Tuesday's Top 10 with NZ Mint: A new frenzy of leveraged buy outs; 'Too big to jail'; China's Lewis turning point; 'The end of central bank independence'; A nasty shock for Angela; Dilbert

Here's my Top 10 links from around the Internet at midday 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 #2 on the structure of China's population and what it might mean for its growth rate.

1. A new frenzy of leverage - Graeme Hart will be happy.

Leveraged buyout companies have been repricing their loans lower and gearing up.

There have been quite a few leveraged buyout deals going through lately, including the Dell buyout.

This was the sort of lunacy that drove prices for the likes of Mediaworks, Envirowaste and Yellow Pages through the roof in 2005 and 2006.

Is this how to get an economy going again?

With more leverage? And we're seeing the return of Collateralised Loan Obligations (CLOs). Remember them? 

Here's the FT with a good analysis.

Private equity firms have lost no time taking advantage of record low yields in the global leveraged loan markets. And like a school of piranhas sensing blood, they have thrown themselves into the fray with gusto.

Financial sponsors have been lowering their portfolio companies’ borrowing rates by as much as 125 basis points in a single move, despite outcries from investors in the loans.

But the third factor enabling strong loan prices – and so the wave of loan repricings in recent weeks - has been the rapidly growing market in collateralised loan obligations, which are securitised vehicles that buy leveraged loan paper. In the US new CLO creation has bounced back – after falling out of favour following the financial crisis – with a post-crisis record $55bn worth of new instruments created last year. This has created a strong bid for leveraged loans.

2. Where have China's workers gone? - Bloomberg looks at the debate over where the 'Lewis turning point' in China will be -- when it runs out of surplus labour to grow its economy quickly.

China’s large pool of surplus labor has fueled its rapid industrial growth. Now this “demographic dividend” may be almost exhausted, and its economy reaching a Lewis turning point: a shift named after the Nobel prize-winning Arthur Lewis, who was the first to describe how poor economies can develop by transferring surplus labor from agriculture to the more productive industrial sector until the point when surplus labor disappears, wages begin to rise and growth slows.

Citing periodic labor shortages and unskilled wages that have risen since 2003, prominent Chinese economists suggest that time has come. The International Monetary Fund disagrees and puts the turning point much later -- between 2020 and 2025, based on a model analyzing labor productivity. A third view is that China’s surplus labor is still plentiful, given that about 40 percent of the labor force is still underutilized in the rural sector, mostly in agriculture, which accounts for only 10 percent of gross domestic product.

3. How to solve wealth inequality - Here's The Atlantic with a look at this thorny issue.

The two easiest ways to think about reducing wealth inequality are (a) building up the bottom and (b) cutting down the top. These aren't equally sensible approaches, they're just the two most obvious. From the bottom, if we found ways to make poor and middle class families save more, they could invest that money in assets that got more valuable over time, and this would increase their wealth. From the top, one extreme solution beyond raising taxes would be to find ways to cap income and compensation.

If you find income-capping sort of a goofy idea, perhaps you're not a member of our trans-oceanic readership. 

Europe in on a rampage against sky-scraping compensation packages. Months after France announced a new confiscatory top tax rate, the EU recently capped banker bonuses at twice their salary. This weekend, Switzerland voted to put historic restrictions on corporate pay. Two-thirds of a national referendum (in one of the finance capitals of the world!) voted to give shareholders the right to slash their executives' compensation and banned "golden parachutes" for outgoing executives. The new crime for paying a CEO too much money? As much as three years in jail or six years' salary in penalties.

4. Too big to jail - Here's HuffPo with America's Attorney General admitting that some US banks are simply too big to prosecute safely.

Eric Holder made this rather startling confession in testimony before the Senate Judiciary Committee on Wednesday, The Hill reports. It could be a key moment in the debate over whether to do something about the size and complexity of our biggest banks, which have only gotten bigger and more systemically important since the financial crisis.

"I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy," Holder said, according to The Hill. "And I think that is a function of the fact that some of these institutions have become too large."

Holder's comments don't come as a total surprise. His underlings had already made similar confessions to The New York Times last year, after they declined to prosecute HSBC for flagrant, years-long violations of money-laundering laws, out of fear that doing so would hurt the global economy. Lanny Breuer, formerly in charge of doling out the Justice Department's wrist slaps to banks, told Frontline as much in the documentary "The Untouchables," which aired in January.

5. The end of central bank independence - Two German economists from Tilburg University in Germany lament the end of central bank independence in this Project Syndicate piece. I'm not that sympathetic. They are of the German school of austerians determined to grind Southern Europe into the dust, but they're onto something about the end of independence.

The Bank of Japan is the most recent example of a major central bank bowing to its government’s wishes, which Prime Minister Shinzo Abe bluntly declared should be accommodated. The BOJ’s recent decision to buy an unlimited number of government bonds to meet its new inflation target of 2% has effectively ended the guise of autonomy.

