Japan's decisive attempt to have a banknote-led recovery seems to be working, at least for now, and Australia's equity market caught up with a rush yesterday.  The already too high Aussie dollar climbed further.

China might be struggling, as Ross 'China' Garnaut reported recently, but if Japan gets some momentum that will be a mighty offset.

Global growth forecasts unchanged according to the nab's economics team. 'Activity still sluggish but set to accelerate in second half of 2013. Financial markets digesting latest Euro-zone crisis (Cyprus) and new Japanese monetary policy. Emerging markets still main contributor to global growth but the big advanced economies should see resumption of moderate upturn later this year.

Australian economic and financial outlook broadly unchanged with room for two rate cuts in 2013 to assist recessed parts of the economy. Timing very fluid – house price increases could delay 'and much depends on unemployment path'.

 Nab said of domestic conditions: 'Business conditions fall to weakest level in almost four years but confidence steady. Previous surge in activity in consumer sectors – retail & manufacturing – unwinds, with signs lower interest rates need more time to fully work through economy. Businesses seemingly unfazed by events in Cyprus or political leadership scuffles at home – at least no more than usual. Forward indicators still poor, not boding well for near-term demand'.

Specific points included:
 
• The business environment remained challenging in March, with business conditions deteriorating to the lowest level since May 2009. The slump in activity reflects a weakening in trading and employment conditions, while profitability was unchanged at a subdued level. While forward orders improved, they remained weak, with the outlook for near-term demand not helped by still low levels of capacity utilisation and capital expenditure. Heavy falls in manufacturing and retail business conditions indicate we are yet to see the upswing in consumer demand that policy makers are searching for; instead, it seems that either lower interest rates need more time, or more stimulus (eg. RBA rate cuts) may be needed to set the economy back on a steady growth path.

• Business confidence was resilient in March, lifting marginally despite reignited worries about a European crisis and political uncertainty at home. It is possible that relatively higher equity prices and lower borrowing rates are keeping firms somewhat optimistic. However, the mood has deteriorated sharply in mining, with confidence falling to its weakest level in four years. This was offset by better confidence in interest sensitive sectors.
 
• Overall, the survey implies underlying demand growth (6-monthly annualised) of around 2¼% in the March quarter. Our wholesale leading indicator suggests little near-term improvement in already weak activity levels.
  
• Labour costs growth was unchanged at a below-average rate, held down by subdued employment conditions. Overall wage cost pressures appear well contained at present. Price deflation was apparent in March, with the poor outcome consistent with the weakness in trading conditions. Combined with modest costs growth, the survey implies further pressure on margins, especially in retail.

Alan Kohler in reporting these results asserted much of the angst is due to the high dollar, but offered no solution.

Certainly the high dollar was a key factor mentioned when Holden's savage downsizing was announced.

'RBA changes tack on currency', says the Wall Street Journal.

'Australia's economy is coping better than had been expected with a persistently strong local currency, mitigating the immediate need for more interest-rate cuts to counter the negative impact on exporters and manufacturers, a central bank board member said.

"I would prefer a lower currency and it does pose some problems for us," John Edwards said in an interview Tuesday. "But I don't think they're at all, at this point, the kinds of issues that require us to make a response."

More on this vital debate here. 

Henry's academic work involves some heavy-weight re-analaysis of the work in Friedman and Schwartz's A Monetary History of the United States. 1867 to 1960.

Friedman famously said 'Inflation is always and everwhere a monetary phenonoman'.

The re-analysis involves adding equity prices to the analysis, formulating new and richer hypotheses and adding data from 1960 to 2012, to retest the hypotheses.

A friend in Canada, now a Professor Emeritus, kindly read the manuscript and suggested I read an article by a heavy-duty British econometrician and a colleague, who criticised Friedman and Schwartz for their relatively simple methods of obtaining equations for the UK and USA demand for money.

