Strangling the golden goose
Date: Tuesday, March 16, 2010
Author: Henry Thornton
Boom and bust is a feature of capitalism.
We have had the Dutch tulip mania, the Mississippi bubble, the South Sea speculation, the Railway booms, property booms, share booms and new economy booms. All these booms and others caused great disturbance and almost all ended badly.
We tend to assume booms and busts are undesirable, worthy of 'reforms' that dampen booms and therefore decrease the busts.
Henry is coming to the view that the 'reform' process is strangling the golden goose that is capitalism.
The benefits of booms are many and varied.
Great things get achieved, whose benefits sit beside the costs of idiotic projects started.
Melbourne became a great city in the property boom of the 1880s. The Railway booms opened new territories and greatly increased the efficiency of existing industries.
People of an innovative mindset get their best chance in a boom, even though some innovative villains get away with other people's money.
Some poor people of talent, or merely lucky, rise during booms, just as some foolish, or merely unlucky, wealthy people miss out.
The busts weed out the seriously incompetent, some of the crooks and unlucky people generally.
The busts break up the entrenched oligopolies, as Schumpeter's gale of creative destruction breaks over the previous boomtown.
Cautious, sensible people usually survive the downturn and find serious bargains when the bust has run its course.
The calculus is far from certain, but history shows that boom and bust is an inherent part of capitalism. Inherent features of any system tend to have some beneficial role.
It is clear that there are many benefits of boom and bust to offset the costs. More work is needed to document and if possible to quantify the costs and benefits. Henry has a strong intuition that the benefits outweigh the costs, with one important caveat.
The chief cost of the busts may be increasingly intrusive and restrictive regulation of business. This may eventually outweigh the net benefits, if indeed it has not already done so.
'Let the buyer beware' has long been forgotten as a catch cry of capitalism. Globalised and harmonised accounting standards failed to stop Lehman Brothers from rorting this intrusive and clumsy set of standards. Friends say that the revamped Sarbanes-Oxley Act is an absolute nightmare.
Existing regulations failed to stop the boom of the noughties.
As the salarymen and women of global governance strive to 'reform' the rules of capitalism, this stark fact should not be forgotten.
The demise of Lehman Brothers, lamented as a mistake due to the trouble it caused, may have been a blessing in disguise. At least it disposed of the myth that bad banks would always be bailed out.
One hopes the re-regulators will put in place a system that does not let such enterprises become too big to fail, and has real costs for crooked, incompetent or merely unlucky managers.
'WHEN a 2200-page legal report on the collapse of Lehman Brothers landed with a thud in New York last week, exposing the grand deception the firm used for years to mask its perilous financial situation, many were left wondering how so many of its top executives could have been so bloody stupid. What made them think they were so special that the normal rules of the market, of the law and of common sense did not apply to them?'
Election week 3 - `release your costings, Mr Abbott!`
Date: Friday, August 23, 2013
Author: Henry Thornton
This was the week when the the Ruddanaught was shown to be stuck in the sand on a beach somewhere in Northern Australia.
Like a large ship stranded when the water draws back prior to returning in the form of a very large wave, the SS Ruddanaught lies stranded.
It seems the initial poll bounce for Rudd Labor was largely in the Labor heartland, and the positions in the marginal electorates, if not as dire in the last days of Ms Gillard's leadership, are pretty dire.
Peter Beattie was recorded in one poll as lagging 40/60 behind the coalition candidate and Mr Rudd himself is said to be lagging 48/52 behind the good Dr Glasson.
Henry agrees that the debate at the Brisbane Broncos Leagues club (where does one put the apostraphe(s), comrades?) was far livelier than the first such event at the National Press club, but no knockout blow was delivered.
Labor has shown real cheek in demanding the opposition's costings when: (a) it released its costings last time on the Friday before the election; and (b) its own track record of budgetary prediction is so horrendous. Henry hopes that Joe Hockey refuses to provide three-and-four-year-ahead estimates, as those provided by Treasury are based on ridiculous 'return-to-normal' economic predictions.
Of course, realistic predictions might just show an even worse outlook than the shocking budget numbers revealed by the current government's current official forecasts, despite the optimism of the assumed return to normality.
Mr Rudd's blather about a '$70 billion black hole' in the Coalition's budget does him no credit, and will be seen by all but the loyalists of Rudd Labor as simply bullshit.
Economist Saul Eslake has said today the Coalition has a $30 billion hole to fill, but the Coalition's campaign spokesman, Mathias Cormann, says Mr Eslake has got his sums wrong.
