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Henry Thornton - Contributors: A discussion of economic, social and political issues Blogs
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?'

Read on here.

Posted today on The Australian's website.

Saturday Sanity Break, 7 March 2015
Date: Saturday, March 07, 2015
Author: Henry Thornton

The political story of the past few weeks is the 'near death experience' of Prime minister Tony Abbott.  Mr Abbott seems to have learned a few things from this experience, as others have done before him, and now looks far more comfortable in his own skin.  Gary Scarrabelotti reflects on the whole episode and offers a few suggestions designed to strengthen the PM's future, increasingly successful, performance.

Scarrabelotti also offers a qualified prediction. 'If he makes it through next Budget, however, without major errors – if there are any, expect that second “spill” motion to re-emerge around 15 June – then Tony Abbott will lead the Coalition into the next elections and will win them with a reduced but comfortable margin.

'By the way, I do not expect there to be any major Budget errors.  Abbott may be devilish hard to shake from his chosen course, but his recent “near death experience” has shaken him, indeed, and he has learned much about where he went wrong.

'There will come the day when Prime Minister Abbott will feel deeply grateful for the fearful drubbing he got from his many friends and well-wishers in the News Limited stable. They’ve proved friends indeed'.

Read on here.

Political economy

Paul Kelly comments on the challenge facing newly resurrected Tony 'Whatever it takes' Abbott.

'The Prime Minister’s recovery from his “near-death experience” may win serious traction'.

But 'Abbott’s strategy is based on an unresolved contradiction that he makes no effort to disguise. He told parliament the IGR shows “that our country’s best days are ahead of us”, yet declared in the same breath this was “provided government can live within its means”.'

Do take in the nice interview with Mr Kelly and the link to the Oz's coverage of the Intergenerational Report.


The economic issue of the week, and the decade, concerns the issues raised by the Intergenerational Report (IRG). While Henry did not fall off his chair, he was interested in the dire predictions embedded in its 50 year predictions, actually extrapolations of what is likely to happen with: (a) Labor's policies; (b) the current government's (or equivalent) policies as articulated in the Abbott government's first budget; and (c) the obviously preferred option with faster budget repair that ends the growth of national debt in short order and actually pays some of it back.

The document and its overview are available here.

Henry was disappointed that there was no useful material on just how the preferred scenario (c) could be made to arrive. We are concerned in particular with the absence of policies to get more young people into satisfying jobs and boosting productivity.

More on this theme here and here.


Do not miss Peter Byron's latest landscapes - Australia's outback as never before been documented.

Fiona goes to Frame of Mind by Sydney Dance Company

Wonderful review by Peter Craven on the soon-to-arrive third season of House of Cards.

'... everything about this show — from the magnificence of its acting to the overheard quality of its dialogue — is stunning.

'Right down to the disquieting suggestion that this monster of a man may actually be a pretty good president'.

Henry's future

In response to questions, Henry's editor and founder, PD Jonson, says he plans to take an active interest in Henry Thornton.com for as long as he is able.

The National Library of Australia in the early 2000s selected Henry Thornton for preservation. It is scheduled to be re-archived regularly.  here is the link. http://pandora.nla.gov.au/tep/33415

We are delighted to learn that, in addition,'the National Library of Australia is 'committed to continuing the archiving of the Henry Thornton website for as long as it is continued to be updated. If the site is no longer being updated for whatever reason we would most likely cease new archives of the site. We would however be committed to maintaining access to already archived material in perpetuity. The Library would undertake necessary digital preservation actions to ensure that future Australians could continue to access material archived through Pandora. The archive copies would remain as static copies of the original website as they were at the time of archiving'.

The  National Library of Australia website contains information about its commitment to long term preservation of its digital collections.


Australia’s number one Bernard Tomic went past the Czech Republic’s number two player Jiri Vesely 6-4 6-3 7-6 (7-5). Thanasi Kokkinak (age 18) was picked ahead of Henry's hero LLeyton Hewitt and turned on an 'absolute cracker', fighting his way back from two sets down to beat the home team’s top rated player Lukas Rosol 4-6 2-6 7-5 7-5 6-3.  More here.

The team at HenryThornton.com greatly enjoyed Australia's big win over the spirited lads from Afghanistan. But with its murderous travel schedule, inconsistent form of Captain Clarke (who has hardly played) and number 3 batter/partnership breaking bowler/star fielder 'Watto' Watson (who was dropped), the former World Cup favourites face a big task to win from here.

Kevin Sheedy has returned home, to his beloved Essendon. Should Essendon players be given time off by ASADA and/or the AFL, James Hird, say the smarties, will be finished as coach.  Essendon let the Bomber go, but having a golden oldie like living legend 'Sheeds' as the club's strategy chief with a younger man running the show on game day looks like a plausible solution.

Image of the week - by acclamation

Courtesy AFR

Intergenerational Report 2015
Date: Friday, March 06, 2015
Author: Henry Thornton

Gor blimey Comrades, in 50 years we'll be dead (certainly Henry and most dear readers) but Australians lucky enough still to be living will be older, possibly poorer and deeper in debt, unless we and our kids pull our fingers out and get on with it.  The press is full of reporting and analysis, so I shall limit my comments to points I have not seen elsewhere.

