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Henry Thornton - Contributors: A discussion of economic, social and political issues Blogs
Industrial relations key to Australian prosperity
Date: Wednesday, April 13, 2011
Author: Henry Thornton

Business conditions recovering, with sentiment again 'above trend', reports the National Australia bank.

In summary: 'THE economy is staging a powerful recovery from a summer of disasters and the annual growth rate could reach 4 per cent by the middle of the year.'

  Courtesy NAB

The bank reported:
• The Australian economy appears to be showing signs of recovery following the flood-induced slowdown, with the NAB business survey reporting a marked improvement in business conditions in March, driven by sharp rises in trading conditions and profitability. The overall business conditions index is now at its highest level since March 2010. Conditions in Queensland improved significantly in the month but are still very poor. Business confidence declined in March, though remains positive and above trend. More broadly, confidence is now more in line with business conditions (or outcomes).
• Forwards orders and stocks picked up, and are now in positive territory. Capacity utilisation also edged a little higher. The survey is consistent with annualised domestic demand growth of around 2½% in the March quarter which, given the impact of recent floods on coal and commodity exports, suggests a flat to negative outcome for GDP in Q1. That would imply a 6-monthly annualised rate of around 1½% versus the survey read of 2¾%. Maintaining March monthly readings in Q2 it would imply a return to more than 4% growth.
• Labour costs were broadly unchanged but continue to trend down in annualised 3-month-average terms. While price inflation remained relatively low, purchase costs are rising.

The Australian's David Uren spoke to NAB's Chief Economist, Alan Oster, who added the helpful colour that 'all industries registered a huge improvement in March' and that the improvement continued in April.

Oster added: "We're getting the first inkling that we're looking at strong growth in the June quarter," he said. "That is consistent with what the Reserve Bank is thinking."

It is also, incidentally, what Henry has been thinking, with growth again at the 4 % rate that indicates the onset of inflatioary pressures.

The NAB reports that inflation remains low, but purchase costs are rising.  Whether the Reserve Bank was right or wrong to hold its fire on rate hikes so far this year will depend largely on whether wages surge.

Under the howard government's WorkChoices legislation there would have been a fair chance of this.  After the Rudd-Gillard rollback there is a more than even chance that wages will break out.

Talk of a 'tough budget', immediately contradicted by promises to 'overcompensate' battlers for the carbon tax, will not hold the line.

The linked article on 'offshore wage explosion' is like the first blowfly of summer.

And there is still no policy for productivity, which has been languishing since the effect of the last big economic reforms of the Howard government wore off, with the slowing also impacted by IR rollabck.

It is no exaggeration to say that Australia's immediate prosperity is in the hands of union bosses. Go for the doctor, comrades, and interest rates will be higher, the budget will be tougher (with a mini-budget after the faux-tough budget we are about to get) and the miracle economy will do more than stumble as it did in Q1, 2011.  It will have fallen flat on its face. 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Read on here.

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

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

Here is a blueprint.


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

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

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

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

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


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

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

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

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

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

Vale Richie Benaud

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

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

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

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

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

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

Image of the week

To be provided

Tax and currency reform
Date: Friday, April 10, 2015
Author: Henry Thornton

Loyal Australian taxpayers have always felt aggrieved as the ATO chases the home team rather than the giant multi-national companies that clearly are failing to pay a fair amount of tax on sales made in and to Australians on our home turf.  We commend Treasurer Joe Hockey for his brave attempts to overcome diversion of profits to overseas 'marketing hubs' and other even more devious schemes to minimise tax. 

This debate has also unexpectedly thrown light in the issue of the damagingly high Australian exchange rate, a point to which we shall return.

Tax avoidance.

No-one asserts that the multinational companies are doing things illegally.  The are just using legal but antiquated tax laws to avoid paying amounts of tax that we feel are appropriate and which we should be equally smart about collecting.

The way 'marketing hubs' work is explained simply in today's Australian/Business Spectator by Leo Shanahan.  'A product made for perhaps $200 in China is sold for $600 to an international subsidiary, which then sells the device in Australia, netting [the company] a taxable profit of just $20'. Simple? Undoubtedly. Legal? According to the letter. Fair? Not on your nelly, gentle taxpayer, who may well be forced to send half of the theoretical cost of shares in a cash strapped start-up paid liu of cash to the ATO. (Yes I know there is a move to reftify this obstacle to new business ventures in Australia, but why did the ATO encourage the previous government to implement this stupid requirement?)