"He doesn't have access to the numbers and the sums we have been working through with the Parliamentary Budget Office (PBO)," he told ABC News 24.
"The Parliamentary Budget Office are aware of the all the detail in our policies but have access to relevant Treasury data, which Mr Eslake doesn't.
"There are some pretty fundamental errors in the calculations that he has made."
'But', the relevant journalist says, 'Labor has seized on Mr Eslake's analysis, saying there would be savage cuts under a Coalition government in order to pay for its promises'.
Hissink: 'True to form, the social policies adopted by all the Western economies since World War II and encapsulated in their welfare state systems, are doing what Stalin couldn't – destroying capitalism; not in the communist sense of violent overthrow and mass murder, but by the slow replacement of capitalism with social democratic welfarism which, due to its principles and inherent contradictions, its intrinsic inability to generate wealth, will finally result in economic collapse.
'Our saving grace is that this slow progress into socialism can still be reversed, but only if we have the political will. This is the reason we need to throw out the ALP from government – not because they are mean-spirited or inhuman, but because they are socialists who simply do not understand how wealth is created'.
Tiresias: 'As for Oz, the fix is in and there will be no socialism to be had in any of it. Oz will be transformed into a continent sized Galt’s Gulch for the aspirational classes of the Third World (especially South and East Asia), a giant bed-sit to service an economy owned by overseas investors. We shall have capitalism all right. Plenty of it, complete with Confucian values, Shariah finance and open borders to keep the housewives of Warringah supplied with cheap gardeners, maids and nannies. I could go on, but it is all too depressing for words.
'You should tell Hissink (with whom I passionately agree about the necessity of savings and the stupidity of morbidly low interest rates), this simple truth: an optimist thinks that the world is going to ruin, but a pessimist suspects that it is actually perfecting itself'.
Why Mr Rudd has to go
Date: Wednesday, August 21, 2013
Author: Louis Hissink
Socialism is the social system that consumes everything, then when it runs out of existing wealth, as the Rudd/Gillard governments did during the GFC, it then, in order to continue existing, has to consume from the future by borrowing money or via credit expansion, known as quantitative easing in the US. At the end of the Howard era, 2007, Australia had no budget deficit and no national debt. After six years of socialist policies, it now has historically its highest deficit and debt ever. The problem is that the socialist political parties in Australia do not understand how wealth is created.
So what is this mysterious thing called wealth? Wealth is simply unconsumed production. Wealth is savings, and people save when interest rates are high, but don't when those rates are low. When the interest rates are low, people, in order to survive, then have to consume their capital. (And if your political goal is destroy capitalism, what better and more efficient way could you imagine)? What wealth creation is not, is money printing or quantitative easing, and inflation in other words.
But the question of inflation remains, and one answer can be found in David A. Stockman's recent book, The Great Deformation: The Corruption of Capitalism in America (available Kindle). In it he shows that the combination of high income but low capital gains taxes resulted in the movement of capital away from the market and productive enterprises into equity where “income” was created by capital expansion by LBO's etc. Low interest rates were also a crucial factor in this mal-direction of capital from productive activities to non productive ones. And as Schiff pointed out in that debate, the money produced by the various QE's has entered the market, but isn't being reflected in the CPI, most likely by the way it is calculated, the implication being that the CPI is being manipulated politically. Perhaps not, perhaps its the redirection of capital from production to equity that is not being reflected in the present CPI indices. No conspiracy here folks, just inherent socialist stupidity that the wealthy take advantage of.
Wealth is created by production of stuff, specifically food. In fact it could be stated as a truism that the modern industrial society is simply the superstructure of a society involved in the mass production of food for mass consumption. Like Chipmunks storing nuts for winter, capitalistic humans save money to allow the accumulation of capital to create technology to preserve our food stocks for future consumption and hence survival. It's the conversion of food into imperishable commodities of money (gold and silver) that is the foundation of wealth, capitalism and ultimately survival and rising living standards. Refrigerators to store food came about because some people consumed less in order to have the free time to invent and manufacture these food storage machines. In socialist/subsistence economies, such free time is not possible, since nothing is saved for future consumption, and all human activity is directed at the most urgent needs of immediate survival.
True to form, the social policies adopted by all the Western economies since World War II and encapsulated in their welfare state systems, are doing what Stalin couldn't – destroying capitalism; not in the communist sense of violent overthrow and mass murder, but by the slow replacement of capitalism with social democratic welfarism which, due to its principles and inherent contradictions, its intrinsic inability to generate wealth, will finally result in economic collapse.
