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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.




And the rich get richer ...
Date: Monday, November 18, 2013
Author: Henry Thornton

In many western nations, over 50 % of the wealth - which is rapidly growing - is owned by a tiny percentage of the population.


Rampant asset inflation is stretching the wealth and income gap between the richest 1 (or 10) per cent and people at the bottom of the wealth and income ladder.


Now Fed chief (subject to confirmation, which seems a done deal), Janet Yellen, has indicated that she will not begin the 'taper' until the US economy is undergoing a strong recovery.


This is despite Ms Yellen's former criticism of Alan Greenspan's easy money policies and early recognition of the damaging American housing bubbles that ushered in the GFC.


The lady says there is no sharemarket bubble. As the Weekend AFR's editorial said, 'even major investors who have gained greatly from the markets' rise ... have expressed concern in various ways that QE is not working for the wider economy as intended: it is simply spinning its wheels as it pushes up asset values without creating a comparable amount of real economic activity'.


Expansionary fiscal policy has been used to the point where there is real concern that excessive debt levels will limit developed nations' ability to maintain government programs, and this will be doubly true when interest rates begin to rise, as they inevitably will.


Extraordinarily expansive monetary policy may have staved off a far more serious downturn - this is arguable - but is now laying the basis for a burst of goods and services inflation that could undo the benefits of thirty years of common or garden inflation. Booming asset inflation is making rich folk richer but the 'trickle down' is imperceptable.


Continued US/Eurozone/Japanese monetary expansionism is helping to keep the Australian dollar too high to allow balanced economic growth and the Reserve Bank has given up except for efforts ro talk the dollar down. The vehicle industry is just about ready to close down in Australia, and with it will go the futures of many small businesses and a vast number of jobs. Here is the simple analysis, but this is a very big question that no-one in a leadership position wants to confront.


If the Aussie dollar did crumble, the big question would be how to limit the flow-through effects so that Australian business became internationally more competitive.  This is the second big question that no-one wants to confront. although slowing wages growth suggests market forces are moving slowly in the right direction.


The international brotherhood ('personhood' may be a more accurate description) of central bankers show little sign of the angst they should be suffering. So its on with the show. Henry will stay long shares and real estate and hope the eventual crash can be avoided - as described here - of if not avoided is not as powerful a crash as many people are beginning to fear.


Saturday Sanity Break, 16 November 2013
Date: Saturday, November 16, 2013
Author: Henry Thornton

Mrs Thornton this weekend has disturbed Henry's normal routine, damned inconsiderate of her, it must be said - by requiring surgical intervention to remove a troublesome gallbladder.


The night before this disturbance, Henry and Mrs Thornton attended a grand eating and drinking occasion at Henry's favourite gentlemen's club. As well as a grand speech, members provided a revue which was not half bad, and got better as wine was consumed by both players and watchers. In a short break, Henry's new dining companion, (innocent spouse swapping was going on between the courses), the lady-wife of one of Henry's pals got stuck into him on the matter of gender imbalance among the membership of Henry's club, the institution whose hospitality the lady was so obviously enjoying.


Henry mentioned that he had intervened (weakly) in support of efforts to even up the imbalance during the great debate that raged over this matter some years ago. 'Perhaps the Governor-General could be offered a place as an honorary member', Henry suggested, 'or the Chair of BHP if in some distant future this post is held by a lady'. 'Good for you' said the lady-wife. Basking in the glow of this compliment, Henry offered to provide the arguments against gender balance that had prevailed in that recent discussion. 'Think of this place as a men's shed,' Henry suggested, 'a place to escape from the world of commerce, politics or, frankly, the need to interact appropriately with (ahem) ladies'. Henry's interlocutor abruptly arose and said 'I am going to vomit. I have to find the loo'.


In fact, said lady-wife merely went to the other side of the table to instruct another lady-wife to swap places with her. Naturally Henry was shocked, and others who had heard the story have offered sympathy. But all this women trouble has put Henry into a slightly jaundiced mood on the subject of gender imbalance. 


Normal transmission will be resumed when Henry has recovered from this inexplicable and disturbing incident.


Kulture


Worst still, Fiona Prior enjoys a night without men at Sydney Opera House, viewing the Australian Ballet's production of La Sylphide after dining at Guillaume at Bennelong.


