'Not without widespread debt default or general, damaging inflation' seems to be the answer.

Historian Niall Ferguson, visiting Australia soon to present the Bonython lecture at the Centre for Independent Studies, concludes an article for The Financial Times/Business Spectator as follows: 'The evidence is very clear from surveys on both sides of the Atlantic. People are nervous of world war-sized deficits when there isn’t a war to justify them. According to a recent poll published in the Financial Times, 45 per cent of Americans “think it likely that their government will be unable to meet its financial commitments within 10 years”. Surveys of business and consumer confidence paint a similar picture of mounting anxiety'.

Ferguson believes that confidence will be killed with budget deficits that are a record for peacetime economies.

The key is effects on confidence.  'In 1981 the US economist Thomas Sargent wrote a seminal paper on “The Ends of Four Big Inflations”. It was in many ways the epitaph for the Keynesian era. Western governments (not least the British) had discovered the hard way that deficits could not save them.

'The remedy for such fears must be the kind of policy regime-change Sargent identified 30 years ago, and which the Thatcher and Reagan governments successfully implemented. Then, as today, the choice was not between stimulus and austerity. It was between policies that boost private-sector confidence and those that kill it'.

'With double-digit inflation and rising unemployment, drastic remedies were called for. Looking back to central Europe in the 1920s – another era of war-induced debt explosions – Sargent demonstrated that only a quite decisive policy “regime-change” would bring stabilisation, because only that would suffice to alter inflationary expectations'.

While Ms Gillard and Mr Abbott trade insults, and increasingly obscene advertisements - themselves doing nothing for the confidence of voters - other western nations are seeking economic salvation in record peacetime deficits. 

It is the legacy of the Howard government that the Labor government has not piled up unmanageable debts, despite its reckless and poorly administered stimulus programs. However, poised as we are between inflationary developing nations and western nations facing debt default or inflation, we too are suffering inflation that could yet severely damage our 'miracle economy'.

John Mauldin this week has addressed America's 'debt supercycle'.

The following graph shows total US debt since 1870, close to the start of the so-called 'Long Depression', usually dated at 1873.

The upward twitch in the 1870s is clearly visible, as is the far larger increase - a surge, not a glitch - in the Great Depression of the 1930s.

The scary thing is the far larger and more entrenched surge that began in the 1950s and accelerated substantially from the start of the 1980s.

(An equivalent graph for Australia is discussed here.)

The size of the task facing the USA is shown by the next graph, which has the heading 'This cannot be.'

John Mauldin says, like Niall Ferguson, the choice for American voters, and indeed voters in all the other highly indebeted and recessed western nations, is between prolonged fiscal austerity and a major surge of inflation.

'It's all well and good to say that you want fiscal rectitude. It's another thing when it is hitting budgets near and dear to you. And to get back to a remotely sustainable deficit is going to take pain in every corner. It is going to hit near you, gentle reader. Some will get hit harder than others.

'And this is the case in every country running large and out-of-control deficits. It is not just a US problem. The Irish are in what can only be called a depression, along with the Baltic states and Hungary. Greece will soon be there, once they have to meet market rates for their debt, or force their labor markets to endure a very serious deflation to make themselves more competitive.

'So, can we know how The End Game will turn out? The short answer is no. Each country will have to make its own political choices. Could we see hyperinflation in the US on Britain or Japan? It is possible, with bad policy decisions. I doubt it that it gets to that. But could we see inflation? The answer is yes.

'That has been the traditional method of default for many countries over the years. Instead of outright default, they simply inflate away debt. And the logic is compelling'.

I agree that 'the logic is compelling' for inflation if the alternative is a decade of fiscal austerity, partial dismantling of the welfare state and slow growth of spending on health, education and defence. (See my February 2010 column on this matter.)

Of course, individual countries may find a 'regime change', as the UK did with Mrs Thatcher at the helm and the US with President Reagan.

But for most, including possibly the mighty USA, inflation may be easier path.

Inflation, if allowed to become too serious, is itself a regime-changer.

But what would the prevailing regime look like if inflation is preferred to great fiscal austerity?

Edited version posted next day on The Australian website.