I feel especially sorry for the kids. Even in Melbourne's leafy eastern suburbs many kids do not yet have regular jobs despite having at least one excellent degree, and being polite, drug-free, nicely presented and with excellent work habits.  Most of the Mums and Dads can work for longer and will never require a pension or other welfare assistance, unless governments and central banks really stuff things up. The people living in Melbourne's leafy Eastern suburbs are generally well off, but only the spirits in heaven central know what it is like in remote western suburbs of our cities or in distant rural outposts. The TV news, however, suggests that 'grim' is an understatement.

Australian industry is deeply uncompetitive, the budget is out of control, there is no plan to boost competitiveness by introducing radical economic reform, and if there were the loonies in the Senate would block it.  As a one-time member of the ALP, Henry is ashamed at that once great party's mulish attitude to whatever reforms that are suggested - even some it espoused before the last election - and its apparent Olympian attitude to Australia's economic challenges. Correction, FIFA's attitude to cleaning up corruption in the world game.  (More here on FIFA's and Sepp Blatter's opportunity for redemption. Mr Shorten, please note.)

Even the ABS cannot totally stuff up numbers of Australian's, including numbers in different age groups. The scariest numbers in the IGR concern numbers of workers likely to be available to support pensioners by 2055. The ageing of the population, and likely rates of births, deaths and net immigration, will mean  that by 2055 there will very likely be only 2.7 workers for every retiree compared to 4.5 today and 7.3 in the mid 1970s.  It should be noted that equivalent numbers in most 'advanced' nations are even worse.

One of the Treasurer's lines is that 'the best is yet to come', but please note the caveat - only if more Australians work harder and more productively for longer. Henry is irristably reminded of a senior British insurance company CEO who returned from a visit to the regulator in London to report 'the best is yet to come' and that his company had beaten the main opposition once again since his company's fine for mis-selling policies was greater than their's.  Our major bank CEO's perhaps feel the same about the extent of mis-selling by the financial planners they bid for so keenly when they were chasing the superannuation honey-pot.

I am aware that these comments will support the view that Henry is one of the more enthusiastic practitioners of what is sometimes called 'the dismal science'.  Please note that Henry believes there are policies that would greatly improve Australia's efficiency and competitiveness.

Another line in Joe Hockey's IGR is 'the world is a competitive place'.  I am confident that Australia's currently unemployed children accept the need to work harder and smarter to create a solid future for themselves and their future children. The message of the IGR is that Australia as a whole needs to do this, meaning on average every Australian faces the same challenges.  Here is Henry's advice for Joe Hockey and his colleagues currently in government. As a current member of the Liberal Party, Henry sincerely hopes he is not as ashamed in five years of his colleagues in government in 2015 as he was with his Labor mates in 1975.

Monetary confusion
Date: Wednesday, March 04, 2015
Author: Henry Thornton

'At today’s meeting the Board judged that, having eased monetary policy at the previous meeting, it was appropriate to hold interest rates steady for the time being.

'Further easing of policy may be appropriate over the period ahead, in order to foster sustainable growth in demand and inflation consistent with the target.

'The Board will further assess the case for such action at forthcoming meetings'.  Read on here.

The RBA acknowleged that growth is 'continuing at a below-trend pace, with domestic demand growth overall quite weak'.  There will be spare capacity and with wages subdued goods and services inflation should 'remain consistent with the target over the next one to two years, even with a lower exchange rate'.

The problem, of course, is that asset inflation, especially house price inflation in Sydney and Melbourne, is glowing in the dark, and global shares are also setting new records.  The correction of local share prices when the RBA announced its 'no cut' decision yesterday shows that monetary policy effects asset prices.  The fact that the currency jumped before the announcement is, or should be, of great concern to the RBA as it was very likely due to a leak, even worse than suggestions last month of selective briefings.

If it is only Sydney and Melbourne house prices that are of concern, APRA could impose some sort of limit on bank lending for housing in those two cities, a Macro Prudential policy response.  But it is surely now recognised that monetary policy cannot serve two or three masters.  This means it cannot be used simultaneously control the overall economy to keep goods and services inflation in the target zone AND help reduce the exchange rate AND control asset inflation.

Please refer to Henry's January 2013 warning about this point.

The proposed new tax on overseas buyers of new houses, with forced sales of second hand properties purchased illegally by overseas buyers, is another (dare I say) crude and narrowly-based Macroprudential policy. It is a partial and therefore ineffective version of Henry's plan for a tax on all forms of capital inflow. This was apparently 'too hard' for important geniuses/madmen in authority to have considered, or even noticed. The latest Hissink file may provide perspective.

Words fail me. Perhaps this image may do more than words to capture attention.

Saturday Sanity Break, 28 Febuary 2015
Date: Saturday, February 28, 2015
Author: Henry Thornton

'Thousands more mining jobs to be cut as export earnings plunge' is one important headline this week.

The other recent bit of economic news is that non-mining investment is hardly rising and has no chance of replaving plunging mining investment, while infrastructure seems to be lost in the chaos of political confusion and budget blow-outs.