In the meantime, Henry's most read blog after a few weeks for 2013, destined to hold the year record, may be accessed here.  It features the same image as that previous 'best selling blog',  which seems appropriate following Henry's tale of the consequence of gender imbalance in a private club.


Image of the week.


Multinationals baulk at cost of doing business Courtesy The Oz


Pushing back the boats
Date: Friday, November 15, 2013
Author: Gary Scarrabelotti

For Indonesia’s sake, let’s hope its government does not make the same mistake that the Australian Labor Party, the Greens, the ABC, SBS and the Fairfax press have made about the man who is now Prime Minister of Australia.


Last week Indonesia refused to take back asylum-seekers picked up at sea by an Australian vessel. Apparently this was the third time out of six incidents. These are not prudent moves. Indonesia should resist the temptation to play games with Australia over asylum seekers now that Tony Abbott is Prime Minister.


Should anyone in Jakarta feel coming over them an itch to use the people smuggling business as a way of making mischief for this country, then they would be wise to pause and consider: Who are we dealing with now?


I tried to give a partial answer, for an Australian audience, to just such a question in May 2012 with a piece entitled “Comes the day, comes the man”.


The key paragraph – in so far as it sought to penetrate Abbott’s psychology – was this:



“When he served as John Hewson’s press secretary, Abbott and his growing family lived in Canberra. During those days, there was a time when he and I played golf together on the West Belconnen course. Each outing I got a thrashing.  It wasn’t fun. So, when the demands of his job put an end to our forays onto the grassy sward, I was relieved. Abbott did not just play better golf than I — which is not saying much — he played with a relentless will to win that operates like a battering ram on the psychology of any opponent. I understood then what the punch drunk ranks of Labor MPs and their advisers still do not understand …”


Among the Indonesian political elites, there is, I’m told, a fondness for golf. So I think that they’ll get the point.


Abbott will always be courteous, respectful, and generally modest in his manners when dealing in international affairs — above all with Indonesia. His mode of address does not, however, signify a weakling. Abbott plays to win. He can be patient. He can endure pain. He has trained himself to play the long game. He has disciplined himself to receive setbacks. He uses them, instinctively, as opportunities for deeper reflection and as a spur to greater endurance and wisdom. This is why he is Prime Minister today and those who mocked him have tasted defeat.


Indonesia is potentially a very powerful country of great human and material consequence. But it is not there yet and it cannot afford to turn Australia into an aggrieved competitor — especially an Australia led by a man of serious intent and genuine toughness.


More here. 


Suck it up, sunshine, #2
Date: Thursday, November 14, 2013
Author: Henry Thornton

If the USA pursues an extremely expansionary monetary policy, which is completely justifiable from its perspective, the problem is this spills over to the rest of the world, which experiences an exchange-rate appreciation as capital flows to earn a higher yield.


This is the guts of Guy Debelle's 'Suck it up, Sunshine' speech last week in Washington, as reported today the the veteran economic commentator Max Walsh.


(For obvious reasons, Henry is deeply sympathetic to old blokes having a red hot go. And also for crusty old journos giving succor to the RBA, whose officers occasionally notice such manna from journalistic heaven.)


Mr Debelle continues: “Even if the global portfolio reallocation that comes about from this is small from the US perspective, it can be large from the point of view of a small, open economy that is the recipient of these flows.


“In the emerging market world, the concern is often that the capital inflows will become capital outflows. In Australia’s case, an exchange rate appreciation that is not in line with fundamentals, if persistent enough, can lead to Dutch Disease [a hollowing out of those economic activities that are, or can be, exposed to offshore competition].


“This is the fundamental problem, be it a Trilemma, or Dilemma, as Hélène Rey labels it.


“But you might say, isn’t a strong US economy good for the rest of the world? Or, in other words, suck it up, sunshine".


This report, with quotes from the actual speech - available the RBA site, it must be said after quite a delay - suggests Mr Debelle's career is still on track.  Indeed, in an age of increasing openness in all matters, it may already have been enhanced.


Mr Walsh suggests the speech conveys a sense of frustration that seems to be building at the bunker at the top of Martin Place: 'It wasn’t just the content, which was ripe with significant implications. It was also the tone of frustration that caught the attention.


