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Henry Thornton - Contributors: A discussion of economic, social and political issues Blogs
Australia - alone and friendless
Date: Thursday, May 20, 2010
Author: Henry Thornton

Good news, fellow Australians, consumer confidence is falling.


I need to explain this controversial statement.


We are by no means the worst example of the consumerist western world, but we are well up there.  Like other western nations, we consume ahead of income and borrow or sell assets to pay for the privilege.


The Melbourne Institute-Westpac index of consumer sentiment in Australia fell 7 per cent in May from April.


A Westpac economist said the survey was conducted after the release of the government's 2010-11 budget a week ago and the Reserve Bank of Australia's 25 basis point rate hike at the start of the month.


Fellow Australians, we are getting the message. Work hard. Consume less and save more.  Reduce debt.


Thank goodness the Liberal Party shares these values. Joe Hockey spelt out some standard Liberal messages at the National Press Club yesterday.


It was left to Finance spokeman Andrew Robb to present the 'nasties', actually savings in government spending, therefore a smaller future burden on taxpayers.


These amounted to almost $50 billion over four years - see summary below.  This is not a bad start, Mr Robb, but you can do better.


There are several reasons to do better.  So we can afford to provide better health services to all Australians.  So we can provide better education to the young people.  So we can afford much better defence of the nation, an essential public service that is not at present convincing.


Plus of course, so that Australia retains the support of international investors, so we do not become the plaything of global investors when times are tough or when, as now, a misguided great big new tax creates a capital flight.  (Why, fellow Australians, has the Australian dollar fallen so far since the mining supertax was announced?)


A theme of recent contributions of both Henry and Sir Wellinton Boote is as follows: 'Australia, alone and friendless: what do we do now?'


All readers are invited to participate...


An offer to publish your thoughts on 'Australia ... alone and friendless' is made here. You should all take up the offer as we want to send the conglomerate of ideas to the wider media. You can disagree or agree; you can suggest problems that you think will impact upon Australia in the future heavily, if not addressed. Succinct is preferable to prolix.


When was the last time someone asked you for your views and offered to publish them? Take this opportunity now. Thousands of folk (mainly in business and politics) will read the offerings. You can use your real name (as Sir Wellington Boote and Henry Thornton do) or think up a snazzy appelation. 


Participate.


We shall publish all contributions (except those that are libellous or obscene).  You are invited to contact Henry here.


Henry.Thornton@HenryThornton.com.


------------------------------------


A Liberal government's budget reforms - #1.


'The proposed cuts dismantle many of the Prime Minister's key priorities, including his computers in schools program, saving $700m; trades training centres being built in high schools (saving $968m); and his GP super-clinics, including recently announced plans for grants to 425 GP surgeries to allow them to improve services.


'An Abbott government would also cut climate change spending, reduce the size of the Green Car Innovation Fund, dump the planned national broadband network to save $18bn, reduce advertising spending and abandon plans to fund reforms in the public service.


'The hit list also included a range of measures that were to be paid for by the RSPT, such as an increase in the superannuation guarantee from 9 per cent to 12 per cent, a reduction in company tax rates and top-up funding for superannuation for low-income earners'.




Inflation (allsorts) high and/or rising
Date: Thursday, July 24, 2014
Author: Henry Thornton

'Inflation', the common or garden variety, means 'goods and services inflation'.  This sort of inflation in Australia has reached 3 %, top of the range agreed between the government and RBA. One can imagine Joe Hockey, newly fired up by the release of his authorised biography, asking 'What's going on Glenn?'


The RBA will be asking itself 'Have we overdone the easing of monetary policy?'  when its bright economists reflect on why interest rates were cut so far. Some brave soul might even say 'Because were were trying to get the bl**dy exchange rate to fall'.


House price inflation seems to be on an unward track. As The Oz reported today: 'The house price boom shows no sign of cooling despite the onset of winter.


'PRICE growth in almost all capital cities in the three months to June has helped the median Australian house price soar almost 11 per cent in just 12 months'. Ouch! House inflation 11 %?


The RBA should be asking itself  'Is this in part a consequences of interest rates too low, as we sought to help stimulate the economy and reduce the bl**dy exchange rate'.


A supplementary question should be: 'Is it time to implement the latest ideas about the need to implement "Macroprudential policy" to contain house prices?'


Then there is share price inflation, continually setting new records despite the great geopolitical risk with the various dangerous global hot spots. 'Nothing we can do about that, governor', the head of Economic Analysis Department might say, 'Share prices are set on Wall Street'.  'But surely the share boom is looking dangerous, a risk to global financial stability, as I hinted in my latest speech', Glenn Stevens might reply.*


'And the bl**dy exchange rate is still too high, decimating the export-oriented trade industries, which Joe Hockey said we should be encouraging'.


There we have it, gentle readers. Mixed up confusion.


* I should note that this speech is one of Governor Glenn's finest. Despite my concerns that the RBA has not yet come to terms with the problems of sensibly influencing the overall economy (and garden variety inflation) and asset inflation, most of the necessary pieces are clearly in the governor's mind, especially when he recognises the role of 'Animal spirits'.


Growing Australia`s Trade Exposed Industries
Date: Tuesday, July 22, 2014
Author: Henry Thornton and friends

The Australian Government has made very clear its resolve to advance fiscal and structural reforms to strengthen the Australian economy. They include the policy areas of infrastructure, taxation and financial regulation. Improvements to labour flexibility and reducing energy and regulatory costs are also seen as critically important.


Four Australians designated as 'The Industry Group' offer recommendations arising out of the current economic environment, including areas that are not so evident, but require urgent attention to ensure the trade exposed industries of the Australian economy can have a sound future.


