The rise of China and the decline of the West
Date: Tuesday, April 26, 2011
Author: Henry Thornton
Easter weekend has seen much press comment on the rise of China and its governance. Julia Gillard is reportedly being counselled about criticism of China's record on human rights. China's relatively fast growth of GDP was the subject of a screaming Anzac Day headline in the Age. Today The Oz has several articles on China, whose rapid growth is generating inflation it is proving hard to arrest.
Henry's Easter reading has included Ian Morris's masterful Why the West Rules - For Now. (Review linked here.)
Some notes from this review on the subject of China and the West follow.
There have been many predictions of the end of Western rule. The current relatively rapid growth of China’s production is the most obvious fact. China becoming America’s banker is another. The near meltdown of the Western financial system during the recent Global Financial Crisis is a third. The capitalist system is experiencing more frequent financial crises, arguably of increasing size and involving growing danger of general economic breakdown. All these facts, the subject of my recent book Great Crises of Capitalism, raise questions about the West’s leadership beyond the simple fact of extrapolation of recent trends.
Ian Morris’s indices of social development show a similar tendency. Extrapolating recent trends show the East overtaking the West early in the twenty-second century CE. The future, of course, is far from immutable, or so we believers in free will are inclined to think. (Morris makes reference to Charles Dickens’ Scrooge who asked the ghost of Christmas Yet to Come if he was being shown the shadows of things that Will Be, or the shadows of things that May Be, only. Morris also reminds us of Asimov’s Hari Seldon and his fictional science of psychohistory. )
Ian Morris’s indices of social development, however, have a far more dramatic message than changes in the relative position of the world’s two great civilizations. They reflect the accelerating, scary rate of change that many of us feel to be a feature of the modern world. As Morris puts it: ‘We are approaching the greatest discontinuity in history’. This is what the futurist Ray Kurzweil calls ‘the Singularity’ – ‘a future period during which the pace of technological change will be so rapid, its impact so deep … that technology appears to be expanding at infinite speed’.
The core of this view is the extrapolation of Moore’s Law, the rule that in every passing year the miniaturization of computer chips roughly doubles their speed and halves their cost. By 2030, Kurzweil says, this law implies it will be possible to upload human minds onto computers. By 2145, computers will be able to host all the human minds in the world, ‘effectively merging carbon- and silicon-based intelligence into a single global consciousness’. This is sometimes called ‘Rapture for Nerds’ but Morris says ‘criticism from incredulity’ is no counterargument. As well as massive computing power, think genetic engineering, think brain implants to alleviate disease effects, think American military experiments to place molecular computers allowing wireless access to the internet in soldiers’ heads.
Even without the wilder aspects of Kurzweil’s Singularity, we are headed for a massive discontinuity, far exceeding the major discontinuities of past developments like establishment of agriculture or the industrial revolution. There may be developments that our unimproved, merely human, brains cannot imagine. ‘Unless’, Morris warns, ‘something prevents them’.
‘Something’ is the worst case scenario. Already what Morris calls the five familiar apocolyptic figures – of climate change, famine, state failure, migration and disease – ‘seem to be back’. Climate change skeptics will stop reading about now, but Ian Morris is another distinguished thinker who believes human activity is causing global warming (or ‘global weirding’ as another distinguished thinker puts it) that may greatly impede human progress. Morris accepts that global warming is real and may cause many problems, exacerbating other adverse trends including mass migration, famine and pandemic, all leading to state failure. I urge deep-dyed skeptics to read the relevant part of Why the West Rules and to meditate on the question what might happen if mainstream science, accepted by Morris, is broadly correct.
Acts of terrorism or even war between China and America involving nuclear weapons (or manufactured pandemic I would add) are clearly possible. Morris quotes experts who say the world is too interdependent and the costs of war so high that war between the great powers could not happen. Unfortunately these experts were writing just before the outbreak of World War I, a conflict, it should be noted, started by an individual act of terror.
