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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.

Low wages - blessing or curse?
Date: Tuesday, May 05, 2015
Author: Henry Thornton

Australia's budget deficit keeps rising as commodity prices fall, previous spending commitments keep on rising and wage inflation keep on falling.  Canada shares with us the first challenge, most countries share the spending blowout and just about everyone has falling wage inflation. It is some time since we lauded ourselves as the 'miracle economy'; hubris has turned to nemsis.

It is probably cold comfort, but many other nations are suffering with low wages growth, in important cases, negative in 'real' (after inflation) wages growth.

The Economist has investigated this matter, and the resulting article is worthy of being publicised. Quotes are from the venerable mag. The dramatic first set of facts are:
* 'Despite five years of growth American real wages are still 1.2% below what they were at the beginning of 2009.
* 'In Britain, real wages fell every year between 2009 and 2014, the longest decline since the mid-1800s. In 2014 median pay was 10% below its 2008 high. "
* 'Germany, a haven during the euro-zone crisis, has done better, but wages are still 2.4% below their 2008 level'.

The graph is worthy of careful study.

Many advanced economies have shared America's experience. From the second world war until 1960, wages rose in line with productivity and from 1947 to 1960 both rose by 51 %. Since 1960 productivity in America has risen by almost 220%, but real wages by less than 100%. This is a major contributor, on top of rampant asset inflation, for the dramatic rise of inequality that concerns some economists and most merely human people.

'Scholars seeking to explain this decline in the labour share reckon a number of big forces are at work. One is that the income from capital—especially from housing—has been increasing more than the income from labour. Another is that, in many industries, capital goods have become a lot cheaper and/or better. Bosses can choose whether to spend money on machinery or people, and declines in the price of the kit required for a given amount of output—which can come about either because existing machines get cheaper or because new ones can do more—reduce demand for labour.

'Globalisation can reduce the demand for rich-country labour, too. Michael Elsby of the University of Edinburgh and Bart Hobijn and Aysegul Sahin of the Federal Reserve have shown that in industries where imports became a more important part of the supply chain between 1993 and 2010 the labour share fell the most. And the decline of trade unions reduces labour’s bargaining power. The share of the American workforce unions represent has fallen in every decade since the 1960s, and similar declines have been seen across the G7'.

Another important factor beloved of economists is the old 'Phillips curve'. 'The usual assumption is that once unemployment gets below a certain rate, idle labour becomes scarce and competition to hire already employed workers heats up'. Australia's unemployment is still rising, and one survey says people's greatest economic concern is fear of unemployment. But in many developed nations, unemployment is now falling, in some cases below the so-called 'natural' rate of unemployment that used to signal rising wages.

'There is evidence' says the venerable organ, that wages might now be shaking off their sloth. 'In late February IG Metall, Germany’s largest union, brokered a 3.4% raise for its members, well above the current inflation rate, 0.3%. The latest British data show average salaries up by 1.7% in a year; with inflation close to zero this is a decent real-terms rise. In America, average real pay is up by 2.2% over the past year. If this continues as unemployment falls it would mean a return to pre-crash normality, with sustained wage inflation eventually triggering central-bank interest-rate hikes'.

But there is another possibility. 'It may be that the damage this recession did to the labour market—the loss of skills and the mismatch between industries where workers have experience and those where there are vacancies—is being expressed not in the form of long-term unemployment but as lasting low pay'. If this turns out to be the case, it will help lock in low inflation. I would be very surprised if the RBA board did not consider this possibility at its meeting today.

If lasting low pay keeps inflation and interest rates low, it may come to be seen as a blessing. If it merely allow capitalists, and highly skilled workers, to grind the faces of unskilled workers, it will be a curse and there will be retribution

The full article discuss several related issues that will delight the specialist. Many economists, including Henry, see 'more flexible wages and prices' as a desirable way to achieve optimal economic outcomes. The Economist has a final warning in conclusion: 'Work must be a route out of poverty, not a way to stay stuck in it. To that extent new political interest in stagnant and falling pay is welcome if it really boosts what poorly paid workers take home while not deterring job creation. But although the new world of ultra-flexible labour markets has its flaws, those on the left looking for a restored rigidity are playing a dangerous game: the unemployment that could result would help neither those rendered jobless nor those scraping by'.

Read on here if you are a subscriber to The Economist

Saturday Sanity Break, 2 May 2015
Date: Saturday, May 02, 2015
Author: Henry Thornton

The RBA board meets next Tuesday and seems poised uncertainly between another rate cut and leaving monetary policy unchanged.  The brutal fact is that further cuts in interest rates will penalise retirees, add further fuel to housing markets and fail to ignite a broad-based economic recovery.  All that can really help the Australian economy is a dose of far-reaching economic reform.  Here is Henry's prescription, with several colleagues,  a submission to the Newman committee.

 'How much do you need to retire?' asks the AFR.  'More than you might have thought a decade ago' and 'much more than most Australians are going to have accumulated' are the general answers.  Imposing a modest tax on pensions for the 'rich folk' - those who have worked hard and saved a lot, despite horribly high marginal tax rates - will simply force effots to become self-sufficient into other channels, such as negative gearing.

The Abbott government is going to revive 'Rewards for elderly to stay at work'. As an elderly person still at work, Henry applauds this idea in principle, without any expectation that he will receive any of the tax-payer-funded-lolly himself. Of course, taxing those still at work in order to subsidise the employment of other elderly persons is the sort of tax'n'welfare scam that bedevils the western world's economic system, and helps to explain why we can expect slower growth in future.  Especially if real reform is not forthcoming.

While agreeing that keeping the elderly in work is a good idea, the rate of unemployment among the young is at least 20 % and rising. (In addition, some of the best young folk are working for nothing as 'Interns'.) Again we must insist that thorough-going economic reform is the only way for Australia to avoid the low growth future that major 'developed' nations are facing.