'In this, he [Mr Debelle] reflected the current mood of monetary and economic leaders around the globe. Despite extraordinary measures of stimulus, the general economic disposition around the globe remains dispirited'.


Australia's economy and policy settings have been well-served by our floating exchange rate and focus on containing goods and services inflation.


But when a currency like the Aussie dollar overshoots on the upside, and remains stubbornly high, it creates what is known as the 'Dutch disease' in Holland and as the 'Gregory thesis' in Australia, or at least at the ANU.


'According to the OECD, using a gauge of purchasing-power parity, the Australian dollar is 27 per cent overvalued against the greenback.


'According to Debelle [reports Mr Walsh], this has posed an interesting conundrum in Australia in recent years.


“We have,” he told his Washington audience of central bankers, “been experiencing a ‘boom with gloom’. We have had the difficult balancing act of trying to tell foreigners that the country is not as good as they think it is, so stop sending us so much capital, while, at the same time, trying to convince the locals that the economy is not as bad as they think it is. Now, that’s a real dilemma.”


Mr Walsh concludes by adding further gloom to the story: 'But, so far, there has been no alternative strategy presented that addresses the flaws in the present system, which load us up with a vastly overvalued currency for what could be a considerable and damaging time'.


Henry wishes to point out to Messrs Walsh and Debelle that a respectable alternative has been proposed, and is discussed in Henry's various articles on monetary policy for 2013, which can be accessed here.


The first article for 2013 sets out the framework, including Milton Friedman's 'monetary policy cannot serve two masters' conclusion that has effectively been lost in the babble of lesser monetary economists since 1963.


As a parent, one is occasionally frustrated when one's children travel on paths that their more cautious parents know are likely to lead to trouble, or at least (one hopes) useful learning experiences.


Henry occasionally feels frustration when his intellectual offspring now running the RBA fail to see an obvious point, and ignore the wisdom of the relevant elder - Friedman, if not Thornton.


Today's advice? 'Suck it up, Glenn, and address your frustration (and the pain of other Australians) with a bold policy initiative'.


Further reading


The text of Guy Debell's remarks is available here.


Max Walsh's article is linked here.


 


The economy and the outlook
Date: Wednesday, November 13, 2013
Author: Henry Thornton

Hints that the US Fed might begin to end its monetary policy 'taper' buoyed the US dollar and therefore reduced the Australian dollar.  One assumes the RBA team quietly celebrated, although our monetary warriors will be well aware that the dollar has a long way to fall before the basis of 'balanced growth' is restored.


Maurice Newman, Tony Abbott's business advisor in chief, has delivered a zinger of a speech. Mr Newman, according to the AFR's Chanticleer, delivered the speech that the Prime minister might have delivered if he was allowed to tell us all what he really thought. 'Newman obviously believes it is his duty to shout from the rooftops how bad things are in Australia following six years of Labor Party rule'.


 Courtesy AFR


Meanwhile, in October, firms reassessed their confidence on the outlook as business conditions again disappointed. Capacity utilisation fell sharply – especially in manufacturing, construction, mining and retail – despite low interest rates and improved housing and equity markets. Other forward indicators deteriorated, reducing earlier gains and implying a continuing soft outlook for domestic demand. Price inflation outpaced by costs growth suggesting margins asre still tightening. This is the summary from Henry's banker. More from the mighty economics team at NAB here. 


China remains on track to achieve its growth target for the year with domestic demand holding up in October, while exports picked up from the disappointing outcome in September. Industrial production was slightly better than expectations for the month, while retail sales and investment were slightly below. Regulatory distortions to trade data are making it difficult to gauge the health of export manufacturers, but solid industrial activity and a pick up in demand from major advanced economies is a positive indication. Demand from these economies is expected to gradually improve.


