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Henry Thornton - Contributors: A discussion of economic, social and political issues Blogs
The age of restraint
Date: Friday, December 05, 2008
Author: Henry Thornton

We may come to call this the age of restraint.

Retailers are going broke, boomtime financiers are in deep trouble, car sales and housing approvals are plummeting, manufacturing activity is plunging, business investment intentions are cooling.

All of these comments apply to Australia, previously described (perhaps with deep irony) as 'the miracle economy' or 'the nirvana economy'.

They apply with even greater force to most other economies.

The euphoria of last week in equity markets is long gone, and the correction of asset values goes on despite massive interest rate cuts and promised fiscal expansion.

From the USA comes the latest gloomy bulletin: 'General Motors acted as a hefty drag on the Dow Jones Industrial Average, falling US79 cents, or 16 per cent, to 4.11 after the company's chief executive told lawmakers that sales of GM vehicles have already begun to dip because of speculation that the company is on the verge of bankruptcy.

'The Senate hearing appeared to leave plenty of doubt about whether the auto maker will get the government loans it seeks to avoid collapsing in coming weeks. Ford, which says it doesn't need immediate aid, lost US19c, or 6.7 per cent, to $US2.66.

'Overall, the Dow lost 215.45, or 2.51 per cent, to 8376.24. The broad S&P 500 index fell 25.52 points, or 2.93 per cent, to 845.22. The technology-heavy Nasdaq Composite declined 46.82 points, or 3.14 per cent, to 1445.56.

And in global commodity markets: 'Oil prices tumbled 6.7 per cent to settle below $US44 a barrel, hitting their lowest point since January 2005, as traders ratcheted up their bets that fuel usage will suffer a steep pullback in the months ahead'.

The Economist explains why the plunging price of oil may not be all good news.

'The price of oil would ideally reflect not only its demand and supply but take into account the damage that its use inflicts on the environment. But when oil is cheap, the hard decisions about investing in alternatives, inventing more energy-efficient plants and machinery, or changing consumer behaviour, all of which would help the world can wean itself off oil, become that much easier to postpone'.

Meanwhile, in the land of Oz, the Rudd government reportedly is going soft on its much heralded emissions trading scheme.

Clearly hard times call for a softer approach, but if climate change is the catastrophe we are led to believe, just maybe we should be tightening belts another notch and getting on with saving the planet.

Henry ventures the judgment that the only way to do this is to change the habits of a century and think 'restraint' rather than consumerism and over-stimulated growth.

We have become used to buying houses with no equity ('subprime borrowing'), buying expensive consumer goods with credit cards or with greatly delayed payment and generally expecting instant or even premature rather than delayed gratification.

Henry recalls companies he has tried to help setting growth targets of 20 %, even in mature industries where growing at the economy average of, say, 5 to 8 % might be considered heroic.

Maybe the massive cuts in equity values are reflecting sober realisation that the world has changed and it will be sensible restraint rather than unsustainable expansionism that will be valued in the twenty-first century.

There is a more general reason to consider the benefits of restraint.

What if massive interest rate cuts and fiscal expansion turn out to be like 'pushing on a string'?

This is clearly possible if businesses and consumers decide to save any windfalls and/or to pay off debt rather than resume the spending habits of a lifetime.

People might just read the unusual actions of central banks and governments as indicating panic, and this might lead them to tighten belts even more than if policy was not so obviously trying to restore business as usual.

In the immediate aftermath of the current crisis, this seems to be many people's plan.  Whether the philosophy of restraint survives the recovery that will come, whether or not it is actually helped by current policy actions, is the big question.

We may be living through one of the global culture's great turning points.

Saturday Sanity Break, 31 January 2015
Date: Saturday, January 31, 2015
Author: Henry Thornton

The latest 'Captain's Pick' has shaken Australian politics. Henry has been a corporate captain and knows how vital it is to take one's fellow officers and indeed the noncoms and grunts with one.  One hopes lessons will (finally) be learned and there is no need for a garotting in a dark room, which was the unhappy result of odd activites by the Captain(s) in the last government. Clearly, however, this government needs far better communication with the grunts (Henry's readers, aka 'voters') as well as the noncoms and sub-captain officers. 

Do not miss Grace Collier's 'Am I a tosser' quiz in the Oz today. It beats all the criticism thrown at the PM by a country mile, proving yet again that satire's rapier beats serious broadsword work most of the time.