If you want to feel even worse, take a gander at Laura Tingle's Friday account of all the good intentions gone south.

'Remember the days when we all rambled on about the whacky Senate? Well that now seems like a millennium ago.

'Instead, we are now all absorbed by a whacky government that – if you have but a moment to pause and think about almost anything it has done in the past couple of weeks – seems capable of wreaking much more serious havoc on the rest of us than a bunch of accidentally elected senators dazzled by experiencing occasional brushes with power.

'It's not so much that the government – and the Prime Minister – seem to have lost their respective schtick, it's that their behaviour leaves us wondering what their schtick was in the first place'. Read on and sob, readers who believe a strong economy is vital for just about everything a government might wish to do.

The bi-annual Australian airshow proved to be a hotbed of political gossip. The conclusion was that Tony Abbott will be challenged and defeated next Thursday and that there will be big changes to portfolios made by Malcolm Turnbull, including Scott Morrison as the new Treasurer and more than a hint that David Johnson will be back at Defence.

Today's press, especially the Oz, seems to have decided it has given the PM enough stick for the time being.  Its editorial begins as follows:

'THE bed wetters, serial miscreants and executive panic merchants of the Liberal party need to reflect on recent history and hold their nerve amid the current political tumult. Public disappointment in Tony Abbott’s performance is manifest yet the government’s standing in the polls is by no means disastrous this far out from an election. What’s more, the Coalition has a reasonable chance of re-election because of Labor’s indolence and four areas of strategic advantage where the government can create a sharp contrast with the ALP: firm opposition to a carbon tax; proven strength on border protection; clear determination in combating jihadist terrorism; and demonstrable — if clumsy — commitment to repair the budget. Bill Shorten wants a price on carbon, plays to “compassionate” critics on border protection, has exonerated erstwhile Taliban loyalist David Hicks as “foolish” and refuses to admit the budget needs urgent repair'.

The gossip-mongers at the Airshow should have a bex and a good night's sleep. Today the B52 flies in from some Pacific Island, does a half-hour turn and flies home again, which will provide plenty of excitement for Australia's retired warriors. Meanwhile, Australia plays New Zealand in what is a danger game.  A loss to our cousins from over the ditch, now that would be a serious crisis.

New Treasury Secretary, John Fraser, has given tongue at a meeting organised by CEDA. Mr Fraser's conclusion makes perfect sense, as regular readers will recognise.

'If we set ourselves on a path of sensible fiscal repair and lay out credible plans for structural reform that address our long-term growth challenges, then the consumer, business and investor sentiment that is critical to lifting economic activity in the near-term will materialise'.

Read on here.  


Fiona goes to the movies and waves off a special Vulcan.


Cricket minnows Afghanistan have beaten Scotland in a hair raising performance, and are said to be after Australia's scalp next.  Australia, meanwhile, are underprepared for their joust with New Zealand. I cringed when I read hairy-chested comments in the press from Australians saying we'd out-bowl them and out-bat them. An American president once said 'Walk softly and carry a large stick'. Right on the money in my view.

The footy makes a sputtering start soon but the real deal starts on Thursday April 2 when Caaaaarlton! meets Richmond at the 'G'.  Henry will be there with a fervant hope that Mighty Mick has finally got it right.  If 2015 is another fizzer, bring back Brett Rattan will be my cry, and Mick can go to Essendon to manage its resurrection.

More from the Essendon bunker here.

Image of the week

Courtesy The Oz

Big economic questions
Date: Thursday, February 26, 2015
Author: Henry Thornton

Janet Yellen is ever so slowly preparing the way for a (gasp!) rate increase in the USA. 'If economic conditions continue to improve ... the committee will at some point begin considerimng an increase in the target range for the federal funds rate ...'. The care with which Dr Yellen is dancing around this matter is a wonder to behold.  Is the US economy so delicately poised that extreme care needs be taken to minimise the chances of great damage being wrought by, say, a 25 basis point increase in the 'target range'?  As I understand it, the current target range is 0 to 0.25.  As a modest contribution, Henry asks whether the range be raised to 0.25 to 0.50 but the new rate be put at the bottom of that range.

And in distant Australia, Treasurer Joe Hockey has warned us to hang on tight when the Intergenerational Report hits our desks for fear of falling off our chairs. We'll all be rooned, comrades, unless we decide to work harder and smarter and for longer.  Imagine the dilemmas in Japan and Italy, where more people are dying than being born.  No wonder asylum seekers are flooding to Italy in leaky boats, and someone should show them Japan as an idyllic destination with rapidly emptying villages set among beautiful scenery.

Closer to home, warm congratulations are due to Scott Morrisan and Patrick McClure for a brave reform agenda for welfare policies, annual cost $150 billion and rapidly growing. As Mr Morrison said, these reforms will not proceed unless Australians agree.  Simpler, fairer and more efficient, and the thrust is getting welfare recipients back to work, and who can sensibly disagree?  And the recent ABC report about rorting by the (private sector) employment agencies chilled the blood, and suggests there is a lot of fixing to be done.