But to go back to the main point, there is no doubt there are more complicated anti-Aussie-tax schemes, some invented by Australians. My main point is that multinational companies are probably milking the ATO of billions of taxes that should logically be helping to pay the costs of good government in Australia, and it is well past time to do whatever can be done about it.

Another story in today's Australian is headed 'Joe Hockey seeking to reap ‘billions’ from tech taxes'. Good on you, Joe. This will help your government's standing in the polls as well as your thankless, frequently frustrated, attempts to balance our national budget.

The currency debate.

Australia's industrial structure has been greatly distorted by the stubborn overvaluation of the Australian dollar, a fact frequently endorsed by senior officials of the RBA. In particular, our manufacturing base has been smashed, while other industries sensitive to an over-valued dollar have struggled to survive.

In its attempt to reduce the overvalued currency, the RBA has relied on the ancient and discredited 'jawbone' technique, supported by cuts to interest rates more than strictly needed to achieve a sensible monetary policy in the face of so-called 'currency wars'.

In early 2013, this writer recommended the introduction of a tax on capital inflow.  This suggestion has been treated with lofty silence by the team at the top end of Martin Place, although Henry has been advised through back channels that 'Australia relies on capital inflow, and to discourage capital inflow would be a strategic mistake'. That is a matter for debate, and in the context of the debate on tax avoidance, senior ATO man, Chris Jordan, has made a major, if unintentional, contribution to this debate, also reported by Leo Shanahan.

'These companies are not going to exit the Australianmarket because they have to pay tax. Even if they pay the full 30, they can still keep 70 per cent. These are profitable businesses. They are here because they need to sell to customers.

'They are not going to leave if they have to pay tax. This notion us trying to tax foreign companies will harm foreign investment is rediculous'.

Bravo Mr Jordan!

As a further contribution to debate, I must point out that the idea of making foreign house or unit buyers pay fees to be allowed to do so is a partial, ham-fisted tax on a tiny piece of capital inflow.  Time to do it properly and I am confident  that Mr Jordan would say something like: 'These companies are not going to exit the Australian market because they have to pay tax. Even if they pay the full 10 per cent, (say), they can still keep 90 per cent. These are profitable businesses. They are here because they need to invest in the miracle economy that is Australia.

'They are not going to leave us alone if they have to pay tax. This notion us trying to tax foreign companies on their way in to Australia will harm foreign investment is rediculous'.

Ukraine`s economic crisis
Date: Thursday, April 09, 2015
Author: Gary Scarrabelotti with comments by Henry Thornton

'The Ukrainian general staff should be sacked and its generals replaced by Ukraine’s bankers', advises Gary Scarrabelotti.

'Whereas the generals have proved out of their depth in dealing with the Russian-backed separatists of the Donbas, and perhaps feel kindly toward them, Ukraine’s bankers have shown themselves completely unsympathetic to Ukrainians in general, no matter what their loyalties, and utterly ruthless in setting up the country’s middle class for extinction. They really should be running the war.

'Since the “Maidan” revolution of November 2013 – February 2014, Ukraine has entered a steep economic crisis.  The economic bust has triggered a banking crash. Above 30 Ukrainian banks have had their banking licenses withdrawn by the National Bank of Ukraine (NBU: the equivalent of our Reserve Bank) and are being liquidated.  Another 15 or so have been put into “temporary administration”.

'This is a disaster not only for the Ukrainian middle class but also for Ukraine itself. It is middle class savers — professionals, small business people, medium-sized farmers — who will be central to any revival of the Ukraine economy.  However, their savings and capacity to borrow are being eliminated and, consequently, their trust in Ukraine’s political and financial institutions is being destroyed.

'This is the second (for some, the third) time since 1991 that Ukrainians have had to endure a savings wipe out.  The first was the result of the hyperinflation that accompanied the collapse of the Soviet Union.  In between then and now there was the GFC that hit Ukraine during 2008 – 2009 more severely than any other large country. Now in 2014 – 2015 the Ukraine middle class is having its savings wiped out again. It’s a shattering experience to see all you have worked for go up in smoke for the second (or third) time in 24 years'.

Read on here. 

Inflation - and other ways to cancel debts.