Governments, Regulators, Industry and Unions have often failed to recognise, understand, or give consideration to the less obvious and often longer term consequences of their decisions and actions, and their impact on Australia’s competitive position.


This is particularly significant when such decisions, as outlined in this paper, lead to long-term operating and capital cost penalties and market constraints, some of which may be difficult to reverse. It is the collective impact of these factors which has been so detrimental for the Australian trade exposed industries. It is clear what Ludwig Erhard had to say about the threat to competitive free markets is as relevant today as it was in his time.


Ludwig Erhard, the Former Vice Chancellor of Germany, writing about “Prosperity through Competition” said “Efforts will only be successful so long as competition is not hindered or eliminated through artificial or legal manipulations.”


Inevitably, it becomes necessary to replace or radically upgrade or expand ageing production facilities to improve productivity and restore a world competitive position. Increasingly however, the logical economicsbased response by business in current circumstances will be a decision not to undertake such major capital expenditure. An adequate return would be unlikely because there appears no realistic prospect that international competitiveness can be restored.


Recent examples of these consequences are the progressive closure of our oil refineries around the coast, rather than their replacement with one or two world-scale facilities, and the closure of alumina refining, aluminium smelting and aluminium rolling capacity. These plants which a decade or so back were at thelow end of the world cost curve could survive periods of global production exceeding demand.


With these plant closures there is also a decline in demand for a range of supporting services.


Other current examples of this substantial hollowing out of Australian manufacturing industry are the reductions in cement and steel manufacture and closure of a number of food processing operations.


Also, some companies have chosen to relocate overseas or have preferred to build new plants overseas.


Industrial development in Australia in the Post World War II years focused on the supply of domestic demand behind tariff protection. Later, countries in the region led by Japan and then South Korea focused on the economic benefits of larger plants to supply not only domestic demand but exports. They were assisted by tariffs and other forms of protection for their local markets, some of which remain in place.


Unfortunately Australia has missed out on a second stage of industrial development, with world-class plants with improved productivity, as a result of the continuing impact of past policies. The failure to gain the benefit of plants with improved productivity is of particular concern. In the report by the Productivity Commission, the Chairman Peter Harris said, “Our (productivity) performance has been significantly worse than that of most other developed economies for more than a decade.”


Decisions against major renewal investment in more productive equipment are made ever more likely when the cost impediments are compounded by low rates of tax-deductible depreciation and the absenceof accelerated write-off to match overseas competitors. This has led to minimum capital expenditure and a focus on immediately tax-deductible maintenance to preserve the status quo as long as possible beforethe inevitable final plant closure.


Free markets have been accepted by policy makers as central for economic growth. Nevertheles ssovereign states, despite statements supporting free markets, are intervening with measures which hinder competition in favour of their national interests and these activities have significance for Australian industryand agriculture.


The trade exposed industries are now operating in a global economy. Markets no longer have a national or regional emphasis but have a global perspective. Specialisation provides gains in productivity but it is the size of markets which enables these gains to create national wealth with opportunities to generate jobs, economies of scale, resources for research and innovation and an increase to the national tax base.


For Australia however, there have been a number of impediments for industry, which have seriouslyconstrained market opportunities and competitiveness.


The full paper is available here. 


Saturday Sanity Break, 19 July 2014
Date: Saturday, July 19, 2014
Author: Henry Thornton

The horrific loss of lives in the air over Eastern Ukraine shows the desperate need for a way to impose the rule of law globally.  Most of my Tea-Party friends (who are against even most forms of national government (until they are mugged or worse) will oppose this idea but can the great majorities in civilised nations continue to suffer attacks of increasing horror by terrorists? While we are at it, one thing Australia can do on our own is to refuse citizenship or even the right to live here to people who explicitly refuse to accept the rule of (Australian) law.


'Multiculturism' is a wonderful concept, but society with a minority of distinctly alien members will eventually fracture, with enormous negative consequences for the great mostly silent majority. Let's start by blocking the return of 'Australian Jihadists' from places where they have been plying their evil trade with an Australian passport in their back pockets. The fact that they are Australian citizens just shows how lax has become our willingness to bestow citizenship. Scott Morrison, let's see how we can tighten up the whole process.


Political economy


What a week it has been for politics and economic policy. Now as well as stopping the boats, the Abbott government has ditched the carbon tax and Bill Shorten has promised to fight on, a promise that is likely to hang round Labor's neck like a long dead sheep. The mining tax is wobbling on its shaky base and seems destined to fall also, if only the swinging Senators can take a fair share of responsibility for Australia's fiscal mess. No chance of Labor helping; in their rush to behave like a third class opposition, Labor members are opposing even reforms they first thought of.


The government's dead wombat is the budget.  It is vital but far from 'tough' but has been badly sold, including the wrong rhetoric that there is a 'budget emergency' and perception that that Aussie battlers are being asked to shoulder too big a share of fixing. There is a serious crisis coming down the budget pike, as we among many others have been warning ever since the Rudd'Gillard'Rudd'Swann government went on its spending frolic. A small budget surplus, and an absense of government debt allowed the Rudd'Gillard'Rudd'Swann government to spend like drunken sailors. Now people say that there is no need to fix the budget since, as a ratio to GDP, Australia's national debt is far smaller than those of major overseas countries.


Budget deficits and high levels of debt are limiting governments everywhere.  Australia's Rudd'Gillard'Rudd'Swann government was able to reverse Australia's happy situation, left by Messrs Howard and Costello, and in doing so applied substantial fiscal stimulus to limit the downturn following the GFC. This was unnecessary, but is an outcome that cannot be repeated given current and prospective fiscal situation of enormous deficits and sharply rising government debt.  Treasurer Joe Hockey says he can do things that do not involve parliamentary approval. Mr Hockey, however, failed to provide examples and, short of a constitutional s**tfight of majestic proportions, this is a fantasy.  Given the size of predicted deficits, fixing the fiscal mess without parliamentary agreeing is just not possible.  Australians are not mugs, Joe, and overstating your case does you no good at all.  Getting the narrative fixed should be your first priority, and I sadly believe you lack the advisors to do this vital task.


