'Emerging economies are particularly concerned about the effects of the loose monetary policy in developed economies that is driving capital to their shores in search of higher returns, boosting inflation and creating volatility in commodities markets.
'Policymakers in these economies are struggling to balance the need to propel domestic growth amid an uncertain international environment against the dangers of mounting inflation'.
If any of this sounds familiar, it should do so. These disturbing trends and policies to improve matters are discussed in the author's Great Crises of Capitalism.
And in distant Australia ...
Australia, the so-called 'miracle economy', has been propped up by the China boom. Before long, even the Rudd/Gillard government's Treasurer Wayne Swan will wish so much money was not flushed away during the Keynesian panic of 2007-08.
Now Treasurer Swan has a massive budget deficit and is slicing and dicing government spending (including spending on medical research).
Clearly Treasury under the benign leadership of Great Helmsman Ken 'wombat' Henry lost its traditional role as guardian of Australia's fiscal probity.
If there is a 'double dip' global recession anytime soon, the reputations of Messrs Swan and Ken Henry will be trashed, along with the jobs of hundreds of thousands of Australians.
Also trashed will be the NBN, meaningful tax reform and great big new taxes of any variety.
Such is life, as someone once said. But we should have been capable of managing the first and second resource booms of the early twenty-first century so much better.
Political retribution will be severe - the government will change and Wayne Swan will no longer strut the global stage.
We must also hope that Treasury regains its traditional role of guarding Australia's financial independence.
The real China syndrone
Date: Wednesday, July 10, 2013
Author: Henry Thornton
Emerging global gloom is no surprise to serious economy watchers, especially those not focussed on an optimistic 'house view'.
The IMF has downgraded its growth forecasts and warned that downside risks are greater than upside risks.
Read on here if you feel the need to temper any excess optimism.
China’s economy, soon to be the world’s largest, is in the middle of transitioning to a new development stage. The Melbourne Institute and the Centre for Contemporary China Studies, both of the University of Melbourne, yesterday assembled five leading specialists on the Chinese economy to discuss where China’s economy is heading, in which way it will develop, and how China’s economy will affect other economies in the years to come.
Professor Yiping Huang from Beijing University was the star of the show.
He said the period of 'uninhibited investment expansion' was now over, and strongly hinted that the current growth potential was 6 - 8 % rather than previous double-digit rates.
In the past 30 years, product markets had been 'almost totally deregulated' but factor markets (including labor markets) were still highly regulated - sound familiar, gentle readers?
Three major matters would be different. * Investment as a ratio to GDP would fall from 50 % to 25 %. * Growing inequality needed to be reversed, and * Pollution had to be controlled.
'Rebalancing' is underway, and there will be three features going forward. * No major stimulus. * widespread deleveraging, and * Structural reform.
Professor Huang expects in coming years financial liberalisation, fiscal reform, rising factor prices and reform of land use amongst other reforms.
He returned in question time to offer some bold predictions about the future. We would see: * The first China-induced global recession. * China would become a source of global inflation, rather than deflation. * A new international division of labor, as the real incomes of China's workers rose. * China would become a 'global consumer of note'.
Other speakers discussed some of these issues in more details. Professor Christine Wong of Oxford, but soon to join Melbourne University, told us about China's totally arcane fiscal system and advised it needed great reform, both so that leaders know the true fiscal situation and the Ministry of Finance could control the fiscal situation - sound familiar, gentle readers?
Professor Dwight H. Perkins of Harvard discussed corruption, or 'rent seeking' to use Anne Krueger's wonderful phrase. Low level rent seeking is encouraged by the myriad of regulations, and would only be reduced by abolishing many regulations, promoting transparency (eg online applications) and removing discretion from officials. Eliminating high level corruption was a far harder task, as much of it was subtle and not necessarily illegal. The current leadership team is trying to grapple with this matters but it is a deeply entrenched issue. The judiciary is not independent of government, the system is not transparent and there is no fair arbitration system. Could this change! 'This will not happen!' asserted Professor Perkins with great energy.
Another key issue concerned the 250 million 'economic refugees' who are registered as living in rural ares but work illegally, and without the benefits available to citizens registered in the cities. The rural areas are denuded of adults of prime working age (18 - 40 years), children are denied education and if with their parents are living in crowded and uncivilised circumstances that are not conducive to doing homework. A trial solution, a school for the children of said refugees, came up with the homework problem and decided to provide dormitory accomodation during the week. The costs of doing similar for all (presumably) 250 million children involved, and also providing decent living for their parents, was four trillion dollar (take your pick, $A or $US the professor assertd) a large sum but doable over the next 50 (did I hear right?) years, subject to Professor Wong's MoF one assumes.
