There are three big things weighing on global equity markets.

The slowing recovery in the USA, with associated risk of a 'double dip' recession. The slowdown in China, with Chinese inflation replacing the deflation that served the world economy (and western central banks) so well for so long. And the sovereign debt crisis in Europe.

These matters will bother markets for some time. In Australia, business leaders say our economy is still fragile.  The rate of unemployment edged up, but this was because 23,000 new jobs were more than balanced by new people looking for jobs, so the 'participation rate' rose. Job ads are still running hot, up 36 % over job ads a year ago.

If recovery in the 'miracle economy' is set to slow, the good news will be no further interest rates until momentum is reestablished.

On Wednesday we canvassed the reasons that global investors remain wary about the Australian economy and in particular the value of shares in our largest companies.

We reminded readers about the dire consequences of the Poseidan boom as well as political and geopolitical uncertainty.  Right on cue comes a report on perceptions of Australia as a safe place to invest, based on the opinions of global resource investors.

Andrew Burrell reports: 'AUSTRALIA'S reputation among global mining investors has taken a massive hit over Labor's bid to introduce a resources rent tax

'The sovereign-risk survey of 429 world mining chiefs, conducted by Canada's Fraser Institute, found Australia's global ranking slumped from 18th to 31st in the past six months when ranked among 51 mining jurisdictions'.

The next time your investment advisor suggests you buy more Australian shares, do quiz him about this matter.

The election campaign is about to enter its final week.  Henry's impression is that Labor did a bit better this past week, though the massive swing in the Morgan poll - illustrated below - looks a little odd.  Tony Abbott's vote of confidence from the Rooty Hill RSL meeting will comfort the Libs, showing as it does Mr Abbott's abilities as a stump politician and also Labor's vulnerability in marginal electorates where people are still doing it tough, slipping backwards rather than 'moving forwerd'.

We note in passing the bad news that the latest weekly Roy Morgan Consumer Confidence Rating for the weekend of August 7/8, 2010 was at 129 (up 4.8pts).

As a policy tragic, Henry echos the editorial of The Oz today. 'With just over a week to go, it is time for Mr Abbott to show that he has the policies to meet the central economic challenges of improving productivity and building a bigger, better country. Ms Gillard, meanwhile, must demonstrate she can be a reforming prime minister, rather than our federal Labor premier. Her election slogan is sounding a little tired but its message, moving forward, should be etched in the policies of both parties'.

Its official. The US Fed has met and says America's recovery is struggling.  It (the Fed) will therefore again do some renewed 'quantitative easing'.  The helicopters are warming up as we write.

The key paragraph in the Fed's post-meeting commentary was the following: 'The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period'.

The Fed's decision was almost unanimous.  Only dissident was Thomas M. Hoenig, who judged that the economy is 'recovering modestly, as projected'.  Mr Hoenig believes that continuing to support the 'expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted and limits the Committee's ability to adjust policy when needed'.

No great fear of inflation, gentle readers, though there is a lot of history that says this should be on the radar by now..

Across the Atlantic Ocean, the Bank of England has denied it is 'soft on inflation', despite inflatyion being over the 2 % target for 41 out of the past 50 months.

Like the Fed, the BoE stressed that there was no evidence of inflationary expectations rising, and there was a prospect of slow but steady economic recovery.

See this New York Times report for more, including quotes from the Bank's struggling Governor, Mervyn King.

In China, the leader of the new world high growth nations, inflation has 'picked up speed'.

'CHINA'S inflation accelerated in July - to 3.3 % from 2.9 % in June - due to a spike in food prices amid severe flooding, but analysts said there was no cause for alarm.

'The inflation outlook was uncertain as higher wages might feed through to a higher consumer price index, Sheng Laiyun, spokesman for China's National Bureau of Statistics, said'.

Mr Sheng said China could achieve its full-year target for a CPI rise of about 3 per cent - we add, this is a dramatic reversal from a few short years ago when Chinese deflation was making western central banks look good.

Analysts said there was no great cause for alarm as the rise was mostly due to one-off factors  and they expected inflation pressures to decline in the months ahead. Attributing inflation to one-off facots that will be reversed shortly is an old mistake.  Maybe this time it's different.

