Inflation, debt worries.
Date: Monday, April 18, 2011
Author: Henry Thornton
A new record gold price on Friday night underlined widespread fear of inflation, despite the G20's cheerful whistling on this subject.
Further concern about Erro-debt also rattled markets and some big-shot said the world is 'one crisis away from serious trouble' (or words to that effect).
David Uren reports today: 'A deal among G20 finance ministers to boost the International Monetary Fund's scrutiny of the seven biggest economies has failed to ease concerns about global economic recovery, which have pushed the gold price to a record of almost $US1500 an ounce.
'As International Monetary Fund and G20 meetings ended in Washington yesterday, markets were rattled by reports that the fund believed Greece had no alternative to default and of inflationary surges in China and India.
'Wayne Swan said after the meeting: "The global recovery is fragile and of course the risks are on the downside."
The Treasurer told Sky News's Australian Agenda that the G20 had discussed the effect on oil prices of instability in North Africa and the Middle East, the disasters in Japan and the sovereign debt crisis in Europe. The main achievement of the G20 meeting was to commission detailed IMF reviews of the major economies for their contribution to global economic excesses. The fund will consider their policies on savings and investment as well as the management of currencies, on which China and the US remain at loggerheads'.
Now 'food giants' have joined the fight to burn the carbon tax. Is there no end to this opposition - the unions, the big polluters, those who drive cars, consume electricity or breath, or try to run businesses.
This is no new theme. Henry's editor's last letter to Minister for Innovation, manufacturing and miscellaneous related matters, the Hon Kim Carr, pointed out that the Howard government (gasp) gave more money for the Cooperative Research Centre (CRC) program than the Rudd government.
At a weekend social affair, Henry was talking to a senior BHP Billiton man. 'We should focus on our areas of strength - mining, agriculture, medical science and sport' the man from BHP concluded. Amen to that!
Monetary policy - `the narrative` matters
Date: Tuesday, April 08, 2014
Author: Henry Thornton
Bugger me dead, as Henry's old footy coach used say. The International Monetary Fund (IMF) is chanelling Henry, via David Uren. Medium Uren reports: 'The International Monetary Fund has urged the return of multiple objectives for central banks, arguing that an exclusive concern with price stability has been shown to be inadequate.
'The fund says monetary policy faces a highly uncertain future, with doubts about its objectives, its policy decision rules and central bank independence.
“Until these issues are better understood, monetary policy will involve more art and less science,” the fund says'.
These stunning insights allegedly come from a 'staff paper prepared for the IMF ministerial meeting this weekend'. This is the news before the news, unless of course you have followed the debate in these pages, and summarised in Henry's submission to the Murray inquiry. We had been steeling ourselves to be ignored, but if the IMF is on the same page, just maybe Mr Murray will ask Kevin Davis to take a look and report back.
But I digress. Mr Uren goes on. 'The fund says the global financial crisis has challenged the notion that achieving price stability is sufficient to deliver macro-economic stability and raises the question of whether other objectives should enter the mandate of monetary policy.
'Yet the IMF says that while there is a consensus that financial stability must form part of overall economic policy, it is less clear to what extent central banks and monetary policy should deal with it.
“Would you put two million people out of work because banks are too leveraged or house prices are rising too fast? Instead, the first line of defence should be instruments that can target financial stability more directly and efficiently, including macroprudential tools, such as loan-to-value and debt-to-income limits, and capital flow management measures.
"Yet , when these tools prove insufficient, we may have to accept a new trade-off for monetary policy, and the interest rate may have to lend a hand to maintain financial stability.”
And, after a theoretical section about whether stabilising inflation may produce greater instability of output - a proposition that Henry doubts - the narrative continues with a stunning admission for Australia's free floaters at the RBA - the 'whatever don't kill you makes you stronger' boys.
'The IMF says that the success of the Swiss central bank in putting a cap on the value of the Swiss franc raises the issue of whether central banks should also target external stability'.
Gor blimey, Comrades, what are they smoking in Washington?
Mr Uren's commentary may be accessed here. Henry presumes that confidential staff papers are only available to friends of the leaky staffer, and if anyone has such a friend Henry would appreciate a copy of the paper.
To quote just a few of the relevant sentances. The issues [in this submission] concern better management of monetary policy, which requires additional ways to manage Australia's currency and credit growth - in short, effective 'macroprudential' policy.