The acceleration in activity since mid-year is expected to lose some steam going into next year as efforts to rebalance and restructure the economy gain more traction – we should get more guidance on how these reforms will unfold following the 3rd Plenary Session of the 18th CPC Central Committee, which is currently underway. We have maintained our forecast for 2013 at 7.6%, with growth decelerating to 7¼% next year. Despite higher headline inflation, temporary price pressures suggest little incentive for the central bank to materially change its stance on monetary policy. We expect the central bank to continue ensuring adequate liquidity for domestic banks while maintaining tighter overall monetary conditions to discourage speculative investment and rapid credit growth. Bouts of tight liquidity could prompt a cut to reserve requirements, but the central bank has been reluctant to do this so far, and indications that foreign capital is returning will likely add to their reluctance. Therefore, reserve requirements and benchmark interest rates are expected to remain stable.


More here.  


In October, indicators of global economic activity were mixed, casting some doubt over signs of recovery in the advanced economies that emerged in previous months. The upturn is still under way, but the pace of industrial growth and business sentiment in some big advanced economies has stopped improving. Activity in emerging economies has also varied.


Volatility has remained a feature of financial and commodity markets given political uncertainties and hesitation over the timing of US Fed tapering.


Oil prices were lower on balance in the month from the dissipation of geopolitical risks in the Middle East and data on rapid crude stocks accumulation in the US. However, WTI was disproportionately weighed down by the political uncertainty in the US while Brent was supported somewhat by renewed unrest in Libya. As such, the differential between Brent and TWI is wider than at anytime since March this year.
Steel input markets have been held up by improved activity in China, but we are entering a seasonally soft period for construction which should keep prices relatively range bound for the rest of the year. Thermal coal prices have now lifted slightly from their recent floors.


Base metals prices rose modestly in October, helped by stronger than expected growth in China in the September quarter as well as reduced fears of a potential US economic meltdown.
With the market currently anticipating no change to the Fed’s asset buying program until early 2014, investors seem reasonably comfortable holding gold in their investment portfolios, providing some support to prices in the second half of October. Nonetheless, the average price was around 2½% lower in October.


More on commodity markets here. 


Overall, our forecasts for commodity prices have been left largely unchanged. Our near-term forecasts for some metals were raised slightly, while we have also widened our forecast for the WTI-Brent spread. We continue to expect only a modest recovery in demand over the forecast horizon, but the recovery is expected to be bumpy, ensuring ongoing volatility in commodity markets


Global growth expected to rise from 2.9% in 2013 to 3.5% next year. The national accounts and business surveys show a quickening pace of growth in the big advanced economies with the UK and Japan the standout performers. The emerging economies present a mixed picture with solid outcomes in  China, a disappointing record and outlook for activity in India and only moderate growth across Latin America and East Asia.


Australian GDP growth to soften to 2.3% in 2013, rising to 2.4% in 2014 and 2.9% in 2015. Unemployment to nudge 6% by end 2013 and reach 6½% by end 2014. Given the soft outlook, core CPI expected to edge down to 2.3% by end 2013 and 2.4% by end 2014. Rising asset price trends and higher confidence likely to see RBA wait to see how labour market trends play out before cutting again in May (previous cut expected in February).


More detail on NAB's forecasts here.


Readers interested in another, mere elegant but similar view, may caere to read the RBA's latest economic rundown.


Deflation and asset inflation
Date: Monday, November 11, 2013
Author: Henry Thornton

'WHAT is a central banker’s main job?' asks the Economist. 'Ask the man on the street and the chances are he will say something like “keeping a lid on inflation”. In popular perception, and in their own minds, central bankers are the technicians who squeezed high inflation out of the rich world’s economies in the 1980s; whose credibility is based on keeping it down; and who must therefore always be on guard lest prices start to soar. Yet this view is dangerously outdated. The biggest problem facing the rich world’s central banks today is that inflation is too low'. (Read on here.)


 Courtesy The Economist


The Economist this week writes about the 'perils of deflation' and warns that both the USA and Europe seem to be slipping into deflation, the problem that afflicted Japan for two decades after its asset bubbles burst from late 1989.


'As Japan’s experience shows, deflation is both deeply damaging and hard to escape in weak economies with high debts. Since loans are fixed in nominal terms, falling wages and prices increase the burden of paying them. And once people expect prices to keep falling, they put off buying things, weakening the economy further. ...


Ultra-low inflation or outright deflation 'makes both government and household debts harder to pay off. And low inflation makes it tougher for uncompetitive countries within a single currency to adjust their relative wages. With Germany’s inflation rate at 1.3%, Italian or Spanish firms need outright wage cuts to compete with German factories.


