Here's my edition of Top 10 links from around the Internet at 10:00 am today. Sorry about the missing one again last week. I had to rush away unexpectedly. We now have a Monday-Wednesday-Friday schedule for Top 10.
Bernard will be back with his version this Wednesday. We will have another guest posting on Friday.
As always, we welcome your additions in the comments below or via email to david.chaston@interest.co.nz.
See all previous Top 10s here.
1. 'A battle the public cannot afford to lose'
Charles Morris has written a searing column on Reuters about 'rentiers'.
He uses Merrill Lynch as a graphic example; between 2001 and 2008 he claims they paid out US$50 billion in salaries and bonuses, and sold out to Bank of America.
But after a proper accounting it seems even after the terrific profits made during the financial boom, Merrill had actually lost US$21 billion - which he says must be some sort of record in the annals of unproductiveness.
Americans abhor “rentiers” - unproductive citizens who make good incomes by collecting tolls on other people’s production. In the early days of economics, rentiers were the owners of stagnating estates who partied in London on the earnings of their peasants and tenant farmers.
More recently, they are the beneficiaries of special privileges, like the web of congressional protections that protect sugar farmers from international competition. Or they have effective monopolies. Can anyone imagine that the Internet would have grown so explosively if AT&T still ruled American telecommunications?
Rentiers profit from falling productivity, preserving their privileges on the backs of the rest of us. John Maynard Keynes once mused that economic progress would require the “euthanasia of the rentiers.”
The special animosities felt toward the big banks stems from the feeling that they are rentiers — sitting athwart the sluice gates of global finance, dipping out bucketsful of glittering tolls from the passing stream.
Opposing the rentiers, in all their forms, is not the same as opposing wealth, honestly earned. It’s not envy, and it’s not sour grapes.
We need a well-functioning financial system. But not one that misallocates resources and generates crises and instability. The banks, however, are fighting a quiet, but grim, take-no-prisoners war in Congress and before the regulators to preserve their old privileges.
This is a battle the public cannot afford to lose. Rooting out the rentiers is essential for the future health of the country.
2. A strong backer
The euro is appreciating. This seems to make no sense given the deflation fears and low growth afflicting the 'old world'.
But some currency analysts think they know why and are pointing to China as the culprit.
In the drive to diversify away from the US dollar, China may be buying the euro. Certainly its has the heft to move currencies. And it wants to slow down the rise of its own. Maybe it has figured a way to achieve its goals at the expense of a currency it actually has little allegiance to. Pity the euro.
First, a divergence between the onshore and offshore renminbi rates can be used as a rough proxy for PBOC intervention in the market and is generally matched by a build-up in reserves. Second, reserve growth has generally been correlated in recent years with euro strength against the dollar. Third, the recent growth in China’s reserves has not been matched by an increase in its holdings of US Treasuries, as far as we can tell from the TIC data published by the US government.
The euro’s share of FX reserves held by emerging market central banks has fallen sharply since 2009. Its share of developed country reserves has been stable – probably chiefly because of Swiss efforts to limit the franc’s appreciation. But now that the euro’s survival is no longer in doubt, reserve managers could be back in the market and those at the People’s Bank of China – reputedly more aggressive in their investment strategy than many of their counterparts – could be in the vanguard.
3. The wrong way
China is liberalising its interest rate policies and most professionals applaud. But unless they address more fundamental issues says Yukon Huang (a formers World Bank country director for China), other, bigger market distortions are possible.
Moreover, a rise in deposit rates would have some undesirable consequences. It would worsen the already serious debt-servicing problem of firms and many local governments, as banks would need to demand higher rates on new loans used to roll over old ones. If current interest levels already are indeed too high, then higher debt-servicing burdens could unnecessarily jeopardize the solvency of otherwise viable firms and investments in a longer-term efficiency sense.
Further increases in deposit rates would also encourage even more investors to pour into China seeking higher returns for their savings. The more creditworthy Chinese borrowers would borrow abroad at lower rates than available domestically, buoyed by limited downside exchange risks. In fact, interest-rate arbitrage is already occurring as Chinese companies use their overseas affiliates to gain access to cheaper external funds, while households and companies in Hong Kong are finding ways to park their Yuan holdings into higher-paying accounts on the mainland. This will pressure interest rates eventually to fall to the levels seen in the other major global markets.
4. 'Don't leave the debate to elites'
We debate the problems with growing inequality, even if all the evidence for this 'new trend' (?) is in other countries. But income inequality is far too important an issue to be left to the economists, writes Thomas Frank. This is a people’s war and he doesn't like that it is a debate being monopolised by economists.
What really defines our time is the simultaneous soaring of inequality and the maddening inability of most progressives (there are exceptions, of course) to talk about it in a way that might actually inspire anyone to get off their ass. Start with the word itself: Like “neoliberalism,” another favorite lefty term for many of these same developments, “inequality” is confusing. It is euphemistic and aloof. It gets easily muddled with other, similar-sounding issues like marriage equality, gender equality and equal housing opportunity. Its tone is also needlessly clinical, giving the whole debate a technical and bloodless air.