Our saving grace is that this slow progress into socialism can still be reversed, but only if we have the political will. This is the reason we need to throw out the ALP from government – not because they are mean-spirited or inhuman, but because they are socialists who simply do not understand how wealth is created. Quantitative easing can't. Implementing national Ponzi schemes can't. Improving our living standards requires that people save, and they can only do that if interest rates are high, but high interest rates are a political no no, so it's some choice we have to make in a few weeks time.
But one fact is clear: Rudd and the ALP have to go.
For a longer version of this tract, including historical examples, see Hissink.
Bombers not playing grand old game
Date: Tuesday, August 20, 2013
Author: Luke Griffiths
Henry loves Mick Malthouse. Or at the very least he thinks the man with the furrowed brow will soon lead his Blue Boys to their first flag since ‘95.
I disagree. I find Mick nauseating and the Blues are further away than they were under Coach Brett Ratten.
Yet I recently found myself partly agreeing with Mick the Merciless when he said – referring to the Essendon supplements saga – '…it's going to be a shambles at the end of the year. Anything can be pressed into the court system and it will (be) delayed and delayed and delayed'.
I say partly because it already is a shambles. Has been for a while.
Almost a year’s worth of intense reporting – often innuendo turned into front page news by a saturated media pack trying to one-up their fellow hounds – has overshadowed an otherwise standout season.
That reporting is, of course, due to Essendon embarking upon a pharmaceutical regime – legal or otherwise – that Michael Jackson would have been proud of. But after all the speculation and hypotheses on possible sanctions, it’s the club’s four senior statesmen who will face the music.
As though Windy Hill turned itself into a cult for a year or two, where the mystical powers of the elders guided their passive followers into hedonistic pursuits deemed innocent due to ignorance.
Barring an injunction, Hird, Thompson, Corcoran and Reid will face charges of conduct unbecoming or prejudicial to the interests of the AFL on the eve of a finals series their team is assured of playing in.
Or are they? The ludicrous situation has resulted in ninth position being highly coveted with just two rounds remaining.
But prominent sports lawyer Darren Kane says, rightfully, that it’s “lunacy” to think the matter will be dealt with prior to the commencement of finals on September 6, meaning the Bombers will play in the first round of finals, and possibly beyond, although its current form suggests otherwise.
So what is Henry’s verdict, given his reporting on the matter in years gone by?
In 2006, as part of a series of articles entitled Drugs in Sport, we here at Henry's HQ spoke to a recently retired AFL footballer who said that for 'as long as I can remember, there have been elite footballers suspected of using performance enhancing substances'.
Seven years ago.
But it’s only now that those suspicions have cast such an unenviable shadow over our great game.
Therefore, Henry’s scribe's verdict is that it’s no surprise this issue has reared its ugly head and by inference the AFL should have better prepared to eradicate what is now – as Malthouse puts it – '…a shocking thing to be hanging over a code.'
Rent seeking, the entitlement mentality and vainglorious spending
Date: Monday, August 19, 2013
Author: Henry Thornton
Former politicians, and former officials, often have things to say that are far more focussed than anything they felt able to say whilst in office. Increasingly the theme of those liberated from the shackles of high office will be Australia's slippage from a culture of economic reform to one of renewed 'rent seeking', the 'entitlement mentality' and vainglorious spending by governments so regretted by all sensible Australian leaders.
Gary Banks, former Productivity Commission Chief, and Des Moore, former high Treasury official, are two such Australians. Des lets us know his views with numerous letters to newspaper editors and via a frequent email to his fans, the list of whom includes Henry.
Today he has circulated the fine paper by Gary Banks, along with his own trenchant comments. I feel sure Des will not mind if I include in today's blog his comments along with further reflections on the theme of Dr (now Professor) Banks.
Des Moore: 'We are in the midst of an election campaign where much concern is justifiably being expressed about the paucity of serious policy announcements by either major party - not to mention the paucity of most of those that have been announced. Perhaps the most important serious announcement has been by Abbott – if elected the Coalition will not increase the burden of taxation (that is, the proportion of tax to GDP) – but this has hardly been discussed.
'Nor has much attention been given to the excellent Stan Kelly lecture given on 15 August by the former head of the Productivity Commission, Gary Banks. The occurrence of that during the election campaign is entirely coincidental. Even so it deserves much more attention because it identifies the need for major policy changes, both economic and political, to reverse the trend in recent years for government policies to become much more accommodative to special interest groups. Protective arrangements of various kinds now extend to a wide range of industries and these arrangements are reducing productivity and economic welfare generally. Just as importantly, it identifies a major problem with the political process now prevailing in Australia.