Another weekend announcement is that there is to be a 'Hit on foreigh property buyers'. Henry has half a cheer for this.  It is in fact a large but clumsy tax on a particular form of capital inflow.  Far better would be a broad-based tax on all capital inflow, at a much lower rate, as advocated by Henry over two years ago - link here. 

The new large but clumsy tax on capital inflow to buy property will of course inhibit property development, at a time when rapid house price inflation in Sydney and Melbourne is worrying all who think hard about their children's future, and that of their children's children.

Tony Abbott has said taxes should be simple, fair and as low as possible. He will eventually see the point of his new property tax, but far better that had happened before the latest bright idea was announced.  There is an emerging pattern of bold announcements followed by sad backflips that should be overcome by serious thinking in advance of announcements.


Fiona Prior visits Beckett’s tragi-comedy masterpiece Endgame. You will laugh while you look for the razor blades! Read more here ...


The liquidation of two Australian drug dealers in Indonesia has excited Australians more than most judicial events in recent weeks. Three things upset Henry in particular, apart from the final barbaric act. The disrespect to the family, especially on the last day. The official refusal to let Messrs Chan and Sukumaran be comforted by their own choice of religious advisors immediately before their executions. And (if it is true) that Indonesian law allows clemancy for those who are genuinely rehabilitated, as these men appear to have been. 

The massive earthquake in Nepal shows just how uncertain life can be.  One hopes Australians are especially generous in their donations and even that perhaps a fair bit of our assistance to Indonesia could for this year at least be channelled to help the Nepalese recovery.

This said, our difference of opinion in the matter of execution of people who have committed horrendous crimes was handled well by Tony Abbott and Julie Bishop. 

There are also some sensible post-execution comments from Indonesia, and it looks possible that mutual damage will not be the ongoing result of the cultural fault-line revealed by this tragic matter.

To move to far more trivial matters, last night Caaarlton! was absolutely flogged by old enemy Collingwood.  Watching the game on TV, even Henry's Collingwood-supporting mate was sympathetic.  Unless and until Caaaarlton! shows some fight, Henry shall refer them as 'the blues' to represent the feelings that they arouse in loyhal supporters' minds.

The week leading up to this flogging Caaaarlton!'s supercoach Mick the Merciless has been filled with conjections that he is about to quit, or be fired by an even more ruthless board.

Caaaarlton!'s captain, Marc Murphy - publically told to 'harden up' by Mick - has said the players are fully behind the coach.  A more general article is in Thursday's SunHerald - 'Mick Malthouse has an unbreakable bond with (most of) the players he has coached'.

So far this AFL season has confirmed the power clubs - Fremantle, Port Adelaide, Hawthorn, Essendon, plus several others (compared to the blues).

The Bombers have been cleared due to lack of concrete evidence that banned substances were injected into their players but face another hurdle.  Totally logical when thought about, WorkSafe Victoria is investigating.  There is no doubt that a variety of substances were ingested by, or injected in, the players.

Lack of evidence of what "pharmacologically experimental" substances were given to which players was a key point that frustrated ASADA in its attempts to prove banned substances were provided.  Henry is no lawyer, but the fact that there is no record of which players got what substances might be construed as a violation of practices in a safe work environment.

It's going to be a bleak winter in the Thornton household.

Image of the week.

Courtesy The Oz

Storm warning and protective policies
Date: Wednesday, April 29, 2015
Author: Henry Thornton

'Reserve Bank of Australia governor Glenn Stevens has warned financial markets are at risk of a major shock linked to a capital flight from emerging markets that could take off just as assumptions about global liquidity are tested.

'The governor highlighted two potential scenarios that could combine to "heighten fragility" after years of yield-seeking by investors coinciding with the rise of the giant asset manager and monetary stimulus.

"From the vantage point of most central banks, the world could hardly, in some respects, look more unusual," he said in an address to the American Australian Association in New York on Monday. "That central banks have had to take such extraordinary measures speaks both to the severity of the crisis that these countries faced and the limited capacity of other policies to support growth."

'Investors were accepting only a small return for taking risks, he argued, and long-term bondholders in most cases were getting very little reward for term and inflation risk. This was not limited to the major economies of the United States or euro area and, naturally, emerging-market economies were benefiting too, boasting ultra-low sovereign bond yields'.

Mr Stevens also lays out a research agenda with clarity.

'The possibility that, de facto, the risk premium being required by those who make decisions about real capital investment has risen by the same amount that the riskless rates affected by central banks have fallen may help to explain why we observe a pick-up in financial risk-taking, but considerably less effect, so far, on ‘real economy’ risk-taking.

'Whether this is best seen as a temporary increase in risk aversion, a genuine dearth of investment opportunities, evidence of monetary policy ‘pushing on a string’, a portent of secular stagnation, or just unusually long lags in the effects of policy, will probably be debated for some time yet. I don't pretend to know what that debate may conclude'.

More here from the AFR Online.  And here is a link to the full speech, which comes highly recommended.

Superannuation: stability of rules

Peter Costello has weighed in to say the stability of super rules is vital.

'Future Fund chairman Peter Costello ... argued that the most important superannuation reform would be to stop changing the rules'. "We've had contribution rule changed, taxes rule changed. Every time there is a budget shortfall of revenue there are proposals to change the taxation of super. I think its affected confidence".

This is the latest contrition to our 'Superannuation 2015' column, linked here.

Radical economic reform - a libertarian approach

'Fire public servants, cut welfare, stop funding research; David Leyonhjelm's libertarian budget'.

If you thought Henry is radical, read the linked feature article in today's AFR. Pp 44-45.

