We will never be able to defend ourselves against an empire that is at full strength and deeply committed to take our resources rather than pay a market price.

Those who do not understand history are condemned to repeat it.

Thus are we encouraged to buy history books and to study the past.

We mostly learn that the decline of empire is due to a series of mistakes whose meaning was obscure to the key decision-makers at the time or they would not have been made.

A varient of this is that mistakes were made whose consequences were thought likely to be adverse but would not show up for decades or even centuries.  'What have my grandchildren done for me' is a question attributed to leaders who push ahead with mad policies whose consequences will only be felt beyond their lifetime.  Quite possibly climate change is such a matter.

'As the UN Climate Change Conference in Copenhagen last December made clear, rhetorical pleas to save the planet for future generations are insufficient to overcome the conflicts over economic distribution between rich and poor countries that exist in the here and now'.

Indeed, Jared Diamond's fine 2005 book, Collapse: How Societies Choose to Fail or Succeed, is 'cyclical history for the so-called Green Age: tales of past societies, from seventeenth-century Easter Island to twenty-first-century China, that risked, or now risk, destroying themselves by abusing their natural environments'.

Harvard historian, Niall Ferguson, is one important thinker who has embraced a different approach.  He has discovered Chaos Theory, in which gradual decline and fall of complex systems is replaced by sudden demise.

'Great powers and empires are, I would suggest, complex systems, made up of a very large number of interacting components that are asymmetrically organized, which means their construction more resembles a termite hill than an Egyptian pyramid. They operate somewhere between order and disorder -- on "the edge of chaos," in the phrase of the computer scientist Christopher Langton. Such systems can appear to operate quite stably for some time; they seem to be in equilibrium but are, in fact, constantly adapting. But there comes a moment when complex systems "go critical." A very small trigger can set off a "phase transition" from a benign equilibrium to a crisis -- a single grain of sand causes a whole pile to collapse, or a butterfly flaps its wings in the Amazon and brings about a hurricane in southeastern England'.

'Regardless of whether it is a dictatorship or a democracy, any large-scale political unit is a complex system. Most great empires have a nominal central authority -- either a hereditary emperor or an elected president -- but in practice the power of any individual ruler is a function of the network of economic, social, and political relations over which he or she presides. As such, empires exhibit many of the characteristics of other complex adaptive systems -- including the tendency to move from stability to instability quite suddenly. But this fact is rarely recognized because of the collective addiction to cyclical theories of history'.

A common cause of sudden collapse is gross fiscal imbalance.

The Hapsburg, Ottoman, and Romanov empires withstood many challenges but collapsed suddently following the Bolshevik Revolution of October 1917.

The United Kingdom's age of hegemony was effectively over less than a dozen years after its victories over Germany and Japan.

Less than five years after Gorbachev took power, the Soviet imperium in central and Eastern Europe had fallen apart, followed by the Soviet Union itself in 1991.

With respect to the US empire now, Ferguson says that 'Alarm bells should therefore be ringing very loudly, indeed...' The United States faces a deficit for 2009 of more than $1.4 trillion -- about 11.2 percent of GDP, the biggest deficit in 60 years -- and another for 2010 that will not be much smaller. Public debt, meanwhile, is set to more than double in the coming decade, from $5.8 trillion in 2008 to $14.3 trillion in 2019. Within the same timeframe, interest payments on that debt are forecast to leap from eight percent of federal revenues to 17 percent.

The 'chaos' theory of history has profound consequences for us all.  If the Americam empire collapses suddenly, or even if it retreats to isolationism in an attempt to mend its near terminal fiscal situation, Australia will be left alone and friendless in a volatile and dangerous part of the world.

We would be wise to devote a significant part of our newfound mineral wealth to building the region's most effective defence force.

We will never be able to defend ourselves against an empire that is at full strength and deeply committed to take our resources rather than pay a market price.

But, like Israel in the Middle East, we are capable of making our conquest hard won and very costly to an aggressor.

The quotes in this account are from an essay by Niall Ferguson for the Council of Foreign Relations, March/April 2010.  Here is a link to the full essay.