Economists say there are three ways to wipe out excessive debts: inflation, debt repudiation; or sales of debt at international auctions at heavily discounted prices.

The graph suggests the power of inflation in the case of The Ukraine.

In fact, more recent figures suggest hyper-inflation is not far away: 'New figures show that inflation in Ukraine during the first quarter of this year increased 20.3 percent compared to the January-March period in 2014, and that last month alone it rose by 45.8 percent.

'The State Statistics Service released information on April 6 that showed the dramatic downturn for the economy last month.

The leaders of the Ukraine seem to have invented a new way, or perhaps it is just an illustration of debt repudiation - let the banks go broke and wipe out the savings of the middle class and while they are at it, repudiate the vast sums of debt owing by the banks.

The Russians and indigenous Soviet sympathisers are attacking militarily while the oligarchs are attacking their own economy.

RBA meets ...
Date: Tuesday, April 07, 2015
Author: Henry Thornton

...with serious matters to discuss.

Did you see Glenn Stevens on TV last night, dear readers?  He is half a generation younger than Henry but looks a generation older. Clearly central banking is stressful, and we wish our former colleagues well as they grapple with near insoluble problems.

1. The economy is rapidly approaching real recession, with rising unemployment and an absolutely disgraceful  level youth unemployment. A modest further rate cut, or even several cuts in cash rates, cannot prevent this slide.  Yet the Reserve cannot look uncaring, so must cut rates to avoid looking uncaring.

2. The Aussie dollar keep looking buoyant, despite the inexorable falls in commodity prices. Further rate cuts will encourage falls in the currency, but dramatic 'banana republic' falls will not occur unless and until international investors lose confidence in Australia's ability to restore growth. While parliament remains gridlocked and budgetary reform seems impossible, risks will grow of a major loss of confidence by investors.  A fall to 50 or even 60 cents in the US dollar would, or should, send shivers down our national spine, while a renewed fall in the US dollar would drive the Aussie dollar higher.

3. Further rate cuts will fuel house prices in Sydney and Melbourne and further damage young peoples' faith in Australia's future. In theory APRA will deal with the housing boom with so-called 'macroprudential policy' - imposing higher reserve ratios on banks to discourage excess lending for housing.  But APRA, until it becomes as open as the RBA, will act too little too late, and the board of the RBA should recognise this and either send APRA a very precise instruction or rethink the rate cut policy.

This is the set of serious dilemmas facing Glenn Stevens and his colleagues. We read over the weekend the touching story of a relatively young RBA director.  With great respect we doubt this person, and the other representatives of the good and the great amateurs who are there to keep the RBA honest, are capable of providing useful advice at this dire time in Australia's history.

The key points are these:

*  Australia's growth depends on rapid and thoroughgoing economic reform.  Any brave economist will provide a list.  Until such reform is implemented, cuts in interest rates will have little effect except providing the RBA will the excuse that it did the best it could.
* Australia's budget problems will drive us into a very nasty dry gully of excess debt if they are not fixed in the next few years. Interest rate cuts will do little to help.
* A lower dollar, provided not the result of a massive vote of no confidence in Australia's economic management, will help at the margin, and this may be the decisive point made at the RBA meeting today. But cutting rates will also fuel asset prices and Australia has already joined the global soft money crusade that will eventually create a massive, damaging, global recession or depression.

What you should do today, gentle RBA board members, is direct Gov'nor Glenn to write a serious letter to the government, copied to the opposition and especially the so called 'independent' Senators.  The three points laid out above need to make up the essence of the letter.  Glenn Stevens has said he plans not to seek another term as head of the RBA, so he has the chance to be a truly independent leader of that august institution.

Please Glenn Stevens, show us what you really are capable of.  I have great confidence you are the most likely person in Australia to get the attention of the politicians and start a process that may even stop their bickering, which is in fact worse than useless.

Weekend Sanity Break - Easter 2015
Date: Saturday, April 04, 2015
Author: Henry Thornton

'The unsubstantiated claims about the size of taxes foregone on super funds over $2m are a disgrace especially from Treasury.

'Also recall that State and Commonwealth public servants are entitled to indexed 2/3rds of their final salary.  So Treasury Sec and others need a lump sum of $8m to get the equivalent pension a assuming an average of 6% - giving a pension of $480,000.

