It has been a long week.

Who'd be a politician?

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

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

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

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

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

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

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

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

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

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

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

The annual GDP growth rate was 3.3 per cent.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Links to relevant ABS data releases are available here.

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

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

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

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

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

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

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

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

Australian economy still breathing.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Links to relevant ABS data releases are available here.

The race for the Lodge.

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

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

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

The Chainsaws are being tuned up in Laborland.

Risk vrs uncertainty.

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

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

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

Ben Bernanke moved the markets on Friday - upwards.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Am I wrong, gentle readers?

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

US stocks 'soared' overnight as nervous investors were reassured by Ben 'Bubbles' Bernanke's promise to do whatever it takes to revive the shaky economy.

Election update.

The election that stopped a nation is over, and it's still stopped.  At soon we will be able to focus on real things like the footy finals.

Post-election post mortum is the theme of the quality papers today, with just a nod to Caaaarlton! typical near miss last night.

Paul Kelly says: Gillard [and Labor] 'poised at a tipping point'.

The SMAGE does not provide a link to 'Opinion' - perhaps because it has no readers of such material, or writers for that matter.

Phillip Coorey and Lenore Taylor say Coalition refuses to 'tug forelock like Gillard'.

The bonus, if that's what it is, if you can sit through a tooth paste ad, you get a video of Bob 'all hat and no cattle' Katter wittering on about Tony Abbott and the Treasury costings.

Newspoll has pointed out the bleeding obvious that a clear majority in the three Amigos' electorates want a conservative government - expressed here last Tuesday.

Here is another Bob Katter ad that may make you smile.

Here is a Pommie view, 'Ugly Troof' from 'Germs' Greer Herself.

'ONE is a ‘treacherous Jezebel’, the other is called a Mad Monk. As the nation’s election farce continues, its most famous cultural commentator reveals the shameful side of Oz'.

And, last but not least, a Taiwan view, thanks to Melbourne's 3AW.

A winter's tale.

 Illustration: Eric Lobbecke

Luke Slattery's hymn of praise to winter starts with TS Eliot's Journey of the Magi.

A cold coming we had of it,
Just the worst time of the year
For a journey, and such a journey:
The ways deep and the weather sharp,
The very dead of winter.

Read on here - it will cheer your heart.

The Australian electorate is no doubt enjoying the political theatre that is enveloping the nation.  What color government do we get, how long will it last, can sensible government take place with deeply eccentric people holding the balance of power?  Ms Gillard and Mr Abbott are dancing on a knife edge.

How many readers, we wonder, are irritated that the process is made excrutiatingly slow and painful by our pedantic insistence in everyone who is eligible to vote actually doing so, especially when we have been told that a record 6 % of votes were informal?

There is also the conundrum of people not on the electoral role who say they should be, in two catagories - those who had identification on the day and those who did not.

Why in this Age of the Internet we cannot we have electronic voting, where every elector registers to vote over the internet, gets a user name and a password and its off to the races on voting day. (Those who are unable to join the modern world could send a postal vote. If there were a second vote using a given name and password, it could be dismissed for later investigation.) No doubt there would be setup costs, but BPay works well for paying bills and something modelled on that would be quietly effective.

Would such a reform make sense?  As much sense as spending $43 billion dollars on the NBN, I suggest and, while I am at it, why cannot we taxpayers see the government's business case for this massive 'nation building' exercise?  Why are the country independents not demanding that of the PM, just as they are demanding that Tony Abbott submit his policies to an obviously partisan Treasury with the clear chance of a leaked opinion damaging the opposition case to govern?

On the substance of the current political impasse, a highly experienced observer, Sir Wellington Boote, says today:

'Australians like stable unobtrusive and quietly working governments. The minority government we will soon get won't have any of these qualities. The minority government will really wear out its welcome by November 2011. But first, we should let someone form such a government (Abbott in my view although I did not vote for him on August 21) and all these five  members should undertake to make every serious effort to go forward for about 12 months. The five of them should commit to support whoever is commissioned to form a government. The government can then agree to a set of policies and initiatives for the next 12 months that address a respectable slice of the issues which motivate the three bush independents and Wilkie and Bandt and then we go to the polls at the end of 2011'.

Read on here for the thoughts of Sir Wellington, who offers the best possible resolution of Australia's political uncertainty Henry has seen.

Replace the Australian Treasury - or reform it!

On the partisan Australian Treasury, Sinclair Davidson today lays out the case to replace it with an 'independent budget office'.