Monetary policy – defined in the usual way by manipulation of cash rates of interest - cannot by itself adequately control the financial system. ... another policy instrument is needed to modify the effects of a currency value too high to allow the country to have a balanced set of industries.
Other forms of macroprudential policy are needed to modify other asset prices. ... I recommend variable prudential ratios, ratios that rise as asset prices rise and therefore provide some resistance to the development of asset inflation.
I recently presented on 'Asset inflation and monetary policy' at one of Melbourne's distinguished universities. One of the issues our team is grappling with is how to define 'monetary policy'. Is it growth of money supply (Friedman); cash interest rates (Historic gold standard,Taylor, modern central banks); 'Chairman's discretion (Zero cash rates plus 'innovation', eg QE); or some complicated mix of all those things plus 'state of the economy'.
A young professor who had spent significent time at one of the American Federal Reserve banks said something like: 'The Fed makes a judgment on all the available evidence', which reminded Henry of Australia's long-ago dismissed 'check list'. This is what I now call 'the narrative'. A central bank should relate its decisions about monetary policy to the entire set of economic indicators, and explain itself in those terms. The question for outsiders is, or should be: 'Does the narrative make sense'.
There is nothing truly original under the sun, Comrades, but it is good to see the IMF is also stumbling slowly to a better approach. Like generals fighting an old war, however, Australia's financial system regulators are reportedly satisfied that all is well here, due to their brilliance.
Saturday Sanity Break, 5 April 2014
Date: Saturday, April 05, 2014
Author: Henry Thornton
Gor blimey, comrades. That Martin Parkinson has got a bit of gorm, discovered his mojo, telling the nation that we have a choice: a steadily increasing avaerage rate of income tax or a widening and broadening of the GST. What a pity he didn't say all this when Australia's least competent Treasurer, Wayne Swan, was busy creating the complete disaster that is Australia's Federal budget. Would have been a career limiting move way back then, of course, but them's the breaks if you are fair dinkum, Parko, old mate.
We haven't seen the report of the Audit Committee yet, but it presumably contains even more ungilded views, justifying the government's latest descriptions, collected here by the AFR's Phillip Coorey.
“Terrible”, “awful” and “horrific” Treasurer Joe Hockey told Alan Jones on Monday this week as he spoke of the legacy inherited from Labor, including a “tsunami” of spending.
An “absolute cataclysmic mess”, was how Prime Minister Tony Abbott described it to Coalition MPs and senators the week before, urging them to spend the six-week autumn parliamentary break in their electorates “reminding people of the challenge we face”.
Fixing the budget is indeed a great challenge. Australia's greater economic challenge is the overall cost level, which Henry has been saying is of the order of 30 to 40 % higher compared to that of competitors and customers.
No newspaper has seen fit to repeat this suggestion, though every week there is fresh evidence.
* In the week just past, BHP let it be known that it costs 50 % more to dig up coal in Australia than in the USA, and several more companies announced their closure here. * Qantas is doomed as an international carrier, because Aussies will not pay the extra 30 % for the priviledge of international travel on the big bird with the flying kangaroo. * Evey week we hear of another bunch of businesses closing down, Toyota, Holden, Forge, the list goes on.
Confirmatory indirect evidence is the detioration in the labor market. Officials and econocrats stick doggedly to the official (ABS) unemployment, which says the rate of unemployment is 'only' 6%, albeit rising slowly.
Those who ask more focussed questions, like Roy Morgan Research, or provide better research, like former Labor pollie, John Black, find a far gloomier situation.
Mr Black's expose is in two big stories in the Weekend Oz; linked here and here.
'The Rudd government inherited a labour market from John Howard and Peter Costello at the end of 2007 that was generating year-on-year almost as many jobs as could be provided annually by growth in members of the population aged 15 or older.
'In September last year, the Abbott government inherited a labour market from Kevin Rudd and Wayne Swan that was generating jobs for only 28 per cent of potential new entrants to the workforce — 94,300 jobs for 334,700 potential new workers.
'In December, this figure dropped to 52,400, or 15 per cent of potential new workers, before climbing slowly back to 68,700 jobs in February. This means the government was then generating enough demand for the market to find places for only one in five potential new workers'.
The fallout is worst for young people, graduating at far too fast a pace for more than a few to find jobs, as discussed here earlier this week with input from Professor Jeff Boreland of Melboure University.