Mr Sheng said a slowdown in industrial activity and investment was good for China's economy at this stage.

'We are in a crucial period of moving toward steady economic growth from relatively fast growth. An appropriate economic slowdown is good for preventing economic overheating and accelerating economic restructuring to keep economic development sustainable,' Mr Sheng said.

The official also expressed confidence about domestic investment and consumer demand, as China is in a period of 'accelerating industrialisation and urbanisation'. 'Momentum for China's economic growth is still comparatively strong' said Mr Sheng.

Debate downunder.

Today two heavyweight economists support Henry's line, and that of Australia's opposition Liberal party - the fiscal stimulus of Labor's ham-fisted government played very little part in our dodging the bullet of recession.

RBA board member, Warwick McKibben, is surely looking for a rest from central banking.  He repeated his view that Labor's claim to have produced 2000,000 jobs during the Global financial Crisis is simply 'wrong'.

Even more definitive, since is is a new claim from a fine economic historian, is the judgment of Harvard's Niall Ferguson.

'Five factors saved Australia from the GFC, and Labor isn't one of them'.

Previous reports of this debate are linked here, here and here.

The Global Financial Crisis (GFC) will be analysed to within an inch of its life.

Today in his regular column in the Oz, Henry's former colleague Dr Don Stammer displays characteristic optimism and enthusiasm:

'IT began in the US and Europe, but the global financial crisis quickly hit hard in all countries and investment markets.

'At the time, many people feared a worldwide depression would follow or, at best, a deep and drawn-out recession, and expectations were that other economies and investment markets would remain "coupled" to what would unfold in the north Atlantic countries, particularly the US.

'These turned out to be exaggerated concerns. The US and Europe did not slide into depression (or even lasting recession).

'Good rates of economic growth soon returned in most Asia-Pacific countries, other than Japan. Sharemarkets turned positive from March last year.

'Last week, I mentioned some of ways in which Australia has seriously "de-coupled" from the post-GFC experience of the US: economic growth, interest rates, house prices, inflation and the challenges facing monetary and fiscal policy. I should have added business capital spending which is 10 per cent higher as a percentage of the overall economy in Australia relative to the US.

Dr Don goes on to say that Australia's differential economic performance may, indeed eventually should, allow Australia's shares to 'decouple' from Wall Street.

The problem, he says, is that currently, the mood is one of 'extreme caution, with many investors waiting to be convinced, among other things, that the Chinese authorities won't go too far in slowing their economy and that company profits in Australia are improving'.

Australia has suffered from a reputation as an unreliable destination for share investments.  Henry once was asked to pitch the case for Australian stocks in Edinburgh, home city for some of the world's canniest investors.  'We remember the Poseidon debacle' was the comment of one such investor after the pitch was delivered.  This canny Scot may have contributed to Wikepedia's account, if not the Reserve Bank's conference.

John Simon - author of 'Three Australian Asset-price Bubbles' at a Reserve Bank conference in 2003 - comments: 'The Rae Committee report, handed down in 1974, documented the abuses that had gone on during the Poseidon boom. The report highlighted how the stock market had been poorly regulated and that much of the information relied upon by investors was uncorroborated rumour. It recommended a number of changes to financial regulation and the regulation of stock markets which would, presumably, prevent the sort of abuses that occurred during the Poseidon boom from happening again'.

Perhaps Australia's reputation as a cowboy economy is fading, but behaviour of Australian shares does not support this hypothesis.  As Don Stammer says today 'our sharemarket has remained closely tied to the ups and downs of US sharemarket. Indeed, the relationship running from US shares to the Australian sharemarket since early 2008 is the tightest I've known it to be'.

There are two further reasons why Australian markets cannot break free of the constraint of global/US markets.

The first is concerns political turmoil, the prospect of a hung parliament (or at least continuation of a  hung Senate) and that we are enduring a Federal election with two inexperienced leaders who seem to be firmly in the 'no further economic reform' camp.

When trying to win friends among deeply cynical professional investors, some assurance of stable government and continued economic reform is necessary.

Then there is the far deeper matter of our location remote from the major metropolitan centres to the south of a region whose main powers are either hostile to 'white fellas downunder' or disinclined to have much consideration for us except as buyers of cheap goods, diggers of valuable minerals and wasters of scarce water.