'For them to build up a fund this big under the existing rules seems unlikely even with the post 50 year olds being able tip in $35,000 pa.  Hence pollies, upper end public servants and judges have implicit mega Super funds.  I could go on. 

'Henry's comments are among the few to caution that the issue is complex, reeks of unfounded envy, etc.
The point about the massive capital cost penalty Australian projects face is a massive growth inhibitor and also results in a lower supply of infrastructure.  Eg half as many subs or hospitals, etc'.

This is a comment on Henry's recent contribution on tax reform and costs of production, linked here and here.  The senior pollies and bureaucrats have to open the kimono on their immensely rich Superannuation schemes.  This used be justified by low salaries, but this is no longer the case. So getting the world's best Superannuation plan now that salaries are large, if not totally obscene, while turning the heat on 'merely-well-to-do' people in the private sector, is unconscionable.

One hopes a crusading journo, or a fair one, will acknowledge the point (and the source) when he or she next writes about superannuation.


Great victory in the final of the World Cup of Cricket. Retiring Cap'n Clarke top scored with 74 and Mitch Starc broke the Kiwi heart by bowling Cap'n Mc Callum in the first over.  So next step is the pps (pestiferous poms) in England, where we were flogged last time we played test cricket in its nation of origen.

A disappointing Caaaarlton! won the first quarter from Richmond and then went to sleep, or lost interest or whatever.  Mich the merciless was boiling and the board will be boiling if there are too many similar lacklustre efforts.

Just came in from a healthful walk to see Melbourne win (against the Suns) for the first first game win for the Demons since 2005. Next item on the weekend calander is Essendon vrs Sydney.  The Swans have to live down the flogging in the Grand Final while Essendon have to prove they can get up without 'supplements' and other unknown substances. Henry's view is that Essendon will play a blinder and may sustain brilliant form for much of the season.

[Ed: Woke this morning to find one of the ankle-biters watching replay of Sydney vrs Essendon.  Essendon well ahead with a quarter to go - following the script. But wait, the Swans are coming in waves, too gripping to miss. Result, Swans by 2 goals!]

Then its Brisbane vrs Collingwood - another exciting first round encounter.  The view among Henry's old mates is that Collingwood is on the slide and Brissie is on the rise. Collingwood prevailed by a few minutes, as Brissie were coming hard at the end.

As an elderly bloke, Henry is watching Grant Hackett's  comeback with great interest.  Note image of the week below - part of Henry's comeback as an economist who paints.


Do not miss Peter Craven's moving meditation on the Easter mystery.

'It’s a haunted, shadowed time, Easter, not least because it’s so full of the cultural memory of where our civilisation — and the mess we have constantly made of it — has come from. This is, after all, the greatest liturgical feast of the Christian calendar.

'What believers are celebrating tomorrow morning — perhaps at midnight tonight if they want the ritual of the midnight mass where the church goes from darkness to light as a symbol of what has happened — is the resurrection of the Son of God, killed on the cross just yesterday, on Good Friday, as that stark day is known, because, so the story goes, his death saved the world'.

Read on here.

And Fiona Prior experiences her first Passion, that of St John by J.S. Bach.

"Bach’s choral storytelling of this famous tale is more about tragedy than agony, more reflection than guilt, but it does share with Mel (Gibson's The Passion of Christ, 2004) a view of the political machinations of the time that would sacrifice a man's life to secure the status quo..."

Read on here.

Image of the week

More from Henry's resident artist here and here.

Lest we forget
Date: Friday, April 03, 2015
Author: Henry Thornton

Do not miss Peter Craven's meditation on the Easter mystery.

'It’s a haunted, shadowed time, Easter, not least because it’s so full of the cultural memory of where our civilisation — and the mess we have constantly made of it — has come from. This is, after all, the greatest liturgical feast of the Christian calendar.

=What believers are celebrating tomorrow morning — perhaps at midnight tonight if they want the ritual of the midnight mass where the church goes from darkness to light as a symbol of what has happened — is the resurrection of the Son of God, killed on the cross just yesterday, on Good Friday, as that stark day is known, because, so the story goes, his death saved the world'.

Read on here.


Grim economic news
Date: Thursday, April 02, 2015
Author: Henry Thornton

The Australian economy is already in an income recession, and many experienced commentators now think we are headed for a production recession.  Yesterday three pieces of dire news showed the parlous state of our economy - manufacturing production falling, indicating a manufacturing recession, household anxiety up, with fears about government policy top of the list, and costs too high to build warships in  Australia.