(My own earlier work on a long-run model of the UK economy suggested a different approach to the problem using even more advanced econometrics than Henry & Ericsson, calculations on the UK Atomic Energy computer at Didcot, but that is another story.)

Here are some extracts from the reply of Friedman and Schwartz to the technocratic attack on their work - 'simply delicious' in my view.

Extracts from Friedman and Schwartz, AER, Dec 1991

‘After years of experiments, HE’s [Hendry and Ericsson's] econometric techniques produced a series of models that confirm some of our principal results, contradict none, and are less successful than our equations in terms of their own criteria of variance-dominance.’

But ... ‘As already indicated, the real proof of their pudding is whether it produces a satisfactory explanation of data not used in baking it – data for subsequent or earlier years, for other countries, or for other variables.’

(This point, though unknown to me in this formulation, is why we break our data into two sets – pre- and post-F&S - while also suggesting the hypotheses be retested in 2050.)

Friedman’s coup de grace is to recount his wartime work evaluating results of experiments seeking better alloys for 'airplane turbo-superchargers'.

Having collated all the data, he needed to calculate a multiple variable regression equation – a task that then would have taken 3 months by 'electric' (not 'electronic') desk calculator, and 40 hours on the Harvard supercomputer of its time actually used to perform the calculation. (A task that in 1991 Friedman said he could do in 30 seconds on his then desk top computer.)

‘I was delighted with the calculated regression. It had a high multiple correlation, low standard error of estimate, and high t values for  all of the coefficients, and it satisfied every other test stastic that I knew of more than 40 years ago.

‘I immediately set to work to create new and better alloys. ...

‘I ended up constructing two new alloys (which with hope combined with caution, I named F-1 and F-2.)

The equation predicted these alloys would last ‘a sizable multiple’ of the best recorded time for any previous alloy. ...

A few days later the testing lab called: ‘my two alloys had ruptured in something like 1-4 hours, a much poorer outcome than for many prior alloys. F-1 and F-2 were never heard of again.'

‘Ever since, I have been extremely skeptical of relying on projections from multiple regression, however well it performs on the body of data from which it was derived; and the more complex the regression, the more skeptical I am.’

Amen to that point. We shall report the results our our wrestling to extract signal from the noise of economic history in due course. For now, we need to enter the lions' dens in Australia's leading universities to see if we can convince the lions of our signal extraction process.

What these important questions have in common is that professional economists can’t answer them. To be more precise, economists can offer plenty of answers about government deficits, printing money, inequality, environmental issues and so on; but none of these answers is authoritative enough any longer to persuade other economists, and never the world at large.

Take two examples. On whether government borrowing aggravates recessions or promotes recoveries, the world’s most eminent economists fall into one of two violently conflicting schools. The world’s most important central banks, the U.S. Federal Reserve and the European Central Bank, hold diametrically opposing views about the effects of quantitative easing. If economics were a genuinely scientific discipline, such disputes over fundamental issues would have been settled decades ago. They are equivalent to astronomers still arguing about whether the sun revolves around the earth or earth around the sun.

How should politicians and voters who look to economists for guidance respond to this cacophony? Economics is ultimately a study of politics, psychology and social behavior. It is therefore as close to philosophy or even theology, as to physics, biology or engineering. Just as philosophers and theologians still argue about the same issues that preoccupied Plato, Kant and Descartes, economists see no shame in continuing the debates over budget deficits, monetary policy and full employment launched by Keynes, Wicksell or Walras.

This political and moral aspect of economics suggests a reason for the subject’s remarkable prestige and power, despite its obvious failings. Economists have become a secular priesthood, turning the political orthodoxies of their times into comprehensible narratives, thereby promoting social stability and democratic consensus.

In the 40 years since the mid-1970s, the dominant schools of academic economics have preached the virtues of free markets, competition and small government, helping to legitimize widening disparities of wealth and income as economic necessities, dictated by natural laws of market competition that were impervious to political interference or social control.