Posted today on The Australian's website.

The longest running soap-opera in Australian politics is over.

Now begins the hard work of making it work.

The hard-heads says the minority government will become a policy-free zone, but there is another possibility. 

The 'Independents' have forced tax reform back on the agenda and have insisted on a big new package for regional Australia.

So all is not lost, unless Rob Oakshott is allowed anywhere near a microphone for the life of this parliament.

Janet Albrechtsen brilliantly summed up the final act of the soap-opera.

'IF you needed a reminder that the nation had been held hostage by a couple of power-hungry independents it arrived yesterday afternoon. For 17 days we waited for the independents to decide. And we waited. And waited.

'They talked about national interest. They talked about rural Australia. They talked about stability in government.

'Yesterday, after Bob Katter sided with the Coalition, Tony Windsor said they had made up their minds at 1.30am yesterday morning. But still we waited until 3pm to learn the identity of the government.

'Windsor was mercifully brief. Fellow independent Rob Oakeshott was insufferably and embarrassingly long-winded, enjoying the moment far too much. After the two independents sided with the Gillard Labor government, Windsor came clean about why.

'The member for New England admitted he sided with Labor because a Gillard government was less likely to go back to the polls.

'When he was asked why Tony Abbott and the Coalition were likelier to go to the polls, he said: "Because I think they'd be more likely to win."

'Get it? Windsor admitted he sided with the party that had less support from Australian voters. It's a novel theory of democracy, almost as brazen as Stalin's theory that it's not the people who vote that count. It's the people who count the votes'.

Interest rates.

Now just about everyone thinks the Reserve Bank will, indeed needs to, raise interest rates before long.

Do these pundits never think for themselves?

After our analysis hit cyberspace and the newsstands yesterday, and (more to the point) after the RBA Chief issued his beautifully crafted comments in support, Australia's commentariat turned on a dime.

So now its 'rate hikes to come' as far as the eye can see.

Today we have been waiting for ... not Godot, not Garnaut, but rather the Three Amigos of Australian politics, and RBA Chief Glenn Stevens.

Henry's view is that the Reserve Bank should, but almost certainly will not, tighten monetary policy following its board meeting today.

It should tighten now because the Australian economy is strengthening more quickly than it, or other analysts for that matter, believed likely.  It will almost certainly not tighten now because of uncertainties in the global economy, mistaken  belief that domestic inflation will remain in its target zone and because it has not prepared its support base for the next rate hike.

This argument is continued here.  

Then there are the Three Amigos. These blokes certainly get the palm for thoroughness in decision making rather than speed, and we need to hope none of them is ever required to make a quick decision when bullets are flying.

As Niki Savva says 'If the independents think the past couple of weeks have been difficult, it will be nothing compared with what lies ahead'.  The fun in the sun is nearly over, and what awaits will be long and difficult, or short and even more difficult if Australia requires a new election quickly.

We shall report in when each decision is made.

Until then, its back to Japan's roaring Eighties and its two-decade-long hangover.

When the sake-quaffers hit the turps, it is a real party.

Decision 1. RBA sits and waits

Glenn Stevens' summary was as follows: 'The current setting of monetary policy is resulting in interest rates to borrowers around their average levels of the past decade. With growth in the near term likely to be close to trend, inflation close to target and with the global outlook remaining somewhat uncertain, the Board judged this setting of monetary policy to be appropriate for the time being'.

Much of the body on his statement confirmed Henry's view that global and domestic conditions are stabilising and indeed improving.  The wild card is business investment, and Stevens confirmed this when he said: 'Indications are that business investment in particular could increase strongly'.  That will quickly become the pressure point and the trigger for the next series of interest rate hikes.  Read on here.

Decision 2A. Bob Katter with the Coalition.

Bob Katter reached his decision for the Coalition before the foreshadowed 'Three Amigos' concensus.  The score now is 74 each and the result either a two seat majority to one or other coalition or a totally hung parliament and, presumably, another Federal election.