Last night the Hawks smashed Freo, who had started well this season after giving Hawthorn a good fight in last year's Grand final. Collingwood belted the hapless Swans last week, and meet the Catters at the 'G' today. Caaaarlton! meets Essendon on Sunday evening, a really bad time for those of us with jobs to attend, or even to watch on TV, and likely to be a really bad time for the Blues if their inconsistent form in two losses so far this season is any guide. I suppose there is just a chance they put together four scintillating quarters to beat Essendon by a point or two, but I'd rather save that result for the 2021 grand final.
The Aussie shielas' cricket team is into the T20 final and have a fair chance of winning, though I cannot for the life of me think who they are playing. The blokes salvaged a sliver of pride to finish one-three (three losses) by beating Bangladesh.
Otherwise it is the dry season for sport, though we did notice that a famous Aussie swimming family roared into Commonwealth Games contention this week. No doubt there are Aussies doing well in darts or two-up contests or boomeranging throwing in foreign climes, proving yet again that 'Global sport' ranks as highly as mining, agriculture and health services in the list of things we do well enough to make a national objective.
With Mrs Thornton, Henry plans to visit the Bendigo Art Gallery for its acclaimed show, then our next kultural highlight will be a visit to St Petersburgh. (Check out the image of the week for the image of the real Henry Thornton, with Wilberforce a great anti-slavery crusader.)
Image of the week
Those who do not understand history ...
Date: Thursday, April 03, 2014
Author: Henry Thornton
'The Reserve Bank of Australia has dumped its overt strategy of talking down the dollar and has ramped up warnings about steep rises in property prices.
'As the central bank’s board left the cash rate at a record-low 2.5 per cent for an eighth straight month, governor Glenn Stevens pointedly declined to describe the currency as “uncomfortably” high – a term he used in December when the dollar was several cents lower than US93¢, which it hit on Tuesday.
'Mr Stevens said the currency’s recent gains reduced the benefit to the economy. At the same time, low rates are expected to boost economic growth, helped by a surge in new home construction.
The shift in tone is a significant acknowledgement recent attempts to “jawbone” the dollar lower have floundered and threaten to undermine the bank’s credibility'.
Curiously, Jacob Greber, AFR's 'Economics correspondent', whose full story is available here, (including a nice video comment), fails to note Henry's clearly articulated explanation of the inconsistency in the RBA's views, posted Monday and available here.
Henry's view is based on the fact that 'monetary policy cannot serve two, [or even three], masters'.
That is, moving cash rates might have a reasonable effect on the economy, and should if managed appropriately, keep goods and services inflation controlled, as in the RBA's agreement with the government.
But moving cash rates cannot, except by chance at particular times in the economic 'cycle', also control the exchange rate or house prices.
Henry's editor's submission to the Murray Enquiry spells this point out as clearly as Henry is capable of doing, and is linked here.
Sadly, those who do not understand history are condemned to repeat it.
Memo Jacob Greber: Henry may be contacted here if you feel a tutorial may be useful.
Youth unemployment - a baffling jigsaw
Date: Wednesday, April 02, 2014
Author: Henry Thornton
No decent person can fail to be moved by the plight of contientious youngsters, with excellent qualifications and aptitude, who cannot get a decent job. The Global Financial Crisis must take a lot of the blame, since 'flight to quality' includes hiring processes. But in Australia's case I also blame the policy of letting 'higher ed' rip, encouraging far to many people to go to universities while downplaying the virtues of good technical training for people who are unsuited to Eng Lit, Maths or Physics or who find Economics boring.
Today's announcenment that the Victorian opposition will rescue a redundant Swinburne Campus from developers and turn it back into a good old-fashioned TAFE is likely to be a small step back to reality with the mix of types of education to match demand in Australia. I predict it will be very popular with voters.
One of Australia's finest economists - of the non-boring variety - is Jeff Boreland of Melbourne University. Jeff is on a one-man crusade to explain the facts of Australia's labor market, and today I present his summary of the youth unemployment, with a link to all articles in his series so far.
• A substantial decline in the employment/population rates of the younger Australian population (aged 15- 19 and 20-24 years) has occurred since 2008. • The decline has been concentrated amongst those not in full-time education who are working full-time and those in full-time education who are working parttime. • The main explanation for the decline has been a slow-down in hiring during the current downturn, which has disproportionately affected young workers. • Employment growth for the younger worforce has been much lower than for the aggregate workforce in manufacturing, construction, retail trade, accommodation and food services, professional services, and health care and social assistance.