Rome’s failure to achieve breakthrough into a time of more rapid development ushered in six centuries of decline, a fate also suffered by China’s Song dynasty. ‘What a Singularity will mean for Western rule is open for debate, but what Nightfall will mean seems much clearer.’
‘For the Singularity to win, we need to keep the dogs of was on a leash, manage global weirding, and see through a revolution in energy capture. Everything has to go right. For Nightfall to win, only one thing needs go wrong. The odds look bad’.
I suspect Ian Morris is a determined optimist, as he does not end his book here. The final pages discuss various factors that might change the course of development – global institutions that help provide better governance, widespread transition to renewable, clean energy sources (including nuclear power) and mutation of human brains, perhaps induced by the technology of the Singularity. Morris discusses the deep irony in his conclusions that whether the West rules will become irrelevant as the world’s globalizes and shrinking geography washes away the artificial barriers between blocks of people with very slight, superficial, genetic and cultural differences.
And in conclusion: ‘On the last page of his book Collapse, the biologist and geographer Jared Diamond suggested that there are two forces that might save the world from disaster: archaeologists (who uncover the details of societies’ mistakes) and television (which broadcasts their findings). As an archaeologist who watches a lot of television, I certainly agree, but I also want to add a third savior, history. Only historians can draw together the grand narrative of social development; only historians can explain the differences that divide humanity and how we can prevent them from destroying us’.
Selling til it hurts
Here is a report on Henry's latest presentation on Great Crises of Capitalism. (See P 2) This week sees a foray to Sydney, an evening with the Quadrant set.
Saturday Sanity Break, 18 May 2013
Date: Saturday, May 18, 2013
Author: Henry Thornton
Budget week has come and gone, though it marks the real beginning of the near four month election campaign.
While budgets in the Howard-Costello government were uniformly conservative - ie underpredicting revenues - the Rudd-Gillard-Swan governments have suffered the opposite affliction, which is to overpredict revenues.
Over-optimism about revenues leads quite directly to overambitious spending plans. Plus, of course, a genetic disposition to spend other people's money on do-good schemes, which is fine if the budget allows that.
The great unanswered question is the extent to which the various predictions of revenues were provided by Treasury and the extent to which they were 'influenced' by the Treasurer. Henry heard one gruff oldtimer on ABC radio saying, with apparent authority, that the only estimates that are pure Treasury are those produced immediately before Federal elections.
Judith Sloan has tackled this matter at length in the Weekend Oz, and allocates blame mostly to the Treasurer, though Treasury has not enhanced its dwindling reputation either.
Henry's contribution from earlier this week is here - take pains to consider 'realistic worst case', comrades.
'Thank goodness for the funds put into the US market' Henry tells Mrs Thornton.
'You're only as good as your latest play', Mrs T replies. 'That gold bar is not doing so well'.
'That was insurance, and the global crisis is not over yet'.
Treat of the week
It started as follows: 'In the commercial world that I have grown up in, eight elements of leadership must exist if you are to be part of a high performance team. Intellect and skill are a pre-requisite, but these two characteristics alone will not achieve your objective.
'Leaders must have a set of principles which recognise that people are your most important asset. These principles are not exclusive but they have certainly helped me, and enabled me to test my principles against others’ actions.
VISION – do you paint a picture of your objectives and are they shared? TRUST – you will only be trusted if you trust others INTEGRITY – do you show courage and promote courage in others? PARTICIPATION – are you building adult relationships? LEARNING – are you tapping into people’s discretionary effort? DIVERSITY – have you confronted your own biases and prejudices? CREATIVITY – do you know where the pockets of creativity lie? COMMUNITY – have you created a healthy environment?
'The other characteristic which must be present is a clear understanding of how to manage the capital of an enterprise which, for a time, you are the steward. That means that you must understand the time value of money, so that a dollar you have to invest today is worth more than a dollar a year from now or at least equal in value.
'In business you must earn above your weighted average cost of capital, that is, debt plus equity. If that cost is competitive and realistic, then your enterprise will generate a cash flow which can be discounted to determine today’s value of future cash flows and the economy as a whole is the beneficiary.