In the 40 years before that - from the Great Depression and Keynesian revolution to the Great Inflation and monetarist counterrevolution - economists played the opposite political role. Their job was to persuade conservative business interests that active government, fine-tuning of economic cycles, welfare safety nets and redistributive tax systems were indispensable to the success and even survival of capitalist free-market societies.

If we look back to the 19th century, to the origins of the modern capitalist system, we can see economists playing other politically legitimizing roles – establishing respect for private property, competition, free trade and voluntary contracts for mutual beneficial exchange, in a world that was still largely feudal, with wealth distribution justified by heredity, violence or military conquest.

As Keynes famously said, “The ideas of economists, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”

What makes Keynes’s comment so relevant today is that the economic system is again in a process of transformation. It is now fairly clear, as suggested in my book Capitalism 4.0, that a new model of global capitalism is evolving out of the 2008 crisis, just as it did out of the crises of the 1970s, the 1930s and out of the collapse of feudalism in the early 19th century. We are still waiting for the parallel transformation in economic thinking, but some of its features can be discerned.

The first is a recognition that the world is too complex and uncertain to be analyzed with models that assume a natural equilibrium of a future that is predictable, at least in a probabilistic sense. The second is that even competitive and perfect markets can make disastrous mistakes. The third is that a world economy that is highly unpredictable must be managed with fairy broad and flexible tolerance ranges for indicators such as inflation, government borrowing or unemployment, instead of the precise inflation targets of the pre-crisis period.

Ed: Mr Kaletsky is asking important questions, questions that deserve answers.  In coming weeks, Henry will seek to solicit, or provide answers.

Volunteers may contact Henry here.

Simon Crean described himself overnight as 'a contributor' to this plan, grossly unfair as it is to 16,000 'fabulously wealthy' Australians, already grossly over-represented in the income tax statistics. The lost sheep is back in the fold, it seems, awaiting the death by millions of votes.

'Easy money won't guarantee growth' says Stephen Koukoulas.

'SOME of the worst-performing economies - the eurozone, Britain and Japan - had central bank meetings in the last 24 hours.

'All three central banks kept monetary policy settings firmly positioned at super stimulatory levels as they struggle to kick-start a decent pace of economic growth and reflate their depressed economies'.

Read on here - Henry (in Bordertown) cannot do so as the Oz's login does not work here.

Henry's column earlier this week was thumping the same drum. 'Japan has responded to new and more decisive political leadership and its central bank is now being run by a man committed to joining the global push for easy monetary policy. Moving forward will replace moving backward, at least for a time'.

Ditto USA, UK and ECB - all this money printing may help for a while but the experiment will end in tears.

Shock, horror - an honest government, says Tiresias of Canberra.

Henry,

Just when you felt like giving up on politicians the world over, they surprise you with something like this! The only honest people to be put out will be the tailors of Saville Row and the shopkeepers of the Rue du Faubourg Saint-Honoré.

How many years will it take till DFAT and AUSAID to face up to the fact that our aid-hungry ‘friends’ in Indonesia and comparable locales not only have no shortage of millionaires,  but that said millionaires enjoy taxation regimes that our ‘fabulously wealthy’ superannuants wouldn’t dare dream of?

'Pakistani elite must pay more in tax to justify UK aid spending, say British MPs' reported The Commentator on April 4.

'In an effort to boost tax revenues for the Pakistani government and broaden the tax base, British MPs have insisted that the UK should not donate more in aid money to Pakistan until the country's own wealthy elite pay more.

'Pakistan is set to become the largest recipient of UK aid next year and MPs remarked that although there is a "powerful case" for continuing aid to the nation, British taxpayers must not be left to foot the growing bill unless Pakistan's wealthy are made to pay their fair share.

'The House of Commons International Development Select Committee said in a new report: "Any increase in the UK's official development assistance to Pakistan must be conditional on Pakistan increasing its tax collection and widening the tax base.

"We cannot expect the people in the UK to pay taxes to improve education and health in Pakistan if the Pakistan elite is not paying income tax.