Many years ago, when Henry was a visiting Professor at the University of Rome, we met over dinner a lady professor. She explained that jobs like hers were very hard to get in Italy, and she had to work for seven years without pay to get on the academic ladder, which she then climbed with great success.
In the past two years we have been helping our kids, and some of their friends, to get jobs, with a success rate of 5 out of around 8 so far. It goes without saying that all were highly credentialled, well presented and had been coached by friends and relatives in how to approach the dreaded interview. In three of the five cases, it was it seems the practical experience in a real but unpaid job as an 'intern' that seemed to make a difference.
The Roman lady professor's husband, the man who invited Henry to visit his university, explained that the magnificent apartment we were dining in had not been purchased on two professor's salaries. 'In Rome', he explained, 'you only own a property like this if you inherit it'. Australian house prices are headed up again far too quickly for this homeowner-with-children's comfort. Could we be headed for Italy's real estate problems as well as their labor market constraints and practices?
Monetary policy stuff-ups
Date: Monday, March 31, 2014
Author: Henry Thornton
'Monetary policy should be conducted with clear focus and without surprises that confuse people in the financial system or more generally'. That is the advice given to the young Henry Thornton by the former RBA governor Sir Harold Knight.
Consider the current RBA's recent three-stage approach to currency management.
1. When the currency was initially well above parity with the US dollar, senior RBA staff delivered the unreasonably brutal message - 'What doesn't kill you makes you stronger'.
Perfectly reasonable, you may think. However, for businesses that were unable to become stronger, liquidation or substantial downsizing was the outcome. Manufacturing, inward tourism, exports of educational services all suffered significent overall shrinkage, while most survivers were weaker, not stronger.
2. Then there was a phase in which domestic interest rates were cut, arguably lower than was ideal, combined with gubernatorial exhortation, so-called 'open mouth' policy. This phase of policy had some success and for a while the currency seemed headed to 85 cents, a level 'mentioned' as better than levels in excess of parity. This phase of policy reminded Henry of the (unannounced) aims of cutting interest rates in the late 1980s, despite explicit board recognition that monetary policy needed to be tightened, not eased. Nemisis came when cash rates had again to be raised, this time very substantially, leading to the early 90s 'recession we had to have'.
3. Now we have moved to a 'no comment' or 'don't mention the war' in which the RBA has let it be known cash rates are likely to be stable for some time. Since the housing boom suggests the next move in interest rates is likely to be up, the Australian dollar is again moving up.
In short: no consistency of purpose, confusing changes of approach, and further squeeze on exporters and those domestic companies struggling to compete against imported products and services. Verdict - 'failure, a weaker economy, not a stronger economy, and confusion.
The current RBA management will no doubt say 'Sir Harold Who?' and 'Henry Who?' should this Blog ever come to their attention.
Yet Sir Harold's advice remains the gold standard of monetary policy, and the mistakes of his sucessors RA 'Bob' Johnstone and Bernie Fraser should resonate with Glenn Stevens and other current senior officers who were watching and in some cases advising in the late 80s and early 90s.
Maintaining a clear focus on low goods and services inflation and a viable industry structure, and to lean into excessive house price inflation, requires additional policies.
* A variable tax on capital inflow to tame the excessive Australian dollar, as argued here in January 2013; and * A pro-cyclical bank prudential capital ratio regime in which bank lending is reduced as house prices rise.
Without these additional policy 'instruments' , RBA governors will simply lose credibility and 'clients' will remain confused about the gameplan being followed.
Not a good look, and not a good outcome for the 'clients' - which means the rest of us Aussies, especially who do not have highly generous salaries and wonderful defined benefit superannuation schemes.
The latest RBA pronouncments has nothing about the (rising) currency, but a reminder that house prices can fall as well as rise.
If you miss target A, aim at target B seems to be the game.
Saturday Sanity Break, 20 March 2014
Date: Saturday, March 29, 2014
Author: Henry Thornton
The general view of the economy , lead by the RBA, which is Australia's most reliable (but far from omniscient) forecasting agency, is that things are pretty good - glass half-full sort of view. The evidence is in the RBA leader's recent speeches, and in particular by Gov'nor Glenn Stevens' latest, 'The Economic Outlook'.
Yet, in Australia at least, today's headline about the early rollout of the NDIS that applies equally to Qantas, Toyota, Holden, Forge and many other failed or failing companies. 'NDIS trial costs blow out by 30 per cent'. The problem of what we have called 'double-digit cost disequilibrium' has nowhere been acknowledged by our leaders, including the RBA, although business leaders do talk about high costs and ask the government/IR bureaucracy to keep wage hikes to a minimum, or in some cases, to do away with overtime loadings or even to freeze wages.