Much food for thought. Professor Huang said, just before rushing off to catch a plane to Beijing: 'My old professor Ross Garnaut (who lead the seminar) told me: 'The pessimists are more scholarly; but the optimists are more often right!'
And in the Great Southern Province ...
The economic team at nab says that their latest survey reports the weakest readings for business conditions & capacity utilisation for more than four years. Business conditions in retail, manufacturing and mining are particularly weak. Labour market forward indicators still point down and transition from mining investment is creating a big structural adjustment task.
We learned earlier this week that job ads continue to plunge. A leading remuneration consultancy says 'Expect no salary increases or bonuses folks'. The sizes of Campbell Newman's proposed salary hikes for ministers in Queensland have shocked everyone, and if not abandoned will further reduce his government's popularity and help Kevin 747.
Prime minister Rudd continues to dazzle us all with continuous action, about a day later per each item than in his first term as now he allows for 'consultation'. The latest move to make his once-great Labor party more democratic (and, just incidentally, locking in an incumbant leader) will not it seems be opposed by the faceless men. This is like an old-fashioned Blitzkreig, and right now it looks like finishing at Stalingrad.
The bookies still have the Coalition as odds on to win well. We are seeing a battle for credibility between punters and the pollsters. Henry's money is on the people who put money on the outcome.
Portugal`s lesson for us all.
Date: Monday, July 08, 2013
Author: Henry Thornton
Geoff Kitney from the AFR will have enraged former finance minister of the year, Wayne 'miracle economy' Swan, by hinting that Portugal may have lessons for us all.
'Lifting productivity is a slow process', and with the best will in the world can only improve an economy by a few per cent each year. That is why the 'lift productivity' team in Australia, while correct, have no immediate solution for current structural weaknesses in our economy, and especially our double-digit cost disequilibrium.
With its own currency, which we have but Portugal does not, there is another remedy. As Mitchell says: 'the quick way is to cut real wages and boost competitiveness is by devaluing'. That is what Australia did in the 1930s and again in the 1980s. In both cases the large currency depreciation was achieved by market forces, with the Bank of NSW leading the way in the early 1930s and the floating exchange rate doing the job in the 1980s.
In the 1930s is was the Arbitration Commission that lead the wage on labor costs, though business was happy to endorse the cut to its cost base. In the 1980s, it was Bob Hawke's 'Accord' with the ACTU that persuaded it to cop a 2 % cut in real wages. Can anyone see how to do this in Australia's current poisonous political climate?
Portugal had its own boom time in the past twenty odd years and failed to take advantage of it to reform then. Mitchell concludes as follows: 'Structural reform of the product and labour markets that would have been very much easier in the boom times now has to be completed in a time of severe economic weakness.
'There’s a lesson in that for all of us, don’t you think?' Read on here.
Graham Tuckwell and his wife Louise have donated $50 million to the ANU for students who have overcome disadvantage to become eligable for university.
They are in Australia to personally pick the first group of beneficiaries. Joanna Mather reports, and Graham Tuckwell is eminantly quotable.
"We're trying to unpick the whole history of the student. It's not what you've done, it's how you got there and therefore how good you are innately"/.
As one might expect from such a dynamic bloke, Graham Tuckwell dismissed the tendency for Australian universities to rely on the ATAR score based on mark from the year 12 exams as "Rubbish".
Henry dares to suggest this initiative is more or less in line with his thoughts that it is culture, not cash, that is the main problem with Australian education.
Saturday Sanity Break, 6 July 2013
Date: Saturday, July 06, 2013
Author: Henry Thornton
Australia's latest (and former) PM, Kevin Rudd, is zipping about seeking friends.
The Indonesian President has come up with an idea, hold a meeting of all nations involved in the people smuggling/receiving business to try to nut out a solution. This is so obvious that one wonders why Mr Rudd did not offer it when he was foreign minister. (I mean no disrespect, Mr Yudhoyono, it is only the very best leaders who readily grasp the obvious.)
The Australian'sPaul Kelly asks today if Mr Rudd's Treasurer, Chris Bowen, will have the ticker to curb his boss's temdency to spray money about like water from a firehose at a barbeque that hs gotten out of control. (I use more colorful language because I am merely blogging, and because it makes me feel better.)