"We cannot advocate that the British people finance, through taxation, the proposed substantial increase in development assistance to Pakistan unless there is clear evidence that the newly elected Pakistan government is also willing to make the necessary changes so as to contribute more to improving the livelihood of its people.

"In the past, donor money has not been spent effectively in Pakistan for a variety of reasons. Corruption is rife in a social order based on patronage and kinship networks. Pakistan's rich do not pay taxes and exhibit little interest in improving conditions and opportunities for Pakistan's poor."

Image of the week

Courtesy The Oz

The trip to Adelaide was mainly to take in the Turner exhibition, which was good but not not so much fun as the Hans Heysen house, gardens and studio at Hahndorf.

Two features of the Turner exhihibition stand out. First is the fact that Turner's retreat into abstraction was so complete that Henry (and other elderly males whose comments we overheard) could not detect all of the the supposed images. For example, in one especially gruesome, but also very abstract, painting of a sinking transport ship whose captain famously said he was only authorised to land the convicts (all women and kids) in NSW, the women and children were all drowning while the perfidious captain and crew were supposedly escaping in a life boat, it was impossible to spot the alleged escapees.

The second stand-out story was that Turner waited til his paintings were hung before tarting them up so they stood out even more. Great idea, Mr Turner, one we may use ourselves.

Hans Heysen was a genuine Aussie genius, and his house, garden and studio are located only minutes from Hahndorf's main street. Nice ladies take one's tiny fee to wander the gardens, and for a small additional fee one may visit Heysen's studio.

Henry's eye was immediatly caught by a painting he had not previously seen, called The way home. But there are many other sketches and paintings to see, plus old brushes, pencils and pastels in a beautiful architect-designed studio,

Here is a nice discussion of what you can see and do if you visit his home near Hahndorf.

This morning we farewelled Julia Gillard and several ministers who left for China, waving to the TV, where she may well be installed as the boss of the Great Southern Province. This seems to us to be the only way that she can avoid being fired by the Australian voters whenever (and if) we have the chance to express an opinion with some legal weight.

The feisty (female) Prime minister left Messrs Swan and Shorten to face the press on superannuation. After much pollie speech and obsfucation, it seems the net result is another fiasco - a new tax that irritates people (especially those whose superannuation fund  earns more than $100,000 per annum) but which will raise almost no money, from only 16,000 'fabulously wealthy' superannuants. Apart from the small (to the Gillard government) matter of legalised theft, everyone thinks this is just the thin edge of a large wedge that, if Labor ever governs again, will be a precedent that will be extended to less wealthy, confirming superannuation as yet another fair target for double taxation of savers.  Not something Paul Keating would have done, but then he was a fine Treasurer with an economically literate Prime Minister.

Still, there is a potential ray of sunshine, Somehow, we have been told, the new tax will be applied to pollies, perhaps following Henry's suggestion from Wednesday's blog.  But then we were told - actually promised, and more than once, by Herself - that superannuation withdrawals by people over 60 would not be touched. No caveats about fabulous wealth, it was unequivocal. Liar, liar, pants on fire!

China of course has form on the matter of ripping off its people and will be able to advise the newly crowned governor Gillard on how best to proceed. In a wonderful book called Mao's Great Famine we learn: 'In the most radical communes, private plots, heavy tools and livestock had to be turned over to the collective. ... As Li Jingquan, the leader of Sichuan, put it: "Even shit has to be collectivised". In response villages tried to salvage as much of their property as possible.  They slaughtered livestock, hid grain and sold assets. ... A common saying in Guangdon was "What you eat is yours, what you don't is anyones".' (P 52.)

This supposed 'reform' will ruin 'Labor's creature' and it will ruin Labor's electoral chances, if the ruination was not already complete. 

Henry and Mrs T arrived safely in Bordertown.  We secured a double room at the local hotel-motel for $100 per night and dinner for $15.50 each, plus an inexpensive bottle of Jamisons Run red The cheap dinner was because it was 'steak night', presumably because it is desirable to sell the surplus steak before it passes its use by date.  But it was cooked to a 'T' and the chips were to die for, although not all were eaten. 