1. The Australian Industry Group Australian Performance of Manufacturing Index (Australian PMI®) moved up by 0.9 points to 46.3 points in March (seasonally adjusted). This indicated a fourth consecutive month of contraction in activity (readings below 50 points indicate contraction) across the manufacturing sector following a brief stabilisation in November 2014.

Various 'activity indicators' in the Australian PMI® continued to indicate very weak domestic demand. Manufacturing production contracted (i.e. below 50 points) for a fifth consecutive month while new orders fell for a fourth month. Manufacturing sales declined for a 10th month in March. Supplier deliveries and stock levels also contracted for a second month in March after brief expansion in January, while manufacturing employment contracted for a third month.

Comparable figures for major economies show: China, slightly underwater and falling;  Japan, slightly positive but still falling; Eurozone, positive and rising; UK, more positive and rising; and USA, strongly positive and still rising.  In this group, including our major trading partners, we are by far the weakest.

2. NAB Quarterly Australian Consumer Anxiety Index - March quarter 2015

'Consumer anxiety rose again in March quarter after a short-lived improvement in the previous quarter, as concern over government policy overtook cost of living as the single biggest cause of consumer stress'.  The NAB's economic team added: 'With overall anxiety increasing, consumers are cutting back on many 'non-essentials'.

The NAB Consumer Anxiety Index rose to 61.8 points in March quarter 2015 (60.1 in December quarter 2014), with higher concern in all categories except health.

According to NAB Chief Economist Alan Oster: 'Government policy is now the single biggest cause of anxiety for consumers, just ahead of cost of living, while job security continues to cause the least stress.'

'In terms of their overall household financial position, however, not having enough to retire, being able to provide for the family’s future and meet medical costs were causing the greatest concern' said Mr Oster.  Please refer to Henry's cri de coeur that relevant tax reform not include weakening the attractiveness of superannuation. Does the government really want to make Australia's most productive citizens, as measured by their superannuation balances, more anxious about retirement and even less inclined to spend?

These are two obvious and direct indications of Australia's slide into a production recession.  Then we come to the overheated cost base, the legacy of the maddest boom in Australia since the gold rushes of the 1850s.

3. Australia's bloated cost base.

We learn almost daily of company retrenchments, a sure sign that costs are out of whack. But rarely do we hear a warning so stark that even deaf Freddy, first cousin of blind Freddy, could not possibly miss. This warning was delivered by Defence Minister Kevin Andrews.  The Oz reported Mr Andrews as follows: 'Australia cannot afford to build warships unless companies and unions bring down costs'.  This is the reason the government is forced to consider spending $20 billion overseas instead of $40 billion and counting to build our next generation submarines in Adelaide.

It means, comrades ...

Many countries are finally recovering from the severe GFC recession, albeit slowly, while Australia is rapidly losing its 'miracle economy' status.  We were warned, here and by other experienced observers, but warnings were ignored.  We pointed out in August 2013: 'The nation's leaders are walking unknowingly into a new economic crisis, ironically just as other developed nations are showing signs of recovery. Warnings have been sounded, and not just by this writer, and the only excuse for the steady tramp into recession is the insularity and self-congratulatory hubris of successive ministers and officials, especially those in Treasury'.

Part of the problem of the weaknesses of Treasury and RBA forecasting is almost total reliance on outdated 'Keynesian' mental models. Our debt and deficit problems are well known.  But the major cost overhang is another equally heavy drag on economic performance. The problem is that is far harder diagnose or to allow for within an old-fashioned 'Keynesian' mental model.

Again this was pointed out in mid 2013: 'RBA Chief Glenn Stevens seems, based on the evidence of his latest speech, is still in apparent denial. He rehearses the state of play in the world economy and in the outlook for various source of demand in Australia's economy. Prudent households are saving. Nervous firms are reducing investment and hiring plans - and he notes that political uncertainty is fuelling that particular bonfire. Global growth is still subdued, and China's growth may fall still further. This is an essentially Keynesian analysis.

'Not a word from Mr Stevens about Australia's double-digit cost disequilibrium. This is surely not because Stevens fails to recognise the problem, more likely because doing so would throw a spotlight on the major dilemma facing the Reserve. Cutting rates further will relieve cost pressures for some, but will do nothing to reduce, and may worsen, Australia's generally high cost structure relative to competitor nations'.