Libertarian senator David Leyonhjelm wants lower taxes, fewer public servants and a balanced budget. This is his alternative budget for 2015'.

In what follows is a series of paras and sentances straight from Mr Leyonhjelm's policy agenda, which we at HenryThornton.com find immensely attractive.  Careful

Readers may wish to compare Mr Leyonhjelm's agenda with our's.

Here is one example of Henry's approach, the version posted to 'welcome to country' the new Treasury secretary, John Fraser.

But to go to Mr Leyonhjelm's arguably more radical agenda.

'Last year I proposed an immediate return to surplus, achieved solely through spending cuts. These included: a 10 per cent reduction in the salaries of public servants and politicians; abolishing Family Tax Benefit Part B and the Schoolkids Bonus; freezing other welfare payments; withdrawing the age pension for those with million-dollar-houses; means-testing Medicare; halving higher education subsidies (while retaining higher education loans); and abolishing corporate welfare including funding for the ABC and SBS.

'I also proposed a freeze to the minimum wage to promote jobs and growth, which would boost the budget through additional taxation revenue and fewer dole payments'.

Mr L says the government's previous budget was directionarily similar to his proposed budget, but more 'timid'.

Political advice.

He provides some interesting political advice: 'Some may say the government's timidity was justified because even its timid spending cuts were blocked in the Senate through the opposition of Labor, the Greens and various crossbenchers (but not me, I hasten to add).

'But if your bills are going to be blocked, they may as well comprise coherent and consistent legislation that you can take to the next election.  And if you're going to lose the votes of those who believe in the age of entitlement, you may as well take an axe to their entitlements rather than a butter knife'.

Particular proposals.

We now move to the list of particular proposals.  Please note the care with which reasons are offered.  There can be no doubt that Mr L is a serious libertarian.

'To begin with, I would not allow any spending on new policies or capital equipment (other than defence equipment) in the annual appropriation bills. Typically, more than $5 billion of such spending is unveiled each year. New policies should be thought of as a luxury only available to governments that can live within their means. We don't have such a government. And capital spending, other than on defence equipment, ought to be the responsibility of state and local government anyway.

'I would then cut various existing programs that are not protected by an enduring appropriation.

'A good number of these may actually be unconstitutional, given that the Commonwealth has no explicit authority in section 51 of the Constitution. In recent times, whenever the High Court has had to rule on the constitutionality of such a program, it has struck it down.  But many continue because it is difficult to get the High Court to consider each one and governments have been content to preserve them in the meantime.

'A long line of programs should face the chop.

'I would cut foreign aid. Aid is a poor diplomatic tool, as indicated by Indonesia's rejection of Australian government pleas for clemency for the Bali 9 ringleaders. Apart from the commitment of military and public health resources in response to natural disasters, the government does not need to be philanthropic on our behalf. Individual Australians who care about conditions in other countries can and should be encouraged to make donations from their own wallets.

'I would cut Commonwealth spending on the health bureaucracy, because healthcare is a state responsibility and government support is best provided directly to individuals rather than to health departments and institutions.

'I would also cut spending that promotes healthy lifestyles, as how we live is none of the government's business. I would nonetheless retain spending on immunisation, which provides benefits beyond the individuals who receive the vaccine.

'I would cut industry assistance, including for exporters, agriculture, the sports industry, the arts industry, and that part of the broadcasting industry we call the ABC and SBS. This is just corporate welfare for the favoured few.

'I would cut government spending on research. It crowds out philanthropic and business support, which would provide greater discipline to the direction of research.

'And I would cut indigenous programs, because race should not determine access to government services.

'Commonwealth grants for regions, infrastructure and schools that are in annual appropriations bills would be cut, because they are areas of state responsibility. I would cut spending on climate change programs because, among other things, I see the reality of global inaction. And I would cut other areas of symbolic spending such as the Human Rights Commission, family studies, and gender equality.

Employing fewer Canberra public servants and paying them less.

'My spending cuts would mean at least 15,000 public servants lost their jobs, mostly in Canberra. While those affected obviously wouldn't appreciate such cuts, it is in everyone's long-term interest to get people out of the unproductive public service and into the private sector where they produce things that people want.

'The government has a mandate for significant public service job cuts, given its election commitment to cut 12,000 public service jobs (rather than the 2000 cuts it decided to pursue after the election).  And there would still be more than 200,000 Commonwealth public servants after these cuts took effect.

'For the public servants that remain, I propose to cut their pay by 10 per cent. After a decade in which pay and employment grew faster in the public sector than the private sector, this is a reasonable option. And yes, politicians' pay should be cut by the same amount.

'Overall, my approach would deliver a surplus in the coming financial year, based on available numbers, without resorting to tax hikes.

'No tax hikes.

'There is no justification for tax increases of any kind. Real (ie after inflation) Commonwealth tax per person has increased by more than 13 per cent since the introduction of the GST. As a result, our tax-to-GDP ratio is higher than in many countries with which we compete, like South Korea and the United States.

'Tax hikes may not even succeed in sustainably raising revenue because they discourage Australians from working, saving and starting a business, encourage mobile Australians to leave the country, and discourage foreign investment and migration'.

This bold contribution is worthy of careful thought, dear readers. Here is the link if you do not have easy access to the AFR.

And in conclusion, Glenn Stevens' final throughts from that speech in New York.

'This is probably a moment to recall the commitments we all made in the G20 meetings in Australia last year, as we agreed on the goal of an additional rise in global GDP of 2 per cent over five years.

'Those commitments were not actually about monetary policy; they were about other policies. It will be important this year, after one of the five years has passed, to see whether we are all making good on our various promises. More generally, actions which promote entrepreneurship, innovation, adaptation and skill-building, that reward ‘real’ risk-taking, while providing a stable macroeconomic environment and a well-functioning financial system, will best support our future wellbeing'.