RBA Chief, Glenn Stevens, has delivered a necessary sermon on the need for tidy fiscal policy along with a warning that growth will be slower in the future than in the past. The glass will still be half full, possibly more than that, but it will be a smaller glass. Methinks a change of mood is taking place among Australia's econocrats. Read on here.
The AFR's David Bassanese points out that bond yields have already risen by almost 1 per cent in the USA and by more than that here. Bond yields hit 8 % in Portugal a few days ago, but the ECB applied the firehose of 'softer for longer' with ECB monetary policy and the crisis was over, for now.
Make no mistake, gentle readers, the global economy is in a difficult space. I have been reading Ben Bernanke's expose on modern monetary policy, American style, which includes Q&A with students. My respectful question to Mr Bernanke is as follows: 'Imagine, Mr Chairman, a demand curve for money and a supply curve for money, intersecting to define an interest rate that defines an equilibrium in the market for money. Then the Fed imposes a near zero interest rate, thereby creating a major disequilibrium in the market for money, and therefore in other markets. Please explain how it all works out over the next ten or twenty years.’
There is a free lifetime (Henry's lifetime) Goldmembership for anyone who provides a half-coherent answer, and if it comes from Bene himself we shall throw in some free movie tickets.
The Wall Street Journal reports: 'After five years of unconventional measures and policies aimed at supporting the economy through severe financial crisis and sluggish recovery, Federal Reserve officials could see the strong June employment report as another sign that their efforts are finally paying off.
'The jobs figures mean the Fed is likely to stay on the course Chairman Ben Bernanke plotted last month and begin to scale back its $85 billion-per-month bond-buying program later this year. He said if the economy continues to evolve as the Fed expects, it would continue to reduce purchases and wrap up the program by mid-2014'.
Mini-politics. Fans of opinion polls have mostly been baffled by the almost instantaneous swing in the polls to give Rudd's Labor a fighting chance in the forthcoming Federal election, or in Roy Morgan's latest poll, a winning position.
Maxi-politics. Henry's blind seer in Canberra, Tiresias, has tuned in to an obscure HBO television series screened in 2003: “K Street".
'If I understand it correctly, “K Street” is an insider’s sly, prescient, pointer to disturbing developments then under way in America. It may well provide a useful resource for analysing the Obama presidency in all its sickly-sweet idealism and rancid realpolitik'.
Caaaarlton!'s last chance to be seen as a credible finalist when out the window in front of a massive crowd at the 'G' last night. The players let Ratts down against weak teams last year, and now after a string on near misses againt top teams they have given up on Mick the merciless against a very good team. Should be a major spring cleaning in September, that is if Mick can be bothered.
Now we shall turn our attention to the Rugby, and George Smith's return after several years overseas, on top of the comeback win last weekend, fills Henry with hope. Coach Robbie Deans is said to be in line for a sacking, which Henry would not approve of, but it is certainly the modern way of doing business.
'Boof' Lehmann's return to the Australian cricket team as coach has, however, cheered Henry. Some simple, direct 'you know what to do, now just do it' Aussie coach instructions have worked wonders, and we fans are all hoping the tide has turned for the Australian cricket team.
Image of the week
Asset prices and economic stability
Date: Friday, July 05, 2013
Author: Henry Thornton
Milton Friedman said that monetary policy cannot serve two masters. This means that monetary policy (ie interest rate manipulation) should focus on overall economic stability and controlling goods and services inflation, while some other way must be found to control asset inflation.
Ben Bernanke in his recently published book The Federal Reserve and the Financial Crisis accepts this logic.
In particular, he says, in response to a question from a student: 'So, yes, we have learned that asset price bubbles are dangerous and we want to address them if possible, but when you can address them through financial regulatory processes, that is usually a more pinpoint approach than just raising interest rates for everything'. (P 24)
Mr Bernanke comes back to this issue more than once.
On p 54 he says: ‘Interestingly, probably the strongest correlation across countries that you can find to house price increases is capital inflows, ...’ (Ring any bells, gentle readers?)
On pp 58-59 he says: ‘And generally speaking, the right way to use monetary policy is to achieve overall macroeconomic stability. Now that does not mean you should ignore financial imbalances. I think the Federal Reserve could have been more aggressive on the supervisory and regulatory side ...’. And: ‘... we should never rule out the possibility that, if all our regulatory and other types of interventions do not achieve stability and the financial; system we want, monetary policy, as a last resort, be modified to some extent to deal with that question’. (Emphasis added by Henry.)