Mr Stevens said of the global scene: 'The United States continues its recovery'; 'The euro area has resumed growth, albeit in a somewhat hesitant fashion'; In China 'Recent indicators have shown possible signs of slower growth in the early part of 2014 (Ark!!! says the petshop parrot); and 'Around the Asian region generally, at this stage, our sense is that economic growth is continuing at about its trend pace'. ('Sensing' a result implies some sort of sensing device, perhaps a really bright young economist from Malaysia.)
Coming to Australia - the speech was in Hong Kong - 'Australia certainly weathered the financial crisis well, and with a real GDP some 13 per cent larger than it was at the beginning of 2009, compares well with many other advanced countries'.
* 'There have been very strong conditions in the natural resources sector' though the terms of trade have fallen and investment has dived. * 'In the rest of the economy, ... consumption and residential construction have been soft for a while. And ... many businesses exposed to those sectors, including retailers, builders and banks, have found the going harder'. * 'In addition, because the mining boom was associated with a very high exchange rate, other trade exposed sectors have also faced more challenging conditions'.
Now comes the crystal ball: 'Looking ahead, as the resources sector's capital spending continues to fall, it will be desirable to see some other sources of growth strengthen'. (Ark, Ark!!! says the parrot, his version of Hear hear!.)
* 'export volumes for resources, ... are already growing strongly'. * 'It will be helpful if some of the other areas of domestic demand that have been subdued start to grow faster' * 'Businesses outside of mining would need to have made some progress in containing costs, and raising efficiency'. (At last, a nod to the unspoken problem. Ark, Ark, Ark!!! says the parrot as he dances a jig on his perch.) * 'Measures of business confidence have improved over the past six months. Businesses seem, so far, to be taking a cautious approach to investment, however: they are waiting for stronger, more persistent signals of improved conditions before committing to significant increases in capital expenditure'.(The parrot is downcast.)
The cagy Mr Guv'nor points out that there is a 'very substantial' degree of uncertaintly surrounding his mildly positive central projection. 9The parrot gets lost in the detail and begins to nod off.0
Gov'nor Glenn continues, however. He acknowledges the housing boom, seems to have given up his attempts to talk the dollar down and mentions as an aside: 'There is, of course, the full panoply of other ‘risks’. (The parrot twitces a wing, but by now if sleeping upside down on his perch, snoring gently.)
And, most importantly: 'Other conditions need to be right for growth. These include ensuring the environments for competition, innovation and investment, including in human capital, are sound. In those areas, various other government policies must come to the fore'.
Read the full speech here, without the intrusive reports on the response of the parrot. 'The bloody parrot's dead', asserts Mrs Thornton, who has arrived with a cup of coffee. 'Its not dead, merely sleeping' Henry replied, but he may have just been dreaming. Coffee? Delivered by Mrs T? 'You've been dreaming Henry', asserts the parrot.
The over-hyped Aussie T20 team got beat by the West Indies, who recaptured their form of the sixties following some trash-talk by the aussies. Memo to George Baliey: talk softly and carry a big bat, mate, much better than the opposite approach. Now the swaggering Aussies have a must, must, must win match against India.
Luckily the shielas seem to be doing a bit better in their world cup. What about a female chief editor at these newspapers, comrades, then we'd might get a fair suck of the sauce-bottle on sport.
Sadly, Caaaarlton!'s gross inconsistency meant a loss to Richmond on Thursday night, leaving Mick the Merciless to ponder the two-zip start to the season. Time to make them drink Ovaltine when they go to bed at 9 PM coach, or slip some other useful substances into their breakfast muesli. And it was heart-breaking to see Eddie Betts kick three goals in the second quarterfir Adelaide against Port Adelaide.
Essendon to come next week. Henry caught the final minutes of Hawthorn's stirring victory over Essendon last night, and clearly Bomber Thompson is not a bad stand-in for Mr Hird, now one hopes happily reconciled with Mrs Hird. Essendon Chairman, Paul Little, may well have learned a thing or two about industrial law - ie an employer cannot punish a player for comments made by his or her spouse. Free speech is still a core value of Australian society. Still no charges from ASADA, and it is beginning to look as if the while supplements affair has been a storm in a sample bottle.