Courtesy SMH

And in late breaking news, new Treasury head John Fraser has admitted to being a fan of Ronald Reagan's tax cuts, while not being a fan of the International Monetary Fund's (IMF's) 'claims in the past year that tough budget cuts had done more damage than good'. This has signalled that his advice to the Treasurer is likely to be less 'pro-Keynesian' than immediate predecessors Martin Parkinsin and Ken Henry. Perhaps Mr Fraser has more faith in the inherent strength of the Australian economy than his predecessors. He also asserted, reports Jacob Greber in the fin, 'I do not resile from the point that I don't think spending our way out of lower economic activity is the way to go'. Perhaps sensing that his listeners might be failing to understand this gnomic point, he later said "Spending your way out of these things just doesn't work".

David Uren asked Mr Fraser about the falling currency in a recent interview for the Oz. A lower exchange rate gave Australia some breathing space, the Treasury head explained, but not enough to rekindle growth. “We can’t pin our hope on a lower exchange rate to do all the magic. The lower exchange rate was a massive plus for us in the 1980s only because we used it to reinforce good fiscal policies and tackle structural problems.” (Advised by the RBA, not the Treasury, incidentally.)

Mr Fraser also confessed to thinking there are better things to spend money on than paying interest on the debt, and that his dislike of debt would leave the country "liable to the vicissitudes of the market" and that when interest rates go up, Australia would be "exposed".  We like your work, Mr Fraser, but where do you stand on the desirable pace of deficit and debt reduction?  If budgets have little predictable short-term effects, why not get the budget fixed in a hurry to minimise later "exposure" in the form of high debt in a world of rising interest rates?  And what about the likely effect of economic reform to boost growth, should rapid budget fixing slow growth?  Or are you skeptical about any attempt to improve the economy? My views are here.

Naturally Henry does not expect the Secretary of Treasury to respond to Henry's assertions, or to answer his questions, but surely the Senate committee could do more to draw him out? Committee chair, Senator Slamming Sam Dastyari, inspired by the Secretary's presentation, spoke of President Reagan's 'Voodoo economics'.  Well Senator, look at its effect on the US economy, and ask some real questions next time you meet John Fraser.

Comment by Des Moore influential former senior Treasury official and regular commentator on important policy issues for Australia.

Despite its length, because  the address by new Treasury Secretary, John Fraser, is potentially so important I am including below the full text of it.  It is important in terms of both substance and tone, the latter because critics of economic rationalism and small government will find it harder to find substantive responses. Indeed, the image of the address is also helped by Fraser’s indication of support for government assistance to the “worst off”, his criticism of excess spending financed from the commodities boom and starting under Howard, and his emphasis on the need for a well-functioning tax system that is “fair”.

If as reported Abbott is searching for a “policy reset”, he has the basics in Fraser’s speech.

Except for The Australian (which appears sympathetic), so far the media has been largely in a straight reporting mode (see attached). As at 1.00 pm the ABC’s digital  “Just In” has not even mentioned the address. No doubt the doubters will be searching for items they can use to try to undermine but the one that appeared so far –that Fraser is a Reaganite – won’t get very far.

It will be of interest to see whether comments are sought from leading politicians, including both Abbott and Shorten, and academics.

Mr Fraser's speech is available here.

The looming deflationary `crisis`
Date: Tuesday, February 24, 2015
Author: PD Jonson

In 1971 President Nixon cut the final link between the dollar and gold. Inflation quickly became a global problem, fuelled by America's attempt simultaneously to win the war on communism in Vietnam and the war on poverty at home. Inflation spread from America to the rest of the developed world, greatly reinforced by successive leaps in the prices of oil. Unemployment rose sharply with inflation, and the ugly word 'stagflation' was coined.

For much of the period since the 1970s central banks as well as businesses and households have feared inflation more than unemployment, which more or less looked after itself with the usual 'cyclical' fluctuations. Most central banks have adopted targets for goods and services inflation, while perhaps taking their eyes of other targets, especially asset inflation.

With the advent of the Global Financial Crisis (GFC) in 2007, attention shifted to the real economy as rates of unemployment rocketed. Monetary policy became super-easy, interest rates near zero, reinforced by so-called 'Quanititative Easing' (QE).

The USA and the UK were the earliest to adopt super-easy monetary policy, reinforced by widespread bailouts of financial institutions in trouble. Now these countries are showing signs of recovery in their 'real' economies, the clearest indicator of which is falling unemployment. Despite super-easy monetary policy, goods and services inflation is languishing to the point that 'deflation' is the new concern.  The prices of oil, coal, natural gas, iron ore and other metals are plummeting (very bad for resource exporters like Australia and Canada) and even consumer inflation is falling, in some cases almost to zero.

But asset prices have been rocketing, and we all know that this cannot go on for ever.  Every boom in asset values is followed by a bust.  If the next bust is big enough, the nascent recovery of developed economies is likely to be snuffed out.

The latest Economist has both a leader and a detailed article on the  perils of deflation in goods and services prices. Both make gripping if scary reading, with a focus on ways in which economic policy needs reconsideration when goods and services inflation is near to zero or even negative.