Mrs T insisted on a photo to illustrate for Governor Julia how people like us have superannuation balances worth stealing from.  We earn a fair bit, by working hard and well past the normal 'retirement' age, and we live frugally. If she could be bothered to comment, Ms Gillard would presumably say: 'Idiots. The peasants of Sichuan were far smarter'.

Sadly Henry cannot report on the news, as the 'wireless Broadband' in this distant outpost allows newspaper websites to open only very slowly and The Oz does not even allow a subscriber to log in.

But wait, we have just had the benefit of an interview with Dear Leader 'Tough' Julia on Channel 24. With respect to Superannuation 'reform', a brave interviewer asked: 'What is "fabulously wealthy" Dear Leader?  You earn $500,000, are you "fabulously wealthy"? After some inconclusive bluster, Dear Leader asserted that the changes 'should flow through' to her.

'How is this possible Dear Leader', the interviewer should have asked, 'given your fabulously generous defined benefit plan?'

Henry suggests a rough way to adjust the pensions of fabulously well-pensioned pollies and public servants. Their defined benefit pensions should be reduced by the extent of any additional tax on superannuation earnings of allegedly "fabulously wealthy" Australians.  If this tax rate goes from 15 % to 30 %, or from 30 % to 45 %, for example, then pollies' pensions should be cut by 15 %.

(Given that superannuations earnings used to be free of tax, there is a case to cut pensions by 30 %, or even 45 % (depending on policy for 'fabulously wealthy superannuants) so you are getting off lightly, Dear Leader.  Cop it sweet, or it will cost you another few seats at the coming election.)

Then there is the Union boss with three staff members on 457 Visas - what hyprocisy.

Henry shall sign off for today, Dear Readers, but we shall be thinking of you as we continue our drive to Adelaide, where Mr. Turner's exhibition and a faster Internet awaits.

Further reading.

Paul Kelly on the alternative Prime Minister.

Judith Sloan on the arrogance of the government's approach to the people's money.

Tony Sheldon's use of 457 visas.

The modern equivalent of the debacle in the US economy - which produced a global depression - is the US Fed keeping US monetary policy super-easy, with zero cash interest rates, quantitative easing and promises to continue doing this for the forseeable future.  The Bank of Japan, the Bank of England and the European Central Bank have joined the game.  China is suffering a resurgance of inflation.

So far, and despite continued advice from many sources to keep easing monetary policy, the Reserve Bank has not joined the global rush to provide a highly easy monetary policy. This column has argued that easy money globally combined with responsible firm monetary policy here has kept the Australian dollar high despite lower (but still high) commodity prices. But the high dollar is strangling various industries. The Deputy-Governor of the Reserve, Philip Lowe, perhaps influenced by his boss’s tendency to look on the bright side, has recently pointed out that the high dollar is encouraging (or forcing) companies to increase productivity. No doubt there is some truth in this point, but this is not an outcome available to every enterprise.

Despite Mr Lowe’s attempt to look on the bright side, I fear that, if the Australian dollar remains at current levels, or rises further (as it has been doing lately), the balance of help and hindrance to prosperity will worsen. Cutting interest rates further is not the right answer, just as tightening monetary policy gradually was not the right answer to the asset boom in the roaring twenties USA.

‘Monetary policy cannot serve two masters’ is a rule that cannot be ignored. The US Fed and other leading central banks are attempting to promote global economic recovery when they should be contributing to this task by keeping monetary policy firm and steady to provide a stable environment for households and businesses, rather than promoting boom and (inevitable) bust in asset markets.

The Reserve Bank needs to maintain a firm and stable monetary policy, while the problem of an excessively high currency needs to be handled in another way. My proposal is to introduce a broad-based tax on capital inflow, applied to all inflows of capital so as to reduce the currently excessive and damaging currency to more sensible levels.