What would you do Henry? I hear some readers cry. As previiously stated at greater length, I'd:


(1) begin a long and thorough review of every spending program with the stated aim of cutting overall spending by 20 %; 


(2) review the income tax act to greatly simplify it by removing all the 'special' provisions that allow systematic tax avoidance, including negative gearing; (If this is too big a task go to previous reviews and pick every suggestion for simplification that appears more than once.);


(3) broaden the GST to cover all areas of spending and raise the rate by whatever is required to balance the books within three years.


In setting up the whole process, explain carefully why this is necessary and ways in which it will make Australia a stronger, more self-reliant nation, able to spend more on defence and programs that will increase sustainable growth, such as Research and Development and programs to foster innovation - putting Australia's generally excellent R&D to work producing new businesses far more thoroughly than happens at present. And while you are at it, talk to Bob Hawke about his plan to make Australia even richer and more self-sufficient by developing a uranium enrichment program, including a program of storing nuclear waste returned by our clients in carefully selected geologically stable areas of outback desert. And crank up the process of removing unnecessary regulation, including deeply damaging regulation of labor markets,


'All totally impossible' I hear you cry. The alternative, gentle readers, is to become a third rate outpost of British-American culture, diluted by far too many alien influences that will attack the British-American heritage from within. What follows is an example of exactly the sort of radical action that is needed.


Dump NBN model


'Let telco competition rip' says Michael Porter, the real one, not the American Michael Porter.
  
'The government is about to receive an abundance of advice on the national broadband network about its formation, cost-benefit analysis and competitive policy options.


'Malcolm Turnbull, under the guidance of experts including Bill Scales, Michael Vertigan and Ian Harper, is seeking a way to ensure Australia gets competition as well as broadband innovation. How can we, in the spirit of the Australian Competition and Consumer Commission, escape the loss of wholesale competition caused by the Rudd-Conroy government monopoly? And cut the $100 billion cost associated with the flagging NBN?'
  
Michael G Porter is research professor of public policy at Deakin University and his trenchent views on matters of industry reform are always worth taking seriously. The answer to both of his questions is 'Why not, indeed'.


The full article is available here


Footy'n'stuff


Caaarlton! finally played four quarters of footy and beat a top 4 contender in North Melbourne. One game does not make a season, and there is a lot of rebuilding to be done.  And how did St Kilda thrash Freo, until now expected to give the premiership a big shake?


We await the rest of the season with resigned detachment about the questions to be asked and answered. Will Judd play on?; Will Waite be traded?; Will Malthouse be paid out and Ratts be asked to return, etc, etc.


Image of the week



Courtesy The Australian


Saturday Sanity Break,12 July 2014
Date: Saturday, July 12, 2014
Author: Henry Thornton

Janet Yellen's bold view about the seperate roles of monetary policy and prudential policy have changed the art of central banking by at least 90 degrees.  While she is at it she has done away with the 'Greenspan put' and the 'Bernanke put',  the idea that central banks should let asset booms run and clean up afterwards by dropping interest rates, to 1 % in Mr Greenspan's case and to near zero plus 'quantitative easing' in Mr Bernanke's case.(To Mr Bernanke's credit, he began to talk about a regulatory response to asset inflation in his valedictory book, reviewed here.)


Bene will hope his bold actions will eventually be acclaimed as staving off another Great Depression. It is far too soon to make judgments like that, and we are far from being out of the woods of the GFC. The recurrant bouts of asset inflation that seem to Henry to be more than capable of derailing the slow and hesitant global recovery - hardly noticable in Europe - that everyone is hoping for.


Anatole Kaletsky yesterday in the International New York Times made the bear case. '... it is when investors get uniformly bullish that the pessimistic case deserves more attention. Many distinguished economists believe that the current improvement in global conditions is just a blip and that the world faces years, if not decades, of "secular stagnation".


Henry's favourite fund manager is still running with the bulls, but this becomes increasingly risky the longer the boom goes on.  He points out several reasons to hang in there: Liquidity remains abundant and it has to go somewhere; High asset correlations are a function of risk being priced off the US long bond; Valuations are a poor timing signal; Bonds are in a bubble but stock prices are not (i.e. if you used the 10yr US bond in your DCF calcs, stocks are relatively cheap); Bull markets do not die of old age. They end when either a recession is around the corner or interest rates rise (often an inverted yield curve) or both.


He does agree there is always the risk of a shock to the system. I plan to have a thoughtful weekend.


And you might take in the report of an interview with RBA Chief Glenn Stevens, with its implied (very sensible) advice to the pollies - 'get you act together comrades'.


Henry's sojorn in the wilds of Europe is coming to an end. Monday Henry and Mrs Thornton join a flight from Milan airport to Dubai, then change planes to Melbourne. We have had great fun, but it is time to return to normal life, and we look forward to picking up the usual threads of life in Oz and catching up with friends and business colleagues.


Footy'n'futeball'n'stuff


Caaaarlton! won its fifth match of the season last weekend, beating fellow cellar-dweller St Kilda is a sparkling performance. But both teams have a long way to go, and Supercoach Mick Malthouse has now decisively underperformed Coach Brett Rattan.  Come back Ratts, all is forgiven, is the call of some supporters.


Brazil have crashed out of the World Cup, beaten 7 - 1 by Germany.  Sadly for the Brazillian fans, Argentina beat Holland in a penalty shootout, so it is North vrs South, as widely expected, just the 'wrong' South.'Go Germany' is the response from the stricken fans.