'FOR central banks in the rich world, two is a magic number. If prices rise at 2% a year, most shoppers can more or less ignore their slow ascent. And a touch of inflation is hugely helpful: it gives bosses a way to nudge unproductive workers—a pay freeze actually means a 2% cut—and an incentive to invest their earnings. Most importantly it keeps economies away from deflation and the depressing choices—hoarding cash, delaying purchases—that falling prices can bring. Yet despite the professed adherence to the 2% mantra, a period of falling prices is on the cards'.

I would like to propose an analytic framework that helps to explain the facts of recent experience and which is grounded in serious empirical research. There are three core concepts that are needed to explain recent oddities of macroeconomic experience - monetary disequilibrium, increased leverage and risk-taking by financial institutions, and the state of confidence, 'Animal Spirits' in the colorful phrase used by some of the world's best economists.

'Monetary disequilibrium' is a more sophisticated version of simple monetarism, where the stance of monetary policy is defined by monetary growth.  It also encompasses the ideas of John Taylor who represents monetary policy with a rule that relates cash interest rates to the state of the economy, in the simplest cases the rate of inflation and the rate of unemployment. Consumers and businesses, it is assumed, use 'Money' as a buffer stock, and adjust decisions in part on whether they have excess or deficient money in their buffer stocks.

For the period until the onset of the 1970s, research has shown that 'monetary disequilibrium' largely influenced the state of demand. Clearly, severe recession/depression produced low 'Animal Spirits' at times during this long period, and during the nineteenth century major gold discoveries in the 1850s and 1890s boosted money supply, and presumably also raised the spirits of households, businessmen and government officials. Both goods and services inflation and asset inflation mostly followed the ups and downs of monetary policy, even when simply represented by money growth.

In the 1970s and 1980s, with the final link to gold severed, 'monetary disequilibrium' also came to influence inflationary expectations, as therefore goods and services inflation. The more or less simultaneous impact of monetary growth on goods and services inflation and asset inflation remained the rule, although there were 'aberrant episodes' identified here that demand a more complete explanation.

The nexus between monetary growth (and therefore 'monetary disequilibrium') was broken in the 1920s USA.  Then monetary growth and goods and services inflation were moderate, but asset price inflation was allowed to boom  by credit advanced by the New York banks to speculators.  This was also a time of strongly positive Animal Spirits, at least in the USA. In the UK, in contrast, the mid-1920s return to the gold standard at prewar parity created pessimism rather than optimism..

Another time of very strong Animal Spirits was 1950s USA when, once again monetary growth (and therefore 'monetary disequilibrium') was controlled but asset price inflation was very strong. A similar period was 1990s USA, when strong Animal Spirits and strong growth and innovation was further boosted by strong credit growth as banks increased leverage in the wake of President Clinton's financial deregulation.

The 15 years of the 2000s and 2010s so far seem to me to contain several strands.  There was strong credit growth and strong Animal Spirits until the onset of the GFC. Then near zero interest rates and 'Quantitative easing' helped avoid a catastrophic decline of economic activity and cushioned Animal Spirits.

Throughout this period the influence of the 'Greenspan put' and the 'Bernanke put' meant asset demand recovered quickly after each asset crash, and rose strongly in the period as a whole, and this will surely have influenced Animal Spirits of investors.  Depressed demand for goods and services closed or slowed the normal recovery channels from recessions. The long period of depressed goods and services demand, combined with continued strong supply of goods and services, is the reason for the global goods and services price deflation.

I have still to put all of this reasoning into a coherent estimable model, but that is the next step. My intuition is that 'deflation' will be seem as a normal  response to a deep recession where the normal response to monetary disequilibrium is diverted to the asset markets instead of into depressed goods and services markets.

Readers seeking references for the assertions in this blog should contact Henry here.

The RBA's Philip Lowe has grappled with some of the issues covered here.  Here is a link to his speech.   In my opinion, Mr Lowe is too heavily focussed on interest rates as the primary transmission mechanism for monetary policy. A direct monetary effect, in my view formulated as 'monetary disequilibrium', would help explain the conundrum he is exploring in this speech.

Saturday Sanity Break, 21 February 2015
Date: Saturday, February 21, 2015
Author: Henry Thornton

The event of the year for Henry is the advent of a new book by Geoffrey Blainey. Its arrival is celebrated in the weekend's Australian Magazine where Geoffrey explains ways in which he sees parts of Australian history with fresh eyes. This article covers largely the history of the first Australians and a theme is that 'Aborigines experienced what is surely the most significant event in our history. Nothing since 1788 can compare in magnitude to the great rising of the seas which – in full sight of scores of generations of coastal Aborigines – flooded coastal plains and valleys. It severed Australia from New Guinea in the north and Tasmania in the south'.

Professor Blainey adds that: 'In comparison, the rise in sea levels and the global warming currently predicted for the next 100 years seem like a sideshow. It is a triumph of the human spirit that Aborigines as a people survived an event which must slowly have drowned all or part of the homeland of perhaps one in every three tribes or “nations”.'

The concluding paragraphs comment on the so-called 'history wars' and follow with a nice remembered account: 'Controversy, not war, will continue for a long time to come. It is in the nature of history and of most intellectual activities, and the more so in a nation where the main strands of history – Aboriginal and European – are utterly different.

