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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. 

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

Australia has a small economy struggling to support modern hi-tech jobs. It's hard to believe, but the Abbott government is trying to blackmail the Senate to support its higher ed reform by threatening to cancel the jobs of many researchers. If this madness is not quickly ended many fine young scientists will be on the dole, stacking shelves at supermarkets or applying for jobs overseas. This will in effect sabotage what should be a unified and consistent attempt to create a smart nation with clever businesses.

This is yet another ham-fisted attempt to reform economic policy that appears poorly thought out and with no attempt to carry the public with it. Henry had great hopes for this government, but it seems as if the coalition is mimicking Labor's arrogance and incompetence. Perhaps these characteristics are transmitted in the overheated air of parliament.

Certainty to the unbiased observer the House of Reps often seems like an asylum whose inmates have taken control.

It seems possible that some boffins in Brisbane have discovered that the amaloid plaques that a believed to cause Alzheimer's disease can be eliminated in mice by some sort of ultrasound. If this turns out to be a reliable way to roll back the symptoms of this dread disease the benefits for elderly Australians, not to mention elderly people everywhere, will be so great that decades of spending on medical research will be justified.

Please do not play chicken with Australia's future Mr Abbott.

Global monetary policy

The mighty US economy is creating many new jobs while many other nations a wallowing in serious, long-lived recession.

With more reliable evidence that the American economy is recovering, the US Fed has changed its language about the state of the US economy, sending waves of fear through financial markets. [Ed: later news saw US, and then global, markets, advance further. Funny things, markets.] America has already ended 'Quantitative easing', and the logical next step is to begin raising interest rates.  This is happening at a time when most other developed nations are still practicing 'QE' with no plans to raise interest rates from current near zero rates.

One result is a rising US dollar and the emergence of 'currency wars'. Even Australia's RBA has decided it needs to create new record lows for interest rates, even though its governor Glenn Stevens must know that the only way the Australian economy will receive a lasting boost will be if the government embarks on real, substantial reforms. 

Attempting to blackmail Senators by threatening to end the jobs of thousands of top high class scientists is just nuts.

Maybe the next discovery will be that those amaloid plaques are caused by shouting abuse in a badly ventilated House of Reps, or watching on the daily TV news.


Fiona Prior finds a lot to be impressed by at ARTEXPRESS 2015


Australia's cricket team beat Scotland and the rain to finish second in Group A of the World Cup.  Captain clarke opened and, wait for it, 'Watto' returned to number three.  Both did well, but Michael Starc was the star with a truly great bowling performance.

It seems that Australia will play Pakistan in the quarter final rather than South Efrica as would have been the case if rain had beaten Australia in Hobart. India, New Zealand and South Efrica await if we overcome the Pakis. The minnows of world cricket, Afghanistan, Ireland, Zimbabwe and those gritty Scots were the heroes, fighting hard against the superstars. Funny game cricket.

ASADA's decision about the future of 34 Essendon and former Essendon players will be known by 31 March. Then the footy can get off to a real start, with Richmond vrs Caaaarlton! at the 'G' on April 2. If Essendon gets off with a light smack on the wrist, Carlton's massive penalty for rorting the salary cap will be seen as the totally unfair travesty that it was.

The latest sports atrocity is the poisoning of a leading dog at the major pommie Dog Show.  Shades of Phar Lap's mysterious death in America. Both atrocities would provide great challenges for Sherlock; would make for great episodes.

Plenty of 'stuff' this week, including bankruptcy of two male basketball teams, and the possibility of no national competition next year. The relative success of the women's league is a wonder to behold.

As we watched the 'Offsiders' today, Mrs T was moved to comment on the rise of women sports commentators. Henry noted the relative IQ levels shown by female commentators and suggested it is like the rise of female pollies.  'Soon the Neanderthal grunts of the males will be replaced in both sport and politics' Henry opined.