But evidence, rather than the feelings of senior RBA officials, or even of this writer, is urgently needed. If Mr Lowe’s view that industry can handle current levels of the exchange rate is correct than the tax may not be needed, or the rate can initially be low.  But if the evidence is that a lower level of the Australian dollar would be helpful to enterprises in industries including manufacturing, tourism and education, indeed is urgently needed, then a moderate tax will be indicated.

Such a tax may prevent, or ameliorate, serious damage to much Australian businesses and derivatively to many Australians.

Do we need such a tax, gentle readers?  Is the high dollar really hurting Australian industry? Let us have you views - contact Henry here.

While things are looking better on the global scene, America is still dealing with excessive growth of government debt, the Eurozone is a rolling crisis that widens the gap between Germany and the rest and China is suffering from large and still rising debt and slowing workforce growth, both trends requiring sizeable structural change.

The ABC's Lateline tackled the China Story and inplications for Australia in a recent interview with Ross 'China' Garnaut, currently visiting Oxford.

Today's Blog also introduces the new head of the Productivity Commission, Peter Harris, until recently a senior mandarin in Canberra. 

Tony Jones started his interview with 'China' determined to get him to say China was on the skids.

Jones: 'Earlier this week the Nomura Investment Bank raised what will be a nightmare scenario for Australia. It warned that China is on the brink of a debt crisis, showing symptoms similar to those that triggered the Global Financial Crisis.

'Is Australia in danger of the kind of financial meltdown we saw in the US and Europe?'

Garnaut: 'No, I don't think that's the right parallel. I think that with the end of the virulent China resources boom that we've had over the last dozen years, there's a very big adjustment coming for Australia, but it's not an adjustment of the kind that we're seeing in Europe and North America'.

Jones: 'We'll come to what that adjustments means. Let's try and concentrate on the allegations, if you like, made by the Nomura Investment Bank and other economists that China's debt is now between 150 and 200 per cent of GDP. Their view is that that spells - would spell terrible trouble for a conventional capitalist economy. I guess no-one's quite sure what that means for a hybrid economy like China's.

Garnaut: 'Well, whether or not debt of that level is a problem depends on underlying rates of economic growth, it depends on the strength of the government budget, it depends on the rate at which the community, the private sector, is saving. So I don't think all of this ends up to - adds up to a coming financial crisis in China. The challenge for Australia is of a different kind'.

After some more argy bargy, Tony Jones quoted another gloomy expert.

Jones: 'What do you think then is driving these doomsayers? Because it's not only the Nomura Investment Bank. Larry Lang, the Professor of Finance at the Chinese University of Hong Kong, he's been making even grimmer assessments. He says that the Chinese debt problem is explosive and the fuse has already been lit and he actually says there's a banking crisis, triggered largely by the masses of debt accumulated by local governments which are now going into default'.

Garnaut (batting like Shane 'Watto' Watson should have done in India): 'Well you'll have to ask them what's driving them, Tony. I'm happy to answer questions about the problems I see in the Chinese adjustment'.

After some further probing like an Indian spin bowler on a dried clay pan pitch, with 'China' asserting the China's problems are 'manageable', Lateline moved on, trying to spin past 'China's' bat with questions about the state of China's (the nation, not the Professor) banking industry and its housing bubble. Henry was getting agitated by Tony Jones's irritating questioning style, not to mention bored at the breadth of 'China's' bat.

Finally, risking a cover drive for two runs, 'China' (the bloke) conceded that China (the nation) had some big adjustments to make.

Jones: 'OK, can I just interrupt you there? I would like to know, if I can, before we run out of time, if there are very big - because of all these things you're spelling out, if there are very big adjustments in prospect for the Australian economy, how big would these adjustments be and how painful for the Australian economy?'