'Banks first outlines some of the sources pressing for the reduction in such policies from the 1960s and accords much deserved credit to former MP Bert Kelly (the son of Stan) for the almost lone role he played in the political system for many years in pointing out the economic damage being done by the high tariffs then imposed. My sole regret is that the important role played by the Treasury was overlooked, probably because Banks was unaware of it and the intense ongoing debate within the public service. When I joined in 1958 Treasury had another “Bert” (Bert Woodrow) who played a similar role to Bert Kelly but in combating the pressure from the department of Trade in support of “Black Jack” McEwen. Treasury’s Bert played an important role in the success of Treasury in securing Ministerial approval for a major reduction in quantitative restrictions on imports in 1959. That reduction, in turn, helped turn the intellectual debate against tariffs'.
Des Moore lists the policy problems that remain today or have developed anew, and I strongly recommend that readers seriously interested in 'political economy' take in Gary Banks' list in full. His article is posted here.
It was good to hear about Treasury's fighting the good fight for tariff reform in the 1950s. We also know of other battles fought by Treasury over the decades, especially against the bogy of excessive spending by governments. Sadly this great tradition seems to have been abandoned in the past decade or so. In particular we are aware of Treasury's explicit advice to throw money at consumers - 'go early, go hard, go consumers' - at the time of the Global Financial Crisis and the approximately $250 billion of new debt accumulated since then. There is also the highly relevant failure to predict the loss of revenue that presumably encouraged the vainglorious spending programs (and promises) of the Rudd-Gillard-Rudd governments.
Of course, those at the helm of Treasury during this period have not yet written their accounts, and it may be Treasury was trying in vain to get sense from the relevant governments. Somehow I doubt it.
Anyway, we are where we are. There is a budget that is by any definition out of control, a national cost structure that will cripple Australia's economy until it is fixed and a return to rent seeking, also known by Joe Hockey's label of 'Entitlement mentality'. Rent seeking, entitlement mentality, vainglorious spending are all related aspects of national culture that will be very hard to fix. Only when leaders political and bureaucratic present a united and realistic analysis will Australians rally to the tasks of embracing a more useful culture. Achieving such a culture will be the next government's most important task.
Mr Rudd has begun to assert that the election of an Abbott government will drive Australia into recession. 'Recession' is written in the stars, Mr Rudd, and when history is written you will be famous as the principal architect of the recession we did not have to have.
As we said two weeks ago: 'Put crudely, Australia has pissed the proceeds of the mining boom up against a wall of gullible voter expectation. In the process, mining companies allowed their cost bases to expand to unsustainable levels. Cost bases expanded in sympathy in the non-mining parts of the economy in a climate of easier than desirable monetary policy and encouraged by those vainglorious spending programs of the Rudd and Gillard Governments'.
Saturday Sanity Break, 17 August 2013
Date: Saturday, August 17, 2013
Author: Henry Thornton
'Labor’s election prospects are looking grim with a poll of eight of the nations’ most marginal electorates showing it will struggle to take any seats off the Coalition on September 7 to offset its own expected losses'. (AFR). Stunning to see Peter Beattie at 40/60 and Messrs Oakshot and Windsor there or thereabouts, along with a number of marginal Labor-held seats.
An astute reader said yesterday: 'The news about the Coalition’s plans to axe the refugee review tribunals (every one stacked with onetime activists, immigration lawyers and ‘community’ representative types) is perhaps the best development in public administration since the British Colonial Office gave up running this country. The quality press has always been discrete about who exactly staffs those boards, which tells you all you need to know.
'I wonder what Mr Abbott has in store for the ABC board, HREOC or umpteen other taxpayer funded sources of mischief. The election campaign has begun to get very interesting'.
Henry's response is to say: Like Treasury's finally discussing risks to forecasts (in a meaningful way) and the SA vehicle workers voting for a wage freeze to save their jobs, finally very very significent developments that give hope are emerging. Be patient, gentle readers, budget costings will be available before we get to vote, sooner than Labor released their costings in the past two elections.
The good sense of the SA vehicle workers is ratified by an AFR report 'Welcome to your pay cut'. It quotes a HR expert, Peter Wilson, as saying most middle management roles are being advertised at 80 or 90 percent of the recognised median pay for the relevant job.
The article also asserts that 'In white-collar positions and middle management, the negotiating position is almost gone in many industries'. The AFR's weekend editorial asserts that Australia is starting the same cycle of consolidation that US and European companies have already gone through after the global economic crisis'. More here.