The federal election campaign is underway as the major parties launched new advertisements yesterday.

The Liberal Party’s first major ad is entitled ‘real action’ and commits them to cutting government waste, ending budget deficits and halting illegal immigration.

Similarly, Labor’s ad ‘let’s move Australia forward’ echoed Julia Gillard's reformist speech from last week.

Links to both advertisements can be found in the new Federal Election 2010 section.

Although there are some clear differences between the parties – such as the federalization of healthcare – both Tony Abbott and Julia Gillard are now trying to court to moderate swing voters.

Both the Libs and ALP agree on the need to return the budget to surplus, stop illegal immigration and promote sustainable population growth.

Abbott says the Libs will return the budget to surplus faster than Labor, but the ALP has announced it will end the deficit by 2013.

But neither party has explained exactly how they will cut government spending and pay off the debt.

The Libs say they will cut spending, yet they have promised new spending on mental illness and paid parental leave. Tony Abbott has ruled out introducing any new taxes, which begs the question – how does he expect to pay for new social spending while returning the budget surplus?

The Labor Party has locked itself into the same position. The government says the budget deficit will end by 2012-13 (this forecast comes from the Treasury and, given its track record, should not be relied on), but its’ promise to federalize healthcare will cost billions of extra dollars every year.

And how can anyone seriously believe Gillard’s austerity pledge after her role in Rudd’s disastrous stimulus spending that bribed the electorate with $1000 cheques, killed several insulation installers and gave private schools much needed new indoor swimming pools?

Both parties have therefore moved towards the centre on economic policy. Abbott realizes the economy is the Liberal Party’s strongest card, but he has not promised any significant tax cuts. Likewise, Gillard changed the mining tax to help pay off the deficit because voters had woken up to Kevin Rudd’s smoke-and-mirrors politicking.

The gap between the ALP and Libs on immigration and population has lessened considerably since Julia Gillard became Prime Minister.

She abandoned Kevin Rudd’s ‘big Australia’ policy and moved Labor towards the centre ground position of ‘sustainable population’. The Liberals also support a sustainable population that is the view held by most Australians.

Lastly, the parties have converged on illegal immigration. Kevin Rudd was seen to be too weak on asylum seekers and this was a key contributor to his downfall. Labor and the Liberals are now talking tough on illegal immigration, with Tony Abbott promising to turn boats away if they enter Australian waters.

Expect this centrist trend to continue over the coming month.

Game on indeed!

Newspoll and the Morgan poll both predict a decisive win for Labor, while the Galaxy poll says the outcome is too close to call.

Both leaders are new to their jobs and have legacy issues of substance - Rudd Labor's blunders and howard's WorkChoices in particular.

Paul Kelly outlines the stakes for both leaders, and both parties.

'FOR Labor, election defeat next month is too horrible to imagine.

'It would shatter the purpose of the leadership coup, constitute the dual repudiation of Julia Gillard and Kevin Rudd, and brand Labor a one-term, humiliating failure.

'The entire reputation of modern Labor is now on the block. Rejection of Gillard as Australia's first female prime minister would condemn Labor's performance in office and its culture as a political party. Gillard's task is daunting - to use this poll to regain Labor's momentum and rekindle public confidence around a new leader.

'Her dilemma is that Rudd's record is Gillard's record. Rudd's blunders are Gillard's blunders. Yet Gillard needs to tap the better nature of Australians to give Labor another chance.

'For Tony Abbott, snatching victory would constitute a miracle result after the Liberal Party's slide into a prolonged shambles following the 2007 defeat of John Howard. The Coalition does not look ready to govern. For two years it felt success at this election was inconceivable. Yet Abbott's muscular populism and genius at destabilising Labor give him a real chance of victory in a climate of volatility.

'Since Abbott became leader, Labor has misread and under-estimated him. But the negative campaign it now plans against Abbott is more risky than it looks, given his warrior mindset and instinctual convictions.