Importantly, Mr Bernanke focusses on the housing boom and bust rather than the share price boom and bust on the grounds that it was the housing bust that caused more trouble in the US economy on his watch.
And he does not hold back from some healthy self-criticism: 'The Fed made mistakes in supervision and regulation' (Pp 50-51). but he is more critical of the overall regulatory regime. '... essentially what was missing here was enough attention being paid to things that could affect the system as a whole, as opposed to just individual firms'.
In a paper written by Claudio Borio and Philip Lowe is 2002, these now prominant men wrote of the financial system and its regulation: 'Currently, the primary focus [of prudential authorities] is on preventing the failure of individual financial institutions, ... and there is a tendency to treat macroeconomic risks as exogenous with respect to the institutions’ behaviour’.
Clearly the Fed had been warned, but one of the weaknesses of central banks is to become cocooned in a warm place of their own making.
As it happens, Mr Borio, now Director of Research at the Bank for International Settlements (BIS), is in Australia where he has shared a platform with Philip Lowe, now Deputy-governor of the RBA. The headline in the AFR says 'Policymakers urged to target asset prices', which gets one tick from Henry whose research on this matter has recently been presented at Australia's leading research universities.
The opening sentance of the report in the fin, however, fails to get a second tick. We are told that Mr Borio 'urged global policymakers to "lean" against asset price booms to reduce the chances of a future economic crisis'.
Henry would be far happier if 'global policymakers' took the trouble to sort out their advice on this matter. Ben Bernanke is surely correct when he says ... essentially what was missing here was enough attention being paid to things that could affect the system as a whole, as opposed to just individual firms'. The same point made by Messrs Borio and Lowe in 2002.
'Global policymakers' while they are at it they should try to decide if Mr Bernanke is correct to say that monetary policy should only be used as a 'last resort' to control asset booms. And also while they are at it, they should make sure that someone really good is at the helm of the regulatory authority overseeing the effect of asset market gyrations on the overall economic system.
Claudio Borio, image courtesy AFR
Does Kevin Rudd get it?
Date: Wednesday, July 03, 2013
Author: Henry Thornton
Henry awoke this morning to the dulcet tones of Kevin 747 Rudd explaining that the China boom was over and Australia was facing difficult times.
Could he be getting some good advice on this matter comrades? Could he be in the process of outflanking Chris Bowen, Joe Hockey and Tony Abbott on the economy? Time will tell, but the RBA is still cheerily contemplating an economic glass half full.
The RBA wisely did not cut interest rates further yesterday, but maintained its 'easing bias', without saying that explicitly.
The concluding para says: 'At today's meeting the Board judged that the easier financial conditions now in place will contribute to a strengthening of growth over time, consistent with achieving the inflation target. It decided that the stance of monetary policy remained appropriate for the time being. The Board also judged that the inflation outlook, as currently assessed, may provide some scope for further easing, should that be required to support demand'.
Clearly it is not the RBA that is advising the Prime minister, and presumably if it is Treasury its Secretary's presence at the RBA meeting would have injected a greater note of realism into the report of the meeting.
Yesterday, Henry presented his paper on 'Asset inflation and monetary policy' to a meeting of the Economic Society of Australia's Victorian branch. There was a lively discussion and some progress in the understanding that 'monetary policy cannot serve two masters' and that asset inflation needs to be dealt with in ways other than by changes to monetary policy. This is a theme in Ben Bernanke's thoughtful 'four lectures' memoir which Henry is reading and will review shortly.
Ross Garnaut remarked that all Australia's big downturns have been sparked by falls in the terms of trade after large rises. That is exactly our situation now, and it demands an immediate rethink about economic prospects and policy.
Australia`s coming recession
Date: Tuesday, July 02, 2013
Author: Henry Thornton
Signs of the coming economic firestorm are legion. Most important is the state of Australia's labor market, often trumpeted by Treasurer Swan as proving Australia has 'the best economy in the developed world'. Official employment statistics, and especially the headline rate of unemployment, are misleading, with the major flaw being the assumption that paid work of one hour a week means the person is classified as 'employed'.
