Wednesday's Top 10 with NZ Mint: Why savers should just STFU; All you need to know about Bitcoin, whether it's a bubble and who actually mints Bitcoins; Jon Stewart on the Murdocholopy; Dilbert

Here's my Top 10 links from around the Internet at 10 am 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 reads today are #6 and #7 on Bitcoin. It made me think about the nature of money and banking and asset bubbles. And now I really want to know who Satoshi Nakamoto is.

1. 'It woz the fall of Communism and the rise of the Internet wot dun it' - Here's former Wall St Journal Editor and Treasury official Paul Craig Roberts with his view on the causes of the Global Financial Crisis.

I think there's something in this that most economists haven't modeled or thought about.

The traditional relationships in economies between productivity, wages, economic growth, debt growth, inflation, interest rates and employment growth have been changed by these trends.

Yet the central bankers and thinkers running the economies keep flogging the dead horse of low inflation and low jobs growth with low interest rates and money printing.

So far it has just blown up asset bubbles. HT our commenters.

Here's Roberts: 

What happened economically because of the collapse of the Soviet Union and the rise of the high speed internet is that it made it possible for Western corporations (corporations in the United States, Europe) to arbitrage labor across national borders. 

In other words, when the Soviets collapsed, it had a big impact on thinking in Communist China and Socialist India.  Their response to the failure of the Soviet Union was to open their vast, underutilized labor to Western capital.  So the corporations found out that they could produce for their home market offshore in India or China, dramatically drop the labor cost, and thereby dramatically increase the profits flowing in capital gains to shareholders and in performance bonuses to executives. 

So the collapse of the Soviet Union began the arbitrage of of labor, and it ended up separating Americans from the production of the goods and services that they consume.  The economy has been dead in the water ever since, and the Federal Reserve under Alan Greenspan tried to substitute - for the missing growth in consumer income in employment - consumer indebtedness.  So we had the rise in consumer indebtedness, the real estate bubble, the various financial frauds, and the ongoing financial crisis.

2. Japan's challenge - The BBC has a nice summary here of why Japan's big electronics exporters are so stuffed and how Japan hopes to focus on its specialist heavy (big) and nano (small) engineering prowess to survive. HT Gareth. 

3. Interconnectedness matters - Here's IMF Chief Economist Olivier Blanchard with his 5 lessons from the Global Financial Crisis courtesy of WSJ.

One of them is that interconnectedness matters.

This crisis started in the U.S. and across the ocean in a matter of days and weeks. Each crisis, even in small islands, potentially has effects on the rest of the world. The complexity of the cross border claims by creditors and by debtors clearly is something that many of us had not fully realized: the cross border movements triggered by the risk-on/risk-off movements, which countries are safe havens, and when and why? Understanding this has become absolutely essential. What happens in the part of the world cannot be ignored by the rest of the world. The fact that we all spend so much time thinking about Cyprus in the last few days is an example of that.

It’s also true in trade side. We used to think if one country was doing badly, then exports to that country would do badly and therefore the exporting countries would do badly. In our models, the effect was relatively small. One absolutely striking fact of the crisis is the collapse of trade in 2009. Output went down. Trade collapsed. Countries which felt they were not terribly exposed through trade turned out to be enormously exposed.

4. 'Shut up savers!' - James Surowiecki writes at the New Yorker that the old whingers about low interest rates should be ignored...

He's onto something here. The big debate now is about generational wealth transfer between older savers who like low inflation and younger borrowers who like high inflation. Who will win?

Here's Surowiecki:

It’s easy to understand why savers feel like collateral damage in the Fed’s fight against recession, but too much sympathy for their plight is dangerous. Sumner points out that, in the past century, there have been only five occasions when a central bank tried to end a zero-bound-interest-rate policy. On four of those occasions, the central bank acted too soon, the economy slipped back into recession, and rates had to be cut all over again. “Raise rates now,” Sumner says, “and you can quickly turn what looks like a recovery into a double-dip recession.” Currently, the big risk isn’t that the Fed will wait too long to raise interest rates; it’s that pressure from savers will cause it to raise them prematurely.

5. The Bitcoin Bubble? - Bitcoin's exchange rate with the US dollar has exploded in recent weeks. Is this a real thing? Or just another bubble?

Here's Tim Worstall at Forbes saying it's a bubble:

Look around at the currency stocks in other currencies. Then have a look at the economic activity that they support. The US money supply supports the $15 trillion of the US GDP for example. And that GDP is a significant multiple of the monetary base of $600 billion or so. The same holds true of other currencies around the world (well, obviously not Zimbabwe). With Bitcoin it is very different indeed. Transaction value (which is not at all the same as GDP, transaction value will be vastly larger than GDP) is much lower for Bitcoin than the outstanding value of the currency is. That might make it a great speculative toy but it’s most certainly not making it a useful currency.