'In 1948 I was in the public gallery of the old parliament house in Canberra. There I looked down with a sense of wonder at the oldest member, the silver-haired Billy Hughes, who had been a member of the first federal parliament in 1901. I did not then know that in parliament he had often sat near William Groom, a senior Queensland politician who, as a 13-year-old back in the 1840s, had been transported as a convict to Australia.

'It shows the brevity of [conventional, post 1788] “Australian history’” that through good fortune I was able to see a living politician whose parliamentary colleague belonged to the convict era – the time when the first settlement at Sydney began. In contrast, the indigenous history of this country is unimaginably long'.

Read on here.

Professor Geoffrey Blainey’s The Story of Australia’s People: Volume I (Viking, $49.99) will be available in the best bookshops on Wednesday.

Political economy

Australia's latest blood sport, Abbott bashing, continues unabated, with even the senior journos throwing some punches, including stories that I find literally incredible, such as the allegation that Chief-of-staff Peta Credlin sometimes chaired the Expenditure Review Committee. 

But there is so much acrid smoke that one must assume that there are plenty of smoldering ashes. Even friends of Tony Abbott say they fear he will not survive for long.

In matters economic, Henry must say, with a heavy heart, that the budget is buggered, and that only drastic action will stave off recession.  Conventional budget reform would involve cutting expenditure or raising taxes, or some mix of the two. Such action is necessary to fix the budget and stop the rise of debt. This will almost certainly slow or delay recovery of the economy unless ...

... Budget reform is accompanied by bold action to encourage growth.

Nick Greiner in today's AFR says there is a need for a "grand compromise" to end the budget stand-off or risk the country grinding slowly toward a "train wreck".

Hear, hear to that, but simply cutting spending and raising taxes - the traditional Treasury way - will be deflationary unless positive energy is injected via serious economic reform.

Here is Henry's agenda for reform.


Fiona Prior falls under the spell of Graeme Murphy's Swan Lake


Wild storms have wreaked havoc in the deep north, and we sincerely hope people are safe and that the insurance companies do not play too hard in assessing the claims that are sure to be many. Rebuliding will add to economic activity and may provide a boost that helps the economy.  It is not a boost that John Maynard Keynes would salute, even though in a satirical moment he proposed digging holes and filling them in again.

At the time of writing, Australia's game with Bangladesh is likely to be truncated or called off.  With the minimun 20 overs each, anything could happen, and the Bangladashies (sic?) are sure to have noted how Brandan McCallum or David Warner make runs. Meanwhile, England seem disinterested, being flogged by New Zealand who are emerging as a real chance to win the tournement.

The footy season is somewhat delayed by the cricket but Essendon continues to hog the limelight. They have been granted permission to patch together a team, sadly not including men from the Ascot Vale firsts, and should get flogged until their regular players are allowed back.

What sad news it was that code-hopper Karmicheal Hunt has been charged with drug using and drug peddling. At least it was not in Indonesia, so he will not face a firing squad, but his new Rugby career seems likely to be over.

Recession or Reform
Date: Thursday, February 19, 2015
Author: Henry Thornton

Gor blimey, comrades, Messrs Abbott and Hockey are singing from the same hymn sheet and the subject is hell and damnation.

Tony Abbott pointed out, entirely reasonably I hasten to add, that Australia's massive budget deficits and rising debt was stealing from our children, and their children.

Today Joe Hockey has weighed in with some powerful rhetoric of his own, as reported by Adam Creighton.

* 'Speaking to business owners of the Sydney Business Chamber, Joe Hockey said the forthcoming Intergenerational Report – a five-yearly document looking at long term fiscal pressures, due for release soon – would make Australians “fall off their chairs”.

* 'But he said the Intergenerational Report would “stimulate a conversation” about whether the rules around superannuation were sustainable for the long term.

* 'Mr Hockey said the IGR would not be like past reports but “a very genuine attempt by the Treasury, in an unprecedented way, to launch a conversation about Australia’s future”.'

RBA Chief Glenn Stevens recently told the pollies that the debt and deficit situation could get far worse 'in a heartbeat'.

And the ratings agency S&P today put the cherry on the top by warning that Australia's AAA credit rating could be put at risk, meaning we'd have to pay more in interest on that debt.

This is Banana Republic Redux. The original Banana Republic was postponed by tough fiscal and wage policies by the Hawke-Keating government, then the recession it (and all of us 'punters') had to have, further postponed by the Howard-Costello government's reforms and seemingly banished by the mother of resource booms.

But motherly booms always end in busts, and the current bust has revealed the dodgy underpinnings of Australia's so-called 'miracle economy'.

Comrades, we know what is needed.  Without imagination and courage, austerity measures which all Australians except the real battlers embrace willingly will be needed. But the measures of austerity must be fair, and be seen to be fair.

'Here is the thing' as a young man might put it.  Without imagination, there are two roads to redemption.  Cut spending and hold it down until the budget disaster and lack of competitiveness is fixed.  Or raise taxes.  Or some mix of the two.

If handled badly, and perhaps even if fiscal reform is handled well, we shall experience the recession we did not need to have.  It is 18 months since this warning was offered, and perhaps too late to avoid recession. 