Very sad about that young man who got his neck broken in what one old salt on a sports show called a 'legal tackle'. Wonder how said old salt would cope with being driven head first into the ground by three beefy young blokes who look as if they've spent all their lives in a gym, with help from Steven Dank.
And Israel Falou is not playing this weekend and did Henry hear he was suffering from an injury to his neck? It one way to try to win a game. Ask Mone Morkal.
Image of the week
Courtesy The Oz
Downtown Abbey on the Molonglo (The Bunyip aristocracy).
Date: Thursday, March 27, 2014
Author: Tiresias of Canberra
Mr Abbott has made a very grave mistake restoring knighthoods and damedoms. Reintroducing chivalric honours, complete with archaic honorifics, will allow Mr Shorten to paint the Coalition as the party of snobs and frustrated, wannabe, Brits. It emphasises Abbott’s personal nostalgia for a world that is past. In the UK knights now mostly decline to use the honorific ‘sir’. The only British knight I know personally insists on first names. Peers, both hereditary and life, largely do the same … unless they are travelling to the USA where would-be sophisticates and rubes adore what passes for European aristocracy.
Australian knighthoods were defensible in the days when we were an Old Dominion and those who held public office could not expect high remuneration during their working life or after it. Today it is very different. We are a republic in all but name, the monarchy plays no real role in national life and senior people in the judiciary and the public sector do very nicely, and the most eminent can expect highly lucrative commercial appointments in retirement as well. There is no principled case why any Australian who has climbed the greasy pole should ape the styles and titles of their 'betters' from days past or why they should receive any greater deference than either money or personal reputation already makes available to them. As for the choice of Cosgrove and Bryce: Peter
Mr (Sir Peter) Cosgrove is worthy enough, but does Abbott think his grassroots constituency (conservative, suburban, Australia) seriously wants to honour someone like Ms (Dame Quinten) Bryce who embodies many of the least likeable features of our smug and snide national elite?
The ABC, SBS and the Fairfax press will mock many of the men and women who will be chosen to receive the new quasi-imperial honours. Who will blame them for doing so? The creepy succession of party donors, spivs, racing industry types and celebrity sportsmen who will inevitably receive such honours over time will destroy public esteem for the whole thing.
Most seriously of all, by making a fuss about the bullshit of knighthoods, Abbott has thrown away a great rhetorical advantage that was available to him: the ALP and the trade unions are the only truly feudal political institutions in the country, that is, they are institutions in which family background and hereditary ties continue to play a truly significant role. This is an Achilles heel of the labour movement – the sheer number of gormless, useless and mediocre, types who continue to rise through the ranks on the strength of their family ties is a disgrace. It goes to the heart of what the trade union movement has allowed itself to become.
Now that Abbott has made himself the champion of chivalry and defender of archaic class distinctions, Shorten shall have undeserved and very suitable cover for the culture of nepotism that plagues the labour movement. Any time that Abbott wishes to focus attention on this nepotism, Shorten shall be able to change the subject merely by alluding to one or other of Abbott’s knights or dames.
Mr Abbott should wise up. University debating and student politics may have been fun, but they are over now. Every day in office is a privilege, every day must count and every punch has got to hit and hit hard. Wasting energy, attention and truly irreplaceable political capital on the honours system in the government’s first term is indefensible. Either Abbott re-sets the national focus where it counts or he is lost.
'Queen’s man John Howard would refuse Abbott’s Sir John title', AFR.
The coming global asset bust.
Date: Wednesday, March 26, 2014
Author: Henry Thornton
'Legendary investor Jeremy Grantham says the US Federal Reserve is killing the recovery of the world's biggest economy and the "next bust will be unlike any other".
We applaud Jared Lynch of The Age for sharing this gloomy prosnostication with Henry and his readers.
His article continues: 'Mr Grantham – the cofounder and chief investment strategist at the $US112 billion ($123 billion) Boston-based fund manager GMO –said he wouldn't invest his clients' money in US stocks for at least the next seven years because of the Fed's "misguided policies".
'Mr Grantham has an impeccable track record, having called both the internet bubble and then the US housing bubble. In November he said he believed the US sharemarket could rise another 30 per cent, although he believed it was overvalued, before crashing again.
"We invest our clients' money based on our seven-year prediction," Mr Grantham told Fortune.
"Over the next seven years we think the market will have negative returns. The next bust will be unlike any other because the Fed and other central banks around the world have taken on all this leverage that was out there and put it on their balance sheets. We have never had this before.