Still, to read around on the subject is to get the feeling that certain liberals like it that way. “Needlessly clinical” is exactly their style. The subject, for them, must be positively cloaked in wonkery. They don’t talk much about “class,” like some troublemaker from the ’30s; they talk about “inequality,” which is a delicate and intricate signifier. Oh, it is extremely complex. It requires so many charts.
5. Ready for the Treasury benches?
It is election year so we are going to get all kinds of 'innovative' policy ideas. On of the first is from the Greens and their promotion of bike lanes. The 'innovation' is to not discount the future benefits they claim - apparently discounting is a trick only used by nasty finance types.
So, Eric Crampton has a deal for them.
If the Greens are happy with this kind of no-discounting cost-benefit analysis, I have a proposition for them. For the low low cost of $1,000,000, I will pay them $25,000 per year for the next eighty years. If we roll up the 80-years' benefits, that's $2,000,000: a 2:1 benefit-to-cost ratio! Sure, it's not 20:1, but it's still pretty good. Two is bigger than one. Right?
6. Fear of wages
Paul Krugman didn't like the policy responses to the GFC and now he is unhappy with the responses by policy makers now we seem to be returning to the new versions of 'normal'. In fact, as I read it, he is seeing sinister 'class interests' in the growing acceptance that interest rates need to move back up after their unusually long low levels.
Presumably he sees Graeme Wheeler as an agent for the 'elite classes'. His NYTimes column is well worth a read however.
Suddenly, it seems as if all the serious people are telling each other that despite high unemployment there’s hardly any “slack” in labor markets — as evidenced by a supposed surge in wages — and that the Federal Reserve needs to start raising interest rates very soon to head off the danger of inflation.
To be fair, those making the case for monetary tightening are more thoughtful and less overtly political than the archons of austerity who drove the last wrong turn in policy. But the advice they’re giving could be just as destructive.
O.K., where is this coming from?
The starting point for this turn in elite opinion is the assertion that wages, after stagnating for years, have started to rise rapidly.
7. Why the ECB should Buy American
European (Euro-zone) QE is not a popular idea in many member countries; the ECB apparently has no authority to issue bonds. If their interest rates are already close to zero and they are facing the threat of deflation, what can they do?
Well, Jeffery Frankel has an idea - the ECB should buy US Treasuries. I had a double-take when I read that, but actually, be makes some interesting points:
What, then, should the ECB buy if it is to expand the monetary base? For several reasons, it should buy US treasury securities. In other words, it should go back to intervening in the foreign-exchange market.
For starters, there would be no legal obstacles. Operations in the foreign-exchange market are well within the ECB’s remit. Moreover, they do not pose moral-hazard issues (unless one thinks of the long-term moral hazard that the “exorbitant privilege” of printing the world’s international currency creates for US fiscal policy). Finally, ECB purchases of dollars would help push down the euro’s exchange rate against the dollar.
Such foreign-exchange operations among G-7 central banks have fallen into disuse in recent years, partly owing to the theory that they do not affect exchange rates except when they change money supplies. But in this case we are talking about an ECB purchase of dollars that would change the euro money supply. The increase in the supply of euros would naturally lower their price. Monetary expansion that depreciates the currency is more effective than monetary expansion that does not, especially when, as is the case now, there is very little scope for pushing short-term interest rates much lower.
Depreciation of the euro would be the best medicine for restoring international price competitiveness to the periphery countries and reviving their export sectors.
8. What a gas
Electric cars are here but hydrogen (fuel cell) cars are coming and the implications could be large. Todd Woody has an interesting (long) review of the current state in the world's tech capital. He says, don't bet on Tesla (and electric) winning the competitive drive to replace hydrocarbons.
Powered by a fuel whose supply is practically inexhaustible - every nation can be the Saudi Arabia of hydrogen - fuel-cell cars convert pressurized hydrogen gas into electricity that powers the vehicle. The hydrogen cars now coming onto the market have triple the range of most battery electric cars and can be refueled in minutes rather than recharged in hours. And hydrogen technology can be scaled up to fuel buses, long-haul trucks and other big vehicles that most current battery packs are too puny to power. “We don’t see any reason customers wouldn’t adopt this technology in exchange for a gasoline vehicle as there’s no trade-offs,” Craig Scott, Toyota’s US national manager of advanced technology vehicles, told Quartz.
9. Major change is looming
We started tracking the aluminium and copper prices daily in January 2008. Today, in NZ dollars, the copper price is the lowest its been since May 2009 and the aluminium price is the lowest since we started tracking it. Aluminium in NZD has fallen 54% since its 2008 peak and copper has fallen 44% since its 2011 peak.
It wouldn't surprise me one bit if Rio return for more concessions at Tiwai Point. These masters of the universe have a bad business there making 'solid electricity'. We shouldn't deal next time, although if Rio do walk away the taxpayer will be left with far, far too much electricity generating capacity.
Electricity generation is a poor business too and the taxpayer should get out of it as fast as they can. In government hands, future prices will be much higher than they will need to be 'protecting the investment'. I would rather the private sector takes the looming losses. The role of the State should only be regulation in the interests of consumers. The present arrangements inhibit innovation around PV and other solar. The generators and network operators are powerful enough - they don't need the Government in their camp too as a majority owner.
10. Today's quote
"There are plenty of ways to get ahead. The first is so basic I'm almost embarrassed to say it: spend less than you earn." - Paul Clitheroe
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