'What’s more, too little inflation will undermine central bankers’ ability to combat another recession. Normally, during a period of growth bankers would raise rates. But policy rates are close to zero, and central bankers are reliant on “unconventional” measures to loosen monetary conditions, particularly “quantitative easing” (printing money to buy bonds) and “forward guidance” (promising to keep rates low for longer in a bid to prop up people’s expectations of future inflation). Should the economy slip back into recession, the central bankers will find themselves unusually impotent'.


All these are good points. They make a case that super-easy monetary policy is legitimate. Super-easy monetary is creating asset inflation, which is no great surprise. But there is a point not made by the Economist.  As Henry's research shows, super-easy monetary policy usually creates asset inflation. If goods inflation is subdued, as it was by goods price controls in the US economy in the second part of WWII, easy money will produce asset inflation far greater than it otherwise would.


Indeed, even with monetary policy apparently under control, (eg as judged by growth of the money supply), times when goods or goods and services inflation is subdued tend to be times of massive asset inflation.  Examples from Henry's research - available here - are the USA in the 1920s, the 1950s and the 1990s.


Current super-easy monetary policy and low goods and services inflation bordering on deflation may be uncharted waters, and central banks need to be especially careful.


Luckily, Australia's RBA has not descended into the region of super-easy monetary policy, but faces (with low goods and services inflation) rising house prices and a stubbornly high exchange rate.


Beware the asset inflation, gentle readers.


Saturday Sanity Break, 9 November 2013
Date: Saturday, November 09, 2013
Author: Henry Thornton

RBA downgrades forecasts; leading journos question future of the motor vehicle industry; banks announce record profits; Sydney house price boom; $A remains greatly overvalued; ATO pursues a genuine baddie; Indonesia grumbles about alleged spying; and parliament resumes. It's all happening folks, in the former 'miracle, glass half-full, 'suck it up sunshine' economy'.


Sadly it seems as if the global crisis has arrived downunder, like the radioactive cloud in 'On the beach'.


Treasurer Joe Hockey has announced that incomes may actually (gasp!) fall if Australian productivity does not surge.  Of course, Mr Hockey has yet to announce the new policies that will miraculously raise productivity growth tby the large amount needed, but these will surely come in due course.


Here is the line of argument offered by Henry when a small group of non-economists were discussing the future of Qantas recently.


'Australia's living standards, and general cost levels are, say, 30 % higher than those of competitor nations.


'Therefore, unless Australians are prepared to pay 30 % more for the privelege of flying Qantas, the airline is doomed'.


In response to the cries of outrage from representatives of other industries under threat, Henry continued.


'Pick your industry; in agriculture and mining we are still competitive, essentially because productivity is sufficiently high that the cost differential can be overcome.


'Industries that cannot match this performance will all wither and die'.


So what other industries have a chance? the non-economists cried.


'Our best chances are in medical research and treatment, tourism, education and sport, although the last of these is fading before our eyes as the cricket team gets belted, the Rugby team can't buy a win and the indigenous all stars get flogged by the Irish in the hybrid game that is definately not played in heaven.  Seeding and reforming these industries should be the aim of a sensible government, while letting all the others die as the natural forces of globalisation do their thing.


'Personally, I'd add defence to the list of industries that deserve help.  The government is the monopoly buyer (now that the bikie gangs are being suppressed) and encouraging a robust skilled manufacturing industrial base will be facilitated if defence kit is purchased from Australian firms and maintained here'.


The discussion sputtered out, but it is the debate cabinet should be having, and perhaps has been having.


Blainey awarded University of Melbourne top honour



Melbourne University announced this week that: 'Distinguished Australian historian Professor Geoffrey Blainey will be awarded the University’s inaugural Tucker Medal, in recognition of his substantial contributions to the University, the Faculty of Arts and to public life'.


Those who know the story of the University's earlier treatment of Professor Blainey will cheer quietly.


AFR Scoop


Rowan Dean today explains the case of the missing young women 'found wandering dazed and confused through the ABC's Lateline studios last week'.