The cancelling or delay of many resource projects will have enormous adverse effects on employment in the resource sector, indeed already is with Australia's global mining companies shedding workers, a process that has been underway for some time in the so-called 'junior' miners that do much of the basic mineral exploration. Non-mining ventures are cutting costs by laying off workers, in some cases moving jobs offshore and in other cases just cutting job numbers.
The fuss over 457 visas no doubt owes its intensity to the weakening Australian labor market. And last night's Four corners has reinforced the problems facing many Australian battlers.
The Roy Morgan survey, which uses a more realistic set of assumptions than used by the ABS, has consistently reported a rate of unemployment twice the official number, and a rate of underemployment (people working fewer hours than they would like to work) also close to double-digit rates.
Another source of adverse news for those who care to look is the number of small businesses struggling to survive or going under. Farmers bulldozing fruit trees, retailers offering stock below cost, manufacturers closing shop or reporting plans to close the business when they retire, are all trends unlikely to filter to Canberra where for the past six years there has been more work to do than people to do it. The plain fact is that Australia is suffering a double-digit cost disequilibrium relative to both competitor and customer nations.
The broader economic statistics also reveal some alarming developments. Employment in manufacturing has been declining for decades, but retail jobs have recently joined the trend. Exports of wine and processed foods have fallen dramatically. Overseas enrolments in Australian universities have fallen sharply from the recent peak and numbers of Australians travelling abroad now greatly exceed inbound tourists. All these trends have been reported in an important recent paper by Professor Ross Garnaut. He has calculated Australia's real exchange rate, which adjusts the actual exchange rate for inflation in Australia relative to overseas inflation, and is therefore the best measure of the extent of the overall cost disequilibrium. This measure increased by 69 % from the end of 2002 to a peak in March 2013. The currency depreciation since then has perhaps reduced this by 10 %, but this leaves a lot of adjustment still to come.
The excessive level of the Australian dollar is widely blamed for trends such as those discussed above, along with ruthless behaviour by monopolistic retail chains and widespread imports of cheap goods purchased over the internet. The Australian dollar looks like it has started a long fall and its level is likely to overshoot any sensible equilibrium level, as asset market always tend to do. This will alleviate one source of pressure on businesses, but it will only help if cost increases are contained.
Australia's economy is in effect highly indexed, meaning it is designed to compensate just about every significent group from the impact of inflation, and privatised utilities and toll roads typically have contracts allowing indexation plus. A large fall in the value of the Australian dollar will create serious inflation, and if this is automatically passed through to income recipients, including welfare recipients, and utilities, our double-digit cost disequilibrium will not be reduced much, if at all, by a falling dollar.
But a falling dollar will mean the Reserve Bank will have to modify or suspend its inflation target, with possibly severe consequences for its credibility. This is already strained by its relatively sanguine 'glass half full' rhetoric, just as Treasury (and therefore the government) has been far too optimistic in its predictions about both the economy and its assumed return to surplus.
One hopes Treasury's initial briefing for the incoming Treasurer has been more realistic about Australia's economic conditions and prospects than those parroted by Treasurer Swan, and also that Treasury has told Mr Bowen what they think should be done.
We feel constrained to publish as often as we can make time, reference to published comments, or provided by readers on significent items of news or opinion that reflect on Australia's uncertain economic future.
Have you ever been polled?
Date: Monday, July 01, 2013
Author: Henry Thornton
Happy new (financial) year, gentle readers
New year, new government, new political battle.
Henry expected a bounce in the polls for Labor, but to near equality?
Is this just because voters have been encouraging the Rudd supporters so we can fire him ourselves?
Mrs Thornton works at a university and is a lonely conservative in a sea of Labor supporters.
She has been asking her fellow academics if they know anyone who prefers Rudd to Gillard and the answer is almost always a resounding 'no!' And all but one said she'd never been polled.
So who do the pollsters survey? is the next question. In a long life as a voter, neither Henry or Mrs T has ever been polled. Is this a bit odd, gentle readers?
So we ask two questions of Henry's readers today.
1. Have you ever been polled about Australian politics?
2. Do you prefer Rudd to Gillard?
Contact Henry here. You may use a nom de plume, as Henry does, but we would be helpful if you stated your age, gender and the way you earn your bread.
Saturday Sanity Break, 29 June 2013
Date: Saturday, June 29, 2013
Author: Henry Thornton
Kevin Rudd is back, and has come out swinging. 'Tony Abbott will involve us in armed conflict with Indonesia' represents his first big blunder, for which he has been roundly castigated by the quality journos.
