slide.

And the owners' two cats have their own gym....

Come the revolution...

Running along Manhattan’s skyline is a vein of private spectacle, accessible by invitation only. Mostly, it’s a place of generic luxury, where a fortune buys a bigger room, a higher ceiling, a better shower head. One couple, though, has turned four full stories atop an 1896 skyscraper into a palace of ideas.

At the 21st floor, the beaux-arts building culminates in grand arched windows and stone angels supporting a sharply pitched roof, Bloomberg Pursuits will report in its Spring issue. Inside this conventionally gracious shell is an utterly contemporary space, a 7,000-square-foot (650-square-meter) penthouse apartment that combines mathematical complexity with childlike playfulness and reduces privacy to an antiquated foible. It’s architecture for the age of social media.

The result is a place of inspired confusion. Walls splay outward and floors slope. Daylight flows in through hidden windows -- bouncing off walls, bleaching out shadows and wreaking havoc with all sense of depth. Wherever you stand, you can look through to other levels without quite comprehending how they relate.

The occupants -- a husband and wife who declined to be identified -- wanted their starship outfitted with the perks of perpetual childhood (although they have no children of their own): Ladders lead to hidden lofts, a swing dangles in front of a fireplace and a steel column rising 40 feet (12 meters) from the living room to the rafters is equipped with rubber handholds and a harness, so you can get in a quick climb before breakfast and rappel down before your cappuccino’s finished frothing. The two cats have a gym of their own, a series of secret passageways buried in the walls and leading to a window that looks down upon their masters’ bed.

6.  The problem with China - James Saft has a good piece here on China's imbalances, highlighted by the stock market there selling off this week on news of more controls on its hot housing market. 

The growth of debt and of fixed investment into things like houses and factories in China has been spectacular but very unusual for an economy as big and as developed. Between 2002 and 2011 fixed investment grew by 13.5 percent a year, much higher than economic growth, meaning that it is now somewhere in the neighborhood of 50 percent of GDP.

Debt too has been sky-rocketing, allowing China to grow while much of the rest of the world languishes, but, as in the U.S. a decade ago, building up potentially dangerous vulnerabilities in its financial system and contributing to what looks achingly similar to a bubble in real estate and in unwanted production.

Total debt, public and private, is now twice the size of China's economy and every year China's shadow banking system makes loans equal to 35 to 40 percent of GDP.

"The quality of China's growth has become increasingly poor, and the rate of growth is utterly unsustainable. The bigger the bubble, the bigger the eventual bust," Mike Riddell, a fund manager at M&G Investments in London, wrote in a note to clients.

Riddell points out that no major economy has been so reliant on fixed investment, and those that have had fixed investment as half of output for two years or more form an uninspiring roster, including Botswana in the early 1970s and Chad in 2003-2004.

7. China's cyber-mercantilests - The New York Times' David Brooks runs an extraordinary piece here on China's cyber warfare measures agains the New York Times and many, many others.

He makes a good point. China takes a mercantilest and openly nationalistic approach to world trade. Do New Zealanders realise this?

The United States is a traditional capitalist nation that has championed an open-seas economic doctrine. We think everybody benefits if global economics is like a conversation, with maximum openness, mutual trust and free exchange.

But along comes China, an economic superpower with a more mercantilist mind-set. Many Chinese, at least in the military-industrial complex, see global economics as a form of warfare, a struggle for national dominance.

Americans and Europeans tend to think it is self-defeating to engage in cyberattacks on private companies in a foreign country. You may learn something, but you destroy the trust that lubricates free exchange. Pretty soon your trade dries up because nobody wants to do business with a pirate. Investors go off in search of more transparent partners.

But China’s cybermercantilists regard deceit as a natural tool of warfare. Cyberattacks make perfect sense. Your competitors have worked hard to acquire intellectual property. Your system is more closed so innovation is not your competitive advantage. It is quicker and cheaper to steal. They will hate you for it, but who cares? They were going to hate you anyway. C’est la guerre.

And this bit about a "brutality cascade" is fascinating. Who would and should New Zealand side with when the silos are formed...

In a brutality cascade the Chinese don’t become more like us as the competition continues. We become more like them. And that is indeed what’s happening. The first thing Western companies do in response to cyberattacks is build up walls. Instead of being open stalls in the global marketplace, they begin to look more like opaque, rigidified castles.

Next, the lines between private companies and Western governments begin to blur. When Western companies are attacked, they immediately turn to their national governments for technical and political support. On the one hand, the United States military is getting a lot more involved in computer counterespionage, eroding the distance between the military and private companies. On the other hand, you see the rise of these digital Blackwaters, private security firms that behave like information age armies, providing defense against foreign attack but also counterattacking against Chinese and Russian foes.

Pretty soon the global economy looks less like Monopoly and more like a game of Risk, with a Chinese military-industrial complex on one part of the board and the Western military-industrial complex on another part.

8. Here's a new theme song for Forsyth Barr about accentuating the positive and not messing with Mr In-between. I'm a big fan of the Singing Detective.

9. An open inflation tax-  Martin Wolf from the FT talks in a fascinating way here about how Japan can get out of its debt crisis by running inflation higher than interest rates to essentially dilute the value of savings and shift wealth from the savers to borrowers. This is the financial repression strategy writ large.

The BoJ could insist that it is aiming at 2 per cent inflation, but follow policies likely to bring higher inflation than this. That would be risky deceit. Alternatively, it could announce the aim of higher inflation, while announcing a lengthy period of low nominal interest rates. This would be an open inflation tax. Either way, policy could be buttressed by a temporary move to a target for price or nominal GDP levels. The argument for this is that bygones should not, in this extreme case, be bygones.

The current price level is 30 per cent below where it would have been if annual inflation had been 2 per cent since 1997. Similarly, nominal GDP is 40 per cent lower than it would have been if it had grown at 3 per cent a year. If the BoJ sought to return to the level of nominal GDP implied by 3 per cent annual growth from 1997, it would be committing itself to annual increase of close to 9 per cent a year over the next decade. That could surely reduce the real burden of debt!

10. Totally Clarke and Dawe on government by reality television.

"It's not reality. It's reality television."

(Updated with cartoons)