'This is the ultimate moment for Gillard and Abbott. It is the contest nobody dared predict 12 months ago. Facing their first contest as party leaders, they are divided by personalities that disguise remarkably shared agendas. The election remains open. It will be won or lost in the campaign. Pivotal to its outcome will be public judgments about the trust and reliability of each leader'.

http://www.theaustralian.com.au/news/labor-stakes-its-reputation/story-e6frg6n6-1225893681467

Tony Abbott has his promise of 47 billion of spending cuts to match Labor's 3 billion budget surplus in three years.

Rising inflation may again force the Reserve Bank to raise interest rates during the election campaign, and those people who have their doubts about the 'independence' of australia's central bank will be watching closely to detect any perceived political bias.

The 'smaller Australia' debate may not be joined, but the voice of Australia's economists should be heard on this, if only to note that net immigration at recent rates of 300,000 per annum is needed to help prevent skill shortages and wage inflation.  Both sides of politics 'hear' the people on congestion in Australia's big cities and the stresses of the cultural melting pot but concerns at these structural isses will not end the economic imperative.

WorkChoices may be 'dead, cremated and buried' but loose talk of using regulations to make labor markets more flexible will play into Labor's hands.

Spending more on Australia's defence is an item that should be on both sides agendas but will hardly be mentioned.  Instead, 'first class health and education' will be agreed by both Mr Abbott and Ms Gillard.

The (now smaller) big new mining tax will be abolished by Abbott if elected and will help fix the budget if Labor is returned.

Each of the main parties climate change policies will by scrutinised carefully.  A big new tax on carbon is off the coalition's agenda and dare not be mentioned by Labor.  Here too is an issue that ought be forced onto the agenda by Australia's economists but will not for the simple reason that every economist worth his salt is either employed by Labor or hohing to be employed by a newly appointed Coalition government.

It's on, gentle readers.

Julia Gillard has been to see the Governor-General and Sky News is confident that the date is 21 August.

Tony Abbott has cremated workChoices and is reported to have buried the ashes.

More later.

The History wars

Richard Allsop reviews Geoffrey Blainey's stellar career for the IPA Review.

'One does not have to have shared Blainey's position on Asian immigration to lament the vitriol that was poured on him. Not content with just debating the actual issue of Asian immigration, many of Blainey's fellow academic historians went back through his opus to find examples of poor practice they could use to undermine his authority.

'It presaged a new era in the national discourse, one in which someone with a view with which one disagreed was not just wrong on that issue, but was a bad person. The attacks on Blainey probably mark the beginning of the ‘history wars' in Australia, wars in which ideological correctness became more important than any other factor in assessing a historian's worth. Ironically, apart from Blainey, the other major victim of the history wars was Manning Clark who, while obviously disagreeing with many of Blainey's views, nonetheless decried the attempts to silence him.

'In many ways, the ground-breaking nature of Triumph of the Nomads has been obscured by the fact that promoting it has not suited anyone's political agenda. The left wanted to stereotype Blainey as a conservative while, for many on the right, aspects of the book, such as Blainey's use of the term ‘invasion' to describe colonisation and strong defence of the strengths of much of Aboriginal society, were not necessarily to their liking'.

Read Allsop's full discussion here.

The Gillard tapes.

By special arrangement, we bring readers a previously secret transcript of Julia Gilliard’s first interview .....
 
TV: “Congratulations Prime Minister. Before we start, as we stand here on Thursday afternoon, do you accept that tomorrow will be Friday?”

PM: “We have always supported the standard structure of the calendar and acknowledge that the public expect a regular system that provides the rhythm necessary for everyday planning and life structures. We feel very strongly about this.”

TV: “So you do agree that tomorrow is Friday?”

PM: “It isn’t important whether it is Friday or Monday. What is important is that unexpected changes don’t interfere with the normal expectations of the public - and this government has a solid record in supporting those expectations.”

TV: “But as today is Thursday, surely you can confirm that tomorrow is Friday?”

PM: “Everything is relative and whether the next day is Wednesday or Sunday is dependent on where you stand at the time. We have never challenged the current system and have the full support of the unions on this. Most intelligent people agree that changes are not required.”

TV: “Well then, what day is tomorrow?”

PM: “Tomorrow is the next day in our plan to further develop our marvelous country in many areas. We plan to continue providing better health care, reduced debt, reduced unemployment, controlled immigration and to be a world leader in controlling global warming.”