Henry's theme has been 'Australia - alone and friendless in a volatile and dangerous part of the world'.

Part of our concern is the strong possibility that the USA will deal with its unsustainable budgetary situation by embracing a new isolation.

Today's contribution to this debate draws attention to the words of a Chinese admiral who reportedly said to an American counterpart: "the U.S. take Hawaii East and we, China, will take Hawaii West and the Indian Ocean. Then you will not need to come to the Western Pacific and the Indian Ocean."

With this background, international investors would need to be confident that Australia could at least put up a very strong fight should an Asian superpower decide to impose its will.

Tell me if I am wrong, Don Stammer, tell us your grounds for optimism about Australian politics and geopolitical realities.

Posted today on The Australian's website.

US stocks rose overnight in the quietest session of the year on speculation that the Federal Reserve would signal potential steps to boost the sluggish economic recovery.

Volume was a mere 5.71 billion shares, compared with last year's estimated daily volume of 9.65 billion shares.  Investors reportedly were wary of taking new positions before the US Fed's statement on Tuesday - ie tonight, our time.

The Fed could, presumably, do some more 'quantitative easing', printing money and handing it out to worthy recipients like Wall Street's biggest financial institutions.

Meanwhile, much is being made of the fact that JPMorgan Chase chief executive Jamie Dimon told the US Financial Crisis Inquiry Commission in early 2010 that the financial system experiences a crisis 'every five to seven years'.

By that measure, the next crash could come by 2015 - years before new banking changes are in place.

Christine Harper writes from New York: 'Many of the measures ordered by US Congress and global regulators, aimed at cushioning the financial system in future crises, are years away from being implemented. The Basel Committee on Banking Supervision plans to give the world's banks until 2018 to comply with limits on how much they can borrow.

'Parts of the new Dodd-Frank Act in the US that would force companies to cut stakes in in-house hedge funds and private-equity units, may not go into effect for a decade.

'Banks' appetite for using borrowed money for investing in complex, illiquid securities contributed to the credit crisis. The pace at which curbs on leverage are likely to be imposed contrasts with the speed at which banks, including UBS and Morgan Stanley, are hiring to increase trading activities'.

"Based on our experience of government's ability to execute these things effectively and in a timely way, we are almost uncovered now from any future financial risk for at least another eight or 10 years, and that's a little scary,'' said Roy Smith, finance professor at New York University's Stern School of Business and a former banker at Goldman Sachs.

'US Treasury Secretary Timothy Geithner said last week that the administration wanted to change the "frustrating, glacial pace" at which rule-writing has occurred. "We will move as quickly as possible to bring clarity to the new rules of finance,'' he said'.

'Even so, he said that banks would have until the beginning of 2013 to meet the new minimum capital requirements and "several years beyond that" to create new capital buffers.

It seems the Dodd-Frank Act requires 67 studies and 243 new rules, according to one Wall Street law firm.

The Act's 'Volcker rule', which bans banks from proprietary trading and limits investments in private equity and hedge funds, is regarded by non-conflicted observers as hopelessly watered down againt the benchmark return of the glass-Steagal Act proposed by America's best former Fed Chairman, Paul Volcker.

Simon Johnson of the HuffingtonPost calls Jamie Dimon 'The Most Dangerous Man In America'.

'There are two kinds of bankers to fear. The first is incompetent and runs a big bank. ...

'The second type of banker is much more dangerous. This person understands how to control risk within a massive organization, manage political relationships across the political spectrum, and generate the right kind of public relations. When all is said and done, this banker runs a big bank and -- here's the danger -- makes it even bigger.

'Jamie Dimon is by far the most dangerous American banker of this or any other recent generation'.

Henry's comment on all this is that the really big financial crises have mostly come a generation or two apart. Perhaps Jamie Dimon knows better, and on his side is the massive globalisation of finance and instantaneous spread of information around the globe, at least when the world Wide Web is working - imagine the chaos if the web was not working at a time when a crisis erupted in London or Tokyo.  Plus there is the fact that Jamie Dimon's traders could probably cause a crisis on their own.