'But the problem isn't whether public servants are running off with the petty cash. The far greater problem is whether appropriate decisions are being made. For example, an audit of the Reserve Bank could ask why it was raising interest rates in early 2008 as the GFC unfolded. Similarly, why have Treasury revenue forecasts been so poor for such a long time? An independent budget office would undertake a public a cost-benefit analysis of the NBN'.

Henry's views on reform of the public service are summarised here.

'I hope that the next coalition government moves rapidly to depoliticise all the important departments involved in advising on policy on both economics and other important matters.

'Or, if this is too hard, it might be best to move more or less immediately to a US-style system, where a new government immediately begins a process of appointing its own people to key public sector jobs.  All department heads should offer to resign if the Washington system is to be implemented by an incoming Abbott government'.

Tonight on Wall Street

David Llewellyn-Smith says  'Tomorrow [in the USA, meaning overnight in Oz] is THE day...

'The S&P500 tilted at the the key 1040 level again today, the neckline of a scary head-and-shoulders top pattern, and held. The Dow is sitting right at the psychologically potent 10,000 level. Gold is sitting right below all time highs.

'And tomorrow the US head of Fed, Ben Bernanke, gives a speech at the Jackson Hole symposium entitled "The Economic Outlook and the Federal Reserve's Policy Response".

'With US leading indicators clearly signaling impending recession, the markets are set up with remarkable technical precision to make a decisive break one way or the other'.

Another knife edge, and for Australians it is two knife edges to endure.

The world's financial history shows clear evidence of growing volatility.

The Tulip boom in 1636 showed just what can happen when speculators get the bit between their teeth.

The Mississippi Bubble in France and the South Sea Speculation in the UK was a bit less than a century after the Tulip Boom, in 1720.  Massive financial instability had enormous consequences for both nations.

The nineteenth century was a time of regular but lesser fluctuations with the first roaring boom in 1825, again just over a century after the previous big financial dislocation.

The nineteenth century should perhaps be called the Age of Innovation as the industrial revolution developed with quickening intensity. There were major gold discoveries, in California and in Eastern Australia in mid-century, the growing strength of the United States began to influence the global economy and there were many booms and busts, although none with the individual intensity of the bubbles of the seventeenth and eighteenth centuries.

The nineteenth century was the first great age of globalisation, if one excludes the days of Roman dominance. As JM Keynes put it in his passionate book The Economic Consequences of the Peace: ‘What an extraordinary episode in the economic progress of man that age was which came to an end in August  1914. The greater part of the population, it is true, worked hard and lived at a low standard of comfort, yet were to all appearances reasonably contented with this lot. But escape was possible, for any man of capacity or character at all exceeding the average, into the middle and upper classes, for whom life offered at a low cost and with the least trouble, conveniences, comforts, and amenities beyond the compass of the richest and most powerful monarchs of other ages’.

This happy state of affairs was not to last. ‘Moved by insane delusion and reckless self-regard, the German people overturned the foundations on which we all lived and built’.  Germany’s ‘roll of the iron dice’ in 1914 is generally regarded as motivated by an almost religious desire to establish an empire that would rival England’s and contain within its boundaries (including colonies) all the resources Germany would need to sustain itself and to develop its empire into the dominant global superpower.

The first great war of the twentieth century has been seen as a backlash against the first great age of globalisation, which opinion sounds a warning for us now. Whatever its value as a reminder of modern risks, this war imposed great financial and other losses through death, injury, damage and spending on armaments and soldiers.  When the heir to the Austrian throne was assassinated in the Bosnian capital Sarajevo on 28 June 1914, there was no immediate reaction in financial markets, despite plenty of earlier discussion of the mighty costs that would be imposed if the major powers went to war.  It was almost a month before the financial press expressed serious anxiety that the Balkans crisis might become something far more serious.  When investors realised the full-scale war was coming, 'liquidity was sucked out of the world economy as if the bottom had dropped out of a bath’. (Niall Ferguson, Ascent of Money).

The first global war was followed by the Great Depression and then second global war.  By any measure, the first half of the twentieth century was the most volatile in global history.  The second half was in many ways calmer, but the 1960s introduced what has been called the Age of Aquarius, with sex, drugs and rock'n'roll signalling a major social revolution in the western nations.  Far more insidious than these developments was the rise of inflation, which led to the Great Inflation of the 1970s and, in some nations, including Australia, the 1980s.