TV: “Returning to the question, can you not confirm that Friday is tomorrow?”

PM: “Friday is always around. It has been around many times before and will be around again many more times. Which is why we need - as a responsible government - to plan and organise for the future. Not just for tomorrow, but for our children and their children.

TV: “Prime Minister, the viewers are waiting for your answer on what day you think tomorrow is?”

PM: “We are dealing with bigger issues here. The Friday, Saturday, Sunday thing is not important or relevant to the scheme of things. They need to understand the critical issues and focus on the matters of concern, such as the condition of our nation and how we can continue to develop it so that all may reap the benefit.”

Cartoon of the week

The Chinese economy has 'cooled' - with GDP growth dropping from an annual rate of 11.9 % in the March quarter to 10.3 % in the June quarter.

Gadzooks, head for the hills.

And China's goods and services inflation has also cooled, supporting recent news that China's house prices have stopped rising.

All very neat, certainly neater than Australia's Treasurer's attempt to explain the budget numbers ahead of the election.

Rowan Callick says 'Fears of China's slowdown are overstated'.  'China economy still red-hot' is an alternative offered by Henry.

On the other hand, as we economists like to say, America's activity measures are failing to thaw.

Minutes of the US Fed's meeting of 22-23 June noted a 'relatively modest' worsening in the economic outlook.  The Fed's policy makers raised the possibility that further monetary stimulus may be needed if the economy shows more serious signs of slowing.  Milton Friedman's helicopter is being tuned up for the US dollar bill drops in depressed areas.

Investors said the minutes weren't surprising, but served as a glum reminder of the troubles the economy faces. Economic data also underscored those woes, with retail sales slumping for the second straight month while an increase in business inventories was weaker than expected.

'A number of participants expressed the view that, over the next several years, both employment and inflation would likely be below levels they consider to be consistent with their dual mandate, but they anticipated that, with appropriate monetary policy, both would rise over time to levels consistent with the Federal Reserve's objectives'.

Wall Street broke a six day winning streak and Asian markets can be expected to sag again today.

Check out the Fed minutes for yourself here.  A good read, as always.

Net-net (as they say) global activity has clearly strengthened, at least in our region - as Premier Joh would have put it.

Qantas has given a further sign of its confidence that the aviation market is improving by boosting fares by 3 per cent.

'The airline revealed the increases to the travel trade yesterday in the wake of Wednesday's announcement that it had advanced the delivery of its long-awaited Boeing 787 Dreamliners by two years and would now take the first aircraft in 2012.

'The decision to increase fares across its international, domestic and regional businesses builds on international increases in December and rises to domestic fares of $5 to $10 last September, after more than a year of falling ticket prices because of the global financial crisis.

'The airline said yesterday pricing was reviewed continually across all routes and took into account factors such as demand, capacity, competitor activity and business performance'.

Politics downunder - election soon

Greg Sheridan reports: 'All new prime ministers take a while to learn the ropes in foreign affairs. Most Asian officials, politicians and commentators I have spoken to are absolutely flabbergasted at Rudd's demise. So are the Americans. Nor have I met a single person in the region who knows Julia Gillard or Tony Abbott'.

If anybody noticed, the spat between Bob Hawke (represented by Blanche) and Paul Keating (representing himself) will do us no good, although it reportedly is amusing Julia Gillard, who today was fending off her own case of alleged deal disowned.

The text of Keating's letter is provided here, courtesy The Australian.

Gillard today at the National Press Club presented herself as a fiscal conservative.  This was Comrade Rudd's approach too, while throwing taxpayer's money at every problem known or discovered.

The larger-than-life Laurie Oaks asked THE question - did you reneg on a deal with Comrade Rudd? The lady's lips are sealed dear reader, but 'trust' will be an issue in the coming election, set for 21 or 28 August according to all the pundits.

Wayne Swan has fessed up to being too clever by half - a surprising occurrance since extreme cleverness is not Mr Swan's main characteristic.

We all wondered at how a major 'reform' of Labor's clumsy tax grab from the miners could satisfy the big miners while leaving the time of return to surplus unchanged and changing the net amount of tax to be collected by a miniscule amount.