Interestingly, Brazilian fans interviewed by the global press said Brazil could not afford the cost of hosting the World Cup. 'We need schools, hospitals and help for those at the bottom', one such fan opined. Now that their team is out of the competition in such a pathetic way, this may possibly become a dominant theme.


Image of the week


 


Asset boom; when comes the bust?
Date: Thursday, July 10, 2014
Author: Henry Thornton

'Welcome to the Everything Boom — and, quite possibly, the Everything Bubble. Around the world, nearly every asset class is expensive by historical standards. Stocks and bonds; emerging markets and advanced economies; urban office towers and Iowa farmland; you name it, and it is trading at prices that are high by historical standards relative to fundamentals. The inverse of that is relatively low returns for investors'.


Neil Irwin reports for The International New York Times.


Mr Irwin says that the phenomenon is rooted in two interrelated forces. The first is 'Worldwide, more money is piling into savings than businesses believe they can use to make productive investments'. To me, that is part of a wider phenomenon.  The development of 'emerging economies' - principally Chana, but also India and other sources of cheap goods and services. Also there is the lingering Great Recession. In developed nations, workers fear for their jobs and do not press for wage hikes. Retailers, capitalists generally, fear to lose markets they have held onto, and restrain increases in goods and services inflation, maintaining profit margins thanks to workers trying to hang onto their jobs.


These reasons for goods and services inflation to be subdued come into collision with Mr Irwins second fact: 'At the same time, the world’s major central banks have been on a six-year campaign of holding down interest rates and creating more money from thin air to try to stimulate stronger growth in the wake of the financial crisis'.  This is absolutely correct.


Very easy money has often created both goods and services inflation and asset inflation.  With goods and services inflation subdued because of the China effect plus nervousness of workers and businesses alike in developed countries, asset inflation is far stronger that it would otherwise be.


“We’re in a world where there are very few unambiguously cheap assets,” said Russ Koesterich, chief investment strategist at BlackRock, one of the world’s biggest asset managers, who spends his days scouring the earth for potential opportunities for investors to get a better return relative to the risks they are taking on. “If you ask me to give you the one big bargain out there, I’m not sure there is one.”


Mr Irwin continues: 'But frustrating as the situation can be for investors hoping for better returns, the bigger question for the global economy is what happens next. How long will this low-return environment last? And what risks are being created that might be realized only if and when the Everything Boom ends?'


We wrote earlier this week about art price inflation, again reaching heights previously scaled in 1987 and again in the late 1990s.


Assets, like United States Treasury bonds, widely believed 'safe', have been offering investors paltry returns for years, ever since the global financial crisis. 'What has changed in the last two years', reports Mr Irwin, 'is that risky assets, like stocks, junk bonds, real estate and emerging market bonds, have also joined the party'.


Logically, the asset boom would be squeezed if goods and services inflation began to increase. Even if this remains a possibility sufficiently likely for central banks to begin to tighten monetary policy, asset prices will be squeezed.


Asset inflation, as Mr Irwin points out, has become highly correlaterd. Tighter monetary policy will produce correlated asset busts.  If asset prices are in bubble-land, as Mr Irwin and I believe, there will be big asset busts.


Take care, gentle readers.


A traipse through the latest art `madness`
Date: Tuesday, July 08, 2014
Author: Henry Thornton

Henry whilst in Europe has naturally taken in some art galleries. Indeed, as usual, this has resulted in a dose of Stendhal's disease - a feeling of nausea that attends the sight of yet another Masterpiece. The Royal Academy in London was a bit of a shocker, to which I will return.


I have been revising Great Crises of Capitalism for a new edition, and today I got to the chapter on the Dutch Tulipomania of 1636, with some remarks on the modern market for great art. Naturally as an economist with artistic tendencies, I take a great interest in the market for art and its relation to other great asset booms, such as share booms.


Winners from great stock market booms, if they are smart, take profits before the equity bubble bursts and diversify into assets such as property or fine art. In the final stages of the great share boom of 2003 – 2007, the London art market was also booming. Adrian Ash reported in a magazine called MoneyWeek in February 2007 that Sotheby's  midweek sale of contemporary art in London netted £45.7 million – some US$90 million. Indeed, it was 'the most successful contemporary sale ever staged in Europe,' for a total of $173 million; Christie's achieved $177 million with its own Impressionist and Modern auction; the next two days brought Sotheby's Contemporary sale, followed by Christie's auction of Post-War and Contemporary art which netted $138 million, including a new Francis Bacon record, nearly double the previous high of $30 million.


In summary: ‘Four days...one city...$578 million. That's more than the gross inflows for the entire UK mutual fund industry over the same period. But don't forget Sotheby's commission on top!’.


Is the market for fine art based on ‘fundamentals’, ‘speculation’ or ‘irrational exuberance’? Dare I say all three in varying proportions?


The dominance of the art auctions by people who are seriously rich means that ‘Caveat emptor applies ... even if the art is to your taste. Doig's White Canoe isn't all that bad, but you wouldn't know it from the Saatchi Gallery's description’ (quoted by Ash):‘[Doig] paints white like it’s got every colour in it; he paints dark like it’s got every colour on it. A mirrored image of a lake at night, White Canoe is a wishful infeasibility where the reflection is more detailed than the landscape itself. The boat is aberrantly glowing. The landscape has the all-consuming blackness of an oil slick, deafening and motionless; all other colours seem to slide across it in a rustic laser show. The blue stains of tranquil moonlight have the eerie effect of erasing; Peter Doig’s perfect night seems to be melting like celluloid stuck in the projector....’