Amen to all that, dear readers.

What we all know, or need to know, is that bold policies of economic reform are the best way to maximise economic growth and to protect people from inevitable economic storms. 

We shall not forget
Date: Monday, April 27, 2015
Author: Henry Thornton

The one hundreth anniversary of ANZAC Day has been celebrated at Gallipoli, and  with record crowds around New Zealand and Australia. This is Australia's most widely supported holy day, and it is amazing how a bloody battle can become a religous ceremony. Tears were shed quietly and Henry and Mrs T applauded as our son Bert marched for the first time as a cadet officer in the Army Reserve.

Paul Kelly's moving tribute, delivered today, stood out for this scribe: 'At this time and place 100 years before the scene was whistling bullets, confusion, blood and brav­ado. This time, the visiting Australians, young and old, rugged up tight against the cold and fortified during a long night, were patient, happy, united and, above all, dedic­ated to honouring their ancestors of four generations earlier.

'These gullies, peaks, ridges and beaches in this beautiful part of Turkey have become, by mutual consent, Australia’s spiritual property.

'Tony Abbott’s speech hailed the transformation of Anzac at its centenary. Our task, the Prime Minister says, is not merely to remember Anzac but to emulate its spirit. This is now the essence of being an Australian'.

Read on here.

National superannuation

Many Australians have saved at the expense of their ability to practice the gross consumerism that is the prevailing ethos in this wide brown land.  Yes there were tax incentives to save but one foolishly believed these incentives were there to encourage people to save and thus to become self-sufficient in their twilight years.  Yes some foolish people people rorted the plan by spending their super nest egg and applying for a pension or part pension.

It has been asserted that 80 % of Australians past the nominal retirement age of 65 and 60 receive some financial assistance from government.  gor blimey comrade, can this be true?

Now superannuation balances have been noticed by the beady eyes of tax'n'spend politicians, especially the opposition Labor politicians and their supporters in the Federal Public Service.

A battle is coming, and we promise not to forget why (compulsory) superannuation was introduced and nurtured by tax concessions.

Henry has created a page to collect his thoughts and those of readers and influential opinion shapers.  A link is here, and you are encouraged to send contributions.

Saturday Sanity Break, 25 April 2015
Date: Saturday, April 25, 2015
Author: Henry Thornton

Today many Australians paused to remember our debt to those of our forefathers who left Australia to help the mother country fight off the Hun, whose reckless expansionism had plunged the world into war. The specific target of remembrance for many is the failed campaign to take Gallipoli.  In a wonderful speech this week, Professor Geoffrey Blainey outlined a new way to think about that campaign, as he so often does with any subject he addresses.

The invasion of Turkey, Blainey said, was designed to break the European deadlock, with vast armies facing each other in hellish trenches. The Gallipoli campaign is widely seen as a useless tragedy, but a very senior German General said at the time it was a brilliant idea badly executed.  The main problem of execution was the many ways in which the invasion was signalled, so that the Turkish defenders were in place and fully prepared when the ANZACS came ashore.

Blainey pointed out that the lesson of Gallipoli was learned.  The invasion at Normandy that marked the beginning of the end of the second war to end wars was conducted with the utmost secrecy, which meant the Allies went ashore at a place the Germans did not expect, leading to a fairly rapid end to hostilities.

So despite the awful, ultimately futile, struggle in 1915, its long shadow saved many lives in the 1940s.

We attended a moving dawn service at Melbourne U and then had an army breakfast that seems likely to linger longer than the usual porridge and raisons.

A champion for self-sufficient oldsters

'Hands off people's super: Morrison'.  Thank goodness, a pollie who understands that "if you want to try and restrict the eligibility for welfare payments, then you don't go and slug people simply for drawing down an income from an asset they themselves have saved to create".

"[Labor is] saying that $75,000, if you're earning more than that off your own super then you're rich", ... the threshold had to go "way north".

At last, a pollie who thinks well and tells it as it is.  Please consult the letters columns of our newspapers, dear readers.  People are waking up to the fact the pollies and public servants get large pensions without ever contributing, based on pension balances created out of money raised by taxing people working in the private sector.

In another offering in the Oz yesterday, Chris Joye points out that with people living longer, there is a strong possibility that some, perhaps many, will end up with their superannuation balances exhausted, forced to rely on government pensions.  In 30 or 40 years, pensions are likely to be impossible to live on, and people will reply on wealthier friends or grateful children, both unlikely sources of help.

Wake up Bill 'Tax'n'spend' Shorten or your slight chance of forming a government in 18 months or so will evaporate like a puddle in an outback summer.


Fiona Prior attends Maina Gielgud's version of the classic ballet Giselle.

Politics of intergalactic warfare.

Education Minister Chistopher Pyne has starred in a Starwars video that has, or will, as they say 'go viral'.


No time to watch today but Caaarlton! beat St Kilda in Wellington and Essendon and a 'gritty' Collingwood slogged to a fine victory over Essendon at a damp 'G'.

Next week, Caaarlton! will find out if its apparent improvement is real when we face collingwood, also at the 'G'.

Image of the week

Courtesy The Oz

The Raff Report – Late April 2015
Date: Friday, April 24, 2015
Author: Henry Thornton

In a recent note, David Stockman (of Contra Corner fame) cited the trend in US Industrial Production as further evidence that Keynesian money printing is not working. The March reading of IP fell 0.6% (Figure 1) but the reason touted from some pundits was the fall from February was because March was a much warmer month than February so the power utilities cut back on production. Demand for heating was lower and the Utilities IP Index plummeted 5.9%. Another notable fall in IP for March was mining (-4%), and it’s worth noting that production of coal was down 20% from a peak 3 years ago.