The polls show a big honeymoon bounce for Rudd's Labor, but surely this will pass when Mr Rudd's personality asserts itself. Where's the bloody hairdryer? Can't you provide some decent food on airforce One? What about that report I asked for 2 hours ago?
In matters economic he is at it like a pack of hungry chooks: 'Tony Abbott will drive the economy into recession with his policies of mindless austerity' tweets the Ruddster.
Even normally unhysterical economists such as Saul Eslake are saying there is a 25 % chance of recession, and this prediction is based on the assumption of 'policy unchanged' - ie Ms Gillard's policies that Mr Rudd will not be able to change in any substantial way before the election.
Treasury will finalise its economic briefing over this weekend and will certainly reduce the degree of over-optimism that underpinned its advice to Wayne Swan.
Henry has urged Treasury to also include in their briefing the 'realistic worst case' and if this is done with honesty and imagination it will certainly conclude Australia just about certain to experience its first recession for a generation. How bad could this recession be? is the question Treasury should strive to explain. Henry's regular article of advice to the board of the Reserve Bank will be available here and in the Oz on Tuesday and will provide an answer to this question - also based on the assumption of 'policy unchanged'.
Hernry will also outline policies that will minimise the damage, as should Treasury. Australia's voters deserve to know the truth about the state of the economy, and Treasury's advice should be published also. Is that a platoon of flying pigs I see outside the window.
Fiona Prior has reviewed The Great Gatsby, and includes a segment on roadkill, also a viral vid of a gymnast at work.
What a week it has been in sport. The British Lions prevailed in their first Rugby test against the Wallabies and saw three Wallabies carried off the field on stretchers with their necks in a brace.
The Wallaby's captain was cleared of a charge of stomping the head of a Lion, but becomes the first Wallaby to face a kangaroo court to review the alleged assult and will almost certainly be out of the third test.
Israel Falou has been freed to 'go hunting Lion' where-ever he sees fit and will himself be prey for the British hit squad.
Stop press: A heart stopping game finished with the Wallabies ahead by a single point after scoring the only try of the game. So now the series goes down to the wire.
Henry has a suggestion for the Rugby heirarchy. Can you please provide expert commontary on what is happening and why? As a non-Rugby player, Henry is baffled by decisions of the ref, and his viewing pleasure would be enhanced if the commentators stopped using comments like 'Is this a Bill Blogs moment' and explained what is going on.
In cricket,the prototypical Aussie opening batsman, Darren 'Boof' Lehman (no relation to the failed bank of the same name) has replaced the South Efrican as the Australian team's head coach. Now there will be much less MBA-style management and far more old-fashioned direct Aussie leadership. 'You know what yer've gotta do, Watto, got out there and score 96'.
Mr Watson's immediate return to the opener's spot where he first made his name is an example of Boof's clarity of thought, and we sincerely hope Watto will be bowling also.
And for the quicks: 'You can have one beer for every pommie batsman gotten out, and two more if they are felled by a well placed bouncer as part of the bowling foreplay'.
The batters apart from Watto will be expected to 'just get on with it' and rewarded with a brusque nod if they make 50 and a rather more effusive 'Why'd you get out?' if the lose their wicket after making a ton.
Caaaarlton! went down after again trying (bravely) to come from behind having been decimated by the Swans in atrocious conditions in the first half of the game.
The conditions reminded Henry of a school game in heavy rain at Nunawading oval back in the 1960s, when two inches of mud was added to the near unbreathable air suffered by Caaaarlton! in Sydney last night.
Like Malthouse at half time, Henry instructed his players to just kick the bloody ball into the forward zone and forget the fancy stuff. Henry's surprise move was to put his shortest players into the key positions, and they done us proud as we pulled off a miracle result.
Caaaarlton's season is all but over, but we shall celebrate any further wins and acknowledge that Mighty Mick has improved the team's attack on the ball. We are still short in the cattle department, and in desperate need of a key forward (Buddy? Or Fev? Or Brown?), a key back (Fletcher?) and a serious enforcer (Hodge? Or Caaaaarlton!'s own Robbo if he can improve his skills at precise placement of the shoulder into the opposition player's head so it looks totally accidental.)
Image of the week
Courtesy The Oz
Rudd`s ascension and the economy
Date: Thursday, June 27, 2013
Author: Henry Thornton
Australia has to be described as a vigorous democracy. Overnight we have a sudden coup, the second in three years and three days.
