Wednesday's Top 10 with NZ Mint: Why Reinhart and Rogoff were only partly wrong; How Spanish bad banks are hobbling squatters; One hedge fund's massive bet on a Canadian collapse; Dilbert

Here's my Top 10 links from around the Internet at 11 am today 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 is #5 on the battle between Sinn and Soros over whether Germany should leave the euro.

1. Hell hath no fury like an econometrician scorned - The Reinhart/Rogoff excel error has certainly sparked a debate.

There have been victory speeches (this one from Krugman comes to mind).

There has been the indignant defence (here in the New York Times from Reinhart and Rogoff)

There has been the rebuttal to the rebuttal (here's the upstarts responding to Reinhart and Rogoff's criticisisms of their criticisms)

There has been the Stephen Colbert comedy routine. 

So what are we left with?

Here's James Hamilton at Econbrowser with his more measured view. HT John via email:

Whichever number you used, you would still conclude that higher debt loads are associated with slower growth in the postwar advanced economy data set, just as they were in the postwar emerging economy data set, just as they were in the centuries-long individual country data sets, and as also was found to be the case in separate analyses of yet other data sets by Cecchetti, Mohanty and Zampolli (2011), Checherita and Rother (2010), and theIMF (2012), among others.

A quite separate and in my mind much more legitimate question is whether this correlation can be given a causal interpretation-- is it high debt levels that cause slower growth, or slow growth that causes debt to accumulate? One can (and should) be persuaded that the correlation is real, but still be in doubt as to what it signifies.

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2. What the Chinese government says - There are plenty of people who say New Zealand is safe because of China's amazing and unending growth, and even if it slows a bit the sheer scale of the growth of China's middle classes means we're home free.

I listened to Stephen Joyce say as much yesterday. His main concern is not demand, but New Zealand's ability to supply milk powder etc to these middle classes.

But we should question that assumption.

Here's Michael Pettis with a good piece, citing the Chinese government itself:

A lot of economies, and especially developing economies with distorted balance sheets and one or two major drivers of growth, can have embedded in their economic institutions self-reinforcing mechanisms that can be very powerful.

I discuss this a great deal in my book, The Volatility Machine. As a consequence of these self-reinforcing mechanisms, I argue, movements in any direction can be sharply magnified, so that positive shocks will often result in much faster growth than anyone expected. But this comes at a cost. The reversal of these shocks often can result in much slower growth than anyone expected, or even in a wholly unexpected collapse into crisis.

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3. Japanese blackmail - Some economists in China are getting very grumpy about the massive Japanese money printing. Pots and black kettles come to mind, but still, worth watching given the naval activity around some rocks in the seas between Japan and China.

Oh, and because China is now our largest trading partner, and the nexus between China, Korea, Japan, and Australia is far, far more important to us than anything happening in Europe or America.

Here's the SCMP as cited by Pettis:

Many of China’s top economists are livid at what they view as an effective currency devaluation by Japan and are calling on the People’s Bank of China to retaliate by weakening the yuan to defend itself in what they see as a new currency war. These economists, including Tsinghua University professor Li Daokui and ANZ Bank’s Liu Ligang, see Japan’s plan to double its monetary base within two years as “blackmail” and have criticised the Japanese central bank’s decision to open the liquidity floodgates to bump up the economy.

Liu said Japan’s unprecedented easing programme, aimed at ending more than two decades of deflation, was “a monetary blackmail” targeted at other export-driven Asian countries such as China and that the central bank should sell more yuan and buy the US dollar to push down the yuan. He also called on authorities to guard against a fresh wave of hot money into China’s fragile financial markets, warning that Japan’s move would reignite the so-called carry trade, under which investors borrow in low-interest yen and invest in high- interest markets.

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4. And then Pettis calls them on it - Here's Michael Pettis again exposing the hypocrisy of the Chinese railing against US and Japanese money printing...

Buying US dollars in order to push down the value of their currencies – and this is all the US exorbitant privilege consists of – allows other countries to increase domestic employment by turbo-charging exports growth at the expense of domestic consumption (and imports). Although countries that do this usually insist that this higher domestic employment does not come at the expense of US employment, no one is eager to carry the current account deficit that comes with the exorbitant privilege.

My guess is that until the US takes steps to prevent foreign accumulation of US government bonds, or, if other countries want to retain the use of an international traded currency, they agree not to game the reserve system, the US will always be faced with the choice either of absorbing demand deficiency from every part of the world that wants more growth or of engaging in its own version of currency war, QE. The very same people who complain about the currency consequences of QE, in other words, are arguing that while it makes sense for them to expand aggressively, it is morally wrong when other countries do it.

That sounds a lot to me like old-fashioned beggar-thy-neighbor politics. And there is no reason we should expect this to end soon.

5. Soros vs Sinn - German econo-thinker Werner Sinn had a go at George Soros for suggesting Germany should exit the euro. Then Soros had good go right back at him in a blog comment on Sinn's opinion piece. Cheeky bugger, but fun to watch.

Here's FTAlphaville with the back and forth and Soros' juiciest comments (the old codger is right on the money):

The current arrangements allow Germany to pursue its narrowly conceived national interests but are pushing the eurozone as a whole into a long-lasting depression that will affect Germany as well.