Of course what is actually happening is that IP is peaking following peak levels of new orders for durable goods. It’s not the weather stupid but the economy. The auto sector boomed with cheap credit ensuring a strong contribution from the household sector to orders and production (Figure 2). Although recent years have seen a massive printing of money there has not been a dramatic increase in US production, it’s just business as usual.

On Wednesday night there was good news for the realtors. Whoopee, low interest rates and job stability were cited as reasons for releasing pent-up demand in the housing sector. Existing homes sales rose at the strongest pace in a year rising 6.3%, whilst prices for existing homes rose 7.8%. The market loved this and the DJIA rose 88.68 pts (0.49%) to 18,038.27, largely reversing the loss of the previous night.

The good news on the housing front savaged precious metals. Gold fell $16.60 to $1,186.50/oz and silver fell $0.23 to $15.81/oz (ouch). Copper also took a hit falling 2.9% to $2.67/lb; somewhat surprising when housing data is strong but then the outlook in China is not rosy. The reason for the fall in precious metal prices was the spectre of rising interest rates induced by good housing numbers. Precious metals don’t provide an income, just a holding cost. The end result downward pressure on gold and silver. Some long range forecasts for these metals are downright gloomy with one prediction that silver will downtrend to $8 per ounce.

Just for the record, on the previous night the DJIA fell 0.5% or 85.34 pts to 17,949.59. Cause of this aberration was disappointing earnings from several leading companies, including Travelers Companies Inc. and DuPont Co. IBM reported a 12% slump in sales. The strong USD is having an adverse effect on revenues of US multinational companies. FactSet analysts are predicting 1Q EPS to fall on average by 4.2% on a year ago. The FactSet universe of stocks is presumably most of the S&P 500.

Homes are only part of the construction story. Factories and infrastructure are also important and taken as a whole; US construction leaves much to be desired. The current cycle is fizzling out short of the 1990s cycle. A previous Raff Report showed new orders for construction materials close to or at a cyclical high. Now IP for Construction Supplies is peaking, and like other IP indexes the 12 month moving average is rolling over. Also note that in all three figures the second derivative is negative and in the case of Figure 1, the first derivative is on a downward course. Upward momentum is decelerating apace.

Thank goodness for the services sectors of the US economy. New orders for durable goods, in constant dollars, show a downward trend with each cycle lower than the previous going back to January 1969, the start of the Raff’s database. New orders going back further are available from the US Census Bureau. With lower orders comes lower total industrial production. When industrial production is examined across a range of industries, those affected by import replacement show declining output or very little growth in output; footwear and clothing are two examples.

What do the trends mean? As stated in previous Raff Reports it would be very strange if the Federal Reserve hiked interest rates this year or next. A hike in rates is usually used to cool an economy and should they be implemented be soon after a cyclical low is reached and the economy recovering strongly again. This is clearly not the case in the US.

Investors or would be investors must understand that period 2002-2008 was an abnormality with strong industrial growth in China, when heavy industrial output recorded average compound growth of 37% (more than doubling every 2 years) sparked the biggest spike in demand for raw materials since invention of the steam engine. Worryingly, there were boards of public companies and individuals that thought such strong growth rates would continue. We are now witnessing the end result of this folly with closure in Australia of small iron ore miners with a bigger collapse should not the iron ore price exhibit a marked recovery. Prices of metals indicate that markets are adequately supplied. When this might change is unknown.

Even the oil market is oversupplied thanks to unconventional sources, principally oil from shale. The decline production rate for oil from shale is around 80% within two years. Some conventional oil wells also have fast decline rates from peak production but the tail is sometimes measured in decades or until the water cut makes the well uneconomic. Secondary oil recovery is beyond the scope of the Raff Report. Oil is expected to retrace towards past highs before iron ore does. In a global sense there is abundant iron ore for many a decade.

At least one mid-tier Aussie iron ore producer is highly leveraged, and why not when interest rates are so low. Shale oil producers in the US also owe buckets of money to banks. Low interest rates are part of the problem. At the same time China’s economy was heading for the stratosphere, the Federal Reserve started the money printing process that roared away in 2009, continuing to this day. Other central banks followed suit. Despite these two great events, there seems to have been no significant lift in US industrial production. Money printing has been a failure, although we might all ponder what would have happened without it. Where has all the money gone? We know that money has gone into stocks as investors chase yield, companies have been active buying back their own shares using almost free money, and investment banks continue to pay large bonuses.

We live in crazy times. In Europe and Japan, real yields on 5 and 10-year paper are negative. In the US, the same government paper provides investors with a positive return in real terms. It’s no wonder that global money flows are flooding into the USD. However, a strong USD is distinctly negative for all commodities priced in USD. The headwinds faced by the resources sector are approaching gale force. The market has experienced falls in real terms for commodities for a 20-year period, most recently in the 1980s/1990s/early 2000s. History has a funny way of repeating so investors much take special care in these troubling times.

Four Corners expose
Date: Tuesday, April 21, 2015
Author: Henry Thornton

Members of the Thornton family rarely watch Four Corners.  But with three children between them with five degrees, and one undertaking her third, and their parents with 6 degrees between them, the subject was irristible. We began with a bias in favour of 'academic standards' as one parent is a practicing academic and the other mixes with a lot of fine university researchers in his extensive work with Cooperative Research Centres.

Henry has long believed that the marketplace is not the best model for all activities, especially not the most important activities. Paul Vonnegut wrote a scathingly vicious novel about a bunch of Japanese men incarcarated in an American jail run by a private firm.  The results were horrible, and one sighs when one hears of ructions at offshore (from Australia) detention of asylum seekers, also run by private firms.  He has long doubted the desirability of utilities, hospitals, schools, orphanages and homes for old people run by private companies, although high status public (ie private) schools do a job often just as good, if not better, than the best public (ie government run) schools.