Image of the week

The Raff Report – March 2015.
Date: Wednesday, March 11, 2015
Author: Nick Raffan

Clip clop, clip clop, clip clop: it must be the King approaching in all his finery. The crowds are cheering as he passes by. But he is absolutely starkers. This fable reminds the Raff of the current status of financial markets. Last night some of the crowd saw the King as he really is and the Dow fell around 333 points, a fall of 1.85%. European stock markets also took a battering. The price of gold fell to a 3-month low of US$1,155.60/oz and silver tumbled to US$15.67. The Aussie dollar fell a cent against the USD to 0.7634. Why was this so?

it seems, all of sudden the punters perceived that the US Federal Reserve was set to hike interest rates soon. Readers might recall that when interest rates rise, the discount rate used for future cash flows rises, and the discounted value of future cash flow falls. This results in contraction of price earnings multiples and share price falls. Of course, it won’t only be the price of equities that will be affected, so too will be bonds. At its most simplistic, when interest rates back-up, the price of bonds fall and vice versa. For many years now the bond markets have been a one-way bet. When US interest rates start to rise it’s all over red rover for bonds.

What has been the real deal about equities in the US? What the Raff is about to say is not new but needs repeating because of its importance. Many US public companies have been borrowing at near zero interest rates to buy back their own shares. So what does this do? Let’s suppose that a company’s profits are the same every year. By buying back shares, each year the number of shares on issue fall and the earnings per share rises. At a constant price earnings multiple, the company’s share price increases every year. This steady rise in the share prices of companies with a strong influence on the leading US Equity Indexes ensures the good times keep rolling. Many share price performances have absolutely nothing to do with management running a business better or growing the business or doing anything else that might generate real value for shareholders. It is dear readers smoke and mirrors.

The prospect of a near term hike in US interest rates deserves pondering. Readers might recall that the spike in US orders a few months ago was because of an abnormal increase in new orders for aircraft which distorts the 12-month moving average, as shown in the following chart. By the Raff’s reckoning the previous business cycle started in December 2002 and ended in April 2008 for total 7 years and 4 months. This current cycle started in February 2009 and thus has gone on for 6 years and 2 months.

Orders seem to have peaked and without the unusual spike in aircraft orders the 12 month moving average would show rolling over heralding the plateau of this business cycle.

It seems odd that the Federal Reserve would increase interest rates at the top of the business cycle but nothing surprises the Raff any more. Maybe the powers that be want to teach financial markets a lesson and will try to regain control once more to dominate us all.

At the time of writing ASX Materials Index is down 3.1%. BHP is down 5.5% versus RIO only down 1.4%. BHP has been creamed because of its exposure to oil where the price is hammered by a global glut and strong USD. The battle between USD and precious metal continues with the former still winning. If anyone thinks that low commodity prices are a sign of a healthy global economy then they must be in the crowd cheering on the King as he passes by in all his finery. 

From where the Raff sits the world is in deep trouble. The Raff is pondering when will come calls for tariff protection. There is no such thing as a flat playing field. The free trade agreements are one-sided. Manufacturing is near to dead as a Dodo in this country. Opportunities for the young are like hen’s teeth. Boy have we stuffed it. The Raff does not see any political party with a plan to remedy the situation. Throwing money at the problem will not help; just ask the Japanese.

Dan Greenhaus comments

Yesterday's release of the durable goods report for February missed expectations. The report joins a long list of recent economic data points that have fallen short of expectations. February existing home sales and industrial production and March Empire Manufacturing index and consumer sentiment readings are but a few of the recent reports meeting this description. While the Bloomberg consensus still looks for Q1 GDP to come in around 2.2%, we think GDP is tracking closer to 1.0% than 2.0% and expect the consensus to play catch-up in the next few weeks.

This communication does not provide complete information regarding its subject matter, and no investor should take any investment action based on the information contained herein. For additional and more complete information, including Important Disclosures and Analyst's Certification and the full post, please click here.

Click Here for the Full Blog Post: 'First Quarter GDP Tracking Close to 1.0%, May End Up Even Less'.