Now interest rates are expected to dip below 2%, and housing markets are roaring, most noticably in Sydney. RBA officials presumably own houses in Sydney, and in corporate life this might preclude them from making decisions that involve such a clear conflict of interest,

This point aside, a leading economist has apparently today asked (according to the front page of the fin): 'Is the RBA insane?' My answer is, 'no, unless clinging to an out-dated mental model is a sure sign of insanity, a point that Einstein might have made about current Australian econocrats'.

Every recession or depression in Australia's history has occurred in large part because the cost base is out of control. Those who do not learn the lessons of history are condemned to repeat the mistakes of the past. This effects us all comrades - it is just not good enough.

Tax reform - the impossible dream?
Date: Tuesday, March 31, 2015
Author: Henry Thornton

Every Australian government in Henry's adult life has dreamed of reforming the tax and welfare system. Now that we have budget deficits as far as the eye can see one might imagine the matter would be urgent. But Labor, who created most of the deficit problem, is still playing doggie in the manger.  And there are no Magis bearing electoral gifts to this manger. 

As Australians gradually realise that modern Labor stands for zero economic reform and fixing tax by attacking the superannuation balances of rich, even 'merely well-to-do', Australians, Labor will be as popular as a pork pie at a Bar Mitzvah. Certainly, that is Henry's dream, since economic and tax reform will be possible again.

The estimable Treasury 'Tax Discussion Paper', titled (I think) Re:Think, features facts like flies at a Bbq. Its prime value, perhaps, is to compare the facts about Australia's tax system with those of other countries. This storyline is as clear as the opening siren will be on Thursday night at the 'G', when Caaaarlton! plays Richmond in the opening real game of Aussie rules for season 2015.  Agreed facts (P13) include the following, with Henry's comments in brackets:

* The world of globalisation creates the need to reform the Australian tax system to prevent people buying GST-free goods from overseas - think Amazon - and to prevent global companies from avoiding taxes here by fiendishly clever transfer pricing. (A braver Treasury would also have mentioned the effect of currency wars fostered by ludicrously easy monetary policies in most 'developed' nations which have distorted Australia's industrial structure and decimated its manufacturing industries in particular.)

* As the Intergenerational Report (IGR) shows, average Australians are likely to be older in 40 years, placing upward pressure on various forms of social welfare and downward pressure on earning capacity of the younger Australians expected to support old and feeble Australians. (But I took exception when Re:Think asserted (on P11) that the IGR 'shows that Australia can continue to build prosperity and improve growth in living standards over the next 40 years'.  'Shows' needs to be replaced in this assertion by 'assumes provided economic reform is embraced and current political gridlock is resolved, two unlikely hypotheses.)

* Australia's overall tax burden is relatively low compared to other developed countries. (Well done, elders past and present.)

* Australia relies heavily on income tax, particularly company income tax, compared to other developed countries as well as our Asian competitors. (I'd have added '/trading partners' here).

*Economic modelling suggests that the taxes with particularly costs to economic growth are company tax and stamp duty. (This is a tricky issue, guarenteed to lose readers.)

* Complexity and compliance costs have many drivers and are a growing problem in the tax system. (Amen to that.  Henry's advice to a shadow Treasurer once included that he stand up on national television and tear pages out of the bloated and incomprehensible income tax act to illustrate his intentions in government. He ignored this advice and his team failed to be elected.)

* Australia's tax and transfer systems are highly progressive (meaning taking from the rich and 'merely well-to-do' and giving to the poor) 'which supports fairness'. Only the Scandinavian nations have more 'progressive' systems, (which is fine if one wishes to live in a thorough-going nanny state in which basket weaving and like pursuits are among the major industries - this assertion comes with an apology to Finland.)

* Tax 'settings' should give people incentive to save for the future, but full income tax on interest rates on bank deposits (for example) and many other ways to save are conflated with lesser tax on some capital gains and even less on superannuation, and none on the family home.  (This is unfair, confusing and inefficient. With the high proportion of tax on incomes, this reduces incentives to save.  This is totally inappropriate for a country requiring high investment if we are to match or even beat the growth rates of the past 40 years.)

I hope I have said enough to encourage readers to go to the Treasury website and download the full report.  It is worthy of a good read, and will cure insommnia, but War and Peace it ain't.)