Readers are advised to keep their seatbelts firmly tightened.

For a comment on Australia's situation, see Richard Gluyas in the Oz next morning.

The weak state of the 'developed' economies means governments are under pressure to reduce unemployment and stimulate growth.

Support for chosen industries - picking winners, saving losers - is an understandable way of trying to save jobs and help local firms fight foreign competitors.   The latest edition of The Economist features the return of 'Leviathan Inc'.

Furthermore, some countries, such as America and Britain, seek to rebalance their economies away from finance and property. Along with older manufacturing, eg cars, clean technology is emerging as a favourite direction. Nearly every large economy has plans to win global market share and create green jobs.

The apparent success of emerging countries like Brazil, India and China, with a big role for the state in business seems to be turning conventional wisdom on its head. Nine of the world’s 30 largest listed firms are emerging-market companies that count the state as their dominant shareholder.

At the same time, America has rescued General Motors, Freddie Mac Fannie May and other financial institutions is focussing on Greentech in its innovation policies.

The apparent success of emerging countries like Brazil, India and China, where a big role for the state in business seems to be working wonders, helps developed countries to embrace 'picking winners'.

The Economist reports that nine of the world’s 30 largest listed firms are emerging-market companies that count the state as their dominant shareholder.

The venerable mag also notes that the internet and the microwave oven came out of government-led research; 'the stranger stuff that governments do can prove surprisingly successful'. A few governments, such as America’s and Israel’s, have contributed usefully to the early development of venture-capital networks.

The trouble is, most such efforts will fail. Costs will be high, both in terms of the direct cost of money paid to companies and the opportunity cost of missed opportunir=ties, even if this is only because of higher interest rates as governments borrow to subsidise their favourite industries.

It is probably impossible to disuade governments from trying to help industry - 'don't just stand there, do something'.

The Economist offers three ideas that should guide a more sensible approach to securing the jobs of the future.

Rather than provide handouts, improve the environment for business — less red tape, more flexible labour markets, simpler tax and bankruptcy regimes.

Invest in the infrastructure that supports innovation, from modernised electricity grids (a smarter way to help green energy) to basic research and university education.

Encourage winners to emerge by themselves, for example through the sort of incentive prizes that are growing increasingly popular (see article).

This contribution by the Economist comes at a crucial time in Australia's election, and renewed attempts by various writers (eg Garnaut) and journalists to focus on weak productivity growth.

Henry's particular nostrum is policies to boost government and private spending on Research and Development (R&D).  Government contribution to spending on R&D should, as it generally is, be the subject of competitive bidding, such as the Cooperative Research Centre (CRC) program that has the further advantage that it exists explicitly to foster end user focussed research and commercialisation.

Tax policies need to encourage R&D by business, and here Australia has an abysmal record.  Early efforts were rorted and Kim Carr's latest effort merely spreads a small tax concession thinner and thinner, arguably helping newcomers at the expense of proven winners. 

Current tax policy to encourage innovation continues to compare very unfavourably with generous negative gearing for investment in real estate.  Is it any wonder that Australia is especially good at providing housing and industrial buildings and relatively poor ar building new industries on the basis of innovative new technologies?

The political campaign we should be having.

Business leaders speak up for growth.

'BUSINESS leaders have slammed both sides of politics over the debate on population.

'And one of Australia's most senior corporate figures says that "we are all fundamentally boatpeople".

'Transfield Services and tollroad operator ConnectEast Group chairman Tony Shepherd said the debate was "terrible" and he was amazed the country was having it.

"If you've got the gumption to go across in a leaky boat across the Timor Sea and arrive here, it is almost a pre-qualification," Mr Shepherd said.

'Speaking at the Infrastructure Partnerships Australia conference yesterday, he also said Australia had benefited from immigration'.

"We are all fundamentally, other than our indigenous population, and even they probably too, we are all fundamentally boatpeople . . . That's what we've grown from."

Professor Garnaut speaks up for productivity.

'How do we reconcile the continued growth of the Australian economy through the first decade of the twenty first century, with the evidence that something has gone wrong with our political culture and economic policy? In truth, it is only the first half of the past two decades of strong economic performance in which productivity-raising reform contributed to Australian prosperity.