Then there is the Queensland election, which looks like going down to the wire. What a catastrophe for the Premier if he loses his seat and his party loses the election or, even worse for the Premier, his party scrambles back and he does not. The week's conspiracy theory is interesting.  The Federal government knows that Australian politics works best when state and Territory governments are different 'colors' to the Federal government.  Hence the ham-fisted attemps to 'help' the Victorian and Queensland conservatives lose the latest state elections. Here is our most recent analysis of this matter.


Two big bits of recent economic news:
* The European Central Bank (ECB) announced a massive bond-buying program ('Quantitative Easing', or 'QE')
* The US Fed, which some time ago ended its QE policy and the Dow soared despite the Federal Reserve clearly indicating that interest rates would soon move up.

The latest Raff Report says that the current business cycle in the U.S. only has 12 to 18 months and perhaps far less to run. To reiterate the current situation, U.S. Industrial Production lags new orders by 6 to 9 months and longer for some aircraft and other large capital items. On this basis, U.S. manufacturing should remain robust at least up until the end of 2015. In 2016 all bets are off. Chucking money at problems is like some aspects of farming. You can lead a horse to water but you can’t make it drink. Ask the Japanese if this is not so.

Read the full Raff report here.

The Australian economy rumbles along despite the political gridlock and without the benefit of the new Treasury Secretary revealing his thoughts about the steaming pot he has inherited. Relatively high 'underlying' consumer inflation produced an upward twitch of the (still overvalued) currency and then with a majority of market denizens deciding the RBA will cut rates next week fell again.

Soon the Aussie will be in a danger zone in which a major slide will be likely.  While this might improve competitiveness, at least for a while, it would be far preferable if that could be achieved by economic reform.  But with the government in some strife this is about as likely as  peace in the Middle East, so we must grit our teeth and soldier on.

My regular advice to the board of the RBA is posted earlier than usual. Henry started the fashion of giving advice, or guessing outcomes, over a decade ago.  Now those who play this game start earlier and earlier, so we must comply, but with the RBA Board date on the relevant Blog.  Confused? You are not alone.

This edition starts with the proposition that our economic problems are not due to inappropriate monetary policy and that we need no further rate cuts.  But the people who think we do need further rate cuts earn far more than Henry, and readers should feel free to follow the money.

And, in the interests of 'balance', the very well connected Terry McCrann argues in the Oz today that the RBA's supposedly new plan for further rate cuts is because the world has changed, with deflation of goods and labor markets and new monetary expansion plans by the big guys, the US Fed apart, it is worth noting.


The courts have turned down James Hird's technical plea for redemption for the second time. But other expert opinion says that in the absence of ASADA's key witnesses their case against Essendon players has to fail.  If this occurs, all that will be left is a very nasty smell and a discredited football competition.

So far as Henry understands, there is no hard evidence, of the sort that is produced by regular drug testing.  Perhaps the issue is like racing on bikes in the Lance Franklin era.  We all suspect the presence of 'enhanced' players, even teams, but it may take death-bed confessions in 50 years to be sure.

Meanwhile, footy's main rival for hearts and minds, 'Futball', or 'Soccer', has produced a magnificant Asian Cup and the Socceroos are set to play South Korea in the final tonight.  After the brilliant wins over China and the UAE, including four brilliant goals Henry is warming to 'futball' as never before.

The tennis has been exciting and it all comes to an end this weekend. Nrws that Lleyton is finally retiring in a year or so is comforting and his continuing involvement in the Davis cup is further good news.  It's time we got competitive in that competition, Lleyton, and the promising crop of brilliant young players will make it possible.  Do not overlook that former Vermont football player, as he has the spirit and physical strength to become an intimidating force if he works hard enough.

'Stuff' this week is focussed on government, as is today's Image of the Week, courtesy AFR and the brilliant David Rowe.

Image of the Week

Saturday Sanity Break, 24 January 2015
Date: Saturday, January 24, 2015
Author: Henry Thornton

Happy Oz Day weekend, gentle readers. we hope it all goes swimmingly, and those who deserve Oz Day honours get their just desserts.

Mario Draghi has finally found the courage to buy bonds with printed Euros, introducing 'Quantitative Easing' (QE) to the Eurozone.  The USA, the UK and Japan are all ahead in that game, and all for the same reason, that conventional easy money has failed to stimulate goods and labor markets. Curiously, no-one seems to acknowledge that 'QE' has massively stimulated asset markets, making owners of assets richer, while doing very little to help battlers.