From the end of the 1970s we see clear evidence of increasing economic and market volatility.

Japan had its Roaring Eighties, when share and land prices experienced a massive bubble followed by an extended but ultimately mighty crash that ended the so-called 'Japanese miracle'. In the rest of the developed world share prices rose sharply and at bubble rates for a while in the mid-eighties, and the Wall Street crash of October 1987 created temporary havoc in financial markets.

Then we saw the Roaring Nineties, reinforced by easy money under Alan 'Bubbles' Greenspan and ending with the bursting of the 'new economy' bubble that was the Techwreck. (Along the way we experienced the Asian crisis of 1997-98, dismissed as mere growing pains by some influential analysts.)

While explicitly declining to lean into the wind of rising share prices, Bubbles Greenspan was quick to reduce cash rates to near zero when the bubble burst, setting in train the events of the Rampaging Noughties.

Greenspan's successor, at risk of being labelled 'Bubbles' Bernanke in his turn, cut cash interest rates to almost zero, supported a series of massive financial sector bailouts and implemented 'quantitative easing', more clearly described as printing money.

This massive monetary easing was more than matched by fiscal stimulus, yet within two years governments everywhere were wringing their hands at prospective budget deficits 'as far as the eye can see'. Could they not project ahead, one is forced to ask?

John Garnaut recently reported from Shanghai: : 'Commodities markets are entering a new age of volatility that could involve dips as low as those seen during the global financial crisis, says the chief executive of Rio Tinto, Tom Albanese.

'Mr Albanese predicted a sharp slowdown in China's trend GDP growth rate to between 6 and 7 per cent for the next decade, overlaid by "higher amplitude" financial market cycles associated with Western economies unwinding their deep imbalances.

' "We will see higher levels of volatility - higher highs, lower lows - as we saw over the past two years," Mr Albanese said'.

It is good to see that this massive mining company is so on the ball in diagnosing the frankly scary evolution of the second age of globalisation.

My own hypothesis is that the biggest threat to capitalism is the serious possibility of instability caused by policy swings: expansion/recovery/asset inflation/goods inflation/policy-tightens/-economy-falls back, etc. Such outcomes would destabilise the beliefs of the econocrats in major countries, as well as their political masters.

The confidence engendered by the apparent success of the ‘Keynesian’ policies followed so far might evaporate with the results impossible to predict with any certainty.

I am grappling with the questions of the dangers of accelerating economic and financial volatility (and what is to be done about it) in a book called Great Crises of Capitalism being published by Connor Court in early 2011.

Posted today on The Australian's website.  

A far worse than expected US housing market has produced another poor result on Wall Street.  Commodities were also hit, meaning it should be a dismal day in Asia, unless the mad 'decoupling' optimists are right.  With the painful attempt to count votes and form a government expected to take weeks, there is little reason for Australia's 'miracle economy' to create new wealth.

Henry was the person to tag Alan Greenspan as 'Bubbles' Greenspan, and to warn that Ben Bernanke may well morph into 'Bubbles' Bernanke.

Now Four Corners has gotten the message and devoted the whole of Monday night's program to the subject.  Three (American) gurus were featured, including the colorful bloke who warned of the myriad of 'bailout bubbles'.

Even more persuasive was the German economist who bewailed the current state of the world economy, 'with bubbles everywhere'.

Also the former American econocrat who said 'we can do it' [avoid catastrophe] but who also warned that it will be a damned close run thing and our whole approach needs to change.

(If you have Adobe flash Player 10.1 you may be able to see the relevant episode here. Henry's PC says the software is downloaded, but the ABC site says it isn't. Sigh!)

On Australia's extraordinary election outcome, Tiresias of Canberra concludes: 'If the election of 2010 means anything, it is that the Australian people are so frightened of change and so keen to avoid acknowledging that the era of easily-won mass prosperity is over, that aspirants for government have to pretend that we are at peace and face no imminent dangers to our way of life and welfare.  During the campaign there was a general consensus that the Magic Pudding (the minerals of the Pilbara etc) would suffice no matter what.  Neither major party sought any kind of mandate for dealing with the inevitable danger of a second round of the global financial crisis.  No one mentioned trade policy.  No one identified any new industries that they wished to see established.  Discussion of economic reform was almost wholly confined to the question of `the ill-fated Work Choices'.

