Bernard's Top 10 at 10: Water 4.0; Why the world is trapped in a doom loop of credit booms; How the Living Wage worked in NZ; Breaking the (euro) buck; Dilbert

Heres my Top 10 items from around the Internet over the last week or so. As always, we welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz .

My must read is #2 on how the next wave of technological innovation may not be great for everyone.

1. Water 4.0 — Vox reports David Sedlak has written a book on the past, present and future of water.

He reckons much of the developed world faces a water crisis as ageing infrastructure needs replacing and the stresses of climate change will compound the issue.

This issue of replacing pipes, sewerage plants and water treatment plants is real in New Zealand, particularly in those areas where populations are flat to falling and Councils are under enormous pressure not to increase rates.

Much of this infrastructure was bought and paid for by generations who welcomed forgone consumption for the sake of future generations.

Related Topics

Over the last thirty or forty years though, many ratepayers hated having to pay extra to invest for future generations and are now pushing back at big ticket infrastructure items, or forcing them to be paid for by those arriving at the margins — hence the obscene development contributions being charged these days.

Sedlak makes the good point that often the big investments happen after crises.

Thats a pity, but probably true.

Heres Vox on Sedlaks views:

Some cities will simply have to plunk down billions to update their aging pipes and plants although many will try to postpone fixes for as long as possible. Historically, weve always been reluctant to spend money on water systems until a real crisis comes along, Sedlak says. And were starting to enter one of those periods.

Meanwhile, better conservation can help water-stressed cities but only up to a point. Many cities in the Southwest may have to look to new technologies, such as water recycling, desalination, or even radically decentralized water systems. Some of these technologies have drawbacks (desalination uses an enormous amount of energy, for one), but they could become more common in the years ahead.

2. The third great wave — This piece in the Economist from Ryan Avent about how the third great revolution of technology may just create lots of wealth for a few is a cracking and disturbing read.

A third great wave of invention and economic disruption, set off by advances in computing and information and communication technology (ICT) in the late 20th century, promises to deliver a similar mixture of social stress and economic transformation. It is driven by a handful of technologiesincluding machine intelligence, the ubiquitous web and advanced roboticscapable of delivering many remarkable innovations: unmanned vehicles; pilotless drones; machines that can instantly translate hundreds of languages; mobile technology that eliminates the distance between doctor and patient, teacher and student. Whether the digital revolution will bring mass job creation to make up for its mass job destruction remains to be seen.

This special report will argue that the digital revolution is opening up a great divide between a skilled and wealthy few and the rest of society. In the past new technologies have usually raised wages by boosting productivity, with the gains being split between skilled and less-skilled workers, and between owners of capital, workers and consumers. Now technology is empowering talented individuals as never before and opening up yawning gaps between the earnings of the skilled and the unskilled, capital-owners and labour. At the same time it is creating a large pool of underemployed labour that is depressing investment.

3. Trapped in a cycle of credit booms — Martin Wolf writes at the FT about the malaise in the Eurozone in particular. He has picked up on the Deleveraging? What Deleveraging? report.

Without an unsustainable credit boom somewhere, the world economy seems incapable of generating growth in demand sufficient to absorb potential supply. It looks like a law of the conservation of credit booms. Consider the past quarter century: a credit boom in Japan that collapsed after 1990; a credit boom in Asian emerging economies that collapsed in 1997; a credit boom in the north Atlantic economies that collapsed after 2007; and finally in China. Each is greeted as a new era of prosperity, to collapse into crisis and post-crisis malaise.

Incredibly, the eurozone seems to be waiting for the Godot of global demand to float it off into growth and so debt sustainability. That might work for the small countries. It is not going to work for all of them. The report talks of a poisonous combination. between high and higher debt and slow and slowing (both nominal and real) GDP growth. The euro periphery, it adds, is where this perverse loop of debt and growth is severe. That is no surprise. Crisis-hit eurozone countries have been running to go backwards. The policies of the eurozone rule out needed growth.

4. Macro-prudential the cure — Wolf reckons macro-prudential policies such as the RBNZs High LVR speed limit may have to be the cure. Hes right on that.

The only way out is to regulate the banks back into the lowly-leveraged boxes where they should be, given the implicit guarantees taxpayers have effectively given them in the wake of the financial crisis.