'The exceptional prosperity of the past two decades can be divided into three parts. Through the 1990s, Australian productivity growth on the back of post-1983 reforms was the highest of the developed countries, after our country had been a chronic underperformer through the first eighty years of the twentieth century. This delivered sustainable increases in living standards.

'Productivity growth slowed in the early twenty first century, and soon stopped. To use an economists’ term, total factor productivity has actually gone backwards since 2005. However, output, employment and average incomes continued to increase through the early years of the century. Productivity was replaced as the engine of growth by a huge expansion of housing and consumption, supported by increasing bank debt. The banks funded their increased lending by borrowing from foreign wholesale markets to a degree that is unprecedented in Australia or in any other country. ...

'Jumping forward three years, the collapse of global wholesale markets in the Great Crash of 2008 demonstrated that growth based on debt-funded housing and consumption certainly was not sustainable. The banks survived through the timely provision of an Australian Government guarantee to wholesale borrowing in October 2008—eventually accumulating to today’s $157 billion of contingent liabilities. ...

'Without productivity growth, there can be no reliably sustainable increases in the material standard of living. Neither is there scope for increases in the material standard of living from another debt-financed housing and consumption boom.

'Nor is there likely to be additional scope for increased incomes per head from the resources boom. China and the large developing countries are likely to keep growing strongly. However, the expansion of productive capacity in Australia and increasingly in many other countries will, over time, bring down the terms of trade, and reduce the rate of growth of Australian resources investment. The contribution of the resources boom to growth in Australian incomes is likely to be at a peak in 2010.

Australians face hard economic policy choices in the period ahead. Not since the 1930s have Australians faced such tight constraints on growth in living standards, and such high risks of instability and rising unemployment if the constraints are seriously breached.

Reserve says rates on hold, growth strong.

'The RBA also said the country's export earnings were likely to remain high for a number of years on the back of higher prices for iron ore and coal.

'The direction for official interest rates over time likely remains higher with inflation still expected to trouble the top end of the RBA's desired 2-3 per cent target band over coming years.

'The RBA said the country's export earnings were likely to remain high for a number of years on the back of higher prices for iron ore and coal.

'The central bank looks to stay on data watch, with any surprise inflation data likely to bring it back into action. The next batch of inflation data will be released in October'.

And there are those geopolitical risks.

Caaaarlton! (AKA the Ratt Pack) is back.

Beating, no belting, Essendon for the first time for several years, just about guaranteeing a place in the finals.

Do not forget, this team beat Geelong and St Kilda, and tonight most of the players had their best games of the year.

The Tango.

'Then come the professionals in full flight, and at times it is hard to believe what you are seeing. Instantly there is a rush of delicious steps that dangerously intertwine legs and send the female dancer flying into the air with feet still pulsing - only to return safely and gracefully to the floor'.

From the archives comes Henry's 2004 experience of this wonderful art form in its native habitat.

Cartoon of the week.

Visiting Canberra it is impossible to miss the bubble-like growth of the business park that surrounds the airport, the massive roadworks and, of course, the politics.

Henry was in the nation's capital to be farewelled with his former colleagues on the CRC Committee by the new Chair, other new members, one continuing member who, like Kevin07 was resurrected after receiving his 'dear Dorethy' letter of thanks for splendid service from Minister Kim Carr after a proposed new member failed to survive Cabinet scrutiny..

It was one of those slightly nostalgic events, far cheerier than the next time Mr Rudd and Ms Gillard break bread together.

Those at our cheery gathering whom Henry judges to be Labor supporters claimed to be 'gobsmacked' at the swift, brutal and effective slaying of Prime minister Rudd.

The resurrected member recalled Henry predicting just such an event in mid-February.  Sadly for Kevin07, who also seemed gobsmacked at his removal, no-one who heard that prophecy saw fit to warn the poor bugger, or he might just have taken notice of the many warning signs.

The headline in the Oz screams 'Pariah to messiah: Kevin Rudd's back'.  The various experts in that and other papers Henry has scanned are unclear if the return of Mr Rudd will help or hinder the campaign.

Ah, the glorious uncertainty of life, and political life especially.