'The controversial Hindenburg Omen – named after the ill-fated German airship that crashed in New Jersey in 1937 – is a technical indicator that was developed by a blind mathematician called Jim Miekka. For
the Omen to be activated, the market must fit a number of criteria, including that 2.5 per cent of stocks traded on the New York Stock Exchange must be hitting new 52-week highs, while the same proportion are trading at 52-week lows.
'The Omen tends to flash during major market rallies, suggesting that they have become vulnerable to major sell-offs.
'Analysts who believe in the Omen argue that it has appeared before every market crash since 1987. It flashed a warning in October 2000, just ahead of the dotcom crash that saw the US S&P 500 plunge by 50 per cent. After the Hindenburg Omen appeared in July 2007, the S&P 500 shed 10 per cent. But after it appeared again in October 2007, the US share market eventually lost 55 per cent of its value.
'According to analysts who follow the Omen, the more times it appears within a short period of time, the greater is its accuracy.
'They warn that the current concentrated cluster – the Omen has flashed a record six times in the last eight trading days – is similar to the ones that occurred before the bear market in 2000 and the bear market in 2007'.
While this particular Omen was previously unknown to Henry, his research of monetary policy and asset inflation suggests more general worries. His more subjective analysis suggests major market swings have become greater and are occurring more frequently.
Beyond this general conclusion, Ben Bernanke's extreme monetary policy ease (NRIRP) has reflected in asset inflation because US goods inflation has been held down by domestic recession. As recession turns into recovery, the Fed will have to remove its excessive ease. Indeed, this week's equity market downturn was stimulated by stronger US economic indicators and consequent fear of sooner than prviously expected policy tightening. (More here.)
All one can advise readers is to be vigilent, as timing is the matter that economists are least good at.
Overnight Hawthorn disposed of Collingwood, in a game that demonstrated yet again the gap between the top teams and the rest. Sadly if Caaaarlton! does sneak in the finals (eg because Essendon is kicked out by the AFL) we are likely to be bundled out again just as quickly.
Essendon are resolute in their decision to fight, and the whole saga seems bound to finish up in the courts. Henry is no lawyer, and therefore cannot share in the picnic, but experts have been saying the drug agency has muddled the waters by involving the AFL, which is contrary to previous practice. There is also the matter of whether it is appropriate to charge the club, or the key people, on the basis of an interim report. The apparent fact that no players have been charged also seems odd, unless of course, there is just no relevant evidence.
The Aussie cricketing shielas are playing the pommie shielas far more effectively than the blokes, and one wonders if we should let one or two of the Aussie shielas play in the fifth test. Henry cannot believe why Nathan Lyon's place as leading spinner is in doubt; selectors please look at his record and evident commitment. Henry also worries about palpable antipathy toward Shane Watson, whose batting as an opener has been sensational (until the antipathy arose) and whose bowling has at least slowed the flow of runs.
We shall be waiting patiently to hear how Sally Pearson goes in the final of her hurdles event, and to see how the revamped Wallabies go against the All Blacks tonight. Caaarlton! is likely to keep us on the edge of our seats againsst the Tiges, also tonight, and Henry may be forced to reprogram his hearing aid to pick up the 3AW broadcast as Mrs T has arranged a night out with friends at an inexpensive eatery.
Well, gotta zip, folks, as Mr Rudd will be saying quite frequently for the next three weeks, and then perhaps more definitively during the evening of Saturday 7 September.
Image of the week
Election week 2 - the return of the rent-seeking society?
Date: Friday, August 16, 2013
Author: Henry Thornton
We all know 'its the economy stupid!'
The big event of this week for economists was a talk to the Economic Society by former Productivity Commission chief Gary Banks.
A great crowd gathered at Deloitte's offices in Bourke Street to hear Mr Banks ask if we were seeing the return of the 'rent seeking' society. Worryingly, the answer seems to be 'yes', and that risks returning Australia to the ranks of the also-run economies that we escaped from under the reformist Hawke-Keating and Howard-Costello governments.
There is a short version of the talk in the AFR, linked here, and comments by Geoff Winestock in the Fin and David Uren in the Oz. Henry is seeking the full speech and will post a link as soon as it can be found. [Ed: As promised, here it is.]
The AFR editorial says: 'If you’re Kevin Rudd, you’re behind in the polls, the budget cupboard is bare and you’re not ready to grasp the difficult policy options required to raise productivity and ensure prosperity as the resource construction boom falls away. So you trump Tony Abbott by springing a grand but sketchy-on-detail vision to develop northern Australia'.
