Wednesday's Top 10 with NZ Mint: Greece eyes 162 bln euro of German war reparations; Volcker's money printing misgivings'; Central banks are 'carpet bombing zombie economies with cash; Bitcoin and game theory; 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 read today is #9 on why budget deficits aren't so bad. Worth a read. I used to think they were. Now, maybe not so much. 

1. 'Don't mention the war' - Der Spiegel reports on a Greek government inquiry that has found Germany still owes Greece (not the other way around) billions in reparations for damage caused in the Second World War.

How convenient.

And how explosive this might be. 

The officials involved spent months scouring the archives and came up with a figure of €162 billion or 80% of Greek GDP. Now the government is not so sure it will ask the Germans for the money in case they get grumpy. Too late now, thanks to a leak...

Compounding interest is indeed the most powerful force in the universe.

Here's the detail.

A top-secret report compiled at the behest of the Finance Ministry in Athens has come to the conclusion that Germany owes Greece billions in World War II reparations. The total could be enough to solve the country's debt problems, but the Greek government is wary of picking a fight with its paymaster.

The headline on Sunday's issue of the Greek newspaper To Vima made it clear what is at stake: "What Germany Owes Us," it read. The article below outlined possible reparations payments Athens might demand from Germany resulting from World War II. A panel of experts, commissioned by the Greek Finance Ministry, spent months working on the report -- an 80-page file classified as "top secret."

2. 'Central banks are no longer central banks' - CNN reports former US Federal Reserve Chairman Paul Volcker, the man who slayed America's inflation dragon in the early 1980s, has come out with some strong comments on the deluge of money printing now going on in the Northern Hemisphere.

Central banks, including the Fed, could eventually inflict more harm by "what they're doing with their portfolio to save the world economy," said Volcker. "Central banks are no longer central banks," said Volcker. "I think it gets dangerous when they lose sight of the basic function of the central bank."

Volcker said that rather than trying to stay out of the market as much as possible and simply tinker from the sidelines, central banks have been aggressively trying to influence economic growth and even inflation. "The central bank is not an all-powerful tool," he warned.

3. 'Carpet bombing Zombie economies' - Here's the Danish Central Bank Governor Lars Rohde telling Bloomberg he also is worried about inflation and asset bubbles in particular. He should know though. He has set Denmark's official deposit rate at below 0%.

Policy makers steering the global economy have pumped the financial system with so much liquidity that any exit risks popping potential asset bubbles or stunting a recovery, Danish central bank Governor Lars Rohde said.

“The risk is we stay in this climate too long and that the carpet bombing of liquidity spurs inflation,” Rohde, 59, said in an April 5 interview from his office in Copenhagen. Though there are no current signs of consumer price inflation “there is inflation, perhaps a bubble, in some asset classes,” he said.

“The risk is that we’ll have companies that are only able to survive because interest rates are extremely low. But these are companies that ought to have gone down,” he said. “We’re seeing projects going through that wouldn’t be sustainable at higher interest rates. We’re seeing zombie companies and zombie economies because of the extremely low interest rates.”

4. Lower US food prices in real terms - This table from AEI is interesting in that it points out US food prices in real terms are mostly lower than they were 20 years ago.

However, it's clear when you look at the detail that most of those prices are subsidised by enormous government handouts.

I'm always stunned at how much big US food conglomerates get in subsidies for corn and, in particular, high fructose corn syrup.

5. Off the reservation in 'Passageway business' - Reuters has an excellent backgrounder here on China's shadow banking system, which we should all keep an eye on.

The detail on 'passageway business' is a tad concerning. China's shadow banks are now worth 44% of GDP.

China's banks are feeding unwanted assets into the country's "shadow banking system" on an unprecedented scale, reinforcing suspicions that bank balance sheets reflect only a fraction of the actual credit risk lurking in the financial system.

The key question is no longer how much risk banks are carrying. Rather, it's how many risky loans have been shifted to the lightly regulated shadow banking institutions - mainly trust companies, brokerages and insurance companies. In 2010 and 2011, analysts began fretting about the large volume of loans to local governments and state firms - doled out as part of China's massive economic stimulus plan from 2008 to 2010 - that were due to mature in 2012. But the wave of defaults never materialized, in large part because banks, working with trusts and brokerages, provided fresh funds to enable borrowers to refinance their debt.