Four Corners basically made a case that stiff competition among Australian universities to earn money puts pressures on entry standards, especially for overseas students, many of whom it was alleged have little English when they start. But entry levels are also amazingly low for some courses in some of the lower-ranked universities. Perhaps even more worrying, because one can make a case that foreign students or poorly educated Australian students deserve a fair go, standards of work demanded of all students are said by the many academic interviewed to be extraordinarily low.

Students who deserve to fail are given many opportunities to pass, and sometimes are passed by higher authority asking another academic to remark the paper.  Some of the academics interviewed were retired and thus had no obvious conflicts of interest - unless of course their fight to uphold standards was a prime factor in premature and enforced 'retirement'.  At least one other eminently sensible women asserted that by appearing on Four Corners she would not be hired next semester.

Plaigarism is also alleged to be endemic, despite sophisticated tools that enable markers to check the repetition of sentences, paragraphs and even whole arguments.  It was alleged that students caught out in this noxious activity are frequently given several opportunities to resubmit. And essays can be purchased for students unable to produce writing of appropriate standard. There was talk of overseas agencies who are paid to present qualified students. It was asserted that these agencies often fake the student's qualifications, and especially the English language requirement. One especially unhappy experience recorded a university teacher hinting that 'non academic favours' would be rewarded with a higher mark.

Now it would be easy enough to test the allegations in the TV presentation.  Henry has asked a senior administrator in a highly ranked Australian university whether there are data of patterns of pass rates over time and, where honours degrees are involved, percentages of students in various catagories, that might show that his university is immune from the matters asserted on Four Corners.  Henry is not holding his breath for a response.

For once, Henry thinks that Four Corners has uncovered an especially juicy scandal. Mrs Thornton agrees there is pressure on her and her colleagues to meet pre-specified patterns of results that include an implausibly low failure rate. One especially telling aspect of the Four Corners report was that none of three Vice-Chancellors, each at or approaching a million dollars a year salary, was prepared to comment on television. As noted above, a case could be made that foreign students or poorly educated Australian students deserve a fair go, the famous Aussie fair suck of the sauce bottle.  But ultimately Australian universities will be competing for ever more discriminating customers, and competing with the top 10 % of world teachers, who will increasingly be from universities in the top ten. Check out Corsera, or look at the myriad of excellent lectures provided under the banner of Great Courses.

Here is the bottom line, itself a cruel irony. A reputation for low standards of entry and in the quality of teaching and evaluation will at best give us a niche market that will mean very little in the overall hot competition in global markets for many goods and services, including top shelf education.

Saturday Sanity Break, 18 April 2015
Date: Saturday, April 18, 2015
Author: Henry Thornton

Western Australia has been treated shabbily in the latest recommended carve-up of the GST revenue. How can any state be expected to cop 30 cents in the dollar return, while others are gettting almost $2? One fiscal genius  said WA should respond by 'economic reform', when every other state maintains far less than ideal industrial relations rules and many other barriers to to maximal economic performance.  Neither is the Commonwealth government a great reforming machine.  Remove the pile of logs in your eyes, other jurisdictions, before you demand WA removes the dust of its wonderful deserts and debris from its tropical forests.

Who could blame the WA government if, stirred into action by the ridiculous criticism of its economic policies, it installed ticket machines at the best of its Kimberly Rock Art galleries and provided subsidised helicopter trips for rich tourists to visit? (See today's 'Kulture' story and image of the week below.)

Former Treasurer Peter Costello has been moved to enter the fray on the subject of 'Who is to blame for our parlous budgetary situation'. 'Everyone' is the only sensible answer, including, in order of importance:

(1) Australia's consumerist culture (note household debt to GDP ratio is around the second highest in the civilised world);

(2) China, for failing to keep iron ore and coal prices at world record levels by continuing to modernise like there was no tomorrow; and

(3) Australian governments who returned too much  'excess' tax during the boom (Howard'n'Costello)', spent like drunken sailors (Rudd'n'Gillard'n'Swan) or failed to implement a sensible dialogue with Australian 'punters' (ie voters) as a prelude to the horrendous clean-up they have inherited (Abbott'n'Hockey). 

Cutting spending would undoubtedly be the best solution, but with a deeply embedded culture of entitlement - see point 1 above - our best bet is to reform the tax system to discourage consumerism, remove bracket creep to maintain some discipline over future government spending, cut corporate tax to make Oz business more competitive, and force global companies to pay fair company tax on their profits earned in Australia. Phew! (Shut eyes and imagine you are Joe Hockey.)

 And, but only if all else fails, seek a larger contribution from retirees. But if this 'reform' is to be pursued seriously, and get Henry's vote - we old folk are after all entitled to our saved retirement balances - it will be provided pensions of politicians and senior public servants are clipped on a pro-rota basis. See the argument here, gentle readers.

The PM has promised no adverse changes will be made to Superannuation rules in this parliament, and one assumes this is one promise that would be broken only by a government with a real death wish.  Reform here will be difficult and divisive even with several years notice, but will get Henry's vote only if other reforms, as outlined above, have failed to balance the books.

National growth Centres

Despite budgetary constraints, the Abbott government has crafted a worthy attempt to energise Australia's innovative industries. These are in sectors with great prospects for fostering industries of the future and/or great potential for growth.

These sectors are Advanced Manufacturing, Food and Agribusiness, Medical Technologies and Pharmaceutical, Mining Equipment, Technology and Services and Oil, Gas and Energy Resources.  In each case, a distinguished Australian has, or will be, appointed to Chair a relevant board, and there is an overall board made up of the sector chairs plus several distinguished independant members.