Likewise, the Bank of England is effectively buying almost every new British government bond that is issued, even with annual inflation above the legally established ceiling of 3%.  Although British inflation has been higher than 4% in recent years, even rising above 5%, the Bank of England has continued to loosen monetary policy. Meanwhile, the US Federal Reserve is now buying more than 90% of newly issued US Treasury securities.

All three countries are violating the most important central-banking commandment: Thou shalt not engage in monetary financing of government spending. But this is not surprising, given that these countries’ central banks have never actually been independent.

6. How to bribe Chinese officials in an age of austerity for 'tigers and flies' - Here's the FT with the latest tips on bribing Chinese officials worried about being caught accepting bribes.

You need to use your imagination, it seems.

Liwuguo.com (Kingdom of Gifts) offers lots of dos and don’ts. First, don’t approach your target at the office. “You must go to the leader’s home to give the hongbao [a red envelope that traditionally signifies a present of cash in Chinese culture]. If you don’t know where he lives, you can ask your colleagues,” the site advised last month in response to a question from a user about how best to oil the wheels of business in the midst of a corruption crackdown.

“Wait near his home until you see him walking upstairs. Tell him you were just passing by, happened to see him walking upstairs and ask him if it’s convenient to have a chat,” the agony aunt of present-giving goes on, advising that the giver should make up something – anything – to avoid directly mentioning what he wants. “You’d better come up with something else – for example, you missed the birthday of his family member and this is a late birthday gift, or you know his relative just got married and this is a late wedding gift, etc,” the site continues. “

Generally,” it concludes coyly, “he will know what you mean.”

7. Richer than Romney - This is the great irony. American voters couldn't love Mitt Romney because he was so rich. 

But in an avowedly communist state 'with Chinese characteristics', many of the members of China's top leadership group are richer than Romney.

Here's Bloomberg with the article.

Ninety members of the National People’s Congress are on a list of China’s 1,000 richest people published by the Shanghai- based Hurun Report, up from 75 last year, according to a review of the data by Bloomberg News. Everyone on the Hurun list had a fortune of at least 1.8 billion yuan ($289.4 million), more than former Republican presidential candidate Mitt Romney.

The 90 richest Chinese on the NPC represent 3 percent of the 2,987 delegates. Their average fortune is $1.1 billion.

By comparison, the top 3 percent of the 535 members of the U.S. House of Representatives and Senate -- 16 people -- have an average net worth of $271 million, according to figures from the nonpartisan Center for Responsive Politics, a Washington-based group that tracks money in politics.

8. A nasty shock for Angela Merkel - Here's Ambrose Evans Pritchard at the Telegraph on a new anti-euro party that has formed in Germany. It's one of many fringe left and right groups now popping up all over Europe.

A new party led by economists, jurists, and Christian Democrat rebels will kick off this week, calling for the break-up of monetary union before it can do any more damage.

"An end to this euro," is the first line on the webpage of Alternative für Deutschland (AfD). "The introduction of the euro has proved to be a fatal mistake, that threatens the welfare of us all. The old parties are used up. They stubbornly refuse to admit their mistakes."

They propose German withdrawl from EMU and return to the D-Mark, or a breakaway currency with the Dutch, Austrians, Finns, and like-minded nations. The French are not among them. The borders run along the ancient line of cleavage dividing Latins from Germanic tribes.

9. Is the bazooka real? - The European Central Bank's pledge to do 'whatever it takes' to keep the euro together through 'Outright Monetary Transactions' (OMT) calmed down Europe's financial system last year and early this year. 

But does it actually exists. The FT's John Dizard wonders if the bazooka really does exist in an era of Beppe Grillo and revolting voters all over Southern (and Northern) Europe.

The OMT programme was an undoubted success at the outset. The fundamental concept, of the European Central Bank buying “unlimited” amounts of sovereign debt on the basis of agreed “conditionality”, or policy commitments, was brilliant, and has had a tonic effect on markets for months.

The only problem with the bazooka, as with the Terminator’s “phased plasma rifle in the 40-watt range”, is that there really is no such thing as an OMT on the shelf. Spain is not going to submit to more restrictive conditionality. The Italian elections tell us that no government, assuming one is formed, would sign up for OMT support on the basis of yet more austerity.

The OMT’s value was in its announcement effect. Even the eurocracy itself has noticed that their officials’ announcements have a decreasing value on the market, not to mention little support in, say, Italian elections. The other problem is that literalists such as German parliamentarians insist on ever-more detailed and open specifications for European sovereign support programs. Look at the nitpicking debate over just what kind of depositors are being rescued in Cyprus.

10. Totally Jon Stewart on an epic filibuster

(Updated with cartoons)