After dancing around the subject for what seemed like weeks the Treasurer now says that it was Treasury's upward revision to commodity price assumptions that made up the missing billions, plus (of course) a smaller company tax cut and abolition of the totally incredible compensation for losses that was part of the original 'reform'.

How do the geniuses in Treasury get ministers into such deep trouble?  Ken Henry's undisciplined grizzle at being out of the loop in Peter Costello's time is finally explained - Howard and Costello were too canny to be suckered in by a bunch of unworldly, too clever by half, boffins.

Treasury has shown a rare ability to bring down by accident a Labor Prime minister whom it presumably quite liked.  Imagine the damage it could have caused to a coalition administration that presumably was not its favourite cup of twinings.

Here is another snippet that reveals Treasury's work.  Henry in his role as advocate for Research, Development and Commercialisation (R,D & C) was once granted an audience with Dr Ken Henry.

My case that more R,D & C would make Australia a more dynamic economy was rejected by Dr Henry.  In fact, Dr Henry said, he was not convinced that the Howard government's extra spending in this area so far (under Howard's Backing Australia's Ability program) was worthwhile.

Years later, we have the surprising fact that under the Rudd/Gillard government, spending on R,D & C is lower than that under the Howard government.

Kim Carr's Department of Innovation, Manufacturing, Research and Science has no ability to stand up to Treasury, and has shown no interest in establishing even a small group with the ability to take on Treasury.  Remember the floating of the exchange rate?  Advocated by the Reserve Bank and the Prime minister's department, fought by Treasury.

Instead, Kim Carr's penchant is for massive conferences of members of massive advisory bodies comprising the great and the good of Labor supporters, some of whom have done some real innovation, with the good minister dropping in to give pep talks.

Unstressful work for all involved, but a fine source of budget reallocation, away from idle conference chatter toward real R,D & C.  Who in the Gillard administration is capable of uncovering and reforming such a situation?

The global financial crisis marks a new era of capitalism - Capitalism 4.0.

That is the claim of Anatole Kaletsky in a new book with that name.

The Napoleonic wars produced the beginning of the classical era of laissez-faire (or Capitalism 1.0); the Great Depression spawned the government-heavy era of Capitalism 2.0; and the stagflationary 1970s led to the era of free-market Capitalism 3.0.

'Like the changes that have gone before', says The Economist's reviewer, 'capitalism’s latest transformation will alter the relationship between markets and governments and between politics and economics. It is the ability to adapt that secures capitalism’s survival. Version 4.0 will be as different from the recent free-market fundamentalism as Reaganomics was from the New Deal.'

Kaletsky says what was a run-of-the-mill financial crisis became a catastrophe because Hank Paulson allowed Lehaman Brothers to fail.  Perhaps 'nearly became a catastrophe' would be a better comment, as we do not yet know whether the Great Credit Freeze recession will become a Great Depression or the triumph of Keynesian policies.

It is also possible that the failure of Lehman Brothers will mark a decisive turning point in the battle against the moral hazard created by the bailout of financial institutions seen as too big to fail.

The Economist says experts will find plenty to quibble with in this book, but it is 'full of clever insights'.

'For sheer intellectual chutzpah and creativity it is well worth reading'.

Amazon, here comes another order.

In the local press, there is more musing about the philosophy of economics, from the estimable Janet Albrechtsen.

JULIA Gillard, we are told, can learn much from the principles of Hayek and Friedman.

No doubt, but such a person has to wish to seek out a different path.

'WHILE the Prime Minister has started her informal election campaign with a pitch to the future, a more honest and telling indicator of a Gillard Labor government is a focus on the recent past.

'Even a cursory look at the Green Loans scheme, just the latest Labor debacle, suggests a consistent message. Labor in the 21st century is committed to a deluded philosophy where a big spending government believes it can spend our money better than we can. It can't, of course.

'While Julia Gillard has taken deliberately bold moves to change direction over the mining tax, immigration, population and climate change, there is no sign that a Gillard government will free itself from the costly fantasy that took hold under Kevin Rudd about the omnipotence of big spending government brimming with expensive and grand designs'.