'Believed to be called Tanya, the blonde female known to the public as ‘the lost girl’ has been desperately trying to find her way onto the front page of every newspaper and weekend magazine for the past few weeks.


'Media agencies have been trying to establish the woman’s identity since she was found in an overtly distressed state screaming abuse at the TV screen on a Saturday night exactly two months ago.


'Originally thought to be an undergraduate student because of her unblemished skin and adolescent mindset, authorities now believe Tanya is in fact much older and may indeed be the deputy leader of an obscure Australian political party known as Labor'.


Read on here.


Reflecting on this matter, and the clearly excellent state of australia's cartooning industry, Henry wishes to add 'Satire' to the list of industries to be encouraged by Australian governments.  Of course, no actively different behaviour is needed - so long as Australian politicians continue to act as they have been, our satirists will need no further help.


Footy'n'cricket'n'stuff.


The pestiferous Poms are complaining at the weakness of the bowlers in the Australia A team, plus the inclement weather in Hobart, as hindering their preparation. Surely next time they visit we can arrange a game on Bruny Island, with a rough grass'n'tussock pitch and Lillee'n'Thompson opening the bowling.


Meanwhile, competition for places in the Australian cricket team has hotted up, prompting all right thinking Aussie economists to smile at the virtues of competition.


The much maligned Rugby team gets its chance to be flogged again, this time by the pasta eaters of Italy. The Rugby League team is doing well so far in the world cup, and wisely being modest in its expectations. Footy, as opposed to the round ball game called 'Futball', is only in the early stage of season 2014.  Fresh light has been thrown on the sacking of the St Kilda coach this week.  Coach Watters is apparently vertically challenged, and player unhappiness with his methods resulted in the hiring of two even more vertically challenged entertainers. Setting fire to one of the entertainers was apparently a politically incorrect action designed to symbolised what the players thought ought happen to their then not-much-loved-coach.


Image of the week (Courtesy AFR)



Suck it up, sunshine
Date: Friday, November 08, 2013
Author: Henry Thornton

This insensitive advice was allegedly (according to the AFR, attributed to Bloomberg) offered to anyone who was listening at an IMF conference overnight. It is attributed to newly promoted (presumably) 'Deputy governor' of the RBA, Guy Debelle. To further advance the young man's career, the AFR's engaging photo shows Mr Debelle's film star visage, slightly wild hair and non-white shirt.



Time to get the image smoothers'n'spinners in, Mr Debelle, and to learn the power of the clever crack.


(Policeman judged to be young used to be the sign that the perceiver was getting old.  Perceiving 'Deputy governors' of central banks as young blokes presumably carries a similar message about the ravages of the old bloke with the sythe and the loudly ticking watch.)


With many others, two of Henry's about-to-be graduated offspring cannot find a paying job for the year ahead.  The good news is that one has won an unpaid 'internship' and the other is pursuing (further) higher ed.


Henry's offspring will be fine, but there are many Australians with far less opportunity including victims of an exchange rate that has been far too high for far too long.  Farmers, junior miners, people employed in tourism, manufacturing and small businesses of all types are presumably today sucking it up and reflecting that the glass half-full that was officialease for the state of the economy earlier this year is suffering fast evaporation.


Was Mr Debelle misquoted?  Henry's visit to the ever-reliable RBA website shows no speeches by the 'newly promoted' (presumably) 'Deputy governor' since August 16, when Mr Debelle was described as  Assistant Governor (Financial Markets).  One hopes sincerely that Mr Debelle survives this verbal slip, if slip it was.  In Henry's day as a start a verbal flogging would have been administered by men who knew how to hand out a good tongue-lashing, and possibly the deadly word 'unsound' would have been inscribed on the perpetrator's file.


As to the reality of the Australian economy, now it seems the RBA has reached the end of what can be achieved with subtle moves of cash rates and is resorting to open mouth policy. 'Suck it up', 'in case you failed to notice the glass is half-full' and 'the dollar is higher than it should be, wait a bit and all will be well'.


Gor blimey, Gov'nor Glenn, what if the USA keeps super-easy monetary policy through 2014, the green shoots of confidence in Australia curl up and turn drought-stricken again and this time next year there is even less water in the glass to be sucked up?


There is another way, Glenn and Guy, and you can read about it here.