Decision 2B. Tony Windsor and Rob Oakeshott for Labor, who will resume governing forthwith.

These two fine Australians made some powerful points in providing the reasons for their decisions and one hopes the 'near miss' (of outright majorities) for both main parties leads to a different parliament providing good government for at least a year or two.  Henry (Thornton) is particularly pleased to see that there is to be a consideration of the (Ken) Henry tax review as well as a strong regional package, greater consideration for renewable energy and focussed attention on improving regional and indigenous education.

One learns that reading carefully the views of selective journalists is a good way to tap into the thinking of the RBA.

I do not wish to imply that the better journalists are leaked upon, just that there is a modern tradition of prepping the market before important changes of direction and that the better journos have learned to deconstruct the messages emanating from the bunker at the top end of Martin Place.

There is also the 'verdict of the market', which is about as reliable as the bets on football games, or should I mention cricket involving men from the sub-continent?  In evaluating the betting odds as a guide to possible policy action, it pays to remember that if the punters really knew what was coming the bookies would be out of business.  (Is this something like Friedman's view that speculation is stabilising, or its converse.  Can someone help?)

Having finished my article for tomorrow's board meeting, I was therefore surprised, if not shocked, to read David Uren's epistle to the uninitiated in this morning's Oz.

'The market response to the June quarter GDP figures shows that international investors do not believe the Asian growth story and think Australia is heading for a fall.

'On Friday, markets were still giving small odds that the Reserve Bank would cut rates tomorrow'.

Uren also mentioned that 'normally ebullient deputy governor Ric Battellino [was] suffering a serious dose of the doubts during last week's US Federal Reserve annual conference at Jackson Hole, Wyoming'.

Henry, of course, was not at Jackson hole to observe Ric Battellino's demeanour for himself.  But he does know that such a one would naturally be sober and perhaps even a bit sombre in the company of the great and the good of monetary policy.

'Don't gloat' was a pearl of wisdom Henry was once offered before a meeting at which his controversial views about the state of the Australian economy were proved in the nicest possible way, with a dramatic data release.

As representative of the strongest 'developed' nation on the globe, Ric Battellino has such advice embedded deep in his psyche.

As it is a quiet news day, readers may be interested in a rare film review by Henry's Sir Wellington Boote.  The film is 'Tomorrow when the war begins' and the crusty knight of the realm highly recommends it to Henry's readers.

Tune in here tomorrow for a view quite different to that of Friday's market, and Ric Battellino's alleged 'serious dose of the doubts'.

An attack of flu - possibly swineflu - has decimated the Thornton family this week, probably explaining the grumpy tone of the week's blogs. (Biota's Relenza helped, even though taken too late for ideal impact.)

Henry is however enraged that he made an appointment to see his GP on the second week after the Rudd gummint said the vaccine was now available but there was, sadly, none available in that particular part of leafy, now sodden, Melbourne. 

Routine Rudd'n'Gillard mismanagement, I guess.  Pity about the lost week.

It is beginning to look as if Julia Gillard is poised to run a minority government backed, if that is the right word, by dingbats and con men.

As some of our best journos have said today, this could not come at a worse time.  The renewed resource boom requires - demands if one cares about the national interest - a renewed focus on economic reform.

Will Tony Abbott (and the nation) pay the ultimate price for finding economics 'boring' one is forced to ask.

George Megalogenis is well worth a read on this subject today, demonstrating his usual incisive brilliance. (Just joking George, and gentle reader. We'll have no confected hubris in this column).

Paul Hogan free to return home

Good to see that the ever-merciful ATO has relented to allow Paul Hogan to return to his home in the USA.   To be sure, he has not yet been charged with any offence, and reportedly has solid expert support for his position, support not previously recognised.

It was a bit chilling to read of the raid at the start of this frolic.  'Hogan's financial adviser, Tony Stewart, hasn't forgotten the cold June morning in 2005 when his Sydney home was raided at the crack of dawn. His wife answered the door to face 10 armed federal police officers.