It’s just not true that people are doing multiple billions a year of Bitcoin transactions. The number is well below that $ billion of the outstanding value of the currency.

6. How Bitcoin works - Here's the New Yorker with a good explanation of how Bitcoin works as a currency. Worth a read. It looks like a sort of gold standard for the digital age.

In many ways, bitcoins function essentially like any other currency, and are accepted as payment by a growing number of merchants, both online and in the real world. But they are generated at a predetermined rate by an open-source computer program, which was set in motion in January of 2009. This program produced each one of the nearly eleven million bitcoins in circulation (with a total value just over a billion dollars at the current rate of exchange), and it runs on a massive peer-to-peer network of some twenty thousand independent nodes, which are generally very powerful (and expensive) G.P.U. or ASIC computer systems optimized to compete for new bitcoins. (Standards vary, but there seems to be a consensus forming around Bitcoin, capitalized, for the system, the software, and the network it runs on, and bitcoin, lowercase, for the currency itself.)

Bitcoin releases a twenty-five-coin reward to the first node in the network that succeeds in solving a difficult mathematical problem requiring a certain amount of brute-force computation (known as a proof-of-work calculation.) The solution is then broadcast throughout the network, and competition for a new block and its twenty-five-coin reward begins. (There’s a good rundown of the technical aspects of Bitcoin on the Bitcoin wiki; there’s also a wonderfully pellucid explanation of the proof-of-work angle from Paul Bohm, on Quora.)

At first, anyone armed with an ordinary computer could download and run the Bitcoin software and gather (or “mine”) bitcoins. The more computing power you can dedicate to Bitcoin calculations, though, the better your chances of arriving first at each solution. This feature of the system, by design, resulted in a kind of computational arms race that strengthened the network by rewarding increased computing power. Four years into the Bitcoin project, only very powerful, purpose-built machines have enough muscle to keep pace with existing network nodes.

In this way, bitcoins are mined like gold used to be, in quantities that are small relative to the total supply, so that the supply grows slowly. There is an upper limit of twenty-one million new coins built into the software; the last one is projected to be mined in 2140. After that, it is presumed that there will be enough traffic to keep rewards flowing in the form of transaction fees rather than mining new coins.

7. Who is Satoshi Nakamoto - Bitcoin was created by 'Satoshi Nakamoto' in 2008 and no one seems to know who he/she/they is/are. Here's the New Yorker with a profile on this modern day Keyser Sose.

There are lots of ways to make money: You can earn it, find it, counterfeit it, steal it. Or, if you’re Satoshi Nakamoto, you can invent it. That’s what he did on the evening of January 3, 2009, when he pressed a button on his keyboard and created a new currency called Bitcoin. It was all bit, and no coin. There was no paper, copper, or silver—just thirty-one thousand lines of code and an announcement on the Internet. Nakamoto wanted to create a currency immune to the predations of bankers and politicians.

The currency was controlled entirely by software. Every ten minutes or so, coins would be distributed through a process that resembled a lottery. This way, the bitcoin software would release a total of twenty-one million bitcoins, most all of them over the next twenty years

8. Just what Britain needs? - Britain is planning to create another state owned bank that specialises in business lending to small to medium businesses. The UK government already owns Royal Bank of Scotland and controls Lloyds HBOS, but just can't get them to lend on anything other than property.

Here's Business Secretary Vince Cable:

“Inadequate access to finance for small and medium-sized enterprises is one of the biggest risks to economic recovery. We need bold action to fix what has always been a weakness of the UK economy, and since the financial crisis has become an urgent problem.

“Whilst we are making great strides to reform the banking system, more needs to be done to ensure that it sufficiently serves the manufacturers, exporters and high-growth firms that drive economic growth.”

9. UBS sees Cyprus as early sign of Euro breakup - UBS' chief economist points to the four things that happen before a currency union breaks up: 

-Monetary union break up is preceded by capital flight from perceived weak from perceived strong parts of the union
-Monetary union break up has tended to be regarded by governments as an opportunity for seizing cash or other assets held by citizens
-Capital controls tend to be imposed early in the break up, and foreigners’ asset holdings are often discriminated against
-Break up of a monetary union is normally associated with civil unrest and authoritarian government in at least some part of the former monetary union

“So has Cyprus (as is tirelessly pointed out, only 0.2% of the euro area measured by GDP) set a course for the euro’s destruction? Indeed, with Cyprus having checked the first three items on that list, has Cyprus already left the euro?” Cluse asked in a note.

“Instead, Cyprus – and perhaps the wider euro area – can be thought of as occupying a position not too dissimilar to that of the United States in 1932/33, when the U.S. monetary union effectively ceased to exist and then reformed.”

10. Totally Jon Stewart on the Murdochopoly.