Janet Albrechtsen reminds us of the great gem from Friedman's preface to Hayek's great book The road to Serfdom.

'Freidman, who wrote the introduction to Hayek's book, best described the four ways we spend money: "You can spend your own money on yourself. When you do that, why then you really watch out what you're doing, and you try to get the most for your money. Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I'm not so careful about the content of the present, but I'm very careful about the cost. Then, I can spend somebody else's money on myself. And if I spend somebody else's money on myself, then I'm sure going to have a good lunch! Finally, I can spend somebody else's money on somebody else. And if I spend somebody else's money on somebody else, I'm not concerned about how much it is, and I'm not concerned about what I get. And that's government."

Albrechtsen also draws our attention to a much watched YouTube video, www.youtube.com/watch?v=d0nERTFo-Sk

The big question, of course, is whether Capitalism 4.0 has more Keynes or more Hayek.

Here at Henry Thornton.com we have an ongoing interest in all the big issues, especially issues where economists or economical thinking can help - if given a chance!

Health reform is one such issue, and we are pleased to draw readers' attention to a fine article in the latest edition of Quadrant magazine.

This is written by Dr Aniello Iannuzzi, a rural doctor in New South Wales, far from Sydney where he studied Medicine and Arts. He is the author of Being Human: For Human Beings (Fontaine Press, 2007).

Dr Iannuzzi starts his article as follows: 'Health is a permanent major political battleground in Australia. In 2010, the major development is Kevin Rudd’s massive GST seizure from the states, with the mantra, “most revolutionary health reform since the advent of Medicare”.

'Just like the Aboriginal housing scheme, the home insulation program and Building the Education Revolution, the so-called health reform is following a familiar twelve-step pattern:
1. Need to be seen to fulfil an election promise;
2. Major political announcement;
3. Massive funding of project out of proportion to historical precedents;
4. Massive media campaign centred on Prime Minister;
5. Senior ministers then engage in a media blitz;
6. Publication of manufactured consent and praise of groups with vested interests or political ambitions in response to steps 2 to 5;
7. Media and expert scrutiny emerge due to lack of detail in government plans;
8. Public cynicism follows step 7;
9. Fiascos related to reckless spending emerge;
10. Fiascos related to windfalls for lucky government contract holders come to light;
11. Failure of “major government initiative” or “reform” emerges;
12. Damage control measures by government fix-it ministers with Prime Minister nowhere in sight.

'The 2010 so-called health reform has not completed all twelve steps, for we are still at steps 8 to 10'.

Dr Iannuzzi sets out, proposes and discusses an alternative twelve steps to achieve real health reform in Australia.  For example, STEP 1 contrasts 'Political approach: more beds' with 'Real reform: what is done with the beds'.

These proposals deserve careful consideration by the Minister for Health, her officials, Australia's political opposition and long-suffering taxpayers. Those willing to consider an alternative to the current dysfunctional mess may read on here.

The good doctor's conclusions are as follows: 'Demography never lies. We are an ageing population, with greater numbers of welfare dependants and an increasing incidence of expensive, chronic disease. If health care is to remain free and heavily subsidised, it has to be rationed. For rationing to remain politically palatable, it has to be served with lashings of rhetoric: blame-shifting (federal versus states), scapegoats (greedy doctors and pharmaceutical companies), grandstanding (apologies and new ministries), and alarmism (swine flu and systems in crisis).

'What a reform it would be for governments to be honest about the limitations of a free system and about their insatiable desires to remain in control of every facet of health care! It is only when politicians are willing to properly consult the real experts, share or part with control, and allow adequate private funding of health that we will achieve real health reform'.

Back in 1999, I concluded an article on 'The health of the nation' by saying that economists have a lot to contribute to sorting out the financial issues. They have identified several areas for reform. The complicated muddle involved in the fact that both the federal government and the states share responsibility for funding public health is one such issue. Reviving private health insurance is another. Insisting on proper measurement, of efficiency, about what works well and what works less well, and generally introducing greater transparency into the health industry is another.