Japanese billionaires set the pace in buying art during their great asset bubble of the 1980s. They were buying trophy properties all over the world, including Hollywood studios in California and the Exxon building in New York. Japanese buyers purchased a Renaissance chapel in France, complete with stained glass windows, intending to dismantle it stone by stone and ship it to Japan. This provoked the French to pass a law prohibiting the export of national treasures.


Japanese buyers were prominent at major art auctions in London, Paris and New York, where they bought famous works of art for phenomenal prices. Just as American tycoons would do ten years later, the Japanese began buying art as if they really liked it. A crime boss, Susumu Ishii, discovered common stocks in 1985 and influential friends helped him to make vast gains. He invested a small part of his fortune to buying works of art by Chagall, Renoir, Monet and others. The Yusuda Fire and Marine Insurance Company paid nearly $40 million for Van Gogh’s Sunflowers. Ryoei Saito spent $82.5 million on another of Van Gogh’s paintings, Portrait of Dr Gachet, and a further $78 million for Renoir’s Au Moulin de la Gallette.


Australia's billionaire beer baron and yachting superstar, Alan Bond, also made headlines in 1987 when he purchased Van Gogh’s Irises for a then world record $53.9 million.  Controversy was redoubled when it emerged that Sotheby’s had lent him half of the purchase price and held the painting under lock and key in a secret location. ‘What troubles critics of the transaction’ said Rita Reif of The New York Times, ‘is that the extraordinary price paid for Irises, less than one month after the Wall Street crash on Oct. 19, 1987, fuelled an atmosphere of euphoria in the art market. The price became the bench mark most often cited as proof that art was a commodity that had weathered the economic crisis’.


Controversy increased when Bond’s business empire collapsed, and again when Bond went to gaol. While he was in gaol Bond became a competent painter of pictures himself; a self-portrait is held by Australia’s National Portrait Gallery in Canberra. All that is needed to close the circle is for some future rich person to buy one of Bond’s paintings for an outrageous sum of money.


Ash concludes: ‘The Japanese were awash with money by 1989. Their cheap money pump – flooding the bond, commodity and derivative markets with carry-trade Yen – finally was washing across Old Masters and New Pretenders alike’. Yet the hubris, or perhaps just sensible asset diversification, that made Japanese billionaires acquire so many fine art works and expensive buildings soon faced nemesis in the form of the Japanese market crash that started at the very end of 1989.


Here is another fact that overturns conventional wisdom. Such wisdom has it that a portfolio of very different assets provides protection against a meltdown in any one asset class. Often this is ‘proved’ by studies purporting to show that the ‘correlations’ between prices of different asset classes are low or negative. This may be so for particular periods of time, perhaps carefully selected to make it so, but in the case of the major crises of capitalism such correlations usually become irrelevant as all asset classes boom together and crash together, or within short time periods from the date of the first asset class to crash.


Following the crash in the prices of equities which began in late 2007, the bubble in old and new art took its time to mature, but in November 2008, Miriam Kreinin Souccar observed in Crain’s New York Business: ‘The bubble has finally burst in the art market. The frenzy that made art students stars overnight, spawned scores of fairs around the world and turned young investment bankers into major collectors has come to an end’.


The market was down by a third, and canny buyers with deep pockets were quietly strengthening their collections. An optimistic art sales executive observed philosophically that what was happening seemed like ‘a return to normalcy after the hyper-reality of the past three or four years’. He added, no doubt after a reflective pause: ‘It will give the artists a chance to focus on their work instead of trying to sell out their studio during the first year of their M.F.A, program’.


The tendency for the art market to boom when share markets boom, or in some cases after that boom is over, provides an ominous perspective on current events. A recent article by Scott Reyburn in The New York Times reported: 'The momentum seems unstoppable. Last week in London, Sotheby's, Christie's and Phillips raised an aggregate 200 million Pounds Sterling, or about $340 million, from their evening sales of Post-Modern and contemporary art, a 26 percent increase on the equivalent series of sales last Summer'.


Our old friends from 1987, Francis Bacon and Peter Doig were well represented, Bacon with a triptych of Greg Dyer (£26.7 million) and Doig a nice pastel landscape, much less spooky than White Canoe, with a multi-coloured rock (£8.5 million) as viewed from the wing mirror of his speeding car. (How does he do this? one is forced to ask.) And there was a lovely image of Tracey Emin's untidy bed, a snip at £2.5 million.


'London's sales', we were told, 'came on the heels of an Art Basel fair in Switzerland last month, where an Andy Warhol self-portrait sold for about $30 million, and a block-buster series of contemporary evening and day auctions in May that totaled $1.6 billion'.


What does all this mean, gentle readers?


To those of us who are merely well-off, such prices may seem extraordinary, perhaps even irrational. But people, even rich people, are entitled to spend their money as they wish. The prices of works by the world’s celebrity artists is a very concrete thing, and their purchase by very rich people surely does no great harm to society. Indeed, many such works of art end up donated to great galleries where they become available for viewing by all people either freely or for a modest sum.


It is not unknown for people rich and poor to bet on horse races, or in casinos, or to buy lottery tickets. People with deep pockets have been known to invest in trying to make new drugs, or to drill for oil or even to make movies in the hope of extraordinary gains or in some cases the expectation of useful tax losses. Howard Hughes was obsessed with building and flying better aeroplanes, a highly speculative venture (that was the subject of a reasonable film.


Tulipomania was succeeded by the Mississippi Bubble, the South Sea Bubble, new territory bubbles, railway manias, land development delirium, Miningmania, Iris- Warhol- and Monet-mania, the ‘new economy’ (Internet) boom and the excitement of many other fads and fashions in capitalist development. It seems clear that some people at least are inveterate gamblers. It is fashionable to be critical of gambling, but is the gambling spirit an essential part of being human? Is a propensity to take bets one of the chief drivers of human progress?  Are the gamblers among us some of our most valuable citizens?