A reader sent the following snippet: 'Thought this was the funniest thing I read today, from an esteemed central banker, Mr. Mario Draghi.


'Mr. Draghi rejected comparisons to Japan. "The fundamentals in the [euro zone] are probably the best in the world," he said, citing reduced budget deficits, low inflation and high current-account surpluses.


'Can he possibly be serious!'


'Suck it up, Greeks, Italians, Spaniards', other lesser people without the law'.


The report by Macrobusiness is here, followed by a number of comments.


Unemployment surges; jobs dry up.
Date: Thursday, November 07, 2013
Author: Roy Morgan Research

In October 2013 an estimated 1.33 million Australians (10.7% of the workforce) were unemployed. This is up 36,000 (0.3%) from last month. The Australian workforce* was 12,465,000 (virtually unchanged – down 2,000) comprising 7,417,000 full-time workers (up 4,000), 3,715,000 part-time workers (down 42,000) and 1,333,000 looking for work (up 36,000) according to the Roy Morgan monthly employment estimates. These figures do not include people who have dropped out of the workforce and given up looking.


Among those who were employed 1,077,000 Australians (8.6% of the workforce*) were under-employed, i.e. working part-time and looking for more work. This is 88,000 more than a month ago (up 0.7%).
In October in total an estimated 2.410 million Australians (19.3% of the workforce) were unemployed or under-employed. This is up 1%, or 124,000 from September, and much higher than 12 months ago in October 2012 (up 272,000, 1.5% from 2.138 million).


Of those looking for work an estimated 726,000 Australians (up 119,000) were looking for full-time work, while 607,000 (down 83,000) were looking for part-time work.


The latest Roy Morgan unemployment estimate of 10.7% is a substantial 5% more than quoted by the ABS for October 2013 (5.7%) – the Abbott Government needs to immediately establish a working committee to demand the ABS release the true and complete unemployment figures each month.


Gary Morgan says:


'Australian unemployment has risen to 1.33 million Australians (10.7%, up 0.3%) only a month after Tony Abbott was elected as Australia’s new Prime Minister in September - this is the highest since March 2013 when 1.37 million Australians were unemployed. An additional 1.08 million Australians (8.6%, up 0.7%) are under-employed meaning a total of 2.41 million Australians (19.3%, up 1.0%) are either unemployed or under-employed – the highest since February 2013 (2.47 million).


'Australia’s high level of unemployment and under-employment following the Federal Election means the new Coalition Government must undertake urgent reforms to restore the confidence of Australian businesses in the Australian economy to ensure the ‘drivers’ of employment are pointing in the right direction'.


David Uren, the morning after, using the (less accurate) ABS numbers.


'IT IS harder for the unemployed to get a job now than at any time since the 2000 slowdown, and the deteriorating labour market is set to dominate economic policy for both the Reserve Bank and the new government for many months to come.


'The cyclical softening in the economy as the resources investment boom comes to an end is compounded by the ageing of the population, which now has baby-boomers retiring in large numbers.


'For a long time, the monthly labour force reports have been surprising for their resilience in the face of dismal business surveys showing companies cutting back their hiring and falling numbers of job advertisements.


'The outgoing Labor government was still able to go to the election claiming there was "almost full employment". Treasury analysis has shown that when unemployment drops below 5 per cent, labour shortages start pushing wage costs and inflation higher.


'However, the labour market has been slowly weakening since April last year. Until about February this year, the jobless rate was creeping higher by about 0.1 percentage points every three months. Since then, the pace has picked up to 0.1 percentage points every two months.


'Hiring has stopped, at least in net terms. There has been no increase in the total number of people with jobs since February'.


Read on here.



RBA grapples with `dilemmas', ordinary Australians suffer
Date: Monday, November 04, 2013
Author: Henry Thornton

The RBA governor has said he cannot deal with the excessively strong exchange rate, but that eventually falling commodity prices will do the job for him.


With his fellow senior officers, Mr Stevens has has dismissed thoughts of a bubble in housing, but at the top end of some markets, especially Sydney's rich belt, bubble-like signs are evident to rich people, or ordinary people who read newspapers.


Journalists are at last (at last!) discussing the dilemmas that are worrying our friends in the bunker at the top of Martin Place.