'She asked them to wait while she woke her sleeping children. As she turned her back to walk upstairs, the police overtook her, racing through the house in their effort to uncover documents linked to Stewart's famous clients, Hogan and his business and comedy partner John Cornell.

'Stewart, whose daughter was woken by a police officer shining a torch in her face and demanding she get out of bed, has never before spoken about the events of June 9, 2005, which first signalled that Hogan and Cornell were in Wickenby's sights'.

Assuming the story is correct - and we will publish a refutation if one is offered - how dare they behave this way?  What a pity none of our sturdy independents has never been brutalised by the ATO in pursuit of some dubious scheme that has been spawned by Australia's horrendously complicated tax legislation.

Then we'd see some action, including if necessary Swan and Gillard in balaclavas raiding the Commissioner's office, if that's what Bob Katter or Andrew Wilkie wanted.

Cartoon of the week.

It has been a long week.

Who'd be a politician?

Imagine having to cope with the Greens, who if they had their druthers would convert most of Australia's industry to basket weaving and poorly painted Bunning's boards.  Imagine having to deal with a man who got elected under the National Party flag but now cannot decide if he's willing to sit in the party room, or participate in the coalition he signed on for.

What about the member for Dennison who doesn't know where he stands politically, who signed on with Labor even thought the Libs offered him more money for his bloody hospital.  And then told Fran Kelly that he wouldn't necessarily be supporting Labor on their major policies. When pressed, it seemed a fair mining tax was ok, but neither version so far produced by Labor was fair.

Bob Katter, we are told, keeps changing his mind, and no doubt is holding out for Minister for Rural Protection in a Gillard government. He'll look good on the front bench next to Peter 'Pink Batts' Garratt, big hat next to bald pate. The hat might hide the nodding girls, of course, which will be a problem for Labor's spinmeisters.

The other 'county independents' at least look a bit more consistent, but Henry's guess is that Bob Oakshott is a natural Labor supporter.  Tony Windsor has all the makings of a fine speaker. He won't be needed for a Gillard government but at least he might get reelected in the election that is sure to occur as soon as a Green or a Wilkie decides to dud Gillard over the ETS, or the mining tax or even over the quality of the scones at the weekly meeting with the PM.

Sorry, folks, I feel a whole lot better now.  But surely Australian politics has reached a new low ebb.  Where is the courage of a Hawke, or a Keating or a Howard? To stay ahead in the global race for economic advantage we need all the smarts we can assemble to continue necessary economic policy reform.

Actually, we need to do better than simply shine at economic policy reform. Australia needs to devise and ruthlessly implement a defence policy that at least gives potential aggressors cause to pause before they decide we are an easily plucked apple.

At least we have the footy finals to distract us. Henry promises to lay off the politicians for a bit if the gods, or Paki bookies' mates, can arrange for Caaaaarlton! to beat Collingwood in the AFL Grand Final by one point, resulting from an improbable goal kicked after the final siren.  Just joking, folks, life would never be that kind, and there is a natural limit to the reach of Paki bookmakers.

If you prefer your distraction in other forms, there is a nice article from the Wall Street Journal in the Oz today on why Lehman Brothers was allowed to fail. This is an important question, touching as it does on matters like the future of capitalism, the ability of senior Americans to cope with a financial crisis on several fronts and the great question of 'moral hazard'.

Here is another contribution on this subject, from Tiresias of Canberra.

RBA Chief Glenn Stevens should pause to remind himself that it is the speck of sand in the oyster that produces the pearl.

The Australian economy picked up 'surprising speed' in the second quarter, reports Daniel Morrissey, growing at its fastest quarterly pace in three years.

The Australian Bureau of Statistics said gross domestic product (GDP) rose 1.2 per cent in the three months ended June 30, from a revised 0.7 per cent in the previous quarter. It was the quickest growth since the 2007 June quarter, when GDP jumped 1.3 per cent.

The annual GDP growth rate was 3.3 per cent.

Economists had tipped quarterly growth of 0.9 per cent and annual growth of 2.8 per cent.

The resilience of the economy is thanks to demand for the nation’s iron ore, coal and other minerals, particularly from China, which has helped boost company profits.