The real issue for economists is to explain why very easy monetary policy has failed to stimulate goods and labor markets. In seeking to understand this issue, economists would be wise to delve into the history of English monetary policy.  In 1871, The Economist reported, fairly offhand, as follows: ‘On several occasions like the present, the Bank of England has borrowed largely on Consols – and in this way circumvented lack of market rate response to the lower discount rate'.  To me this is a description of 'QE', attributed to the grand Old Lady of global monetary policy.

Anyway, with the partial exception of the mighty USA, zero discount rates and QE seem utterly impotant.  To a simple bloke like Henry, this suggests that easy money, even very easy money, is not the core reason for sluggish goods and labor markets. Governments are like the drunk looking for his wallet under the lamp post, not because that's where he lost it, but because that's where the light is best.

The Oz reports that Tony Abbott has had his 'Banana Republic' moment, warning that Australia risks becoming a 'second rate' nation. That's a good start, but the Treasurer earlier in the new year was spreading optimism about the state of the nation.  The only way to square the circle here is that Mr Hockey is confident he can successfully fix the budget mess, and the large-scale cost disequilibrium and restore Australia's productive growth and global competitiveness. 

Henry has advised the incoming Treasury Secretary on the questions he, (and the Treasurer), should be asking. Just as 'Disunity is Death', failure to 'Ask the right questions' is a second certain way to fail, in economic management as much as anything. In effect, Australia has a mild version of the Eurozone disease, sluggish growth of goods and labor markets, and Treasury and the RBA will be (or should be) delving into history and current experience of other nations to find the answers.

In case you missed them, Mr Hockey, here are the questions and a set of implied answers.


Very sad to see the exit of Lleyton Hewitt and Sam Stouser from the Oz Open, but great performances by the younguns, lead by Bernard Tomic and Nick Kyrgios, made for a cheery start to the weekend.

We think we heard that the ugly Oz cricketers beat the Poms with the second last ball of their innings, which is about as good as beating Collingwood by one point kicked after the siren due to an umpiring error.

But the highlight of the sporting week was undoubtedly the wonderful win by the Socceroos over the brave Chinese team in the quarter final of the Asian Cup of Futball.  And the goals scored by Tim Cahill were a joy to behold - here is a replay.


Henry was awakened at 7 AM today by a discussion on Radio National with the author of what sounds like a very nice book about the state of play in Australian culture. Will try to find a link, but this bloke  - a BBC correspondant - sounded like he is onto something.  Some overlap with the fin's interview of Anna Funder, linked here. We used to cut down the tall poppies, but 'now we are cutting the cultural cringe'. (AFR P 18, no link I can find.)

Also in the fin, nice discussion of the need to take science mosr seriously, with the views of Australia's four living Nobel laureates.

American Sniper is a must see movie in what is a summer of movie excellence.  Here is a link to the trailor and additional critical comment by Grace Randolph.

Also nice review in the Fin (P 51).

Image of the week

Energy crisis; what crisis?
Date: Wednesday, January 21, 2015
Author: Henry Thornton

The press is full of 'energy crisis' stories - energy workers who will lose jobs, companies that will go broke, energy exporting nations that will suffer cuts to real incomes, the list goes on. But this reader can remember the 1970s when oil crises - limited supply, soaring prices - caused 'stagflation' - that ugly mix of inflation and severe recession.

Logically, current events, with plunging enery prices, should produce deflation, or at least restrained inflation, and economic growth stronger than if energy costs remained high.

'Seize the day', says The Economist. 'The fall in the price of oil and gas provides a once-in-a-generation opportunity to fix bad energy policies'.

Economic policy is mostly about tinkering at the edges. Sometimes there is opportunity to do something useful. 'From Deng Xiaoping’s market opening in 1978 to Poland’s adoption of “shock therapy” in 1990, bold politicians have seized propitious circumstances to push through reforms that transformed their countries. Such a once-in-a-generation opportunity exists today'.

It's relatively simple.  'With energy prices falling, and set to fall further, it would be possible to abolish billions of dollars of distorting subsidies, especially for dirty fuels, whilst shifting taxes towards carbon use. A cheaper, greener and more reliable energy future could be within reach'.

The venerable mag's latest edition includes several reports on aspects of the state of modern energy production, conservation and pollution. One learns about matters like:

* Why the oil price is falling.