More here.  www.business.gov.au/industrygrowthcentres.

The government solicits comment and Henry urges all people with an interest to respond.


Fiona Prior sees Sydney Theatre Company’s Jumpy and then turns up the passion with Le Grand Tango http://www.henrythornton.com/article.asp?article_id=6783

And don't miss the wonderful front page story in the Oz today (image below) about the Kimberly rock art and its cultural significence.

'The eye of the sea is imprinted on the solid rock face of Kimberley land. It is a place that Robyn Mungulu cherishes, part of her oral history.

'Cyclone Cave is tucked behind Freshwater Cove camp in the remote and tranquil Buccaneer Archipelago, 360km northeast of Broome.

“When I see the art, I see ­stories and the people who made them,” says Mungulu, who tells visitors about the mother who went looking for her lost son, “poked the eye of the sea with a spear, and it sucked her in”.  Read on here.


Last night, lowly St Kilda confirmed its cellar dweller status by being belted by Collingwood.

Today, Henry will find it hard to ignore the game that he expects to produce another spanking, this time by the mighty Hawthorn-slayers, the substance enhanced Essendon.  The good news about Caaaarlton!'s cellar dwelling aspiration - why did we ditch Jacobs, Kennedy, Eddie Betts, Waite, Garlett, I could go on but it's just too sad - is that there will be more time to work at weekends, dear readers.

In Perth, the fiery young fast bowler,Henry Thornton continued his dramatic break through in international cricket.

'Australia Under-19s' new-ball pair of Jhye Richardson and Henry Thornton shared three wickets apiece to set up a crushing win against England Under-19s in the second ODI - the 1000th Youth ODI - in Bunbury. The win helped Australia level the five-match series 1-1'. More here.

Image of the week

Courtesy The Australian. For more, google Kimberly Rock Art

Global deflation - Mystery or common sense?
Date: Friday, April 17, 2015
Author: Henry Thornton

Last evening was spent at a banquet involving a large number of serious medical researchers. We were celebrating the triumph of an octogenarian friend who has just earned a PhD and so needs to be addressed as Dr, Dr, though he is (of course) far too sensible to insist on that germanic salutation. The food was traditional with the menu built around rare beef and sticky date puddin'.

Our octogenarian friend some time ago had an inspiration while reading about the life of Charles Darwin. His eureka moment was about the mystery illness suffered by the father of modern biology. A medical man commented that this was a PhD based on a conjecture, which is itself a breakthrough.  Apparently, only analysis of Darwin's genome will prove or disprove our friend's hypothesis. This will presumably be provided in due course, the medical profession having an excellent history of grave robbing.

The diners were almost all distinguished researchers, including a former Vice Chancellor still working age 85, no shrinking violets to be seen. The wine flowed freely and several short speeches were made, one in particular regretting the current government's apparent disinterest in medical research.  Not for the first time, as the only economist present, I was asked why the government could possibly fail to see the virtues of medical research.

My reply was in three parts. The first, and most important, was that distinguished scientists need to stoop to conquer.  They must learn to speak in language that economists, and especially economists in the Federal Treasury, can understand. Second, they must explain the benefits of medical research in respectable benefit-cost terms, with hard data, not airy assertions. Third, they might also spend some time understanding the vagaries of politics and getting to know how politics works.  Right now, I asserted, they might send powerful messages to their Labor mates about the importance of fixing Australia's budgetary mess and supporting sensible economic reform.

These messages are not always welcome, but need to be passed on in as persuasive ways as clever medical women and men can devise. But after the fire caused by this subject retreated to glowing embers, a recently retired medical researcher asked why jobs were hard to get, wages growth was slow and global leaders were concerned about 'deflation' while asset prices were rocketing up.  This person has been reading Mr Picketty's book and has built up quite a nice theory that it is essentially a matter of the rich grinding the faces of the poor, with central bankers and government officials part of a giant conspiracy of the ruling classes everywhere.

I did my best to explain that, as in so many other cases, a cock-up was a far more likely hypothesis than a conspiracy. I asserted that economics has not yet solved the problem of why monetary stimulus - introduced to save the world from depression - is currently mainly pushing up asset prices. I could tell that the distinguished medical man remained skeptical but we parted as friends, the medical man having been given Henry's web address so that he could access independant non-ruling class commentary on the great debates of economics.

As Mrs T and I wandered slowly to Lygon Street in quest of an empty taxi, I opined that there is really no great mystery about the subject of the divergent behaviour of labor and goods markets, on the one hand, and asset markets on the other hand. My mind seemed to have been clarified by more red wine than my personal medical advisor would endorse. 'It is all about demand and supply', I opined. 'There are too many people chasing to few jobs. There is too large a supply of mass produced goods, like motor cars and television sets, and prices of these items and others like them are forced down, or at best do not rise. Assets, on the other hand, are in shorter supply.  As central banks throw money into the system, it does little to raise the demands for labor, or cheap mass produced consumer goods, but does a lot to boost demand for relatively scarce assets.  Think houses in Sydney or Melbourne, New York or London, shares of Australian banks, blue chip shares everywhere, except for the present shares of mining companies like Rio and BHP, Vale or Shell.'

We found our taxi, despite some trouble with a work crew that was repairing Lygon Street in the dead of night - another sign of the times. As we were driven to our home in Melbourne's leafy Eastern suburbs by a nice man from India, we discussed the present overproduction of engineers in Australia, hard on the heels of a massive oversupply of young lawyers and indeed just about the output of any university discipline one can imagine.  We had heard earlier that, in China, young people are being encouraged to train for trades, there already being too many young people trained in the professions by universities.