Garnaut: 'Yes. Well we've been through an extraordinary boom, a resources boom the like of which we've never seen in our history, given scale and longevity of the boom. That's been driven especially by high prices for iron ore, thermal coal, metallurgical coal and high investment in those industries and also in LNG. The outlook's not exactly the same for all of these commodities. It's probably most problematic for thermal coal, where the focus on environmental issues is combining with the structural factors that I've mentioned and a slightly diminished rate of growth to undermine what were always unrealistic hopes in Australia of ever-increasing large growth in imports of thermal coal.'

Jones: So what are you predicting then in terms of the impact on the budget for the Australian Government going forward in the next few years?'

Garnaut: 'Well, we can look forward to - the current lower prices for iron ore, thermal coal and coking coal, all of which are much lower than a year or two ago, we can look forward to them going lower in the future. We can look forward to resources investment peaking and then going into decline. And overwhelmingly, the growth in business investment in Australia in recent years has been in the resources sector, so it's going to take quite some effort to gear up the rest of the economy to take up that slack. So, that's going to come out in much lower revenues. We've already seen that lower government revenues, state and federal, over the past couple of years. The pressure is going to intensify. It's going to be very difficult to maintain the level of demand that's necessary to maintain high employment, and to keep high employment going forward, to maintain the good record of the past decade, including through the financial crisis, so we're going to have to be pretty clever. There's going to have to be downward adjustment in Australia's average cost level, probably by a large amount.'

Jones (now licking lips and salivating a bit): 'What about living - sorry to interrupt you there. What about living standards generally? Do you believe Australian living standards are gonna go down rather than up because of this?'

Garnaut: 'Yes, over a few years, I think to maintain full employment and continued economic growth, we're going to have to at the same time try to keep total levels of expenditure strong and improve the competitiveness of Australia. And the competitiveness will improve partly through a fall, probably a big fall when it comes, in the dollar, but that's no use to competitiveness unless we're able to contain costs. Import prices and exportables prices will rise. That will be inflationary. We've got to stop that flowing through to the general price level. This is really hard. The last time we had to deal with this was after the collapse of the '60s and early '70s boom and we bumped along the bottom until Australian policy started to get its act together from '83, but there was a long period of pain before that happened. I hope this time we can get things right without a long period of pain'.

Jones: 'A final quick question: the Labor Government is so worried about its budget position in the budget coming up, it seems set to raid superannuation, at least to overturn some of the Howard Government's tax breaks for wealthier Australians. Is that a good or a bad thing?'

Garnaut: 'Oh, I think that over the past dozen years we've increased incomes of Australians unsustainably in general. There was a lot of middle class welfare, a lot of unaffordable reductions in tax, a lot of pretty sloppy increases in expenditure as well as reductions in tax. All of that's going to be - going to have to be tightened up if we're going to maintain growth and maintain full employment in the very difficult period ahead'.

Jones: 'So we're nearly out of time, but including the superannuation scheme? Do you think that shouldn't be untouchable? Some people would prefer it were untouchable.

Garnaut: 'Well I haven't had a close look at the detail of what's being discussed, Tony, but it shouldn't be untouchable. Some of the concessions to superannuation that were made during the high points of the boom half a dozen years ago were unrealistic'.

There you have it gentle readers, tighten your belts and prepare for a more presbyterian future.

The full transcript is here.

There is little relief on offer from Peter 'Productivity' Harris.

David Crowe and David Uren: 'AUSTRALIA'S new productivity tsar is urging governments to sharpen their focus on economic reform or risk a long-term slump in living standards as he lists infrastructure planning and regulation as two of the biggest challenges facing the nation.

'Productivity Commission chairman Peter Harris warns that the ageing population will make it "harder and harder" to improve national wealth without action from political leaders to make the economy more efficient'.

Read on here.

'Our invisible recession' is the best of the weekend's economic commentary, and comes from Laura Tingle and Jacob Greber for the AFR.

No access unless one is a subscriber, but the message is simple although far from widely understood.

The fall in Australia's terms of trade is reversing the wealth boost given by the earlier dramatic rise.  The problem is exacerbated by the stubborn refusal of the currency to fall, as it did when the terms of trade last fell.