The image below shows Canberra as it looked in 1927, when it was still a sheep station.  Not much has changed!  Did we use a time machine to obtain this image - 'sort of' is the answer.

At last, some serious discussion, if not yet debate, on the China syndrome.

The syndrome under discussion is China's rapid growth and development, with Australia 'feeding the blast furnace of the biggest industrialisation in history.'

The quote is from Michael Stutchbury's main article in today's Oz.  Stutchbury is leading the charge for a 'bigger Australia', in opposition to our political leaders who are both running a 'smaller Australia' campaign. This is inevitable, really, as the battlers in marginal seats respond understandably to populist dog-whistle causes.  Among these, high immigration, increasing numbers of asylum seekers and road congestion are all issues that worry Australia's battlers.

Australia's trade surplus for June set a new  record as export earnings from iron ore and coal surged, lifting the local Australian dollar and acting as a reminder of why the next move in interest rates is still likely to be up.

The surplus of $3.54 billion was almost twice the market forecast and far outstripped the previous record of $2.5 billion.

The surplus for the three months to June amounted to $6.6 billion, a turnaround of almost $10 billion from the first quarter's deficit and laying the base for strong economic growth.

The gloom at slow retail sales reminds us that wealthy owners of retail malls are doing it tough, and can be expected to continue to lobby - as they always do - for low interest rates and some 'healthy inflation'.  Why retailers or owners of retail malls are allowed to sit on the Reserve Bank board, given their blatent conflict of interest, escapes this writer.

But I digress.  The main point about sluggish retail sales is that it represents a new and welcome frugality.  As we said bank in May, 'Good news, fellow Australians, consumer confidence is falling'.

Similar points apply to the housing market.  The latest quarterly ABS house price figures show a sector almost in bubble territory.  The June month numbers provided by a private group suggest a substantial slowdown, confirming evidence from lower anction clearance rates, low building approval data and slow growth of lending for housing.

Vehicle sales, however, are still booming so the old consumerist habits have not yet been fully replaced by the new frugality.

The Oz also has a feature article in the subject of the geopolitical waning of the USA and the gain of China, at least so far as the Pacific region is concerned.

'BENEATH the radar, almost by stealth', writes Cameron Stewart, 'the tectonic plates of power are shifting in the Pacific Ocean.

'A resurgent China is baring its teeth at the once indomitable US Pacific fleet. The certainty of US hegemony over this vast ocean, which Australians have taken for granted since World War II, is being challenged.

'But this steady transformation of our security outlook has failed to capture public attention in Australia precisely because it has been so steady and does not lend itself to an easy headline in a world of 24-hour news cycles'. 

Stutchbury's main point is that Australia needs to 'make the most of our China wealth without becoming too beholden to Beijing.  We must surely use our China bounty to become bigger and stronger by the middle of this century'.

Amen to that. A small remote capitalist nation like Australia - alone and friendless - needs sturdy independence and the ability to stand on its own two feet.  This is especially important now that the USA is in serious financial strife and likely to be tempted to revert to its traditional isolationist policy, which expert opinion sees as highly likely.  A major risk for America's allies, a big opportunity for its enemies.

Posted on The Australian's website.

We also recommend a paper by Colin Tease delivered at Melbourne University earlier this year.

And also Ross Garnaut's Hamer Oration, August 2010.

The late Joan Robinson, a Cambridge economist, once wrote, “the misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all”. Her quip, written in 1962, was inspired by underemployment in South-East Asia. Since then, capital has busily “exploited” workers in that region and its giant northern neighbour, much to their benefit. Now it is time for capital to invest in them.  Thus The Economist ends its lead article on the rise of China's workers.

China's workers get a small slice of the national cake: 53% in 2007, down from 61% in 1990 (and compared with about two-thirds in America). Letting wages rise at the expense of profits would allow workers to enjoy more of the fruits of their labour and help with the necessary 'rebalancing' of the global economy. The Economist estimates that a 20 % rise in Chinese consumption might produce an extra $25 billion of American exports and create over 200,000 American jobs.

China's workers have been behaving like workers in the west, going on strike for higher pay, and the government has allowed this, especially when the strikes are at foreign-owned factories. Workers are scarce in the dynamic coastal areas and internal migration is drying up. The best evidence is the wage increases of China's internal migrant workers, which rose 17 % last year.  As the graph shows, this is a break-out compared with previous experience.