The polls certainly seem to be slowly but surely returning to a position in which the Coalition has a solid lead. Still great cries of 'where is the money coming from' by Labor, but this is the party who couldn't manage the substantial flow of money it has received in the past six years and whose spending has averaged a totally unsustainable 4 % per annum (above inflation).
Richo says today that at the start of the campaign he thought Mr Abbott might win by 10 seats but now he fears it might be twenty. Much confected fuss about Mr Abbott's admission that a Liberal candidate had sex appeal, but one suspects this helped the coalition vote in the 'key marginals' and put Mr Abbott ahead of Mr Rudd as preferred Prime minister for the first time in any Newspoll. Bill Leake said it all in the cartoon linked here. Gary Scarrabelotti adds: 'Bring on the bloke'.
Henry suspects that the coalition has a very disciplined plan to release policies and (in the final week) costings. There is a massive task ahead of the next government, both to fix the budget and restore Australia's competitiveness. Reform of the GST should not be ruled out, although Henry sees this as the last resort of expenditure fails to be cut sufficiently and iother tax reforms fail to balance the books. Henry's proposed four-part process is outlined here.
Henry and Mrs Thornton had the great pleasure of attending a Higgins-Kooyong dinner with Kelly O'Dwyer and Josh Frydenberg and over 1000 of their special friends. Both candidates spoke well as part of a panel discussion with General Cosgrove and Ms Cathy Walter, boardmember extraordinaire.
But the show was stolen by 'a man from Queensland, who is here to help'. The surprise was that he appeared to be Kevin Rudd himself, and he presented a most engaging talk, with some singing and dancing, about ... you got it, ... himself.
US economic data released overnight was upbeat: (1) the consumer price index (CPI) rose 0.2 % in July and 2.0 % y-o-y; (2) homebuilder confidence rose to a seven-year high in August; and (3) weekly jobless claims fell to its lowest level in over five years.
US equity markets fell substantially. Go figure. (Nearest correct answer: fear that the Fed will remove the rivers of high-alcohol punch it has been spraying about.)
Courtesy The Australian
Economic outlook worsens; SA vehicle workers lead the way on recovery
Date: Wednesday, August 14, 2013
Author: Henry Thornton
'THOUSANDS of Australians could be kept out of work for a year longer than previously forecast, according to a federal budget update that quantifies the risks to the economic outlook.
'The final budget update before the election has confirmed a deficit of $30.1 billion this year, the same as Labor announced earlier this month, but also includes an “alternative scenario” with a bleaker outlook for jobs.
'The independent Treasury analysis concedes the threat to employment after market economists took a sceptical approach to the government's claim that unemployment would fall quickly from 6.25 per cent to 5 per cent in the year to June 2016.
'The “alternative scenario” would see about 115,000 people remain out of work for one year longer than in the official forecasts.
'Today's release of the pre-election economic fiscal outlook, or PEFO, escalated the political debate on the economy, with Kevin Rudd challenging Tony Abbott to reveal the costs of his policies, while the Opposition Leader vowed to release more details within days'.
Good to see Treasury presenting alternative scenarios, though it comes as no surprise that the risks are mostly on the downside. Well done, chaps.
Henry was asked today 'is the budget position the biggest economic challenge Australia fis acing?'
'The budget's pretty dire, but the double-digit cost disequilibrium is a bigger problem' remains the answer.
Vehicle workers in Adelaide voted yesterday to forgo wage hikes (unless reflecting productivity increases) in order to save their jobs.
'HOLDEN workers have voted to support a new workplace agreement which will allow the company to stay open in Australia beyond 2016.
'The 1700 workers at the company's Elizabeth factory cast a "clear majority vote" today in favour of the revised enterprise bargaining agreement negotiated between the unions and the carmaker in recent weeks.
'The new EBA cuts conditions to provide greater flexibility to Holden and also removes a scheduled November pay rise for workers.
'Australian Manufacturing Workers' Union South Australian state secretary John Camillo said the vote was "the right decision".
"It has been a very, very, tough time for our members here and their families," Mr Camillo said.
This is the biggest break in the job-hostile IR system Australia has seen since Labor's 'Accord' with the unions to restrain real wages in 1986.
The fact that it has been achieved despite institutional hostility to such deals is a stunning development.
More people power, people.
Henry's optimism about Australia's future has just risen a notch or two.
ZRIRP! Or is it NRIRP plus NHB?
Date: Tuesday, August 13, 2013
Author: Henry Thornton
Try saying that after a hearty meal finished off with a beaker of brandy.