It can be asserted that Tulipomania was no ‘crisis of capitalism’. But it was at least a proto-crisis in a proto-capitalist economy. As such it contains features that we see repeated throughout history, especially and typically very substantial asset price inflation in a relatively short period of time. Unlike modern crises of a similar type, it did not spread internationally, nor was the asset price bust serious enough to produce massive economic dislocation. Tulipomania adversely impacted on ‘honor and trust’, and in this sense it was a clear precursor of the type of crisis that has subsequently become both more widespread and more serious.



As already mentioned, we took in the Royal Academy exhibition in London. About ten rooms, each arranged by a 'Fellow'. of the Academy, initials RA after his or her name. This consisted of paintings (and sculpture) chosen from the RAs and 'promising' artists, pals of RAs one assumes. Hundreds of items per room, a cacophony of paintings, a weird description for a weird concept.


I was shocked at how awful most of the paintings seemed to me, which I assume just shows how ignorant I am. I cannot recall any names, but there was a small (9' X 15' perhaps) painting by a lady RA that consisted of a white centre with apparently random splashes of blue paint around the edges, price £66,000!


Crikey, comrades, what a whiz.


My advice you young Australian artists is that they move to London, find an RA to cozy up to, and give the poms a dose of the Aussie outback. Sadly, as Bazza McKenzie said, the poms don't like to plan and simple!


Saturday Sanity Break, 5 July 2014
Date: Saturday, July 05, 2014
Author: Henry Thornton

What a week it has been for monetary policy.


First the Bank of England said it needed a new way to handle house price inflation, backing Henry's eighteen month campaign on the proper roles of monetary policy and what is now called 'macroprudential policy'.


Then the new head of the US Fed, Janet Yellan said something similar, although wider.


Both approaches are consistent with the view we have been running for 18 months now, with a special focus on the overvalued Aussie dollar.


Read all about it here and, please remember, you heard all this here for the first time, not in Australia's insular press.


Australia's unemployment problem


June Australian Unemployment was up 0.9 % to 10.6 %, reports Roy Morgan Research, and Under-employment up 1.4 % to a record 9.5 %. Now 2.51 million Australians are unemployed or under-employed. This is a terrible waste of resources. Readers may care to consider here how Australia became on of the world's richest nation - it was certainly NOT by wasting resources.


Gary Morgan said:


“In June Australian unemployment increased to 1.326 million Australians (10.6%, up 0.9%) and under-employment increased to1.188 million (9.5%, up 1.4%). Analysing longer-term trends shows Australian unemployment has now risen in June for the fourth successive year and has increased in June in five out of the last six years in June since the Global Financial Crisis. Now a total of 2.51 million (20.1%) Australians are unemployed or under-employed. This is only the fourth month more than 2.5 million Australians have been unemployed or under-employed – the first since February 2014.


“In recent months unemployment had fallen – although this was driven in part by a declining workforce as people who had been searching for employment ‘gave up’ – while this month saw an increase in both employment (up 142,000 to 11,182,000) and unemployment (up 140,000 to 1,326,000). Looking within the employment figures reveals that the rise in employment was driven by a strong increase in part-time employment – up 177,000 to 3,713,000 while full-time employment fell to 7,469,000 (down 35,000). Increases in part-time employment are strongly co-related with increases in under-employment.


“Clearly Australian unemployment and under-employment is far too high at present and if the Abbott Government wants to stand any chance of winning the 2016 Federal Election it must enact significant reforms to Australia’s industrial relations laws to ‘free up’ the Australian labour market and increase the productivity of the broader Australian labour force".


And do check out Paul Kelly's superb contribution, which we cover under the heading 'Political gridlock; economic


Terminal 5, Heathrow


A senior mining man wrote as follows: 'Henry Thornton's comment last Saturday on the Terminal 5 experience at Heathrow reminded me of this Terminal's opening in March 2008. For months, the PR apparatus had been working at fewer pitch, photographers and journalists had been brought from all over the world to promote this "most advanced in the world" facility.


'On opening day staff arrived late because of inadequate parking space, the sophisticated computer-operated baggage system failed disastrously, escalators and travelling walkways broke down, only one of 18 lifts was working, electronic messsage boards failed. There were two hour queues, 34 flights were cancelled, 7 flights left without pasengers' luggage.


'It appears that six years later nothing has changed'.


Another friend wrote from London about our difficulties. 'Apparently on Saturday there was a shambles in Terminal 5 with luggage, so I'm pleased yours kept up with you. Some planes went out with 30 or 40 pieces only.


Footy'n'Futball'n'Tennis'n'stuff


It is surprising, surely, that Aussie footy gets very little coverage on Italian TV, or in the international press.  But it is also sad that the AFL website is pretty ordinary, with 'live scores' posted only slowly with useless headlines that tell little about key points of the game.


Futball is also not much covered here, as Italy is out of the WORLD CUP. But, Costa Rica apart, it comes down to Europe (ex England) and South America. Any result but a win by Brazil will be a surprise, but Germany's highly disciplined outfit will give it a shake unless, like Phar Lap in America, they are nobbled.


At last, something to cheer about in international tennis.


Nineteen year old Aussie Nick Kyrgios topples no 1 Rafael Nadal at Wimbledon.


Gor Blimey, comrades, can this be true?


Henry today managed to complete the hardest walk - two hours up and down on the Chinque Terra in Southern Italy - without suffering a heart attack or stroke.  Even his knees are not hurting much, but tomorrow may be a different matter.


Took 4 trains and 4 hours to get back to our flat in Prato, where Mrs T is teaching for two weeks, but we arrived by 10.45 pm just in time for Henry to complete this brief report.