'I have a strong belief that economies that incentivise business to generate consistent added value through profitable endeavours will grow, jobs will be created, and the tax revenues will increase for the community as a whole'.
The three legged stool of debt.
Date: Friday, May 17, 2013
Author: Henry Thornton
Another budget has come and gone, and Tony Abbott's reply has acknowledged the dire budget situation and outlined his 'road to surplus'.
Mr. Abbott's speech has been well received, and his approach of keeping Labor 'saves' to help with the immediate budget crisis is good politics. Also, by avoiding a sudden lurch in fiscal policy, sensible economics.
The glum looks on the Labor frontbench showed the extent to which they are well aware of the trouble they are in.
The biggest news of the day, however, was the 'debt warning' expose by Don Argus, AC, arguably one of Australia's greatest business leaders.
The Don, as he is called in Henry's circle of friends, has taken the trouble to assemble information on debt owed by government, households and business - the three legged stool of debt. Data for both the USA and Australia is assembled, and naturally it is not a pretty picture.
Incurring debt is borrowing from the future, and repaying debt, as any honest enterprise or individual must do, imposes slower growth as repayments are made, unless the debt is used productively.
Rather than trying to summarise the Don's argumants, I invite readers to look for themselves.
Budget projections - what were they smoking?
Date: Thursday, May 16, 2013
Author: Henry Thornton
This year's promised surplus has long ago evaporated, and we learned last night that the detioration is of the order of $20 billion. Blimey, comrades, what were they smoking?
In what is possibly his final performance as Treasurer, Wayne Swan showed a greater degree of sober realism than ever before, though many economists believe the risks to current forecasts are still biassed to the downside, and that current 'realism' is still not total.
One assumes there is some hard thinking going on within Treasury. In Henry's day as a forecaster, it seemed logical to consider what we called 'realistic worst cases' as well as 'best guesses'. Even a modest application of such an approach might have prevented the fiasco of Labor's entire time in office. While budgets in the Howard-Costello government were uniformly conservative - ie underpredicting revenues - the Rudd-Gillard-Swan governments have suffered the opposite affliction, which is to overpredict revenues.
Over-optimism about revenues leads quite directly to overambitious spending plans. Now the overspending has been encouraged by desire to make life as difficult as possible for Tony Abbott's government, or at least that is one plausible theory going about.
The great unanswered question is the extent to which the various predictions of revenues were provided by Treasury and the extent to which they were 'influenced' by the Treasurer. Henry heard one gruff oldtimer on ABC radio this morning (he missed his name) saying, with apparent authority, that the only estimates that are pure Treasury are those produced immediately before Federal elections.
If the one lesson from this experience is that 'realistic worst cases' should be built into forecasting exercises, it will be useful.
But of course, the deficient revenue projections and overambitious spending plans will have far larger consequences - a major set-back to Labor's reputation as economic managers, unnecessary pain when the consequences of overspending has to be unwound, confusion and unhappiness all round.
Wanted; a plan to fix Australia`s busted budget
Date: Wednesday, May 15, 2013
Author: Henry Thornton
Readers will already be sick of the budget chatter, and Henry will highlight only a few key points.
* A deficit of almost $20 billion, and not much lower next year.
* Economy forecast to resume trend growth (3 %) in fiscal 14-15, with unemployment reversing current uptick. (What if commodity prices fall further than now expected, comrades, or growth slows further?)
* Key 'Labor' spending initiatives announced but virtually unfunded, leaving the next government to cancel the programs or implement Labor's excessively ambitious policies.
* Spending increasing at Banana Republic rate, despite revenue dropping like a stone, (relative to inflated forecasts).
* Revenue fall, 'completely unforseeable' says the Treasurer.
Blaming Treasury, naturally. Has no-one told the Treasurer about risk management?
Sid Maher, Political correspondent concludes: 'WAYNE Swan has moved to entrench Labor's stamp on the nation beyond a predicted election defeat and set a political timebomb for Tony Abbott'. Read on here, but Bill Leake's cartoon tells this story.
courtesy The Oz
'Targeting Tony the last shot in [Labor's] locker' is Paul Kelly's verdict.