This has helped support business and consumer confidence and kept household consumption buoyant, a big contributor to economic growth in the June quarter.

The overnight analysis has reconciled yesterday's strong consumption numbers with weak retail sales.  Vehicle sales have been extraordinarily strong and so too is overseas holidays.

It is time to remind readers, including the gnomes of Martin Place, that those who forget history are condemned to repeat earlier mistakes.

There are two well established propositions about the modern Australian economy.

1. There is a systematic tendency for growth to exceed expectations; and
2. Growth exceeding predictions = inflation

I reminded Glenn Stevens and his colleagues of these propositions in April of this year, and who knows on how many earlier occasions.

The trouble is that Glenn Stevens lives in a climate of Martin Place euphoria, being told regularly what a great bloke he is and what a good job he is doing.

Stevens should pause to remind himself that it is the speck of sand in the oyster that produces the pearl, not the sweet oyster juice of his mates.

There are more interest rate hikes to come, gentle readers, and you have been warned.

Lightly edited version posted today on The Australian's website.

*******************************************************************************************************
Technical note.  It was the young Joachim ('George')Goschen who advised the Bank of England in 1861, and no doubt regularly afterwards, that Bank Rate should be raised in 1 percent jumps if monetary policy was to be effective.  This advice was taken and this is perhaps the first time anyone criticised a central bank for moving 'too little, too late’ to slow a boom.   The proposal was “most unpopular” but was commended by the magisterial Walter Bagehot in his book Lombard Street, when he wrote in 1873 “On this occasion, and, as far as I know, on this occasion alone the Bank of England made an excellent alteration of their policy, which was not exacted by contemporary opinion, and which was in advance of it”. (Clapham,  The Bank of England, Volume II, pp 258 – 259, Bagehot, Lombard Street, 1892 edn, p 184).

With no government at work, one of Australia's chronic problems is in full retreat.

I refer to the excessive Current Account Deficit - the CAD.

After a temporary check because of floods in Queensland, exports are again roaring out of the country, showing the influence of the renewed China boom.

With consumers showing some long awaited and very welcome (except to retailers) caution, imports are subdued, at least by Australia's normal standards.

Latest ABS figures show that, in seasonally adjusted, current price terms, the current account deficit fell $10,817m to $5,640m in the June quarter 2010. Exports of goods and services increased $12,747m (21%) and imports of goods and services increased $3,041m (5%).

In trend current price terms, the current account deficit fell $9,463m to $7,141m in the June quarter 2010.

In seasonally adjusted chain volume terms, the deficit on goods and services fell $1,260m (16%) from $7,694m in the March quarter 2010 to $6,434m in the June quarter 2010. This is expected to contribute 0.4 percentage points to growth in the June quarter 2010 volume measure of Gross Domestic Product.

Australia's net International Investment Position (IIP) rose $4.2b to a net liability position of $763.5b in the June quarter 2010. Australia's net foreign debt liability increased $14.1b (2%) and Australia's net foreign equity liability decreased $10.0b (10%).

Links to relevant ABS data releases are available here.

The long term picture shows the net benefits, with the CAD below 2 % of GDP and signs of  a check to the increase of net foreign debt as a ratio to GDP.

Some modest celebrations are in order, gentle readers, preferably with local bubbly!

After one day (overnight Friday here) of market bounce, last night saw another slump in US stocks.

President Barack Obama says his economic team is working to identify new measures to stimulate US growth but there is no "silver bullet".

The measures, he said, will be part of a "full-scale attack" to strengthen the lacklustre economy.

Mr Obama, speaking in the White House Rose Garden, said his economic team is "hard at work in identifying additional measures that could make a difference in both promoting growth and hiring in the short term, and increasing our economy's competitiveness in the long term".

Stimulus that also adds to productivity is far better than measures to bailout failed businesses and failing households. Measures such as cutting taxes, extending financing to small businesses and boosting investments in renewable energy are all on the President's agenda and are well worth consideration.