The best chance of avoiding recession involves a burst of economic reform to create growth that would help the budget and create jobs. When ratios to GDP are out of whack, a government can cut the denominator or raise the numerator.

Here are eight big ideas to raise the numerator, with the full analysis available here.

* Immediate action needs to be taken to reverse cabotage rules introduced since 2009, and phase out as rapidly as possible the entire cabotage system and its unique work practices regime. This would allow costal shipments of products and raw materials to be transported at internationally competitive rates.

* High efficiency super-critical coal fired power generation must become again the major base for a return to Australia’s power and energy cost advantage, even if we eventually decide Australia is ready for nuclear alternatives.

* Company tax reform needs to provide for the write-off of new manufacturing equipment to match overseas competitors.

* Government should urgently remove regulatory impediments to management and labour flexibility, to allow work practices and conditions of employment to be tailored to the specific needs of each individual business.

* Policies need to be put in place to raise the overall spend (Government and corporate) on R&D as a percentage of GDP, to global best practice levels. The program would need to ensure that relevant business and administrative skills and experience are available to use any Government support effectively. The government's new 'Growth Centres are relevant here, as is the long-standing CRC Program.

*  A task force needs to be constituted to review best practice arrangements in countries which lead the table of performance with innovation and commercialisation. The outcome would be a basis to review and implement policies which would be relevant for Australia, which currently is the lowest county in the OECD rankings in this vital area.

* A persistently overvalued exchange rate is a form of asset pricing imbalance that involves instability of industry structure and which requires fresh thinking by the Reserve Bank of Australia.

* Priority be given to mergers which favour the formation of a strong group which can compete in international markets rather than having weak fragmented entities. The ACCC brief needs appropriate revision.

It is very late if recession is to be avoided.  But better late than never, as Grandma Thornton used say.  Radical economic reform requires both courage and imagination.

We shall soon find out if our leaders have what it takes.

The coming global property bubble
Date: Wednesday, February 18, 2015
Author: Henry Thornton

'KEEP interest rates low for long enough and the property market will eventually boom' asserts Buttonwood of the Economist. 'That has been a good rule of thumb for investors throughout history. It is even proving true in Europe, despite the continent’s sluggish economy'.

There you have it, dear readers, a similar view to Henry's, as presented last week.  Henry's graphic hints of a focus on housing, reflecting the traditional Aussie bias.  But the basic logic is similar to Buttonwood's far more sophisticated offering.

The venerable mag summarises, and offers an entirely rational explanation. 'Europe’s rebound outpaced the 9% rise in global property transactions, although not a 15% rise in American deals. Office buildings and hotels were the most active sectors worldwide.

'It is hardly surprising that investors are enthusiastic for bricks and mortar. In both the cash and government-bond markets, yields are zero or even negative. By comparison, yields of 5% on American property or even 4% on office blocks in central London look attractive'.

Yields on property are falling, but long-term returns from property look very respectable. 'In the ten years to end-September, American commercial property delivered a total annualised return of 7.9%, according to IPD, a property-information group; returns in both Canada and New Zealand were in the double digits over the same period (see chart). That compares with the 8.1% annual return (including dividends) achieved by American equities over the same period and with the 6.8% annual return achieved on long-term Treasury bonds'.

Is the market due for another downturn? 'Not necessarily. Property is vulnerable to three things: a rise in interest rates, a downturn in the economy that hits demand, and a burst of speculative building that leads to oversupply.

* 'On the first point, central banks are still cutting rates in much of the world. There is the possibility of rate rises in America and Britain over the next year, but with inflation very low, central banks are likely to be cautious.

* Second, 'The world economy is not exactly racing, but forecasts (for what they are worth) predict GDP growth of more than 1% in the euro area and Japan and more than 3% in America. In any case, prime properties, which investors are most enthusiastic about, managed to weather the 2008-09 recession and so should be resilient to another downturn.

* 'In terms of supply, it is easy to be misled by the view from The Economist's offices of the flocks of cranes perched over London. This is the exception. Globally there is yet to be the kind of development spree that usually marks the peak of the property cycle. Deals involving development land fell by 29% globally last year, including a 3% decline in Europe'. Trevor Swan, one of Australia's few globally significent economists, once advised the young Henry that the may cranes of Sydney had stopped moving. 'That's all you need to observe to see the recession has started' the old boy (as he then was) announced.

The cranes of London are still moving, and elseware they are like the famous parrot - not dead but resting. 'So it is possible that commercial property’s streak could last a good deal longer. Lots of investors need income and the obvious alternative to property—corporate bonds—has had a very good run. Investors have even been willing to accept a negative yield on bonds issued by Nestlé, a Swiss foods group, in effect paying for the privilege of lending it money.

'Until the 1970s property was the asset of choice for long-term investors such as university endowments and pension funds. It has been replaced in recent decades by government bonds, which are much more liquid. If yields on bonds stay at Japan-like levels for a while, however, the allure of property will only increase. And if inflation returns, property will be a better hedge than conventional government bonds'.