He maintain's the 'bomb' analogy and offers the likely next PM a warning: 'If Abbott merely channels Labor, then he forfeits his flexibility as prime minister. But by rejecting much of the Gillard-Swan spend-and-save edifice, Abbott puts immense pre-election pressure on himself to reveal his own tough savings agenda.
'Beneath its Abbott trap, this budget runs a huge economic risk. Faced with revenue shortfalls, a budget blowout and a hazardous transition to non-resources growth, Labor has pressed the button on big and iconic spending initiatives out to 2020, designed to warm ALP hearts in the coming wilderness. It is a dangerous step. Swan assumes the economy stays buoyant, unemployment lifts only gently, revenue growth is firm (forecast at 7.3 per cent for next year) and the budget returns to surplus in just three years during 2015-16.
'Such optimism is heroic, and mocked by Labor's record, but the party is unlikely to be in office to be held accountable for another round of false optimism'.
You will access a nice video discussion when you hit the link to Paul Kelly's piece. Will save you lots of reading.
And Henry recommends Laura Tingle's stirring summary: 'Wayne Swan’s sixth budget owes much to the scorched-earth tactics used over the centuries by the Russians retreating to Moscow in the face of a numerically superior enemy.
'At considerable cost, the Russians would systematically destroy their own land as they lured the enemy to follow them into country devoid of sustenance.
'In what is without doubt a courageous and highly unorthodox election-year budget, Labor has opted to look beyond election defeat, removing “easy” savings from the Coalition’s armoury and giving the government the best chance of reducing another deficit: its deficit on economic credibility in the race to September 14. At the same time, it is a strategy that locks in its legacy reforms in education and disability'.
Only four months to go, then we get to express our opinion in the most emphatic way possible.
China update, Australia`s budget, Australia`s culture
Date: Tuesday, May 14, 2013
Author: Henry Thornton
Partial economic indicators for Chinese economic activity were largely in line with expectations during April reports the economics team at nab. 'However, we are yet to see signs that real activity is picking up significantly, although monetary expansion has been much more rapid. Nevertheless, we have left our growth expectations for 2013 unchanged at 8 %, although we continue to view the risks as skewed to the downside – sub-8 % growth this year is looking increasingly likely.
'But even with the growth outlook turning more moderate, expectations for the Chinese economy – and the currency – have encouraged capital inflow since late last year (spurred on by quantitative easing by major central banks). These factors are creating a quandary for policy makers who have become increasingly concerned over building inflationary pressures and (arguably unsustainable) expansion in system credit. Consequently, this has added to the uncertainty surrounding the likely path of macro economic policy in China'.
The journos and talking heads are just about locked up by now, it being 4 PM. The lock-up is a quaint but totally unnecessary custom when all the key features have been comprehensively leaked already.
'Plotting a path to surplus' seems to be the predominant theme, but 'restoring surplus without mindless austerity' seems to be the sub-theme. Also '[try to] re-establish some credibility with the voters', while 'leaving landmines for Tony Abbott'.
What fun it all is, and such a waste of the time of high quality thinkers. (Who they might be I leave to the readers.)
The Lucky Culture and the Rise of an Australian Ruling Class
Last night Henry had the good fortune to hear Geoffrey Blainey launch Nick Cater's new book with the catchy title, and implied homage to Donald Horne.
The large hall at the Rendevous Hotel in Flinders Street was packed to overflowing by members and friends of the IPA and the Liberal book club.
This book will be a best seller, and may even be influential.
Henry will review it when time permits, but you can be sure it will be reviewed by the Australian, where Nick Cater is a 'senior editor', currently shaping the paper's opinions.
Lovely quote on the back page: 'The secret to Australia's good fortune is not found in its geography or history. The key to its success is the Australian character, the nation's greatest renewable resource'.