With appropriate modesty we point out that our regular column has used the words 'dilemma' or similar quite often in the past year, and also that we have articulated an appropriate way for Glenn Stevens to approach these dilemmas.  Here is the evidence.


Our tagline is that 'monetary policy cannot serve two masters', appropriated with attribution from the master monetary economist of the twentieth century, Milton Friedman.


His point is that monetary policy must focus on restraining goods and services inflation and guarding the economy from the ravages of financial instability.


Other objectives need actions other than the subtle movement of interest rates which takes most of the time of central bankers. (What they do after their morning tea is mysterious to most people, which is why central bankers do not often invite critics, or even old friends who occasionally offer advice, into the bunker.)


Here is Australia's current position.


The economy is sluggish, though the latest job ads (a highly reliable indicator that has been falling for some time now) may finally be stabilising. Jobs are hard to get and an oversupply of university graduates, and of older, highly experienced workers, is making jobs even harder to get for ordinary Australians.


Inflation is low but may be rising.  If there is a big and sudden fall in the value of the Australian dollar, inflation will quickly exceed the RBA's target zone. If our central bankers think things are difficult now, imagine double digit inflation with double digit unemployment to follow.


Interest rates may already have gone a bit lower than is wise, partly in the hope of reducing the Australian dollar, which seemed to be working for a time but the RBA has now thrown in the towel.


The trouble is, we have been told, the pesky American central bankers keep deciding not to begin to restore a sensible monetary policy, and the resulting global boom in asset prices is holding the Australian dollar up and may drive it higher again.


The RBA needs help.  Australian monetary policy alone cannot solve the problems posed by global asset inflation.


As our better economists have said, one approach to an overvalued exchange rate is to introduce new economic policy reforms to help companies to cope with a high dollar that is greatly hindering efforts to export and to compete with imports.


Here is the rub. No practical and feasable program of economic reform could do more than raise Australia's productivity by a few percent each year.  The Abbott government has at least stopped the productivity reducing policies of the late, unlamented Labor govenment but will hasten methodically with its reform program.  Labor is committed to doing its best to prevent  the axing of the carbon tax and would certainly scream with rage if the Abbott government tried to improve the working of the labor market or attacked fiscal spending sufficiently to create the real hardship in Canberra.


It is a sad fact that it is only an actual economic crisis, or plausible fear of a real crisis, that gets big reforms done quickly.  Crises also focus business leaders and ordinary workers on the main game of improving productivity, but this is almost always accompanied by a powerful and damaging increase in unemployment.


This is why I believe we need to fix the currency problem by imposing a modest across-the-board tax on capital inflow. The skeptics point out that Australia is a capital importing nation and cowardly skeptics imagine that global investors would cross Australia off their investment lists if we imposed such a tax.  'Rubbish' is the correct answer to such arguments.


Taxing capital inflow will help to discourage the buying of expensive houses by wealthy people from overseas and rich Australians who play asset booms bravely and well. But, in the next decade or so, house price inflation will only be controlled if there is sensible reform by state and local governments, reforms that allow more people to live in the inner city areas, with higher density housing, faster releases of land for suburban housing and junking of near-useless regulatory blockages by local governments.  Governments also need to find ways to encourage people to live and work in rural towns and cities.  Like economic reform in general, this process will be at best slow and will not be sufficient to solve the problem of house price inflation. The people who oversee Australia's financial system need to introduce some new policies under the heading of 'macroprudential policy'.


Required asset ratios for financial institutions are part of the solution, ratios that flex up when asset booms gather strength and flex down when the booms decline or when overheated bubbles burst.


When the RBA meets today in that large, quiet, board room that seems such a suitable place for quite contemplation or even religious observation (if only a pipe organ with a competent organist were installed), one sincerely hopes that the governor leads his board members in prayer for the wisdom to face their problems (which are the problems of ordinary Australians) honestly and with clarity of vision.


The RBA cannot do more to achieve general reform than to advise quietly and speak generally and not often on the subject.


But the RBA can advise government and should do so in the strongest terms about the urgent need to reform the state of Australia's asset markets by giving it the tools it needs to keep the economy on an even keel while methodical general reforms are planned and carried out.


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