Image of the week  shows the steady fall in commodity prices received by Australia's exporters. Sad that the Aussie dollar holds up, but there is an answer, gentle readers.  Please ask your local member what is so wrong about a tax on capital inflow? Or ask Glenn Stevens if he appears in your local pub.


Image of the week



Financial stability-monetary policy breakthrough
Date: Friday, July 04, 2014
Author: PD Jonson

Regular readers will be aware of Henry's attempts to persuade the RBA to sort out policies to control asset inflation, so far as this is possible, distinct from monetary policy, which involves keeping the overall economy on an even keel with low goods and services inflation. This week, Janet Yellen, US Fed Chairwomen, joined the crusade, which is all over save the shouting.


Glenda Korporaal yesterday reviewed the RBA's latest comment on monetary policy. She says 'yesterday’s glass-half-empty statement from Martin Place reveals a sense of frustration at the RBA with the stubbornly high dollar.


'A month ago, the bank was hopeful that some easing in the exchange rate could “assist in achieving balanced growth in the economy”, but now it’s not so sure.


“The exchange rate remains high by historical standards, particularly given the declines in key commodity prices” (which is what it said last month) “and hence is offering less assistance than it might in achieving balanced growth in the economy”. (Read: now we are really getting impatient that the dollar isn’t coming down). More here.


Henry must admit his own frustration. In his case it arises from having proposed a solution eighteen months ago to be met with  lofty silence from the RBA.


Here is a link


Since then I have done a lot of work on asset inflation and monetary policy, mostly reflected in the regular articles on monetary policy in 2013 and 2014 posted here.


The rule that 'monetary policy cannot serve two masters' (a much ignored dictum of Milton Friedman) is slowly being taken up in the search for policies to curb housing booms. The traditional approach - and I confess to supporting this until my Pauline insight reported in January 2013 - was to use monetary policy (ie, interest rate policy) to moderate asset inflation.  That is, to raise interest rates more than would be required to control the economy in efforts to contain goods and services inflation when assets such as housing are looking dangerously uppity, and prior to that to talk about the dangers of excessive house price increases and threaten to raise interest rates. Or cut rates by more than required for overall stability in an asset crash.


Now good thinkers, including the new governor of the Bank of England, Ben Bernanke himself and (I believe) senior people in the RBA, are considering or (in the UK case implementing) what is called a 'macroprudential' policy to directly curb house price inflation by controlling bank lending for housing.


And, earlier this week, the Fed's new chief, Janet Yellen, changed the goalposts for US policy, supporting the UK, hints from Ben Bernanke and the RBA.


The FT reports: 'Federal Reserve Chair Janet Yellen speaks at the International Monetary Fund in Washington, Wednesday, July 2, 2014. Yellen said she doesn't see a need for the Fed to start raising interest rates to address the risk that extremely low rates could destabilize the financial system.
 
'Janet Yellen has mounted a forceful defence of the US Federal Reserve’s decision to keep monetary policy loose in the face of soaring asset prices, arguing there was no need to increase interest rates to tackle financial instability because the central bank has other tools at its disposal.


'In a clear signal of how the Fed intends to prevent a repeat of the 2008 crisis, its chairwoman suggested the central bank is more interested in having a resilient financial system that can cope when asset bubbles burst than it is in popping them through rate rises'


But here is the clincher.“I do not presently see a need for monetary policy to deviate from a primary focus on attaining price stability and maximum employment, in order to address financial stability concerns,” said Ms Yellen.


“That said, I do see pockets of increased risk-taking across the financial system, and an acceleration or broadening of these concerns could necessitate a more robust macroprudential approach.”


'A macroprudential approach would involve using non-monetary policy tools designed to manage the safety of the financial system as a whole'.  Full report here.


With appropriate modesty, Henry feels he has been fishing in the right stream. Now, dear RBA, let's discuss the overvalued exchange rate. While the overvalued australian dollar is not a bubble, it is creating general economic instability by distorting asset allocation across the economy.


'Macroprudential policy' I am sure will create a lot of debate in coming years, but I feel that policies like those discussed above, distinct from 'monetary policy' are going to be essential. 'Monetary policy cannot serve two masters', in this case control the overall economy sensibly and also 'influence' house prices, share prices or the exchange rate (or other asset prices), in an appropriate way except for short periods when the needs of asset inflation are in accord with the overall need for economic stability with low inflation.


The FT has already added to the debate with its editorial headed 'Caution on rates is wise but Fed could do more on bubbles', a proposition I agree with.


My simple point is this. If respectable central bankers see the necessity of curbing house prices, or excessive financial system risk, with 'macroprudential policy', why not do something about a stubbornly excessive exchange rate? Something other than cutting interest rates, which has been the unstated (in my view) approach in recent times in Australia.


Political gridlock, economic decline.
Date: Thursday, July 03, 2014
Author: PD Jonson

'THE trajectory of Australia’s relative decline now seems set with the nation in denial of its economic challenges and suffering a malaise in its political decision-making — signalling that a country that cannot recognise its problems is far from finding their solution.


'Australia’s political system is in malfunction. The evidence has been plentiful for some years and continues to mount. The origins of the crisis are deep-seated. This is the reason it is unlikely to be easily reversed. The nation’s economic advantages are extensive but unless buttressed by effective public policy they will erode relentlessly'.


This is the opening to Paul Kelly's latest commentary about Australia's grid-locked politics and near-certain relative economic decline.  Every voter should read this article and contact their local member to give him or her a wake-up call.  It is available here or in the printed edition of the Australian yesterday.


One example, close to Henry's heart, concerns monetary policy.  Since the RBA is formally independent of  Australia's grid-locked politics, the problem comes from deficient understanding, or reluctance to innovate to solve a problem that has been obvious now for over a year-and-a half.