In the cold light of day this morning, as Henry headed to the Epworth hospital for a scheduled MRI of his right knee, he reflected this is what he had been trying to explain for some time now. The best attempt so far is available here, with a nice picture. But the conjecture in both the article and the nice picture has yet to be proved.  That is the challenge still before us.

Saturday Sanity Break, 11 April 2015
Date: Saturday, April 11, 2015
Author: Henry Thornton

Henry's favourite journo, Grace Collier is at it again.  (Ms Collier seems only to write when she actually has something important to say. How good it would be if all journos acted that way.  But I digress.) She says: 'I hate to bring down the national vibe of the moment and interrupt this “let’s find some rich bastards who should pay more tax” hunting collective, but this country does not have a revenue problem, it has a spending problem. And by the way, those rich people we think we can chase down rabbit holes and fleece, they are already paying most of the tax.

'Too many of we perfectly capable types supplement our household budgets with taxes taken off the rich. We have done so for many years. Well, times are tough and the gravy train has screeched to a halt. But instead of getting off with dignity and walking on our own two feet, we are staying on board and demanding someone else be found to get it going again.

'Many of us must learn how to give back the benefits we have been taking for granted. While we are at it, we should probably mind our manners — this country needs people who know how, and are willing, to create wealth. Instead of holding them up as examples of evil, we should thank them for living here and ask them if they can think of ways we can attract some of their clever and wealthy friends. Blasphemy, I know. I expect to be hunted down and burned at the stake'.

Read on here.

The rest of the economic news is so depressing.  Iron ore prices keep falling, Sydney and Melbourne house prices keep rising and youth unemployment remains a national disgrace.  But most of the excitement this week concerned the RBA's failure to meet near universal expectations of another rate cut. The smarter commentators are nearly all agreed that the only lasting cure for Australia's economic ills involves thorough economic reform. 

It is often asserted that true reform will only come when there is an indisputable catastrophe. We are headed to economic catastrophe, dear readers, so keep telling your favourite pollie to get off his/her derriere and start reforming all aspects of our economic framework. While you are at it, ask said Pollie if he/she knows the capital sum required to support his/her superannuation payout and those of senior public servants.

Here is a blueprint.


Henry's parents ended their lives as struggling pensioners.  Their view was typical of their generation.  They would almost prefer to die than accept any help from the state, or for that matter from their children.  Sometime in between that generation and now almost all of society has embraced the culture of entitlement, an issue Joe Hockey tried but failed to get on the national agenda. Henry respectfully asks the Treasurer to try, try and try again, another cultural characteristic that seems to be lost in the haze of sugar hits from handouts, interest rate cuts and reform backflips.

This week Smokin' Joe got onto the more promising  subject of clawing more tax out of bloated multinational firms that (gasp!) legally avoid paying tax in Australia by clever use of so-called 'marketing hubs' and even more devious constructs. Henry's take on this is here.

If you missed last week's expose on superannuation for pollies and senior public servants, click here. Why has no respectable jouro covered this vital point?

Memo journos: Mrs T believes the pollies have quietly dropped taxing 'rich people's' super so the can of worms pionted out here last week does not get opened.

On a lighter note, Fiona Prior has been to the movies and reports on Cinderella here. 'If you are the parent or grandparent of little ones sure as climate change, Justin Bieber ending up in rehab and Kym Kardashian’s buttock’s exploding (OK, this one is more wish than certainty:) you will see Kenneth Branagh’s Cinderella'


Caaaarlton! travelled to Perth to play the Weagles on their home ground last night.  The Weagles were said to lack a backline for this game but, as one wag put, it Caaaarlton! lack a forward line, so it should have been a fair contest.  As it happened, Caaaarlton! was spanked with Josh Kennedy, the man we swapped for Juddie, kicking 10 goals.  Judd himself was brilliant in the first quarter but like the whole team faied to do much after that. Judd's excuse was being shadowed by a young Weagle who may just have found his role in the process.

Henry is reflecting bitterly on Caaaarlton's leadership blunders.  For example, we sent our then no 3 ruckman, Sam Jacobs, to Adelaide, where he has become one of the best in the land and we now have no effective ruckman.  We sent Eddie Betts in the same direction, where he is playing brilliantly. Our only power forward, Levi Casboult can take pack marks as good as anyone in the game, but cannot kick straight. It's just an art to be learned like anything else Levi.  Or get Tuohy to stand behind you and handball to him as he goes past.

Also from Perth, we learned last week that: 'Henry Thornton's remarkable spell on the opening day in Perth gave Australia an immediate advantage in the first youth Test.

'Thornton, the 18-year-old from Sydney, took 4 for 17 in 13 ... dismantling England's top order and leaving the tourists with work to do to get back into the match.

At one stage England were reduced to 11 for 4, with Thornton rampant after three wickets in an opening spell'.could this lad be a distant relative, or the accidental offspring of an illicit encounter in the home state of Australia's fast bowlers?

Vale Richie Benaud

It is geatly sad to learn that the great Australian cricketer, Richie Benaud has gone to a better place. Tony Abbott has offered Richie Benaud’s family a state funeral, saying his death is the “greatest loss for cricket” since Don Bradman died in 2001, Rosie Lewis reports.

'The beloved former Australian Test cricket captain, selector and commentator, has passed away at 84 after a battle with skin cancer.

'Mr Abbott said Benaud had been “the voice of cricket” since the 1960s and that today Australia had lost “an icon”.

“There would be very few Australians who have not passed a summer in the company of Richie Benaud,” the Prime Minister said.

“He was the accompaniment of an Australian summer. His voice was even more present than the chirping of the cicadas in our suburbs and towns and that voice, tragically, is now still.”

'Mr Abbott said the nation would remember him with “tremendous affection” and also recalled his “extraordinarily successful” time as Australian cricket captain'.

Image of the week

To be provided

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