And in conclusion: 'Eventually, such logic will inflate a bubble, of course. Residential property in London (fuelled by a combination of low rates and international capital) has already reached that point. But the surge of interest in second-tier and more speculative commercial-property projects that marks the top of the cycle is only just beginning, at least in Europe. The skyscrapers will tell you when to worry'.

Sunday Sanity Break, 15 February 2015
Date: Sunday, February 15, 2015
Author: Henry Thornton

The new year is already looking like the old year.  Henry's corporate commitments are still limbering up and his major research project is on hold and so there has been time to listen to or even watch the antics in the hig house on capitol hill. We have been slowed up by a serious carpel tunnel problem that fortunately was fixed in time to avoid real problems.  While in recovery mode - NO TYPING - there has been almost enforced Skye News watching. Parliament seems more than ever like a public school where the boys have taken over and the headmistress is trying unsucessfully to rule the roost from her podium in the Assembly Hall. The rules remain absolutely no generosity of spirit, no sense of common purpose and no common courtesy is to be shown by either side.

As well as watching (and seething with frustration) I have at least found time to produce a few blogs. As is my wont these include comment on monetary policy ahead of the RBA board meeting and afterwards. My strong advice ahead of the meeting was that the economy needed the budget to be fixed as well as policies to make Australia more efficient and competitive. There was little justification for further cuts to monetary policy, unless the economy was in deeper trouble than senior members of the government, or for that matter the RBA, had indicated.  And there was a real chance of renewing, or strengthening, the housing boom, although the RBA may be relying on APRA to impose new-fangled 'macroprudential policy' to sort that problem.

The view that there was little case for further rate cuts was of course trumped by the RBA Chief with a rate cut.  Many will say that the RBA is looking good in the light of the large jump in the official (ABS) unemployment rate data released today. The RBA forecasts were shaded, not slashed, however, so it is reasonable to ask why the RBA has changed tack. (This is discussed in my latest blog, linked here.  This blog also touches on the touchy subject of pre-meeting 'briefing' by the RBA, which it has been asserted was especially obvious before this latest meeting of the board.

The weekend AFR reports that Glenn Stevens has said to a meeting of parlimentarians that the budget problem could get much worse 'in a heartbeat'.  If they were not terrified, they should be.

Gov'nor Glenn also said there is a limit to what monetary policy can do. This was because interest rates are already low, but a far bigger issue is that other policies, concerning regulation, fiscal policy and policies of state and local government have far more impact on the economy than a small cut (or cuts) in rates of interest.  I am sure that Glenn Stevens agrees with this, but no doubt thinks the RBA has to be seen to be doing its bit. But rate cuts will be positively unhelpful if they stimulate asset inflation.  Initial impacts suggest this is a real risk.

Art lovers may care to comment on my editor's latest post-modern painting, designed to illustrate that monetary ease in current circumstances goes more reliably into asset prices than economic stimulus.

All of Henry's friends bemoan the state of Australian politics and ask what can be done. In 'Political economy, Aussie style' I provide an answer. A reader asked if I was advocating policy made by technocrats rather than politicians. I remarked that the independant central bank with a clear mandate had served Australia well.

While giving Treasury independance plus a mandate to run a sensible fiscal policy is probably a bridge too far, what about requiring Treasury to provide us all with its policy advice, as the RBA does in its field.

This is worth debate and, when it bobs up in a newspaper, please recall you heard it first here.

All the best for the year ahead. Remember this is a time to tread carefully with seatbelt engaged.


Fiona Prior is back, reviewing Cirque de Soleil. She says, for those of Henry’s [mostly elderly] readers 'whose idea of a circus is a ringmaster, elephants, and men with whips facing off giant cats – Cirque de Soleil is a completely different experience altogether (except, maybe, for a shared penchant for sparkly leotards)'.

You must not miss this, elderly readers.  It will help you to look cool to your grandchildren.

Henry judges that this summer's movies are the best for years. The latest stunner is Selma, the story of the freedon marches in Alabama several short decades ago.

Hard to accept that back then American Negroes, as African Americans were called, were blocked from voting, a century after the Civil War. Lovely work by all concerned, and here is a trailer. Watch the ad, Shen Yen, 5000 years of Chinese history in one gorgous sitting.


Australia beat England by 111 runs in the second match of the World Cup of Cricket.  This was despite batting failures by Warner, Watson and Smith and with Mitch

Marsh getting five for while Johnson and Starc dealt gently with the pestiferous poms (PPs)  Smith chimed in with the best catch I have seen, and Starc pulled of a close second miracle catch. George Bailey scored 55 and captained the team well. Sadly, Bailey may be required to stand down in favour of Michael Clark, which seems like a real pity.

As predicted here last weekend, it seems that Essendon will be 'topped up' with a team mainly from Ascot Vale and other suburban teams.  Hope a suburban coach is in charge of the team, not Sir James Hird - did you miss Tony's latest cap'ns choice? Imagine the furore if Essendon Vale beat an AFL heavyweight, like Collingwood.

With cricket on for 6 weeks, by which time the footy will be underway, there will not be much time for moping, or trying to help Tony save his job.  Some honest toil, that's what we both need, like choppimg trees or weeding vegetable patches.

Image of the week

Courtesy The Oz

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