Henry's solution - a tax on capital inflow - has not yet filtered into the marble halls of the AFR.

And, on top of this, the German paymasters have insisted on confiscating a sizeable proportion of people's bank deposits as a condition of providing a bailout.

Greg Sheridan observes, saying the obvious (but then no economist has had the wit to say this): 'If your money is not safe in the bank, your society has ceased to function at several basic levels. The essential compact between a citizen and his institutions is broken. Naturally when word of this government theft of savings got out, every rational depositor wanted to take their money out of Cyprus. To prevent this, Cypriot banks were shut and strict limits put on daily withdrawals from ATMs.
 
'Now the banks are open again but their opening has been accompanied by harsh capital controls. You still cannot withdraw much from your bank - €300 a day - and you cannot under any circumstances take more than €1000 with you if you leave Cyprus. Thus, if before this crisis you had €200,000 in a Cyprus bank, you are vastly worse off than if you had €200,000 in a German bank. This is the antithesis of a common currency. A Cyprus euro was and is, and may well be into the future, worth less than a German euro'.

Henry remains as certain as he ever is about anything that the Eurozone cannot last, and that it should not.  As some clever person said: Southern Europe is suffering austerity fatigue, and Germany is suffering bailout fatigue.

Politics downunder

Henry also cannot understand why a modern social democratic government would think it would appeal to a majority of voters by playing the class-warfare card, not once but consistently.  Paul Kelly reflects.

'Labor's current tragedy is writ large. As Wayne Swan said yesterday, Australia is one of a small group of nations with an AAA credit rating, solid growth, unemployment at 5.4 per cent and low inflation. So what gives with a projected election wipe-out on the scale of Greece or Spain? How did Labor achieve this bizarre double? We missed the recession but our government has the poll rating of a deep-recession nation. Something has gone badly wrong.
 
'The answer is that Labor has lacked a firm governing strategy to unify its decisions, its rhetoric and its electoral tactics. It has been all over the place with confused priorities, poor decision-making and sudden improvisations. The proof is everywhere.
 
'Taking recent weeks, if Labor had a coherent governing strategy it would never have adopted its media package based on the flawed idea of greater state powers over newspapers.
 
'It would never have run the foreign worker 457 visa scare based on short-term electoral gains by sacrificing its economic credentials.
 
'It would never have offered a litany of concessions to the unions, week after week, that merely reinforce a one-dimensional pro-union, anti-business image that is electorally disastrous.
 
'And it would not have sanctioned a three-month feeding frenzy over its plans to impose new superannuation taxes that has unnerved superannuation holders and the industry. Read on here.

Footy

At last the real thing is underway, with the completion of Round One of the 2013 AFL season.

Henry watched his beloved Caaaarlton! take on the Richmond Tigers at the 'G' on Thursday night.  First quarter started 'barely tolerable', with scores all tied up, but only because of Richmond's poor kicking. 

The once mighty Blues seemed in danger of reverting to last year's born to rule approach, modified only by following new super-coach Mick Malthouse's instruction to 'bring it round the boundary'.

For the next two quarters, the Tiges made Caaarlton! look like Muhammad Ali in his last fight, against Larry Holmes, stopped by Ali's trainer in the eleventh round.

Henry assumes that Mighty Mick told Caaaaarlton! at the three-quarter break to go for it boys, play your natural style, and the boys gave Henry something to cheer about, moving the ball fast more or less straight up the guts (of the ground) to peg back a clearly tiring Richmond.

The Tiges hung on to win by four points, producing the greatest roar Henry has heard at the 'G' - leaving his ears ringing for several hours afterwards, and requiring a medicinal brandy before sleep would come creeping in.

Super-coach Mick said after the game that both the team and himself had learned things from the experience.

We sincerely hope so, Mick, as we (and you) get to face the old enemy, the mob that ditched you for a younger man, next week.

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