Yet the biggest lesson of these crises is not to let debt run ahead of the long-term capacity of an economy to support it in the first place. The hope is that macroprudential policy will achieve this outcome. Well, one can always hope.

These credit booms did not come out of nowhere. They are the outcome of the policies adopted to sustain demand as previous bubbles collapsed, usually elsewhere in the world economy. That is what has happened to China. We need to escape from this grim and apparently relentless cycle. But for now, we have made a Faustian bargain with private sector-driven credit booms. A great deal more trouble surely lies ahead.

5. The Living Wage works — This paper for the Population Health Congress on the early success of the Living Wage Campaign in New Zealand is heartening.

This is one pragmatic comment cited from one employer who moved to a Living Wage:

I think if youre taking them from a minimum wage to a living wage youd only need them to be another 30% more productive to be cost neutral, and 30% is not a big jump in terms of most people wasting 30% of their time on facebook and texting.

6. Auckland cant afford these view shafts — HT Eric Crampton for alerting me to this (not so) little issue preventing the intensification of housing in Auckland.

The Council proposed and finalised these view shafts around Auckland this year that stop building of high rises that would spoil the views to various volcanic cones around Auckland.

This little graphic courtesy of the Auckland Council explains how high rises are now allowed. The Epsom electorate is heavily represented.

And heres the map showing where you now cant build up. This sort of thing is why house prices in Auckland are nuts and the rest of New Zealand is forced to live with higher interest rates and a higher currency than is necessary.

7. Breaking the euro — We all learnt about the dangers of breaking the buck during the Global Financial Crisis when money market funds faced credit rating downgrades if they fell below 100c in the dollar.

Now theres a risk of something similar happening in Europe because the European Central Bank is charging interest on deposits.

Ambrose Evans Pritchard has the story, which is disturbing in a very Ambrose sort of way once you think about it for a while:

Standard & Poors said the 500bn nexus of funds in the eurozone is facing serious stress, increasingly unable to generate profits since the European Central Bank cut its deposit rate to -0.2pc and pulled down short-term rates across the spectrum of maturities.

Pressure is building for these funds, said Andrew Paranthoiene, the agencys credit director. Were observing portfolios on a weekly basis. If there is any deviation from our credit metrics, a rating committee would determine if rating action was appropriate. In our view, any loss of capital means that the safety of principal has been breached, he said.

Standard & Poors rates all its European money market funds at AAA(m). Industry experts say it is unclear whether the funds could function for long at a lower rating, given the nature of their business as ultra-safe depositories of corporate cash.

8. The rising tide only lifts luxury yachts — This Salon piece looks at fresh research showing income inequality actually slows economic growth.

Economists believed that redistribution slowed down economic growth, and that attempts to reduce inequality would, as a result, only worsen poverty. The reasoning had at least two strands of thought: First, since the poor tend to consume most of their income, it was good for the rich to have more wealth to invest in the future inequality would increase savings. Second, inequality provided incentives for individuals to work harder to take home more of the pie.

There is now a burgeoning literature showing that these assumptions arent true, and that inequality actually reduces growth. Thats because the reasons for accepting inequality were actually backward. Instead of motivating the rich to invest, higher inequality meant that the poor took on more and more debt, destabilizing the economy. Without enough poor and middle-class families consuming their products, businesses had fewer customers, and less revenue. Further, instead of providing the poor and middle class an incentive to better their lives, higher inequality gave the rich a reason to pull up the ladder, leaving the poor behind. Instead of working harder, the rich sit back on their wealth. The poor and middle class, disenchanted by lack of opportunity, have less money to invest in their own education (and are therefore are increasingly burdened by debt ). Inequality thereby reduces growth by reducing both demand and upward mobility .

9. Totally Jerry Kleinfelds speech on advertising to an audience of advertising executives last week. Some slightly nervous laughter ensued.

10. Totally John Oliver on the business of civil forfeiture in America, where the Police can take assets off people who havent been convicted of anything. Oliver is doing a great job of publicising some great journalism.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment in the box on the right or click on the Register link at the bottom of the comments.

Remember we welcome robust, respectful and insightful debate. We dont welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current Comment policy is here.