A good starting point for individuals, corporations or nations in these dangerous times is to reduce leverage, which means repaying debt.  Debt free is the ideal, and Australia is not yet too far from that ideal, at least as far as government debt is concerned. Our banks required the bailout of deposit guarentees and the loan of the government's AAA rating for their extensive overseas borrowings.  Private debt owed by Australians is large and still growing, which puts our banks at risk if there is a second gloval financial freeze.

Most other 'developed' nations, or at least their governments, are heavily indebted and still borrowing.  Therein lies the risk facing all of us, because Australia's mix of low government debt and high private debt will not save us if other nations, more heavily indebted overall, solve their problems by debt default or inflation, which are the traditional methods.

Whether (or when) individuals should reduce exposure to equities is a harder question.  While Four Corners did not say so in explicit terms, that is the next question for those concerned to protect their wealth. 

Rather than selling equities, another approach is to hedge against the possibility of a large negative correction. It seems that Nassim Nicholas Taleb, of Black Swan fame, has been hedging his equity portfolios, and also buying olive groves in his native Lebanon.  In a dangerous and overcrowded world, food (and clean water will be valued highly. The put options that provide downside protection are presumably now very expensive, so we may all have missed our opportunity.

The Bailout bubbles will burst just as previous bubbles have burst - maybe this is already happening.  Far better to have sold some equities when the bubbles burst, but timing is the issue.

The federal election has come and gone, Australia now has a hung parliament and I’m still shocked I predicted the result last Thursday.

As of writing this blog on Monday night, Labor has 72 seats, the Coalition has 70 and there are three independents and one Green in the House of Representatives.

The experts are predicting Labor and the Coalition will end up tied with 73 seats and there will be another independent. This would leave the major parties on 73 seats each, four independents and one Green.

So what are my conclusions from the election and what will happen next?

First, the election itself.

I think the election results show that there are now two fundamentally different Australias. We have gone the way of America and now have our own red/blue state divide.

The first Australia, that I’ll call Blue Australia, is concentrated in the south-eastern cities and overwhelmingly votes for the ALP and Greens.

Centralism is the overriding political philosophy in Blue Australia. Blue Australia supports the mining tax because it socialises the wealth from mining in Red Australia (I’ll move onto Red Australia in a minute). Blue Australia also believes in global warming and wants the government to do something about it with other people’s money.

Blue Australia defied a national swing against federal Labor and returned most of its members and elected the first Green to the House of Representatives.

In contrast to Blue Australia, there is Red Australia.

Red Australia comprises Queensland, West Australia and most country seats in Blue Australia. Red Australia is conservative and votes for the Coalition parties and independents. Red Australia opposes the mining tax and is sceptical of global warming hysteria.

The national swing against Labor was greatest in Red Australia and the ALP now only has three seats in all of West Australia.

If you don’t believe my Red/Blue Australia observation, just look at The Australian’s electoral map. It is proof that two fundamentally different Australias emerged from the election.

So my general conclusion is that the election split our country into two different Australias – one Blue and one Red.

Now onto my prediction for who will form the next federal government.

On this question I am fairly confident we will have a Coalition government.

Three of the Independents are former National Party members and I just can’t see them siding with Labor on issues like global warming and the mining tax.

However, the Coalition cannot afford to take the Independents for granted.

The country independents strongly disagree with the Coalition on some crucial issues and will seek some promises before allying with them.

Bob Katter, in particular, has criticised the Nationals for blindly following the Liberal Party’s “economic rationalism”. This “economic rationalism” refers to the federal government’s support of free trade policies that have crippled the economy of country Australia.

Free trade is a nice theory when taught by economics departments at Australian universities (I can testify to this), but it does not apply to the real world where every national government retains barriers to trade.

With minimal tariffs, Australian farmers compete in a world economy where the average agricultural tariff is above 40%.

In light of the real world situation, free trade is nothing short of economic suicide.

I hope Bob Katter secures an agreement from Tony Abbott to end the “economic rationalism” and put the Australian economy, rather than the free trading world economy, first.

The independents also point out the obvious reality that Australia is not suffering from overpopulation.

They correctly argue the population “debate” has been framed from a city perspective to scare swing voters in Brisbane, Sydney and Melbourne. 99% of Australia is uninhabited and yet politicians argue there is overpopulation.

Egypt has a population of 90 million and is a desert country smaller than West Australia.

These two issues – “economic rationalism” and population – show the major parties either don’t grasp or are just ignorant of the major issues in country Australia.

They will have to change their attitudes if they have any hope of governing Australia.

*On a lighter note, click here for a fantastic Bob Katter commercial.*