Here is the most direct link I could find.

A personal view.

Reducing spending by government would be the single reform that would do most to reduce the current scary growth of deficits and therefore debt.  While government debt as a ratio to GDP of 50 to 60 % would 'not be too bad compared to other developed nations', it would still be pretty bad.  Suppose in 40 years, Australia had a debt ratio of 50 %. Suppose further that bond rates by then were a mere 6 %.  That would imply 3 % of GDP would go to paying interest on the debt, making our ability to provide welfare, or encourage innovation or defending Australia far more difficult than it is now. Imagine a bond rate of 12 %, dear readers. We'd be firked.  Other 'developed' nations would be more firked, in fact, no longer 'developed', but that would be cold comfort.

Hence Henry would like the government to focus on cutting spending. This is virtually impossible with the existing Senate, which is why an eventual double dissolution (dd) election is practically mandated by any government that has plans to reform Australia's governance. I offer a modest related suggestion below.

To continue the expression of Henry's views, the single reform that would most improve the efficiency and fairness of our tax system is to raise the GST to, say, 15 % and remove all exemptions.  Please note that such a tax is 25 % in those pesky Scandinavian nations that come out as 'fairest' in Re:Think's overview of global tax and transfer systems. 

Overconsumption is one of Australia's abiding economic vices and, if the increase in the GST were combined with real spending savings, abolition of nuisance (mainly State) taxes and charges and cuts to income tax, (especially to slash the top rate to 40 % and remove 'bracket creep), Australia would have a fair chance of becoming the economic powerhouse it could be.  Labor, of course, and the fringe dwellers in  the Senate, will not allow this reform, which is another argument for the dd.

Labor will however, be happy to 'soak the rich' and hit the 'merely well-to-do' by taxing 'large balances' in Superannuation funds. Except for senior pollies and public officials, whose pensions would presumably be inviolate while private pensions were slashed by taxing either super balances or withdrawals. Please note that attacking private superannuation attacks those who have contributed most to Australia's development during their careers. Such people have paid most in income tax during their careers (even Henry once paid 66 % in the dollar) and have otherwise planned a life that allowed them a decent income in their twilight years. Should 'soak the rich' become law, many elders will decide to soldier on to replace the money grab. This will reduce opportunities for young people to achieve promotions or, as increasingly the case already, even finding a job.  But its main effect would be gross intertemporal unfairness.

At least Treasurer Joe Hockey has said any changes will be 'prospective'.  And Tony Abbott was on the case against Labor's right-hand straight into the Superannuation accounts of rich and 'merely-well-to-do' Australians: 'It’s so typical of the Labor Party that they immediately want to see more tax, not less. As far as I am concerned, as far as this government is concerned, we want lower, simpler, fairer taxes.'

Who was the political leader who said: 'To be rich is glorious'?

Henry's modest suggestion was first articulated at one of those dinner parties enjoyed by the 'merely well-to-do'.  Let's start a new political party, called the 'Don't Touch our Super Party'. DTOS with the right candidates would surely get sufficient votes to have a good chance of winning the balance of power in the Senate.  At that point it would: (a) be able to prevent any government from raiding superannuation balances; and (b) support any government that offered real economic and tax reform.

Potential supporters or candidates may contact Henry here. Henry has no ambitition to be the Clive Palmer of DTOS, incidentally, as he has far too many useful other things to do, but would be happy to play some sort of facilitating role. Here is the key question. Is there is a potential leader - probably in her or his 40s - ready to stand up and seize the opportunity offered by Australia's current dire political gridlock?

The next day's (1/4) screaming headline from the Australian newspaper show just how hard it will be to roll back the tide of greedy cash grabs from people who manage to accumulate a decent nest egg. Or was this an April fool's Day joke?

'The $10 bn tax-free gift to retirees'.

A regular reader comments as follows.

'The unsubstantiated claims about the size of taxes foregone on super funds over $2m are a disgrace especially from Treasury.

'Also recall that State and Commonwealth public servants are entitled to indexed 2/3rds of their final salary.  So Treasury Sec and others need a lump sum of $8m to get the equivalent pension a assuming an average of 6% - giving a pension of $480,000.

'For them to build up a fund this big under the existing rules seems unlikely even with the post 50 year olds being able tip in $35,000 pa.  Hence pollies, upper end public servants and judges have implicit mega Super funds.  I could go on. 