* Energy efficiency - 'using less'

* The oldish five-story house at Notting Hill that on average exports energy to the grid.

Renewables are no longer a fad but a fact of life, supercharged by advances in power storage

The theme is that the cost of renewables is falling very fast and that there are innovations galore.

The graphic is not dynamic, but even current relative costs will suprise many readers.

If you are a subscriber, do not miss the latest edition.

If you are not a subscriber, look out for the latest edition, available at news-stands in most cities of the advanced nations.

Courtesy The Economist

Welcome John Fraser
Date: Monday, January 19, 2015
Author: Henry Thornton

We are delighted to welcome someone from the real world to the Australian Treasury.  John Fraser has the bonus of being a former high Treasury official. Mr Fraser peaked at Treasury after my time as a senior RBA man, so there is no personal bond between us. But I do wish him every success, as his success with be success for all Australians.

There are three big issues that should be in Mr Fraser's file marked 'urgent and important'.

1. The budget mess
2. Australia's major cost disequilibrium
3. Low productivity and poor competitiveness.

Some Treasury Secretaries I have known would have ticked all three items on this list based on plans to have a really good recession, created or made worse by a 'horror budget'.  This is the fallback solution, and will be imposed by international market participants if we do not get it done by our own efforts. Shock treatment of that kind is, of course, no longer part of the Treasury playbook, and unlikely to appeal to a government struggling in the polls that has not developed the narrative to explain why rapid action would be better than gradually nibbling away at what are major problems.

So any attempt to fix these problems needs to be gradual.  One can imagine a gradual solution to Australia's three vital economic challenges but, writing frankly, this will at best spread the necessary adjustment over several years, even a decade.  One notices newspapers pointing out that slow growth will mean employment will not grow fast enough to prevent the rate of unemployment keeping on rising.  Last week's alleged 'good news' on jobs must largely be due to poor statistics from a cash strapped ABS, as it is not supported by feedback from the real world of people anxiously job-hunting.

Now to the arguments that one hopes are in the folder marked 'urgent and important'.

1. The budget. The Treasurer has said that there will be no more spending cuts to match falling revenues. The idea is to avoid imposing fiscal pain on households and businesses already struggling to make ends meet. This means no further attempts to balance the Federal government's books and delays the time when Australia will again deserve an AAA rating. It also shows the iron grip of Keynesian economics in Canberra.

The question to ask, Mr Fraser, is this.  Would decisive action to fix the budget, despite Keynesian fiscal tightening, help or hinder the confidence of Australian businesses and households? (Compared to the status quo of no forseeable budget repair.)

2. Cost disequilibrium. The basic Keynesian analysis still practiced in Canberra means that 'major cost disequlibrium' is not a concept readily embraced. So far as I can figure out,  cost imbalance is a concept at most recognised as a subsidiary factor when attempting to forecast the various componants of 'aggregate demand'. Yet in the real world of highly competitive markets, it is probably more relevant than hours, even days or weeks, attempting to predict the economic future by torturing the numbers of each componant of 'aggregate demand'.

Now it is true that a falling exchange rate will help restore competitiveness provided local costs do not simply increase to wipe out the benefits.

Here is the second question to ask, Mr Fraser. Can Australia, with existing wage fixing tribunals, industrial relations arrangements and monopoly price setting across the board (think Coles and Woolies) be competitive enough to restore full employment within a year or two?  If the answer is 'sadly, no', what is the implication for policy?

3. Low productivity and poor competitiveness. If you fix the first two challenges you will be well on the way to fixing the third. But it would be wise to consider what additional policy changes might help improve overall competitiveness directly.  Here is a selection of ideas from a recent review, with the full analysis available here.

* Immediate action needs to be taken to reverse cabotage rules introduced since 2009, and phase out as rapidly as possible the entire cabotage system and its unique work practices regime. This would allow costal shipments of products and raw materials to be transported at internationally competitive rates.

* High efficiency super-critical coal fired power generation must become again the major base for a return to Australia’s power and energy cost advantage. [Nuclear alternatives need consideration, but a mere mention of that would be political, ahem, dynamite.]

* Company tax reform needs to provide for the write-off of new manufacturing equipment to match overseas competitors.

* Government should urgently remove regulatory impediments to management and labour flexibility, to allow work practices and conditions of employment to be tailored to the specific needs of each individual business.