The trouble is that deficit spending is already past the point where it becomes counterproductive. America's debt burden reflects the extent to which spending power has been stolen from future consumers to help current consumers, and such people - everyday Americans who expect to be around in a decade or so - are unlikely to tolerate any more raids on their future spending power.

Australian economy still breathing.

David Uren reports: 'The mining sector almost doubled its profits in the June quarter while earnings in the rest of the economy went backwards.

The mining sector reaped 40 per cent of all company pre-tax profits in the June quarter, although it accounts for less than 7 per cent of the economy. Soaring prices for iron ore and coal boosted its earnings by $9 billion to $19.5bn.

"The economy is awash with cash from the mining boom," RBS chief economist Kieran Davies said. He said the mining profits would surge again in the September quarter before easing in line with some reductions in contract export prices.

Excluding mining, pre-tax profits fell by 8 per cent

Total credit outstanding is creeping up, according to the Reserve Bank's latest data release, though business credit is still creeping down.

Total credit provided to the private sector by financial intermediaries rose by 0.1 per cent over July 2010, following an increase of 0.2 per cent over June. Over the year to July, total credit rose by 2.8 per cent.

Housing credit increased by 0.5 per cent over July, following an increase of 0.4 per cent over June. Over the year to July, housing credit rose by 8.1 per cent. Housing credit rose over July due to growth in lending to both owner-occupiers and investors.

Other personal credit was flat over July, following a fall of 0.3 per cent over June. Over the year to July, other personal credit increased by 3.2 per cent.

Business credit fell by 0.4 per cent over July, following a fall of 0.1 per cent over June. Over the year to July, business credit declined by 5.0 per cent.

The latest ABS Retail Trade figures show that retail sales increased 0.7% in July, seasonally adjusted, compared with an increase of 0.4% the previous month, and ahead of economists' expectations.

Cafes, restaurants and takeaway food services (5.3%) recorded the largest seasonally adjusted increase in July followed by Other retailing (1.4%) and Food retailing (0.4%).  Red meat production boosted the South australian economy.

ABS Building Approvals show that the total number of dwellings approved rose in July 2010 following falls in the previous three months in seasonally adjusted terms.

According to the ABS, New South Wales (9.7%), Victoria (12.1%), South Australia (8.3%) and Tasmania (4.4%) recorded more dwelling approvals this month, while Queensland (-18.3%) and Western Australia (-4.9%) recorded less dwelling approvals in seasonally adjusted terms.

Latest ABS figures show that, in seasonally adjusted, current price terms, the current account deficit fell $10,817m to $5,640m in the June quarter 2010. Exports of goods and services increased $12,747m (21%) and imports of goods and services increased $3,041m (5%).

In trend current price terms, the current account deficit fell $9,463m to $7,141m in the June quarter 2010.

In seasonally adjusted chain volume terms, the deficit on goods and services fell $1,260m (16%) from $7,694m in the March quarter 2010 to $6,434m in the June quarter 2010. This is expected to contribute 0.4 percentage points to growth in the June quarter 2010 volume measure of Gross Domestic Product.

Australia's net International Investment Position (IIP) rose $4.2b to a net liability position of $763.5b in the June quarter 2010. Australia's net foreign debt liability increased $14.1b (2%) and Australia's net foreign equity liability decreased $10.0b (10%).

Links to relevant ABS data releases are available here.

The race for the Lodge.

Both main parties are still being nice to the independents and the Greens.  Labor has the Green votes, but if it forms government will be seen to have made a pact with a deep green devil.  Given Labor's junking of the ETS, such a pact is hard to imagine in any case.

Henry's view that the Coalition rather than Labor is a far more likely partner for the country independents remains unchanged.

Tony Abbott's body language is visibly strengthening and even the ABC, it seems to me, is being minimally more respectful to the man who is likely to be Australia's next Prime Minister.

The Chainsaws are being tuned up in Laborland.

Risk vrs uncertainty.

The trouble with investing, or making policy, is the the future is uncertain and measures of risk relating to the recent past may be, indeed probably will be, deeply misleading.