Glenda Korporaal yersterday reviewed the RBA's latest comment on monetary policy. She says 'yesterday’s glass-half-empty statement from Martin Place reveals a sense of frustration at the RBA with the stubbornly high dollar.


'A month ago, the bank was hopeful that some easing in the exchange rate could “assist in achieving balanced growth in the economy”, but now it’s not so sure.


“The exchange rate remains high by historical standards, particularly given the declines in key commodity prices” (which is what it said last month) “and hence is offering less assistance than it might in achieving balanced growth in the economy”. (Read: now we are really getting impatient that the dollar isn’t coming down).


More here.


Henry must admit his own frustration. In his case it arises from having proposed a solution eighteen months ago to be met with a lofty silence from the RBA.


Here is a link


Since then I have done a lot of work on asset inflation and monetary policy, mostly reflected in the regular articles on monetary policy in 2013 and 2014 posted here.


The rule that 'monetary policy cannot serve two masters' (a much ignored dictum of Milton Friedman) is slowly being taken up in the search for policies to curb housing booms. The traditional approach - and I confess to supporting this until my Pauline insight reported in January 2013 - was to use monetary policy (ie, interest rate policy) to moderate asset inflation.  That is, to raise interest rates more than would be required to control the economy in efforts to contain goods and services inflation when assets such as housing are looking dangerously uppity, and prior to that to talk about the dangers of excessive house price increases and threaten to raise interest rates.


Now good thinkers, including the new governor of the Bank of England, Ben Bernanke himself and (I believe) senior people in the RBA, are considering or (in the UK case implementing) what is called a 'macroprudential' policy to directly curb house price inflation by controlling bank lending for housing.


This I am sure will create a lot of debate in coming years, but I feel that policies like that are going to be essential. 'Monetary policy cannot serve two masters', in this case control the overall economy sensibly and also 'influence' house prices in an appropriate way.


My simple point is this. If respectable central bankers see the necessity of curbing house prices, why not do something about a stubbornly excessive exchange rate? Something other than cutting interest rates, which has been the unstated (in my view) approach in recent times in Australia.


For more views on the BIS approach to asset bubbles, and related matters, discussed on Tuesday, see James Saft of Reuters.


BIS warns of bubbles
Date: Tuesday, July 01, 2014
Author: Henry Thornton

Happy new year, gentle readers.


'An organization representing the world’s main central banks warned on Sunday that dangerous new asset bubbles were forming even before the global economy has finished recovering from the last round of financial excess', reports Jack Ewing of the New York Times.


'Investors, desperate to earn returns when official interest rates are at or near record lows, have been driving up the prices of stocks and other assets with little regard for risk, the Bank for International Settlements [BIS] in Basel, Switzerland, said in its annual report published on Sunday.


'Recovery from the financial crisis that began in 2007 could take several more years, Jaime Caruana, the general manager of the B.I.S., said at the organization’s annual meeting in Basel on Sunday. The recovery could be especially slow in Europe, he said, because debt levels remain high.


“During the boom, resources were misallocated on a huge scale,” Mr. Caruana said, according to a text of his speech, “and it will take time to move them to new and more productive uses.”


The BIS has been ahead of the general curve in advising on how to moderate asset booms so thay don't turn into bubbles. 'Bubbles' do not slowly deflate, but rather pop.


The USA has experienced three major stock market booms in the twentieth century - in the 1920s, in the 1950s and in the 1990s. The first such boom turned into a bubble and burst, helping to produce the Great Depression. The booms in the 1990s burst and marked the end of the so-called 'Great Moderation. The US Fed's rapid easing of monetary policy helped stave off serious recession but re-ignited the stock boom and this led directly to the Global Financial Crisis (GFC). (Why the asset boom of the 1950s, extending into the 1960s did not turn into a bubble is worthy of careful analysis.)


As The BIS said in the quote above, the world economy is still struggling with the aftermath of the 2007 market crash.


This writer said in late 2010, in the opening paragraph of Great Crises of Capitalism: 'The Global Financial Crisis of 2007-08 might still produce a great depression. Massive monetary and fiscal stimulus has been thrown at the problem. Major financial institutions, with one exceptions, have been bailed out by taxpayers. The problems created by excessive debt and over-easy monetary policy have been 'solved' by more of the same'.


Now the BIS is warning of renewed bubble problems and it is time for investors to be especially cautious.


The summary of the BIS report is as follows: 'A new policy compass is needed to help the global economy step out of the shadow of the Great Financial Crisis. This will involve adjustments to the current policy mix and to policy frameworks with the aim of restoring sustainable and balanced economic growth.


'The global economy has shown encouraging signs over the past year but it has not shaken off its post-crisis malaise (Chapter III). Despite an aggressive and broad-based search for yield, with volatility and credit spreads sinking towards historical lows (Chapter II), and unusually accommodative monetary conditions (Chapter V), investment remains weak. Debt, both private and public, continues to rise while productivity growth has extended further its long-term downward trend (Chapters III and IV). There is even talk of secular stagnation. Some banks have rebuilt capital and adjusted their business models, while others have more work to do (Chapter VI).


'To return to sustainable and balanced growth, policies need to go beyond their traditional focus on the business cycle and take a longer-term perspective - one in which the financial cycle takes centre stage (Chapter I). They need to address head-on the structural deficiencies and resource misallocations masked by strong financial booms and revealed only in the subsequent busts. The only source of lasting prosperity is a stronger supply side. It is essential to move away from debt as the main engine of growth'.


Access to the full report is available here. It is worthy of careful reading and even more careful thought.


For later discussion of the BIS approach to asset bubbles, and related matters, see James Saft of Reuters.


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