* Policies need to be put in place to raise the overall spend (Government and corporate) on R&D as a percentage of GDP, to global best practice levels. The program would need to ensure that relevant business and administrative skills and experience are available to use any Government support effectively.

*  A task force needs to be constituted to review best practice arrangements in countries which lead the table of performance with innovation and commercialisation. The outcome would be a basis to review and implement policies which would be relevant for Australia.

* A persistently overvalued exchange rate is a form of asset pricing imbalance that involves instability of industry structure and which requires fresh thinking by the Reserve Bank of Australia.

* Priority be given to mergers which favour the formation of a strong group which can compete in international markets rather than having weak fragmented entities. The ACCC brief needs appropriate revision.

This is a powerful list, and the full list contains arguments in support of these suggestions. You might well say 'This list is very challenging, minister', in true Yes Minister style.  There would be cries of outrage from the vested interests that would be disturbed. 

But please consider this point.  If radical reform is needed to restore Australia's economic strength, as I believe, the necessary pain should be spread widely and fairly.  My earlier advice that the government take a temporary (and voluntary) 20 % cut in wages remains. This would certainly get people's attention, and almost certainly indicate a government that is fair dinkum.

Saturday Sanity Break, 17 January 2015
Date: Saturday, January 17, 2015
Author: Henry Thornton

The global economy has been dealt another blow as Switzerland abandons its policy of capping the Swiss Franc, and associated support for the clock and choclate industries. 

Currency capping was initiated in 2011 to protect Swiss industry.  But the cost of keeping the Franc low required massive buying of foreign exchange - mainly US dollars and Euro - financed by printing Swiss Francs to pay for it. When the cap was removed, the Swiss Franc exploded up against the Euro, initially by 40 %, with correction back to a 'mere' 18 %. The reason seems to be that the Euro is expected to depreciate against every other currency when the Eurozone starts 'quantitative easing' (QE) to combate deflation and depression.

The Swiss central bank also cut its 'discount rate' from -0.25 % to -0.75 %, though this is unlikely to deter people seeking protection againt further cuts in the Euro. No need to blink, gentle readers, these bizarre numbers are not typos, just indicative of the fragile, hairtrigger state of international finance, instability that will foster further volatility and policy experimentation.

The AFR has reported 'veiled wrath' of IMF Chief Christine Lagarde, which suggests 'private fury among the European elite'.  Also that the gnomes of Switzerland have set up a 'blockbuster European central Bank meeting next Thursday'. The US Fed, meanwhile has ended its QE as US jobs growth strengthens. US economic recovery means that now market participants are betting on the first increase, from near zero, in the US discount rate.

The Australian dollar was, of course, tossed about in the wake of the global financial chaos. Smart punters now put potential downside for the Aussie dollar at US$0.70, which for some time has been Henry's best guess at a stopping point of Australia's currency weakness. Memo to self: consult the blind seer about whether 60 cents might be the new low.

Of course, we now have a new boss of the Australian Treasury, John Fraser. His brief tenure has included the surprise report of jobs strength in official (ABS) statistics. Also continued failure in the initial attempts of the Abbott government to achieve a convincing budget outlook, with backflips and hints of further backflips to come.  The news from the mining sector is for massive jobs loss, and it is highly unlikely that jobs growth will be anywhere strong enouth to give the government a real chance of its promise - or was that just an 'aspiration' - to create a million new jobs in its first 5 years in office.

Recent chatter among the elderly members of Henry's social circle focusses on whether Mr Abbott's government has any real chance of being re-elected in a bit over 18 month's time. Even the Labor members of friends in their twilight years add the caveat that Bill Shorten does not have what it takes to run the country, and the second most favourite topic is whether it's too late to put hard-earned savings offshore.

Henry's favourite journo, Grace Collier of the Oz, commends the government, and Josh Frydenberg, for its latest really good idea about a new tax. 'It is obvious more taxation is urgently required and the timing of the Assistant Treasurer’s proposal is perfect. This kamikaze government needs to restore its standing in the eyes of the populace. If starting the new year by talking loudly about a new plan to increase the cost of living doesn’t work, then I cannot imagine what will.'

Read on here, and ponder where the Australian dollar will go as the degree of Australia's fiscal deadlock is fully revealed.

Welcome to Country, Mr Fraser.