"Assets are overpriced generally. They will become cheap again. That's how we will pay for this. It's going to be very painful for investors".
A close friend, and Goldmember, sent us a link and asked what we thought of this scary prognostication.
I replied as follows: believe ultra loose US monetary policy has fuelled the last two asset booms. When the late 90s boom ended, Greenspan reversed policy to make money again cheap as chips.
Another substantial asset boom started after some time, and it was a doozy. Bernanke did the same when the GFC hit the world.
US monetary tightening now under way will produce another bust, but history says if it gets serious the Fed will then reverse engines again.
If one is willing to bet that the next bust will again be reversed one can sit and take one’s medicine, then enjoy the recovery.
At some time, global investors will however cotton on to the thought that this game cannot go on forever.
Whether this makes for the worst bust ever is uncertain, but one cannot rule it out.
I plan to reduce my equity holding before the next bust, but timing is something no-one is very good at.
Is Australia's growth doomed to slow?
Date: Tuesday, March 25, 2014
Author: Henry Thornton
The inter-related topics of 'Demographics, Productivity and Innovation' is the subject of a fine speech by Philip Lowe of RBA fame, as reported yesterday. Australia's population is growing faster than those of other developed nations and numbers of Australians born overseas are rising to nineteenth century levels. These are two trends that may help make Australia relatively innovative and relatively productive. Offsetting this, our population is growing older and older people are costly to look after and (mostly) less innovative even while they are still working.
Productivity growth (and therefore standard of living growth) in almost all developed nations has declined markedly since the mid 2000s compared with that in previous decades, possibly as an effect of the Global Financial Crisis which severely limited business investment. Australia is no exception. As Mr Lowe says: 'Looking back over the past two decades or so, we have enjoyed faster growth in real per capita income than almost any other advanced economy. In the 1990s, we benefited from strong productivity growth. Then in the 2000s, our collective living standards were boosted by a very large rise in commodity prices. And over much of this period our national income was further increased by the rise in the labour force participation rate that I mentioned a moment ago.
'Today things look a little different. Productivity growth over the past decade has been lower than it was in the 1990s, commodity prices are high but no longer rising, and the share of the population in employment has fallen recently. If these trends continue we face the prospect of considerably slower growth in our living standards than we have become accustomed to.
'The solution here is to lift our productivity growth. Mr Lowe did not add 'but this is easier said than done'.
He did however provide brief summaries of the main thesis of two of the books referred to by Michael Folie, plus a more optimistic view.
'Professor Robert Gordon from Northwestern University ... argues that the first three-quarters of the 20th century was a golden period in terms of productivity growth for the advanced economies. During that period, we worked out how to take full advantage of the transformational inventions of electricity and the internal combustion engine that occurred at the end of the 19th century. While there have been many breakthroughs over recent years, Gordon argues that they pale into insignificance compared with the huge advances made possible by these iconic inventions at the end of the 19th century'.
'Another sombre assessment is offered by Nobel Laureate Edmund Phelps. He argues that the problem is not so much that we have run out of really great things to invent, but that western societies are now less able to invent them. He argues that cultural changes, including the changed role of government, have stifled the desire and incentives for innovation. As a result, our economies have become less dynamic and less likely to find, develop and make use of the major technological breakthroughs that are the source of much productivity growth.
'As is usual in economics though, there is a counterview and it is much more optimistic. This view is that the so-called techno-pessimists are fundamentally wrong and, rather than facing a future of much slower technical progress, we are on the cusp of a new era of great progress in science. A prominent advocate of this view is Robert Gordon's colleague at Northwestern University, Joel Mokyr, who argues that the technological advances of recent times have given scientists a dazzling new range of tools and instruments. These advances have also greatly lowered the cost of accessing information. His argument is that, as a result, a new age of great scientific advancement is now possible'.
Which view, or which mix of views, is nearest to being correct, is impossible to tell in the current state of economic knowledge. However, Mr Lowe notes that 'if we are to improve efficiency and advance technology then innovation is required and innovation requires someone to take a risk – the risk of trying a different process, the risk of changing workplace organisation and management practices, or the risk of spending scarce resources to explore a new idea'.
This brings us to the question of how to create a more innovative economy. Mr Lowe asks 'How has our society's attitude to risk and innovation evolved over time and what are the implications for productivity growth?'