'Henry's comments are among the few to caution that the issue is complex, reeks of unfounded envy, etc.
The point about the massive capital cost penalty Australian projects face is a massive growth inhibitor and also results in a lower supply of infrastructure.  Eg half as many subs or hospitals, etc'.

This is a comment on Henry's recent contribution on tax reform and costs of production, linked here and here.  The senior pollies and bureaucrats have to open the kimono on their immensely rich Superannuation schemes.  This used be justified by low salaries, but this is no longer the case. So getting the world's best Superannuation plan now that salaries are large, if not totally obscene, while turning the heat on 'merely-well-to-do' people in the private sector, is unconscionable.

One hopes a crusading journo, or a fair one, will acknowledge the point (and the source) when he or she next writes about superannuation.

Sunday Sanity Break, 29 March 2015
Date: Sunday, March 29, 2015
Author: Henry Thornton

Congratulations Mike Baird and your NSW coalition government. You have ensured continued good government in Australia's biggest state and provided great support to the Federal leader and Prime minister, Tony Abbott. The National Parliament has risen for the pre-budget break, and one hopes that more thought will go into both the substance and especially the presentation of the budget.  Clearly debt of 50 or 60 % of GDP is worse than many others but also totally unacceptable.  Sadly, the rhetoric on debt and deficit is still inconsistent and unconvincing.

Late last week Henry interrogated the man who manages most of his Australian-based equity investments.  Coming in to the meeting, Henry wanted a more defensive asset allocation, while Mrs T was all for remaining more or less fully invested. This view was shared by Henry's favourite equity manager (HFEM). 'The US economy seems likely to slow from here, while the Eurozone may be picking up.  China is not going to fall into a hole, and the US Fed's rate hikes may not begin in 2015', argued HFEM. There was further analysis of global bond markets and the assertion that the global equity boom may go on for far longer than most investment managers believe.

Since HFEM had the Thornton funds largely out of resource equities and small cap rubbish, Henry was forced to concede he may be right. 'Take care, Favourite Equity Manager', advised Henry, 'I don't want to be eating catfood due to being over-invested in equities during the Great Crash of 20xx'.

We also discussed strategy for Henry's Family Superannuation fund. There is growing confidence among poor people that the government is likely to impose some sort of tax on rich people's superannuation.  Savers like Henry and his family during their declining years will be helping to finance the lifestyle of non-savers and those who have used all their super is a splurge so as to be eligable for a pension.  We fully agree with Joe Hockey that Australia must abolish the 'entitlement mindset' but such a big idea needs constant reiteration and innovative illustration. 'x % of Australians receive some sort of specific assistance from government' is a compelling fact, especially when it seems that 'x' is 80.


Fiona visits the House of Dior and the French Film Festival

The frocks are gorgeous too, if you had not already guessed.


Today has been declared national watching the cricket day in the Thornton household, as the ANZAC nations slug it out for the title of World champion of (One day) cricket. This is a bit like Australia playing the USA for the World champion of basketball, or baseball.  We know if the title rested on one game, Australia might just pull it off, and the doughty fighters from NZ could do so today.

We wish NZ every good wish short of winning.  Best perhaps would be NZ batting first and making  a very fine 350.  Then Australia's leading batters get dismissed cheaply to set up a dour struggle by middle and late order Aussie batters.  Amazingly, the tail wags and with one ball to go Australia needs 6 runs to win.  The NZ captain declines to order a final ball rolled down the pitch and Mitch Starc, 94 not out, wins the game with a mighty 6, landing on the roof of the highest stand. 'In your dreams, Henry', says his greatest NZ sporting pal.

In futball, the Asian champions hold world champions Germany to a 2-all draw, after being in front for much of the game.  Ange is a genius and we look forward to the next World cup of Futball. Dodgy Eurozone referees will do their best to lock us out of the finals, but Ange Postacoglu and his team will find a way.

Footy's drug's scandal comes to a head just before the start of the 2015 season. Did I read that 'Bomber' Thompson when at Essendon tried 5 times to have the supplements program cancelled.  Yet he was fined $30,000.  Scale it up to the people who failed to notice, or to follow Bomber's advice, and you have the appropriate financial penalty. Plus a season on the sidelines?

Image of the week

Courtesy Herald Sun

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