Having triumphed in the long form of the game, Steve Smith's all conquering heros have put away their white gear for their green jammies and taken on the Poms and Indians in a one day (actually, afternoon'n'evening 'tri-series') under George Baily's leadership and with the real captain doing stretches in the grandsstand.  Young Mitch Stark struck again in the first over  and it took an Irishman to make England's score respectable enough to ensure a full evening's fun'n'games under the lights.

Henry will take a rest from cricket in order to be properly fit for the tennis.  Roger Federer is Henry's choice for the men's trophy and Slammin' Sam Stouser for the lady's, on the grounds that she needs to come good on home courts sometime soon.

I am aware that readers, if any, are thinking: 'Stick to your day job, Henry, if you have one'.  In fact, Henry has just had printed and bound 530 pages of historical analysis of the state of  Optimism and Pessimism in the USA and England.  Sources are magazines and books from 1843 and the plan is to turn this literary material into an index that may help explain share prices.  Will report back in a month or so, and then again when the formal statistical analysis is completed.

Image of the week

Courtesy HeraldSun

Old economics-new economics
Date: Monday, January 12, 2015
Author: Henry Thornton

The US economy added  252,000 jobs in December, confirming 2014 as the best year for job creation since 1999. The good news for the US economy's competitiveness is that growth in wages and US government bond yields remained subdued.

The strong job growth reinforces other evidence that the US is outperforming other large hi-income economies. In particular, the Eurozone, is reentering deflation for the first time in more than five years, and the Japanese economy is still struggling.

While investors are betting that the US Federal Reserve will raise interest rates this (Northern) summer, expectations are growing for the European Central Bank to embark on a full-blown programme of bond-buying to stimulate its economy.

The FT reports that the US Fed officials 'are in broad agreement that US interest rates are unlikely to rise until at least April, according to minutes from their policy meeting in December.

'Most people on the 10-strong Federal Open Market Committee agreed with Fed chairwoman Janet Yellen that the move to drop the central bank’s forecast about keeping interest rates low for a “considerable time” should be seen as a signal that it will not raise rates at its January or March meetings.  Read on here.

Most interest rate experts say US cash rates are unlikely to begin to rise until mid 2015.  But this is contested by some old-fashioned types who remain committed to pre-GFC economics.  The old-fashioned types expected excess money to generate goods and services inflation. While the labor and goods markets remained depressed it was possible to rationalise lack of response of goods and services inflation.  Smart old-fashioned types - eg Rupert Murdoch -  could also rationalise excess money raising asset inflation.

The emerging global issue is deflation of goods and service markets, and the recovery in the US economy is hardly strong enough to drag the global economy into the full-employment zone.  Unless and until this happens, global excess money, generated in Japan and the Eurozone, even if no longer by the US Fed, is likely to continue to flood into asset markets. When the Fed begins to raise interest rates global asset inflation may be checked, but while excess money keeps coming, this may be only a temporary check.

The economic textbook are already out-of-date, and 2015 may see wider recognition of this vital point.

Henry's first attempt to write the next generation of text book is available here.


Saturday Sanity Break, 10 January 2015
Date: Saturday, January 10, 2015
Author: Henry Thornton

The year has started with a barbaric act of terrorism by Islamists who object to people who are free to make fun of religious ideology. As we write, Australian law enforcement agencies are supposedly keeping tabs on likely would-be perpetrators of another act of terror.  Endless future diligent detective work seems likely to be required to minimise these atrocities, but there is no obvious alternative.

'Why not simply decline to accept any immigrants from the Middle East?' asked a visitor during the holiday break.  No short run relief from such a policy, and it may make things worse as existing people with imagined reasons to attack Australia's multicultural civilisation would presumably be given a fresh reason to feel aggrieved.

If such a draconian approach is not acceptable, surely we need a more rigorous filter for people from places with a generally hostile view of western values. Evaluation of applications for permanent residence or citizenship could be far more thorough, with interviews by pairs of people trained to detect latent hostility to our prevailing culture.

When interviewing job applicants, I have often found revealing the answer to a question like 'Why are you interested in working for XYZ corporation'. People with real expertise should be able to sort out likely trouble makers, especially if records of the interviews are kept and reasons for accepting people who later become terrorists are scrutinised carefully.

A cheaper solution would to be only to accept people from cultures known to be sympathetic to Australia's values, though one hopes even such people should be scrutinised more closely than current practice suggests is the norm.

Readers inclined to respond are invited to contact Henry here.

Economic prospects for 2015.