The Reserve Bank has just posted a speech that makes these points to be presented today by Assistant Governor (Financial Markets) Guy Debelle.

If you have fogotten these fundamental points, you will benefit from a good reading ... correction, thrashing.

Ben Bernanke moved the markets on Friday - upwards.

He is following the modern tradition - which he helped shape - of supporting growth rather than sorting out the fundamentals.

Bernanke is an historian of the Great Depression.  It is widely agreed by historians that in the crisis of 1929 the US Fed tightened monetary policy rather than easing.  The government declined to bail out the banks and tightened rather than eased fiscal policy, in line with the prevailing conservative beliefs of the time.

In the crisis of 2008, the US government, along with many others, adopted an expansionary fiscal policy and bailed out all the big financial institutions who needed help, with the curious exception of Lehman Brothers.

The Fed cut cash interest rates almost to zero and engaged in 'quantitative easing', printing money by exchanging privately owned paper for cash.

Now, after two years of new age expansionism, the USA is at best growing slowly, with unemployment just a tad under 10 %, and at worst slipping back into the slough of despond.  It is time for Ben Bernanke to account for his policies.

'... when the eruption of the Panic of 2008 threatened the very foundations of the global economy, the world rose to the challenge, with a remarkable degree of international cooperation, despite very difficult conditions and compressed time frames. And when last we gathered here, there were strong indications that the sharp contraction of the global economy of late 2008 and early 2009 had ended. Most economies were growing again, and international trade was once again expanding'.

'... as we return once again to Jackson Hole I think we would all agree that, for much of the world, the task of economic recovery and repair remains far from complete. In many countries, including the United States and most other advanced industrial nations, growth during the past year has been too slow and joblessness remains too high. Financial conditions are generally much improved, but bank credit remains tight; moreover, much of the work of implementing financial reform lies ahead of us'.

Here is the central dilemma of new age economic policy. The Crash of 2008 was the culmination of decades of overspending and overborrowing by the western nations, led with gusto by the mighty US of A.

Yet the new age policy response involves more overspending and overborrowing.  While households and businesses are sensibly looking after their own futures by spending less, saving more and working harder (when work is available), governments are urging them to resume spending, and governments are providing the wherewithal.

Mr. Bernanke provides as careful update on current conditions and prospects.  The summary is depressing.  'Although output growth should be stronger next year, resource slack and unemployment seem likely to decline only slowly. The prospect of high unemployment for a long period of time remains a central concern of policy. Not only does high unemployment, particularly long-term unemployment, impose heavy costs on the unemployed and their families and on society, but it also poses risks to the sustainability of the recovery itself through its effects on households' incomes and confidence'.

Here is my interpretation. The great boom of the three decades to 2008 brought forward - ahead of America's ability to pay - much consumption.  It also involved bad habits of overspending on things no-one really needed or even wanted, as an atmosphere of easy money always does.

It is ludicrous to expect an easy or quick adjustment to the imbalances caused by three decades of bad habits.

America is a great nation with strong entrepreneurial traditions. It would be much better for its government and senior banker to be emphasising a return to America's traditional strengths, virtues and habits than to be pressing stimulus policy to the maximum extent possible and exhorting Americans to respond accordingly.

There will be no lasting improvement in the American economy unless and until the aims of its businesses and households are refocussed.

This conclusion applies to a greater or lesser extent to all western nations, including Australia.

Our economy is stronger than most because of its conservative fiscal situation and wealth from the mining sector thanks to China's rapid emergence as an industrial powerhouse.

But there is a crying need for renewed economic policy reform to reinstate rapid productivity growth, an end to the Labor government's waste and mismanagement and sensible decisions about population policy, which means immigration policy.

Ben Bernanke's concluding paragraph starts with the following sentance. 'As I said at the beginning, we have come a long way, but there is still some way to travel'.

Far nearer the truth is the following rearrangement. 'We have come some way, but there is still a long way way to travel and serious risks to avoid on the way'.

Am I wrong, gentle readers?

Here is Alan Kohler's take on Bernanke's Jackson Hole speech.