Hurculean task ahead; Gatsby flies in US
Date: Monday, May 13, 2013
Author: Henry Thornton
The Howard-Costello government turned a budget deficit into a surplus in a year, then run nine more budget surpluses, reduced income tax five years in a row, paid off Labor's $96 billion in debt and accumulated assets, with net debt becoming minus $44bn.
This summary is provided by Henry Ergas, who goes on to point out that: 'Average real male earnings in 1995-96 were only 2 per cent higher than in 1982. In John Howard's period as PM, they rose 47 per cent. That didn't stop jobs growth, however, with unemployment falling to its lowest level since 1974.
'Middle-income earners were great winners, with Australia recording the highest growth rate of median income in the advanced economies after Ireland (which started from a much lower base and whose success was illusory). And strong employment growth, underpinned by increased labour market flexibility, not only spread prosperity but also proved the best form of welfare.
'In the early 1970s, fewer than 5 per cent of the working-age population received social security benefits. That proportion rose steadily to 26 per cent in 1996. Under John's government, however, it fell to 16 per cent, while the share of households mainly dependent on government benefits nearly halved to 12 per cent'.
Read on here, and if you can put up with David Koch spruiking a safe car website, you will get a fine pre-budget video to set you up for tomorrow night's econothon, Mr Swan's likely swansong.
The AFR presents a photo of five leaders of business groups grinning like very happy folk whilst complaining about 'budget chaos'.
Michael Smith reports: 'Australia’s four [there were two from the BCA] peak business groups have come together to demand an end to budget “chaos”, calling for a credible return to surplus and an overhaul of tax, carbon and workplace policies.
'In a rare united front, the business groups warned that the Gillard government had misread the post-global financial crisis challenges confronting the country and expressed concern that Tuesday’s federal budget would slug industry with higher taxes to fund election promises.
'Business Council of Australia chief executive Jennifer Westacott told an unprecedented round table discussion with The Australian Financial Review that Labor’s budget strategy was in “disarray’’ and called for an audit on the size, scope and efficiency of government'.
Business is 'concerned and alarmed', says the nation has become 'complacent', wants faster progress on IR reform and expects a mini-budget if the Coalition wins government.
Trouble with this otherwise exemplary plan, is that a new government will need a new narrative if people are going to cop the pain of a serious reform process.
This will take time, and the pre-election jostling and name-calling will contribute only marginally to the establishment of a more frugal, pro-growth agenda.
Fixing the budget will be a hurculean task, and is likely to take at least a year of hard grind. When the budget is again on an even keel, with a path to meaningful surplusses clearly established, people may be ready for further reform.
'Business conditions remain very difficult', reports NAB, 'and confidence stumbles after showing signs of recovery earlier this year. Despite less negativity in retail & manufacturing, activity still very poor and labour market showing new signs of weakness. Also no sign of upward momentum – with forward orders, capacity utilisation and employment all very subdued and weaker. Tomorrow’s Budget to show lower growth forecasts and a fiscal position still retarding growth. We still expect one more cut (November) but could come earlier'.
The Great Gatsby
The US opening at the weekend was strong, with revenues a bit over US$ 50 million.
Saturday Sanity Break, 11 May 2013
Date: Saturday, May 11, 2013
Author: Henry Thornton
It was a big week for economy watchers and policy makers, with more to come. Another rate cut, taking cash rates below what during the GFC was described as 'emergency levels'.The RBA issues its detailed economic overview, 'warning of "considerable uncertainty" over government spending, while acknowledging that its own interest rate cuts could spark a destabilising jump in housing prices'. Budget frenzy reaches its seasonal crescendo, with those confident about the outcome of the forthcoming election are calling the Treasurer's swansong.
In recent weeks first the Treasurer revealed tax receipts were $7 billion below forecasts, then the PM said the number was $12.5 billion and two days later the Finance Minister said the number was $17 billion.
What the **** is going on comrades? Is Treasury so incompetent that they have issued three new forecasts in three weeks, and two in two days?