Martin Wolf of the FT presents the best overview of likely global economic developments this year Henry has read.  As Henry has often advised Australian astrologers, Wolf presents a base case but also major risks. He says global growth in 2015 is 'extremely likely' to be not too far short of 4 %.  Developing countries may grow faster (as they catch up to current high income economies) and developed nations slower than the average, perhaps at 2 % rate.

Risks to this benign scenario are various: financial meltdown in China; messy Eurozone dismemberment; dollar strength creating developed nation economic crisis; geopolitical  shock; and I would add global equity crash as US interest rates rise.

The Australian economy would normally be part of the high income group, but with our reliance on China's growth a crisis there would intensify the pain already being felt by plunging commodity prices.  While our budget problems are (or should be) well known the current state of political hostility and Senate gridlock is unusual.  As Henry has said, only a widened GST at a higher rate will fix the budget, and we must all hope this is achieved by some political alchemy currently hard to imagine.

In the short run, the greatest impediment to 'high income' growth is our cost disequilibrium.  This will be remediated if the Australian dollar keeps sinking and yet wage and price inflation stays low. Remediation would be faster if there were a productivity boost, but political gridlock is likely to be a blocker here too.

Readers are advised to save money, be unaggressive about remuneration claims and make it clear to government that they want the budget problem to be fixed and economic reform to encourage innovation and boost productivity. Passing these views to local members is likely to be effective, especially now when every one from John Howard down are expressing views on how to do better.

Martin Wolf wisely reminds us that economic forecasts exist to make astrology (or, we must add, alchemy) respectable.  Read on here.


Finally we saw some real form from the Indian cricket team under its young new captain Virat Kohli.  That said, the number of dropped catches during the Indian innings was unusual and Ravi Ashwin's brilliant dismissal of Dave Warner was another sign of growing Indian confidence. Henry will be watching the last day of the fourth test today and expects it to be a real contest.

Why the futball world cup begins at 10 pm on Friday is beyond Henry's ability to understand or explain.  Fine for unemployed couch potatoes, but what about people with jobs that require alertness by 8 AM Saturday? Henry nevertheless sat up last evening and was entranced by the ebbs and flows of a fascinating game in which the Aussies overcame a bad start to beat Kuwait 4-1.

Soon the tennis will be front and centre. A win for little Lleyton Hewitt and/or Slammin' Sam Stouser would bring great joy to the Thornton household, but must be regarded as less likely than a serious geopolitical accident.
Image of the week - Courtesy The Oz

Bull market - how long?
Date: Thursday, January 08, 2015
Author: Henry Thornton

The UK stock market is in its 70th month of a bull market, which began in March 2009. There are only two other occasions in history when the market has risen for longer. One is the period leading up to the great crash in 1929 and the other before the bursting of the dotcom bubble in the early 2000s.

The graph puts current performance into perspective.

The article from which this graph is extracted is called 'Ten warning signs of a market crash in 2015'.

Read on here, and ponder.

We would welcome comments, prognostications or even wild guesses, if accompanied by some minimal logical support.

  Contact Henry here.

Work smarter to find work.
Date: Wednesday, January 07, 2015
Author: Henry Thornton

Every offspring of Henry's friends has had trouble finding a regular job in an area trained for at one of Australia's finest universities. The luckiest have found a spot thanks to the intervention of family friends. The most innovative have become unpaid 'interns', and in some cases this leads to paid employment.  The restless will find work in a remote outback town. The rest either take a job stacking shelves at a supermarket or return to university to try another profession. Teaching is currently one of the most popular options in the leafy Eastern suburbs of Melbourne.

We guessed this was a global problem, because if Australia - a 'miracle economy' - is having this trouble, what about less miraculous places? This week's Economist has filled in the story in a leader called: 'The on-demand economy' or 'Workers on tap', with accompanying graphic.

To be sure, the venerable mag's approach is from the view of the entrepreneur, rather that the struggling young would-be worker, but there is an implied message here. This was the theme of a movie, 'Nightcrawler', Henry watched with young Bert during the holiday season.  The chief character in this movie was a bloke who had turned to crime to create work for himself, dangerous and providing only a meagre income.  He happened upon a newsworthy event and when the newshounds arrived the lightbulb went off. He became a newshound, selling stories to any TV station that would pay for them.