His 'tentative answer is that there has been a subtle, but important, shift in the way we think about risk and innovation. In particular, our preferences appear to have shifted in such a way that we increasingly focus on risk mitigation and risk control. There are examples of this in a whole range of activities in our society – from the nature of the legislation that parliaments pass, to the increase in compliance activities in the nation's boardrooms, to the amount of money we are prepared to spend to limit the probability of blackouts and even to our attitudes about the design of children's playgrounds. In each of these areas, our society has been prepared to limit options or to spend more of our scarce resources to reduce risk'.
While I am attracted to this view as a structural influence to add to the net effect of technical matters or low recent investment levels, it certainly cannot explain the recent almost halving of the growth of productivity in almost all developed nations.
This must remain a matter for further thought and perhaps for further testing, ideally in the more rigerous manner used by real scientists such as physicists.
My own pet theory is that Australia's tax and welfare system suffers major anti-innovative biases relative to those of the USA, a famously innovative society. One reason for this is because taxes on start-up companies are far higher here, and the ATO zealously tries to kill plans to reduce this bias. The ATO's insistence, for example, that shares issued in lieu of cash must be taxed at full nominal value, so that staff and directors of cash-strapped start-ups must pay full tax on a value that may, statistically will on average, be greatly overstated is a ridiculous obstacle to an innovative economic culture.
So too is Australia's relatively generous welfare system. But would we really want to make things far harder for the battlers, as it is in the USA? Logically, however, if normal jobs are hard to get and welfare is low and also hard to get, some people will create new businesses, even if it is mowing lawns or minding otherpeople's children, or walking other people's dogs.
But we must accept that America's history was in important respects far more innovative than ours. The relentless drive to the west, buying or capturing massive new territories, the massive influence of mining booms (which we share), acceptance of migrants who had to make it or fail with little help, the war between the states, the influence of colonial masters, who Americans threw off over the issue of excessive taxationwhile we outwaited ours, the differences mostly work in the direction of a more self-reliant, harsher and more entrepreneurial culture.
And, as Mr Lowe says, perhaps being rich makes a nation less innovative, or allows a rich nation to be more risk adverse. My own writing on these matters is available here.
They raise questions such as the role of gambling in creating an innovative culture, what would Australia would do if a young Albert Einstein popped up or what does the research on the mainsprings of economic growth really show? Questions a Deputy Governor is probably trained not even to think about.
But adding all the evidence and opinion (except that of the optomistic Joel Mokyr), it seems that unless something big changes, standards of living are likely to grow more slowly in developed nations like Australia. Countries, like Australia, whose standards of living have grown faster than productivity may even need to undego a reduced standard of living. Difficult to handle, especially it is only a few conomists on the recored to warn Australians of this gloomy possibility.
RBA Speech - Demographics, Productivity and Innovation
Date: Monday, March 24, 2014
Author: Michael Folie
I have over the last year been mulling and reading about the need for economic policy to focus primarily on growth policies and this leads to the question of how do we incentivise productivity. The usual macro response is to upgrade skills and training and spend money on bureaucratic innovation councils and hence how to get venture capital mobilised.
Several eminent economists have notable treatises on this topic. Michael Spence .. Technology convergence helps Emerging Economies. Richard Gordon points out that productivity gains in the future will be much less than historical. Edmond Phelps (my favourite) argues that productivity stems from a widespread attitude encouraging creativity, try something different at the individual level . This means a very flexible workplace without all the prescriptive rules such as Fair Work Australia.
The attached link is to a speech given 10 days ago by Phillip Lowe, Deputy-governor of the Reserve Bank of Australia. I draw it to your attention because it is the first time I have seen such a serious discussion in Australia. Mainly the Phelps book which I think offers an interesting angle towards supporting workplace reform.
Ed: We encourage others to comment on this important speech, providing a fine discussion of an issue that effects us all, and on which economics is a long way from being definite about. Contact Henry here.
They raise questions such as the role of gambling in creating an innovative culture, what would Australia would do if a young Albert Einstein popped up or what does the research on the mainsprings of economic growth really show?
The role of 'bourgeois dignity’
Thanks, Michael. I had the pleasure of hosting Deirdre McCloskey recently in Adelaide. Her explanation of the Industrial Revolution, which she generalises, has to do with what she calls ‘bourgeois dignity’: entrepreneurs saw themselves as doing (a social) good; and the dominant groups in the society grew to appreciate the contributions of those who upset the status quo. This is very like the phrase Michael quotes from Phelps, ‘a widespread attitude encouraging creativity’. Ideas and attitudes, along with interests, shape outcomes.