Economists are strongly aware of the need to deal with monopoly providers, those Neanderthals of the health industry who refuse to recognise good overseas qualification, who limit places in medical faculties, who limit numbers in courses and who discourage (subtly or otherwise) prevention since that will limit their potential to earn money (remember dentists and fluoride?)

Above all, the economists insist, we need always to consider carefully the ways in which the health system and the welfare system interact. This interaction must be allowed for in plans for the reform of either. I also suspect that a major role for the economists is to work out both the best and the current worst uses of scarce research dollars. My guess, for what it is worth, is that additional resources should go to cancer research, measures to reduce youth suicide and clever promotion of the benefits of a healthy lifestyle and safe practices in high risk activities of all kinds.

Of course, deciding what to spend less on (assuming the benefits of additional expenditure overall cannot be established) will be the really controversial bit, but pointing out the need for difficult choices is what economists are paid to be good at. In all this it pays to recall the vital facts that Australians on average are healthier and are living longer. There are several well-publicised ways for many individuals to improve their own health, and this information is widely promulgated.

Breakthroughs in treatment and knowledge come at an exhilarating rate. Yet the dilemma outlined at the start of this article persists. Despite objective indicators of improved performance, there is constant talk of crisis in the industry. Economists who get involved as clients in the industry almost always notice myriad forms of inefficiency. Getting serious about efficiency may be the biggest reform that is needed now.

It is a great pity that all of these suggestions remain to be implemented!

The low point for the world economy was February 2009. The World Trade Organisation’s indexes of global imports and exports collapsed around 42% from cyclical peaks in July 2008. Since February world trade has rebounded by around 45%.

When global trade collapsed in the face of the GFC some sectors suffered particularly badly. Whilst trade in manufactures fell 27.6% in 1Q09 on a year ago followed by a fall of 29.8% in 2Q09, trade in iron and steel fell 54.7% in 2Q09 and 55% in 3Q09 on a year ago. Trade in automotive products fell 46.9% in 1Q09 on a year ago followed by a fall of 45.6% year on year in 2Q09.

2010 started with a huge surge in trade activity in 1Q10. Let’s start with imports by the BRIC countries. China’s imports in 1Q10 rose 65% on a year ago, closely followed by India with an increase of 55%, Brazil 36% and Russia 18%. North American imports rose 22% and European lagged behind with a 'mere' 16% rise on a year ago. Asian imports for the period were up 45% on 1Q09.

Now let’s turn to some of the recent year-on-year increases in industrial production. All the changes in industrial production have been sourced from The Economist, July 3rd 2010.

Singapore still leads the pack with 58.6% for May, with Taiwan in second place with 30.7%. Thailand (17.2%) was in third place in Asia but internal problems cut output in May and South Korea is in third place with a rise of 21.5%. The world outcast is Venezuela with a fall of 13.3% for March. The simple truth is that world industrial production is recovery and very few developed countries are returning negative changes on a year ago. The most recent industrial production for the BRIC countries are: Brazil (April, 17.4%); Russia (May 12.6%); India (April, 17.6%); and China (May, 16.5%).

Closely related to world trade are the prices paid for shipping bulk materials like coal and iron ore. In this regard a lot of attention is being given to the sharp fall in the Baltic Dry Index (BDI). The BDI captures the prices paid to the owners of bulk carriers to ship bulk commodities around the world. The BDI has fallen around 50% from its May 2010 high. The inference is that the world economy is slowing dramatically and demand for iron ore and coal has plummeted. But could the fall in the BDI be related to the number of bulk carriers bidding for work?

There is no doubt that there has been an increase in inventories of iron ore and steel in China. To make matters worse, China has accelerated production of iron ore from its domestic mines. At this point in time China requires fewer bulk carriers arriving at its ports loaded with iron ore. This certainly does not mean that the world is diving into a double-dip recession.

At the start of this decade there was a shortage of bulk carriers to handle the explosive growth in Chinese demand for bulk commodities. With plenty of money available new orders for cape sized bulk carriers soared to many times the historical average. At the time that the GFC hit there were new carriers ready to be delivered.