Germany is advocating a reduction in budget deficits while pursuing an orthodox monetary policy whose sole objective is to control inflation. This causes GDPs to fall and debt ratios to rise, hurting the heavily indebted countries, which pay high risk premiums, more than countries with better credit ratings, because it renders the former countries’ debt unsustainable. From time to time, they need to be rescued, and Germany always does what it must – but only that and no more – to save the euro; as soon as the crisis abates, German leaders start to whittle down the promises they have made. So the austerity policy championed by Germany perpetuates the crisis that puts Germany in charge of policy.

Japan has adhered to the monetary doctrine advocated by Germany, and it has experienced 25 years of stagnation, despite engaging in occasional fiscal stimulus. It has now changed sides and embraced quantitative easing on an unprecedented scale. Europe is entering on a course from which Japan is desperate to escape. And, while Japan is a country with a long, unified history, and thus could survive a quarter-century of stagnation, the European Union is an incomplete association of sovereign states that is unlikely to withstand a similar experience.

6.  The last word on Reinhart Rogoff - Here's Betsy Stevenson and Justin Wolfers writing at Bloomberg with what they hope is the last word on the debate. Eseentially, countries with very, very high government debt also have lower growth. The difference is not as dramatic as Reinhart/Rogoff's original thesis and the tipping point thing may be false, but it's still slower growth. That's still relevant and meaningful.

Let’s not get lost in the trees. In the end, all the corrections advocated by the critics shift the average GDP growth for very-high-debt nations to 2.2 percent, from a negative 0.1 percent in Reinhart and Rogoff’s original work. The finding remains that economic growth is lower in very-high-debt countries (see chart). It has been disappointing to watch those on the left seize on the embarrassing Excel errors but ignore this bigger picture.

The negative correlation between public debt and economic growth is also present in the other samples studied by Reinhart and Rogoff, and it is a finding whose broad contours are consistent with other empirical analyses. Although the critics are right that it’s difficult to pin down the exact strength of the debt-growth correlation, that’s no reason to discard the balance of evidence suggesting that it is negative.

Equally, it’s time to abandon the more specific claim that there is a threshold of 90 percent of GDP beyond which the negative effects of public debt on economic growth become particularly evident. This was always a stretch, and is now quite clearly inconsistent with the balance of the evidence. Unfortunately, it’s the sort of sound bite that the media and our politicians find irresistible.

7. 'Time your exit well' - So says Nouriel Roubini in this piece about buying stocks, and then selling just before the US Federal Reserve starts removing the punch bowl.

We're all catchers of falling knives and bomb disposal experts now...

Roubini is predicting an uptick in stock prices over the next two years as the Federal Reserve continues its stimulus efforts. But buyer beware, Dr. Doom says, because a day of reckoning is lurking at the end of the two-year horizon.

The Fed, he said, is creating the same problems that led to the financial crisis in 2008 by keeping rates near zero. "They are creating massive fraud," Roubini said during a panel at the Milken Institute Global Conference in Los Angeles, Calif. Monday. He pointed to the junk bond market as one example of a bubble.

"At some point, there's a levitational problem," said Roubini. When gravity sets in, Roubini says there will not be a recession but a depression.

8. 'Bet on Canada bursting' - A few people are picking Canada's property bubble will burst at some stage, the Globe and Mail reports. Hope Amanda is watching.

This hedge fund manager, Vijai Mohan, is betting Canada's banking regulator will puncture the bubble by forcing banks to put aside more capital and give up the old way of using risk weighting of assets to assess capital (which by the way is what the RBNZ does at the moment...)

Mr. Mohan’s bet against Canada isn’t just about potential regulatory changes. He believes that the world is due for an emerging-markets crisis, which will drag down the Canadian economy and dollar with it. Combined with a home-price bust, the impact would “cause direct and specific risks for the Canadian financial system.”

Mr. Mohan thinks the explosive growth of Brazil, Russia, India and China is not an indication of a changing world order, but merely the latest in a long line of emerging-markets bubbles. His forecast: a crisis akin to Russia’s debt default in 1998 within the next two years. “I have a lot of confidence a crisis will happen,” he says, “but I don’t have a pinpoint on time.” Such a crisis would trigger a selloff in commodities, with harsh effects on the Canadian currency and economy – a catalyst for higher unemployment, a downdraft in the housing market and higher loan losses for the banks.

Should someone tell Mr Mohan about New Zealand?

9. Squatters in Spain - This Bloomberg story has some good reporting on the ground zero that is Spain's property market. The last line is the most interesting.

A 285-unit apartment complex in Parla, less than half an hour’s drive from Madrid, should be an ideal target for investors seeking cheap property in Spain. Unfortunately, two thirds of the building generates zero revenue because it’s overrun by squatters.

“This is happening all over the country,” said Jose Maria Fraile, the town’s mayor, who estimates only 100 apartments in the block built for the council have rental contracts, and not all of those tenants are paying either. “People lost their jobs, they can’t pay mortgages or rent so they lost their homes and this has produced a tide of squatters.”

Banks have remarked on how they are disabling elevators and tearing out stairwells in their apartment blocks to prevent entire buildings from being occupied.

10. Totally Jon Stewart on how Congress canceled the budget cuts that affected them the most. The law rewrite was handwritten...

"They only care about meals on wheels when they're rolling down the aisle"

Stewart invents a new word. 'Congratsturbating'.

And Part II...