Or is the government's tin ear that is responsible? Or is it the frenzied 'new day, new policy' that has reduced budget preparation to a sick joke?
All will be revealed - possibly, because even Swannie is probably not fully up to speed on all this - next Tuesday and it will not be a pretty sight. Readers should brace themselves for deficits as far as the eye can see, putting Australia into the same class as other developed nations. With rate cuts into the danger zone, and more expected, we are in danger of joining the inflationist party of the major central banks.
It has become the rule in Australian politics not to leave anything in the cookie jar for one's opponants. The Gillard guv'mint has set new standards, imposing a massive debt as well as an empty cookie jar. Here is a slightly satiric account of those at the top contributing personally to the process, from May Day 2013.
Here is a link to the RBA's sober report, which should only be read with a bottle of one's favourite tipple at one's side.
On the politics of the budget, Dennis Shanahan says 'Despite Julia Gillard's successful spiking of ambitions to restore Kevin Rudd to the leadership in March, there are Labor MPs who believe a resentful reaction to the budget and a steady diet of internal polling showing wipeouts will turn cold panic into an active hot panic.
'The Liberal Party is factoring in the possibility, albeit remote, that Tony Abbott could be facing someone else at the election - and not necessarily Rudd'.
Geelong easily won the battle for the top spot in last night's shootout against Essendon at the oddly named stadium with the roof. Hawthorn vrs the Swans (no relation to the Treasurer one is quick to note) should be another ripper game and Henry sadly has to wait until Monday night to see Caaarlton! take on the Saints. This looms as a danger game and one hopes not to be so exhausted from barracking that one is weakened for the budget presentation.
The Great Gatsby - coming soon
'Few will be shocked to learn that Luhrmann’s version of Fitzgerald’s short, spare, near-perfect novel is long, gaudy and flawed' says Tim Walker of the Independent. 'If you don’t care for his previous films, you’ll find little in the way of pleasant surprises here. But if you can abide the Australian’s lurid, hyperactive style, then there is much to admire nonetheless'.
Tim later refers to 'Luhrmann’s stonking lack of subtlety', which must be retained for all Australians abroad, and in Australia for Prime ministers and Treasurers.
A high Treasury official once told a meeting in Paris, the OECD as I recall: 'Let me, in my blunt Australian way, call a spade a bloody shovel'.
His successor with be able to improve on this with: 'Let me, with my native "stonking lack of subtlety" tell it like it is'.
'If you haven’t seen No and you enjoyed Ben Affleck’s Argo then do make the effort. Similar to Argo, No presents such an unlikely history-driven tale you will delight at the richness of reality’s twists and turns. No celebrates yet another victory of the against-all-odds, slightly insane long shot over what appear to be the most controlled of situations – the political strong-hold of Pinochet’s brutal, right-wing dictatorship in Chile, 1988'.
Image of the week - Prudent budgeter
A reader suggests tht Mr Swan be reminded of Mr Micawber's famous recipe for happiness:
"Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."
Curbing the dollar - time to consider Plan B
Date: Thursday, May 09, 2013
Author: Henry Thornton
Gor blimey comrades, ASIC Chairman Greg Medcraft is sounding a warning - much to his credit.
'Australia’s top corporate regulator has warned investors and their lenders that a search for profits triggered by low interest rates could lead to another wave of failed financial investments.
'Australian Securities and Investments Commission chairman Greg Medcraft expressed fears the Reserve Bank of Australia’s record low 2.75 per cent cash rate could lead many investors into attractive-sounding assets that are too sophisticated for them.
“This is the real high-level concern risk – in the search for yield, people invest in products that are probably inappropriate for their needs or they don’t understand,” he told The Australian Financial Review.
“That’s going to be a very, very important thing that we’ll focus on.” Read on here.
The commentariat is finally - finally! - getting agitated about the dilemma inherent in current economic policy settings here and abroad.
This is a matter Henry was worrying like a dog with its bone in Great Crises of Capitalism and more recently in his regular essay on monetary policy published here and in the Australian.