Political pundits expect a 'sugar hit' gain for Rudd Labor and a quick election won by Tony Abbott but perhaps with a smaller margin than seemed likely for Gillard Labor.
We salute Julia Gillard for her grace under pressure and stoic departure and Kevin Rudd for showing the decency to commend Ms Gillard and her Treasurer for what he sees as their contributions to Australia.
Henry's contribution is to think outside the box and look ahead on the question of what it all means for Australia's economy.
Kevin Rudd gave as his prime reason for breaking his pledge never (again) to challenge the incumbent Prime minister to save Australia from the horror of Tony Abbott. Mr Abbott, he claims, will restore WorkChoices and impose mindless austerity like the UK's conservative government.
Presumably, Mr Rudd will continue both his own tendency as PM and Ms Gillard as PM to throw taxpayer's money at perceived problems.
Without recalling the 43rd parliament from the planned winter break, followed by the election that must be held (if I have heard right) by 30 November, all Mr Rudd can do is announce policies for that election.
The issues he was deposed for bungling were the carbon tax, the mining tax and the flow of asylum seekers, plus bad behaviour of a sort that leopards are known for not being able to change.
The carbon issue is still a thorn in Australia's side, the mining tax is a (justified) flop and the flow of asylum seekers is increasing exponentially. Mr Rudd must offer answers to the questions these issue raise.
Henry suspects that another big issue in the electorate's collective thinking (if such a thing may be imagined) was the constant promise of a budget surplus this year being ultimately junked after events made nonsense of the overly optimistic forecasts on which those promises were based. This unhappy event leaves people questioning the competence of both Treasury and the then Treasurer, despite all the rhetoric about 'miracle economy, 'best economy in the developed world', etc.
Treasury should immediately present Mr Rudd and his Treasurer with their current best guesses about the state of the economy and its prospects. Such a set of projections will, if Treasury is as competent and as fearless as it claims, show a far more dismal picture that has been pomulgated by Treasurer Swan.
I urge Treasury to also present the new government with a set of 'realistic worst case' forecasts. I am unsure whether Treasury has the courage or the imagination to do this, although such an approach is a vital part of serious policy making.
Treasury also has responsibility to present a set of policies designed to return the economy to robust health, both if their 'best guess' predictions are near the mark or if the 'realistic worst case' prevails.
The unarguable facts to be taken into account in either scenario include the following:
* Global markets are in turmoil, with equity and bond prices reacting in an alarming way to attempts to prepare for the 'tapered' end to wildly dangerous monetary stimulus, and rebounding with poor economic data in the USA, presumably because this is likely to allow for a slower taper. (A whiff of the Whitlams for global traders, perhaps?) * China has dangerously overstretched banks with the People's Bank reported one week to be tightening monetary policy and then said to be offering accomodation to banks in trouble. * Japan's mad stimulus policy seems (after an initial 'sugar hit') to have failed. * Southern Europe remains mired in depression with the rise in global bond yields now seemingly underway likely to put renewed pressure on their budgets, with more 'mindless austerity' so higher interest burdens can be paid. At some point as bond yields rise, budgets cannot be fixed and debt must be repudiated. Eurozone banks would come under immediate pressure in that scenario. * Australia faces all this turmoil with a cost base that shows double-digit disequilibrium, ie costs far out of line with costs in competitor and customer nations. The results include major mining projects cancelled or on hold, junior mining companies in crisis, non-mining companies cutting costs by making staff redundant, postponing hiring (a great blow to many young people graduating this year) and planning to move more staff (or the whole enterprise) offshore. The state of small business generally is worse, with many facing total failure.
In my view, the best outcome for Australia is a mild growth recession if the global outlook does not worsen, and the worst case is a renewed global crisis and 'mindless austerity' imposed by market vigilantes, not by an Abbott or a Rudd government.
Over to you, Dr Parkinson.
Here are links to the main (largely political) responses in the mainstream press today.
Date: Tuesday, June 25, 2013
Author: Henry Thornton
'Since 2007, actions by central banks have prevented financial collapse. Further accommodation is borrowing time for others to act. But the time must be used wisely. The focus of action must be on balance sheet repair, fiscal sustainability and, most of all, the economic and financial reforms needed to return economies to the real growth paths authorities and the public both want and expect'.
This is the opening sentance of the Annul Report for 2013 of the Bank for International Settlements, sometimes called the central bankers' central bank, released last weekend.
The BIS has a reputation as a nest of economic dries, a description it gladly accepts.