We learn about this new-old concept courtesy of Peter Wells in the AFR, who has been reading Tweets from Bill Goss, bond trader extraordinary, and talking to at least one of the Aitken Brothers.
ZRIRP stands for Zero Real Interest Rate Policy. Last time the world had Zero Real Interest Rates, Mr Wells asserts, was in the 1970s, an ugly decade with an ugly combination of high umemployment and high inflation - STAGFLATION for those who can still remember long words.
In fact, most developed nations have had negative real interest rate policy (NRIRP) since the Global Financial Crisis (GFC). Alphabet soup is fun, as Henry used try to convince his first offspring - we gave up on numbers 2 & 3, incidentally.
Anyway, economists worth their (unsalted) soup have been waiting with some anxiety to discover what NRIRP means for the global economy. The alarms whenever the US Fed hints it might remove NRIRP suggest things might turn ugly in the red corner, though one is informed that the Fed is confident that, like hitting ones head against the wall, the pain will eventually subside, at which point the final big hit of actually removing the massive stimulus will be administered.
NRIRP, combined with QE, and statements about 'doing what it takes' (DWIT) delivered by econocrats in high places (EiHPs) has finally breathed life into the economies of the developed nations. This has happened while goods inflation has been low to declining, giving the EiHPs anxiety that there may be DEFLATION on their watch.
Henry's research shows that a combination in which monetary policy and goods inflation seems to be under control produces (predictable) asset booms. This is not so silly when US share prices are hitting new records, a matter that some market gurus even predicted, as Mr Wells reports.
Now we must apply this logic to the Australian economy. To her credit the Old Lady of Martin Place (OLoMP) resisted the ZRIRP of the major nations. Goods inflation stayed under control, and so did asset inflation, especially housing. (Wall Street influences our equity markets directly, so we must look for asset inflation effects independent of the Wall Street effect in asset markets more insulated than stock markets.)
Now, and finally, the dire domestic goods and labor market situation, with understandable fear of DEFLATION, has lead the OLoMP to begin the slippery slide toward ZRIRP in the previous 'miracle economy' that is Australia. Evidence comes in two forms - Henry's columns on monetary policy, and today's report that vehicle workers in Adelaide may be about to vote for a three year wage freeze (except for increases justified by productivity increases.
With their usual impeccable timing, the economic team at nab said today: 'Business conditions remain at 4 year lows while confidence slumps to 8 month low – despite a falling AUD and lower interest rates. Conditions very poor in manufacturing, construction, mining, retail and wholesale; WA now the weakest state. Forward orders, stocks and employment still very poor. Weaker AUD hurting wholesale and retail purchase costs but weak activity sees this reflected in lower profits not higher prices'.
As interest rates fall from responsible levels to dangerous levels, quick as a flash we see signs of a ... wait for it ... a renewed housing boom (RHB).
Milton Friedman once said, and Henry has striven to remind readers, 'monetary policy cannot serve two masters' (henceforth MPCS2Ms).
If the OLoMP really believes monetary policy should be easier, and who could doubt this, then it needs a separate lever to pull gently on to prevent a RHB (renewed housing boom) turning inrto a NHBb (free life membership of HenryThornton.com for first correct transcription of this new member of the alphabet soup.
Today's big story is Tony Abbott's commitment to improve the lot of Australia's indigenous people, with the able assistance of Warren Mundine.
'TONY Abbott has declared fixing Australia's greatest "national failure", dire indigenous disadvantage, will be one of his personal priorities if he wins office, and has secured the agreement of former ALP president Warren Mundine to deliver generational change.
'An Aboriginal leader who once hated the Opposition Leader's "Tory politics", Mr Mundine has agreed to head a super advisory board on indigenous spending, projects and policy, reporting directly to the prime minister, if a Coalition government is elected.
'In a dramatic shift away from Labor politics and ideology on indigenous affairs, Mr Mundine would directly drive a philosophy of lifting the dire living standards of Aboriginal communities through commercial development and self-help.
'The Coalition's emphasis on lifting conditions in Aboriginal communities will shift from land rights to ensuring "all children go to school, all the adults are working or in work-like programs and the ordinary rule of law runs through those communities".'
RBA downgrades economic forecasts, Paul Kelly recognises large risks.
The RBA has downgraded its economic forecasts, in a move that journalists see as a significent change in its positioning.