With great respect to the various 'money experts' quoted in the Fin and the Oz, the so-called experts have missed one key point. 'Monetary policy cannot serve two masters'. (M. Friedman.) Think about this vital dictum from the world's leading monetary economist and ask yourself how it applies to Australia's current situation. A shaft of light will eventually appear.
Almost to a man, the experts agree with ASIC that further rate cuts take the RBA into dangerous territory.
Vesna Poljac in the Fin reports: 'There's not much the Reserve Bank of Australia can do to weaken the dollar, cutting interest rates to a record low could store up trouble down the track and the Federal budget has got out of control, say Australia's top money managers and strategists'.
Paul Bloxham, the man who said the next change in interest rates would be up, reminds us, also in the Fin, that 'Cheap money is not the solution to all that ails an economy'.
The Oz has brought in one of the big guns, John B. Taylor of 'Taylor rule' fame, though the message is not so clear as those in the Fin.
'THE Reserve Bank's latest salvo into the emerging Asian currency war has failed to dent demand for the Australian dollar, which has clawed back most of Tuesday's losses following a surprise spike in China's trade performance. Leading international economists said artificial attempts to limit the dollar's ascent, underpinned since December by Japan's aggressive monetary loosening, could be damaging and futile.
'It clawed back almost half its losses yesterday, climbing back near $US1.02 following the news that China had posted a surprisingly strong trade surplus last month, suggesting global demand for Chinese goods was strong.
'John Taylor, the economics professor who designed one of the operating templates for modern monetary policy, warned central banks worldwide against the dangers of unilaterally undermining their currencies.
"If everyone tries to undermine the value of their currency with monetary policy, the results will not be good," Professor Taylor told The Australian yesterday.
'He argued that damaging commodity and asset price bubbles would ultimately result'. Right on, brother, but what is the solution for a small open economy that wants to avoid asset bubbles?
Clearly plan A has failed, and will almost certainly cause trouble.
China curbs capital inflow
Date: Wednesday, May 08, 2013
Author: Henry Thornton
Wild enthusiasm from just about everyone as Glenn Stevens pours more booze into the punchbowl.
Commentary varies from 'stumbling reluctantly to the truth' about our struggling economy, to 'the economy must be weaker than hitherto thought' to 'the RBA is compensating for poor fiscal policy' and 'the RBA is trying to cut the dollar'.
With further rate cuts likely and a budget still stubbornly in deficit, the overall plan is hard to discern.
Having watched the Mia Farrow version of The Great Gatsby last night, it is clear the we have some way to go before the dancing and drinking reach Gatsby heights. But we are trying, and it would be wise to recall that Gatsby ended in tears.
Henry's plan to curb the excessively high dollar without easing monetary policy into the Gatsby zone has been ignored by just about everyone here. (For a lively exception, click here.)
But today we read that China appears to have endorsed Henry's approach.
'SHANGHAI—China's yuan fell sharply against the U.S. dollar on Monday after Beijing unexpectedly introduced new rules intended to curb the flow of foreign currency into the country, which are also expected to slow the yuan's recent appreciation.
'The yuan rose on news that China is taking steps toward internationalizing the currency. The WSJ’s Shen Hong explains what the move means for opening the country’s capital markets.
'The rules appear to have scaled back investors' expectations of further gains by the yuan in the short term by effectively limiting banks' ability to bet against the dollar versus the yuan in China. But analysts say the yuan's longer-term outlook remains bullish because of China's huge trade surplus and sound economic fundamentals.
'On Monday, the yuan fell against the dollar for the first time since April 22, snapping what had been a strong run for the Chinese currency that came despite signs of a slowdown in China's economy'. Read on here.
Smart people, the Chinese.
Public discussion: Monetary Policy and the Exchange Rate at the End of the Mining Boom: Two Different Views
1.30 – 3.00pm, Friday 24 May 2013 at the University of Melbourne
Two speakers, Professor Ross Garnaut AO and Dr Peter Jonson will each present their views followed by panel discussion and questions.