'Whatever it takes' has been the rallying cry of the major central banks. The immediate crisis has been averted, but much remains to be done. And by everting the immediate crisis with extreme monetary policy ease, the major central banks have provided time for underlying problems to be fixed, time that has not generally been used well.
As the BIS points out, central banks cannot fix many of the weaknesses of the current global economy.
'Central banks cannot repair the balance sheets of households and financial institutions. Central banks cannot ensure the sustainability of fiscal finances. And, most of all, central banks cannot enact the structural economic and financial reforms needed to return economies to the real growth paths authorities and their publics both want and expect.
'What central bank accommodation has done during the recovery is to borrow time – time for balance sheet repair, time for fiscal consolidation, and time for reforms to restore productivity growth. But the time has not been well used, as continued low interest rates and unconventional policies have made it easy for the private sector to postpone deleveraging, easy for the government to finance deficits, and easy for the authorities to delay needed reforms in the real economy and in the financial system. After all, cheap money makes it easier to borrow than to save, easier to spend than to tax, easier to remain the same than to change'.
Progress in dealing with those things central banks cannot fix has been slow, partial and uneven. 'Alas, central banks cannot do more without compounding the risks they have already created. Instead, they must re-emphasise their traditional focus – albeit expanded to include financial stability – and thereby encourage needed adjustments rather than retard them with near-zero interest rates and purchases of ever larger quantities of government securities. And they must urge authorities to speed up reforms in labour and product markets, reforms that will enhance productivity and encourage employment growth rather than provide the false comfort that it will be easier later'.
Fiscal consolidation has not generally proceeded quickly enough. Very low interest rates have provided relief, therefore allowing relevant governments to hasten slowly. 'But the relief is temporary and not without risks. To see why, recall that in the two decades preceding the crisis, long-term interest rates in many advanced economies averaged about 6%. Today, long-term bond yields in major advanced economies are around 2% – in Japan, they are well below. When interest rates and bond yields start to rise, investors holding government bonds stand to lose huge amounts of money.
'Consider what would happen to holders of US Treasury securities (excludingthe Federal Reserve) if yields were to rise by 3 percentage points across the maturity spectrum: they would lose more than $1 trillion, or almost 8% of US GDP. The losses for holders of debt issued by France, Italy, Japan and the United Kingdom would range from about 15 to 35% of GDP of the respective countries. Yields are not likely to jump by 300 basis points overnight; but the experience from 1994, when long-term bond yields in a number of advanced economies rose by around 200 basis points in the course of a year, shows that a big upward move can happen relatively fast'.
And in conclusion: 'Six years have passed since the eruption of the global financial crisis, yet robust, self-sustaining, well balanced growth still eludes the global economy. If there were an easy path to that goal, we would have found it by now. Monetary stimulus alone cannot provide the answer because the roots of the problem are not monetary. Hence, central banks must manage a return to their stabilisation role, allowing others to do the hard but essential work of adjustment.
'Authorities need to hasten labour and product market reforms so that economic resources can shift more easily to high-productivity sectors. Households and firms have to complete the difficult job of repairing their balance sheets, and governments must intensify their efforts to ensure the sustainability of their finances. Regulators have to adapt the rules to a financial system that is becomingincreasingly interconnected and complex and ensure that banks have sufficient capital and liquidity buffers to match the associated risks. Each country needs to tailor the reform agenda to maximise its chances of success without endangering the ongoing economic recovery. But, in the end, only a forceful programme of repair and reform will return economies to strong and sustainable real growth'.
This epistle is about as savage as it gets in the circles circles occupied by the BIS and national central banks.
Fortunately Australia's monetary policy is not (yet) dangerously easy, and fiscal deficits have not taken us to a point where a doubling of global bond rates would bankrupt us. But we have made our economy less flexible in the past six years, and handouts and grandiose schemes have wasted resource and weakened the spirit of enterprise. Australia's cost base is in double-digit disequilbriun, and the current plunging exchange rate will not solve the problem unless domestic costs are severely constrained. Our challenges are different than those of the major nations, but equally intractable.
And this morning's news shows Australia is not immune.
The Oz reports: 'FINANCIAL markets are being gripped by another bout of concerns about liquidity in key economies for Australia, particularly China, helping spark the biggest one-day sell-off in Australian government bonds since the turmoil in global markets that followed the collapse of US investment bank Lehman Brothers in late 2008'.