In terms of running a shipping business some of the forecasts were awful, with predictions that by 2011 the shipping sector would be two times oversupplied. If this situation is close to the truth then it is not surprising that bulk freight rates are low; for the competition for cargoes is high.

It is difficult to tell when the market’s perception of the resources sector will change or what the precise catalyst will be. We are getting nearer a point of change; perhaps it will come from the IMF?

The IMF revised global growth for 2010 from 4.2% to 4.6%. The IMF’s global growth forecast for 2011 is unchanged at 4.3%. If world trade keeps recovering going into 2011 the IMF will revise its estimates higher for 2011. World trade will rise and guess where commodity prices are headed?

Technical note.

Over many decades there is generally a close visual relationship between world trade and the Reuters CRB Index.

A notable period when the relationship didn’t hold was earlier this decade when world trade accelerated sharply higher at a time when real  commodity prices were still stuck in a 20-year decline. In hindsight there was a very strong buy signal to wade into the commodity markets in 2002/2003. The following figure shows the relationship between the Reserve Bank of Australia’s (RBA) Commodity Price Index and World Merchandise Trade.

In the first quarter of 2010 World Merchandise Trade soared 25% on a year ago, a solid recovery in any language. Global trade fell slightly in January, was flattish in February and soared in March. It is no coincidence that the inventories of copper and nickel on the London Metal Exchange are falling daily and the oil price has backed up over US$75 per barrel.

Nick Raffan's full report is linked here.

Populate or perish used be an Australian mantra.

Now our political leaders are more likely to advocate a smaller Australia.

No, they are not advocating giving bits away, or selling them, but less people than would otherwise be the case.

Great good sense on this matter is written today by George Magalogenis in the Oz.

'Freezing the labor supply now to appease electorates in Western Sydney would compel employers to raid each other's existing staff. ... Fewer workers begat higher wages which begat higher prices which begat higher unemployment'.

There's more: 'Slow population growth, and the Reserve Bank would have no choice but to slam on the monetary brakes to minimise the risk of a wages breakout'.

Henry's collected contributions to this debate are available here.

Refugee policy

Greg Sheridan writes that the UN's current refugee policy, and Australian do-gooder response to it is out-of-date and unworkable.

'ACCORDING to UN Secretary-General Ban Ki-moon, there are 16 million refugees in the world today. According to Julian Burnside, Malcolm Fraser and the other faux compassionate advocates of soft policies for illegal immigrants, any of those 16 million who get to Australia's waters should be automatically offered permanent residence in Australia, with immediate access to welfare and all the other benefits Australia offers.

'In fact, the category of people to whom the progressives would offer automatic permanent residence in Australia is far greater than this. ...

Some broader possibilities.

The Henry Thornton writer's group recently attempted to outline risks to Australia and what could be done about them.  Here is a relevant example.

6. The UN passes a resolution requiring Australia to give up 5 million of the continent's 7.7 million square kilometres to countries in South East Asia so they can move their excess populations to more spacious areas. ...

Implications: A UN which turned its toxic attention to the economic/environmental/social crises among our neighbours in the South Pacific and South East Asia will see Australia as a feasible solution to many of these problems. This hasn't happened yet because map alterations always have a long gestation period and all crises need to mature. ...

This matter is never discussed in Australia. It is probably not widely discussed in our region, although there are plenty of Indonesian officials and thinkers who see it as an option. However, situations can move very quickly in international affairs, especially when it is a crisis which is the driving force.
 
Mitigation: Try thinking about this, gentle readers ... for your grandchildren's sake.   Have the public debate and decide what we are prepared to do to prevent this outcome.  Are we prepared to do whatever it takes, become like Israel in the South Pacific?  Allocate more money to building up a powerful defence force so we can fend off boarders?

Economist Online

Check out the new look Economist Online site.

The World Game

The Sports News channel on pay TV today showed the delphic octopus who correctly picked the winner of each game played by Germany in the World Cup.

Today this psychic sea creature predicted that Spain would win the final.  We have been told, gentle readers.

But wait, Henry's sporting correspondant, TP Mahar, predicts the Dutch.  Unlike (presumably) the octopus, he has put money on the men from the land of dykes, windmills and strange food.

Read on here.

Cartoon of the week