  Courtesy The Economist

Experts say that the country’s villages still contain perhaps 70m potential migrants. 'But the supply of strong backs and nimble fingers is not infinite, even in China. The number of 15- to 29-year-olds will fall sharply from next year. And although their wages are increasing, their aspirations are rising even faster. They seem less willing to “eat bitterness”, as the Chinese put it, without complaint'.

As costs rise, some economists (including Henry) worry about a new Chinese export: inflation. Between 1997 and 2005 the price of Chinese exports to America fell by more than 12%. What if that trend is now reversed? asks The Economist. In principle, the China price can rise or fall without any effect on inflation. As long as the central bank remains vigilant, other goods will just get cheaper or dearer, leaving overall prices unchanged. In practice, however, Chinese competition made it easier for the Federal Reserve to contain inflation, back when containing inflation was the biggest thing on its mind. For now, though, it is low on its list of worries.

Australia's immigration debate
 
The consensus amongst the great and good, says Tiresias of Canberra, is that Australia needs more people, especially to settle the remote but underpopulated north-west and to ensure that there are enough workers to replace the baby boomers, and that an immigration policy heavily biased towards skilled immigrants is the way to go. 
 
Some caution is needed since one expert has concluded that America’s long reliance on overseas born scientists and engineers (including ones that had migrated to the US from the newly industrialised world as students), had created perverse incentives for US institutions to hire academics from poorer countries rather than raise the incentives for US nationals to undertake careers in academic science and engineering, creating continued reliance on immigrant workers.
 
More recently, critics of skilled immigration in the US have begun pointing out that many of the supposedly skilled IT workers from India in fact frequently lack the skills for which their visas were issued.  The reliability or probity of immigration is a particularly relevant issue for Australia, as most of the work on our immigration programmes is performed by locally engaged staff overseas, most of whom belong to cultures where the receipt of baksheesh in exchange for favours is entirely acceptable.
 
The essential thing with skilled immigration is to balance the need to fill genuine vacancies in strategically significant industries with the need to ensure that we do not either get played for suckers by opportunistic would-be migrants or create perverse incentives for our institutions to neglect their duty to patiently develop native-born human capital.  Like all matters for judgement, this cannot by decided by an ideological calculus or any amount of spin-doctoring. 
 
Tiresias presents some ideas for the basis of a future  immigration policy:
 
Firstly, we need to identify strategic pools of human resources that we want and actively target them. Forget everyone else.
 
At the moment one million native born Californians leave the economic turmoil and racial transformation of their state every year for resettlement in the largely white areas of the Pacific north-west, the inter-montane West and central Texas.  Why not develop an immigration policy designed to capture the cream of this crop, one that aimed to convince 20,000 to 50,000 Californians a year to come to Oz?  Special preference could be made for those with three to five years experience managing a high-tech start up or with experience in the venture capital markets, avionics, mining or advanced horticulture/agriculture.    
 
Australia is soon to experience a critical shortage of mechanical skills in the air transport sector, which the airlines will doubtless use as an excuse to move maintenance off-shore to China.  Why not solve this in one swoop by importing a thousand or so Californians with backgrounds in avionics?  Australia has trouble manning its submarines, so why not recruit a couple of hundred ex-submariners from the many thousands of ex-Navy men in Southern California? Australia’s universities are soon to experience a labour shortage, as the tenured baby boomers cash in their superannuation.  Why not replace the boomers with the cream of the US graduate schools?  This would do more to raise the intellectual value of our universities than a thousand gassy ministerial media releases about ‘world class universities’.
 
Similar opportunities exist in abundance in Europe too.  Back in 2006 George Walden, UK Minister for Higher Education under Thatcher, published a book that explained why the UK cannot offer the majority of its people a decent life and why they should consider leaving – Time to Emigrate.  Identical books could be written for most of Western and Northern Europe.  To take advantage of this situation we need to make permanent residency easily available to any Dutch, German, Scandinavian (of for that matter Japanese or South Korean) nationals under the age of fifty with valid trade qualifications from their homeland (ditto any of these with a degree in something of substance like medicine, engineering, mathematics or languages).