Being a man of great entrepreneurial drive, he figures out how to do the newshound job better than any of the regulars.  Partly this involves making the news, his first instance being to move a corpse to create a more dramatic image.  Where this leads I shall not divulge, but the trailer, linked here, offers hints.

As the Economist says: 'Some of the forces behind the on-demand economy have been around for decades. Ever since the 1970s the economy that Henry Ford helped create, with big firms and big trade unions, has withered. Manufacturing jobs have been automated out of existence or outsourced abroad, while big companies have abandoned lifetime employment. Some 53m American workers already work as freelances.

'But two powerful forces are speeding this up and pushing it into ever more parts of the economy. The first is technology. Cheap computing power means a lone thespian with an Apple Mac can create videos that rival those of Hollywood studios. Complex tasks, such as programming a computer or writing a legal brief, can now be divided into their component parts—and subcontracted to specialists around the world. The on-demand economy allows society to tap into its under-used resources: thus Uber gets people to rent their own cars, and InnoCentive lets them rent their spare brain capacity'.

And in conclusion: 'But even if governments adjust their policies to a more individualistic age, the on-demand economy clearly imposes more risk on individuals. People will have to master multiple skills if they are to survive in such a world—and keep those skills up to date. Professional sorts in big service firms will have to take more responsibility for educating themselves. People will also have to learn how to sell themselves, through personal networking and social media or, if they are really ambitious, turning themselves into brands. In a more fluid world, everybody will need to learn how to manage You Inc'.

More information is available here.  If your offspring cannot find a decent job, show him this blog or tell her there is more than one way to create a future. If teaching fails, there is always setting up a baby-sitting business, or walking dogs for a living.

`Banana Republic` and politicising the public service
Date: Monday, January 05, 2015
Author: Henry Thornton

New years bring releases of cabinet papers and this allows former policy warriors relive their glory days.  The only real contemporary relevance is the lessons for the immediate future.  Geoff Kitney provided such an analysis in the weekend AFR and concluded that the economic mistakes of the Hawke-Keating government make 'ominous reading' for Tony Abbott.

Henry's memory goes back to the 'Banana Republic' event of 1986. This was sparked by sharply rising external debt.  After a serious s**tfight, Keating agreed that stern policy action recommendeded by the RBA's economists was required. In the event, the Treasurer persuaded the cabinet to cut government spending to the extent that a serious budget deficit was turned into a surplus. Prime minister Hawke persuaded the ACTU to cop a cut in real wages, accepting less than full compensation for the effects of the plunging dollar.  The falling dollar was possible only because of the earlier deregulation of the market for foreign exchange, the Hawke-Keating government's greatest policy move.

The advice of the Research Department (never 'official' RBA advice) was ultimately accepted by the government after a lot of Keating's global best practice invective focussed on the RBA's Chief Economist. Mr Keating's abuse was dished out at a meeting that included the entire senior Treasury team whose members with one honourable exception kept their head down while the verbal bullets were flying. Why Treasury was not leading that debate is a mystery.  Either Treasury read the economy differently, or they were far better careerists.  But in the crucial meeting alluded to Treasury officials (with that one honourable exception) sat quietly. 'Cigar store indians' Mark Twain would have said.

The next event of significance was the global share price crash of October 1987. Again there was frenzied debate, with Treasury (and several elderly advisors in the RBA's executive committee) arguing that the crash would create a global recession.  Once again the advice from the RBA's chief economist was that there would be no global recession and the risk of overheating was a larger risk than the deep freeze predicted by most journalists and policy advisors.  The RBA's board seemed to accept this advice and the related advice that monetary policy should be tightened. But while this advice was repeated at each meeting of the board, and seemingly accepted, interest rates fell rather than rose.

Geoff Kitney focusses on the major political event of the 1980s, the struggles for the top job between Messrs Hawke and Keating. 'Through 1989, Keating, the Treasury, and the Reserve Bank collectively misjudged the policy response of the boom, applying the monetary brakes too late and keeping interest rates too high for too long'.

By then, I had stood down as the RBA's Chief Economist and shortly after that accepted a job in the private sector. I will admit to have been seriously disillusioned about the dangers of giving fearless advice that the textbooks (and common sense) recommends for public officials. This disillusion was strengthed as those who kept silent during the big debate in 1987, and who were responsible for 'the recession we had to have', were promoted. To my mind, this is a major cause of the politisisation of the Australian public service that thoughtful people regret.

That is the real message of 'the recession we had to have', one that there is little evidence that the current government understands.

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