Industry executives say at least half of trust company assets and 80 percent of brokeages' entrusted funds are related to so-called "passageway business." In passageway deals, trusts and brokerages cooperate with banks to act as passive reservoirs for loans that banks originate but cannot keep on their own balance sheets without running afoul of lending quotas, capital adequacy requirements, and loan-to-deposit ratios.

6. First there was LIBOR - Now is it swaps too? Bloomberg reports America's CFTC regulator is investigating allegations of the maniupulation of a key interest rate swaps index.

Remember, our Commerce Commission is investigating the possible mis-selling of such swaps to farmers in New Zealand and many businesses and banks here rely on the pricing for these swaps.

The CFTC plans to interview about a dozen current and former brokers at ICAP’s Jersey City, New Jersey, office as well as dealers that contribute prices used to set the daily ISDAfix swap rates, said three of the people, who asked not to be named because the matter is private. The regulator is probing whether ICAP brokers are colluding with dealers who stand to profit from inaccurate quotes, including failing to update published market prices after trades occur, one of the people said.

The ISDAfix levels, which the Federal Reserve includes in a daily report on money-market rates, are used by everyone from corporate treasurers to money managers to determine borrowing costs and to value much of the $379 trillion of outstanding interest-rate swaps globally.

7. More on bitcoin - Here's a useful backgrounder from FTAlphaville on the amazing bitcoin phenomenon. I'm still getting my head around it, but it certainly makes you think about the nature of money.

Although it does seem like a currency that is one hacking episode away from oblivion.

The first way is to create or “mine” Bitcoins for yourself, but the downside here is that it takes a lot of computer power (and know-how) to do this effectively*. The amount of CPU dedicated to Bitcoin creation is in a sense directly proportional to the number of Bitcoins in circulation. The more Bitcoins exist, the greater the CPU power needed to mine new coins — meaning there is only an incentive to mine new coins if and when the Bitcoin price is high enough to cover your computer costs.

There is theoretically also a possibility to hack, replicate or steal existing independent Bitcoin warehouses. However, there is a bit of game theory involved in the programme which encourages everyone to play the rules. The game theory works on the basis that if a major hacking did take place, this would only knock confidence in the system, crashing the price of all units, including the stolen ones, rendering the efforts to steal them pointless in the first place. All in all, there should always be a greater incentive to mine new coins and play by the rules — especially, if you have the tech know-how to hack stuff in the first place — than to hack or destabilise the system.

8. If only we could eat Bacon all of the time - Apropo of not much except it made me chuckle, a new fast food joint that only offers bacon has opened in Toronto called Rashers. HT BusinessInsider.

Warning: This Top 10 item is not Kosher.

It’s Rashers’ mobile strategy, however, that really brings home the bacon.  If customers can prove — via a smartphone app —  that they have traveled a route around Toronto in the shape of a pig, they can claim 30 per cent off their next order.

Rashers also uses more traditional marketing techniques: The restaurant recently posted fliers featuring tear-off strips (of “bacon,” naturally), offering a free bacon sandwich for anyone who brought one in.

9. 'A balanced budget is an extreme outcome' - Here's Dylan Matthews at the Washington Post detailing why voters (and therefore most politicians) seem so obsessed with getting rid of government budget deficits, and why they needn't worry so much.

The 90 percent figure comes courtesy of Harvard economists Ken Rogoff and Carmen Reinhart in their paper “Growth in a Time of Debt.” They found that debt loads above 90 percent were associated 1 percent lower growth rates. That’s pretty bad. But there are a lot of potential pitfalls in this analysis. “If one reads their paper carefully, it is clear that Reinhart and Rogoff picked the 90% figure almost arbitrarily,” Yale’s Robert Shiller haswritten. “They chose, without explanation, to divide debt-to-GDP ratios into the following categories: under 30%, 30-60%, 60-90%, and over 90%. And it turns out that growth rates decline in all of these categories as the debt-to-GDP ratio increases, only somewhat more in the last category.”

Shiller, John Irons and Josh Bivens, and Mike Konczal have also noted that’s it’s much more likely that causality runs in the other direction. That is, countries have high debt-to-GDP ratios because they have slow growth, rather than the other way around. This makes sense. Slow growth means lower tax revenue, greater social service payouts, and a whole lot of other factors that contribute to increased deficits and debt. It’s possible to tell a story where high debt hurts growth, but it’s much less intuitive and only holds when interest rates are high and choking off private investment.

10. Totally Jon Stewart on Barack Obama's still-born budget proposal.