Secondly, we need to get serious about the refugee issue and learn to say ‘no’.  I am the son of a Czech DP who married a British woman and then went on to raise his two children with English as their native language, but I can think of no credible reason why Australia should continue to take in any refugees for permanent settlement, given the circumstances in which we find ourselves. Australia has no moral obligation to turn over its mineral wealth for the relief of the Third World poor and Anglo-Australians would be fools to follow the example of the white Americans, who will soon enough find themselves a minority in their own land, surrounded by rival, often hostile, minority groups easily aroused to violence by their real or imagined wrongs. 

Thirdly, if Australian still feel the need to exorcise the much-dreaded ghost of the White Australia policy, there is a simpler, better solution, than filling Australian cities with unemployable, crime-prone, welfare recipients from Africa, the Middle East and South Asia: make permanent residency available to all Singaporean citizens with enough capital to buy their own home in Australia.   Simple and painless.  Elitist too and a deep affront to the NGOs and Julian Burnside QC, but what is wrong with that?
 
Finally, whatever we do we must close off access to the courts to non-citizens contesting the outcomes of adverse immigration decisions.  The courts are there to administer justice, not offer one roll of the dice after another for disgruntled people we wish to exclude.  Leaving the legal system to decide our future population and citizenry is insanity, given its demonstrated indifference or hostility to the public interest.  Any party that is not prepared to do something about this is not truly fit to form a government.
 
Given the economic down-turn in Europe and North America and the Muslim related mayhem and violence sweeping the former, Australia has the exceptional good fortune to be able to offer sanctuary and useful employment to whomever we are prepared to take.  There is no good reason to settle for a second or third best migrant intake.  Provided that we are prepared to pick winners and exclude losers immigration will have no trouble attracting popular support in abundance. Australians are no more a nation of fools than they are nature’s racists.  We deserve an immigration policy that aims high, but which also aims to preserve the quality of life and civility of this astonishingly tranquil society.  It is about time that our politicians learnt to stand up for an immigration policy that did both.

And, we add to further radicalise the debate, Australia could sell places to the highest bidders, after allowing a quota for genuine refugees.  As a fine economist visiting Australia, Lord Desai of St Clement Danes, said in 2002: 'The world needs to make the movement of people as free as the movement of capital, as was the case in the second half on the nineteenth century'.

The Reserve Bank met today and no doubt engaged in deep thought about the economy and the risks facing us all.  As widely predicted - even by Henry! - no rate hike, providing great relief to the government, the battlers and the Reserve itself.  At last a better than expected inflation number and a slight fall in house prices.

The case for deep thought was clear and stated clearly in Henry's usual advice for the board and his readers - available here.

Those paid to guess at (or learn via other channels) the outcome were in furious agreement.

No economic time series go in one direction without abberent moves that can confuse even very careful watchers.

Geopolitical risks include a return of global inflation, just as domestic risks include inflation pressure from the renewed rise in the terms of trade and the return of the mining boom.

A world facing warmer northern summers - despite Melbourne's old-style wet and cold winter - will be a world short of food.  Australia's likely large wheat crop comes in a year when Russia, the world's third largest exporter of wheat, is suffering drought and bushfire, and the price of wheat is rocketing up.

This adds more pressure to our terms of trade and  the Reserve needs to remain alert but not alarmed and to raise interest rates again later in the year.

By then, of course, we shall have a new government.  Julia Gillard with her own mandate will keep Kevin Rudd's hectic, mistake-ridden big spending ways, adding new sources of domestic inflation to the global pressures.

Tony Abbott has pledged to cut Labor's bureaucrats, saving a lot of taxpayers' money in the process.

Either party would be wise to develop a serious strategy to gain the most from the renewed resource boom.  Our concern is that almost all the major geopolitical risks facing Australia require a far more effective defence capability.

The risk of the USA returning to its traditional isolationist strategy as it grapples with unsustainable budget pressure underlines the need to boost spending on defence.

We invite readers to consider likely future Megatrends and Megashocks, and to see if you agree with this diagnosis.

See also RBA Statement on monetary policy - August 2010