Stumbling reluctantly to the truth
Date: Tuesday, March 10, 2015
Author: Henry Thornton

'China dependency to hit Australia hard' says Crispin Odey, a wealthy hedge fund guy whose fund is no doubt set for the coming recession.  Other similar hedge fund men are also mentioned as agreeing in the article that starts on the front page of the AFR.

Leafing thru this august news source, one is not surprised to read 'China slashes our imports'.  The featured article on the same page says 'US jobs surge points to Fed rate hike'. US 'Quantitative easing', along with near zero cash rates, plus America's strong resilience, has stimulated America's recovery. Like destroying the villages to free the inhabitants, this has created the competitive currency devaluations that are giving our RBA (and all Australians) such a hard time.  The same article reports 295,000 new jobs in the USA which, coming on top of several months of strong jobs growth, has reduced the rate of unemployment to a 'mere' 5.5%.  Just as our unemployment is 6.4 % (or more) and 20 % for young people.

In Australia, jobs growth, and jobs ads, remain depressed and the issue is whether further rate cuts can have any effect, apart of course from fanning the fires of asset inflation. Some economists have suggested that rate cuts will further fire the housing boom and therefore stimulate the slow growth of our former 'miracle economy'. The sane members of the tribus economicus point out that it is lack of supply that is the main reason for the housing boom, not lack of demand. Why is supply constrained?  Ask you local council, dear reader, regulation piled on regulation.

This is a paradigm of reasons for our overall sluggishness.  Another AFR article asserts the tax reform is the priority, which gets one (feeble) cheer from Henry. Tax reform is strongly needed to pay for the many programs that we cannot afford now that the mining boom has ebbed. Of course it would be good if the loonies in the Senate would come to their senses and find ways to cut spending. With China struggling, global demand is not going to actually encourage aggregate supply in Australia.  Strong overall supply, especially strong exports and  strong domestic sourcing of product, replacing imports, is what is needed.

The Oz asserts today that 'we can ride out recession'. Since the RBA is not expecting recession, this is no great comfort.  But the mere existence of the relevant research report suggests someone in authority is beginning to fear 'recession' is likely, or at least possible. It is slightly more than 18 month since Henry said: 'Put crudely, Australia has pissed the proceeds of the mining boom up against a wall of gullible voter expectation.  In the process, mining companies allowed their cost bases to expand to unsustainable levels. Cost bases expanded in sympathy in the non-mining parts of the economy in a climate of easier than desirable monetary policy and encouraged by those vainglorious spending programs of the Rudd and Gillard Governments.

'Restoring Australia's economy to robust health will require massive effort by all Australians. The budget must be restored to a point where it has a sustainable balance, that is a balance over the course of the conceivable ups and downs of the global and local economies. Ideally there will also be a return to sustainable budget surpluses, but that is for a future government to consider when the basic repair work has been undertaken. Tax reform is needed to improve incentives and enable elimination of the many nuisance taxes that cost so much to administer. Regulations generally must be slashed, and labour market regulations revamped, to give owners of small business encouragement to create sustainable jobs'.  Full article here.

RBA legend, Austin 'Aussie' Holmes used point out that someone was 'stumbling reluctantly to the truth' when he had come very late to one of his (Austin's) radical prophecies or proposals. Henry is delighted to bestow the inaugural Aussie Holmes award to the editors and staff of the AFR and the Oz.

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

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

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

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

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

Read on here.

Political economy

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

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

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

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


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

The document and its overview are available here.

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

More on this theme here and here.


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

Fiona goes to Frame of Mind by Sydney Dance Company

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

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

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

Henry's future

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

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

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

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


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

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

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

Image of the week - by acclamation

Courtesy AFR

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Read on here.  


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


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

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

More from the Essendon bunker here.

Image of the week

Courtesy The Oz

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

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

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

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

Courtesy SMH

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

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

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

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

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

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

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

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

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

Mr Fraser's speech is available here.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Read on here.

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

Political economy

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

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

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

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

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

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

Here is Henry's agenda for reform.


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


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

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

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

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

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