'GDP growth is expected to remain a little below trend at close to 2½ per cent through to mid 2014, before picking up to above-trend growth by the end of the forecast horizon as the global economy experiences above-trend growth and the stimulatory effects of the recent exchange rate depreciation and current low level of interest rates lead to an improvement in business conditions and so investment (Table 6.1)'.
Paul Kelly has no doubt been briefed by an expert. Today his column includes this gem: 'Beneath the useless campaign spin lie the home truths. First, Australia has got itself into a serious mess because its budget is in trouble at the same time as the China boom slows, demanding a significant transition towards non-resources growth. If you're still playing with Vegemite, you're not serious. Get this transition wrong and we end up in recession with unemployment far above the 6.25 per cent already forecast'. Read this important article here.
Finally Australia has had a fine opening day in a cricket test, thanks to the bowlers, chief among whom was xxx Lyon, who could not even get a game at the start of the tour.
It is worth remembering that England won the first test by 14 runs and were saved by the rain in the third test. Only the second test was a debacle for australia, and if the batters can perform tonight, even the bad memories of the second test will be put away.
Pity one cannot say the same about footy. Caaaarlton!'s season is all but finished. Henry was at the game against Freo. Their players were taller, heavier, faster and apparently more skilled. I am all for tough management, but against Freo, Mick the Merciless shouted, waved his arms and urged his hapless players on, with Robbo, once called the human cannonball, receiving repeated sprays at every break. In Henry's view, the Caaaarlton! players ran themselves ragged for three quarters, clawing their way back into the game at the end of each three quarter. But by the final quarter they were simply spent.
Mick, you cannot get men to do that they are physically unable to do. Maybe for a year or two on the Kokoda Track in the face of a real enemy, but there are limits in games, even games vital to a team's chances of making the finals. This week there are stories of the biggest spring cleaning of players in AFL history. Caaaarlton! needs three or four key position players, at least one of whom is capable of hard at the ball retaliation when a skilled small man is cut down. For goodness sake be sensible, Mick. These boys are certainly trying.
The sorry saga of Essendon and the jungle juice limps on. Today there is talk of a 'deal' in which, if Coach Hird and the club doctor take the fall, other sanctions against the whole club will be lessened.
'The deal' is what the junkies thrive on, Mr Demetriou. Apply the suspensions according to the rules already in place for use of illegal drugs if such drugs have been used, and do not forget how you crucified Caaaarlton! for rorting the salary cap, taking us to a place where we have not yet recovered from.
At the same time, state-by-state data shows the Queensland economy is growing strongly, showing that fiscal prudence of the Newman government by improving business confidence has overcome any 'Keynesian' effect of budget cuts.
Writers at The Australian say: 'KEVIN Rudd has been thrown on the defensive on economic management after a surprise fall in full-time jobs offset by strong growth in Queensland that challenges his warnings about the damage from the state Liberal National Party government's "austerity" cuts.
"Thousands of Australians gave up looking for work over the past month in a new sign of the weak jobs market, sharpening Coalition attacks on the Prime Minister yesterday, despite the addition of almost one million jobs since Labor took power.
"The federal government hailed the steady unemployment rate - 5.7 per cent last month and still the highest level for almost four years - but economists warned that thousands more could join the jobless. The unexpected loss of more than 10,000 mainly full-time jobs between June and July fuelled economists' concerns the unemployment rate would climb higher than the 6.25 per cent forecast in last week's economic statement'.
ABC radio's Fran Kelly this morning asked two commentators who had won the first week. Michelle Grattan said it was a close-run thing, while The 'Insiders' Queensland man (whose name escapes me) said Labor had started well but then experienced a flat spot.
Someone likened the election campaign to the race between the tortoise and the hare. Rudd is the hares, scampering out of the blocs, maniacially appearing in several places almost at the same time, wearing hisself to a frazzle. Tony Abbott is an unlikely tortoise, but what is clear is that slow and steady, substance over flim-flam is likely to win this race.
A well known portrait painter observed to Henry that Mr Rudd was looking very frazzled by mid-week, and there are four weeks to go.
Richo it seems is yeaning for the return of John Howard and perhaps Tony Abbott could persuade the doughty but nowadays relaxed old gaffer to return as Prime minister emeritus, minister without portfolio but with an honoured place on the front bench next to Tony Abbott. (The cartoon and video will bear watching.)
Mr Rudd spoke this week of his 'Seven point plan' to improve Australia's competitiveness, perhaps revealing tutorials provided by his former boss (in the Australian embassy in Beijing) Professor Ross Garnaut.
Henry still cannot find this speech in the blogsphere but will continue to seek it so that dispassionate analysis can be brought to bear.