Venue: Theatre 1, Ground Floor, Faculty of Business and Economics Building, 111 Barry Street, University of Melbourne Registration: there is no charge for registration, but RSVP is essential. Places are limited to the space available. Please register online through our website.
Another rate cut, but mind the gap
Date: Tuesday, May 07, 2013
Author: Henry Thornton
The Reserve is likely to cut cash rates by another 25 basis points either this month or next month. It faces an acute dilemma, however, due to failure to acknowledge (or perhaps failure to accept) that monetary policy cannot serve two masters, and thus risks a repeat of the Bank's misjudgment in the late 1980s. (Henry's view this morning.)
The problem needs again to be spelt out. The many economists I have spoken to about this matter - eg here - agree about the limitation of monetary policy, but there is no agreement about the remedy. Henry's proposed tax on capital inflow is not even mentioned by people who write about the problems of a high dollar strangling industry, fearful I suspect of being labelled as sinning against the modern economist's religion of universal free trade.
This religion of course falls short of recommending absolute free trade, just as few practicing Christians consistently obey the Ten Commandments. In particular, few economists recommend free trade in labor, witness the near hysteria about people arriving in remote locations in small boats and alleged overuse of 457 visas. Free flows of people across national borders is clearly a policy that would improve global efficiency while maximising opportunities for people in the poverty-stricken nations but, like practicing Christians, economists have their limits too.
Virtually all developed nations are operating with near zero interest rates and 'quantitative easing' (euphemism for printing money). Global investors are seeking yield. Australia is politically stable with mostly sensible economic policies, and yields among the highest in the developed world. Despite the fall in commodity prices, which previously would cause the Australian dollar to fall more or less in parallel, global investors seeking yield are pouring money into the country.
The net result is a high dollar that is making Australian industry uncompetitive. The official view is that the lack of competitiveness will be solved by firms and individuals working harder or smarter. The official view, propounded recently by RBA Deputy-governor Philip Lowe, is that what doesn't kill you makes you stronger.
One can agree with Mr Lowe and others that the pressure of a high dollar (on top of generally high costs) will make some enterprises stronger, but many others will be forced to downsize or give up. Recent news has included fruit growers bulldozing their trees as the big food retailers have sourced cheaper product overseas. A government or a central bank that endorses such outcomes is simply irresponsible, especially as agriculture is one industry that is notoriously not practising global free trade.
The RBA has at times been tempted to cut interest rates when there is what is regarded as undue pressure on the currency. This writer, whose job in the 1980s (until February 1988) was to advise the board of the RBA on monetary policy, consistently recommended tightening monetary policy (ie raising interest rates) as recovery from the mild recession of the mid-eighties proceeded. (I am unable to be more precise because I have been denied access to the papers written then.)
Every month the board seemed to agree with this advice but in fact interest rates were cut. The prevailing view of my senior officers (or the Treasurer, as the RBA was not then 'independent') apparently was that the rising dollar needed to be reined in with lower interest rates, but this was not a matter that was debated before the board.
The net result was that easy monetary policy allowed excess demand to get out of hand, leading ultimately to a massive monetary crunch, the 'recession we had to have' and much misery. Read on here.
In coming months and years, Australia risks a repeat performance. The main safeguard is that fiscal policy will need to be tightened substantially. Several weeks ago, the Treasurer said the promised surplus was undercut by a $7 billion revenue shortfall, then the PM said the number was twelve billion, overnight Penny Wong said $17 billion. Gor Blimey, comrades, whot is going on?
Laura Tingle at the AFR has said: 'The shortfall in forecast budget revenue will be between $60 billion and $80 billion from now to 2016, forcing the Gillard government to dump spending pledges, including $1.8 billion in family assistance'.
Assuming the Labor guv'mint starts the process of getting Australia's fiscal policy into good shape, and the Abbott guv'mint completes the task, there may be scope for further responsible cuts to interest rates. But why in a healthy economy cash rates below 3 % are needed is beyond Henry's paygrade to answer, and this should be explained with unusual clarity should the RBA deem it necessary.