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Henry Thornton - Contributors: A discussion of economic, social and political issues Blogs
Inflation shock - for some
Date: Thursday, April 28, 2011
Author: Henry Thornton

Schlock horror ... inflation surprises on the upside.

Henry said in early March: 'Australia’s goods and services inflation is rising, though when it will break through the RBA’s ‘target zone’ is a matter from legitimate debate. Sooner than you think, Mr. Stevens, is my view, but I do not expect you to take that view seriously. But goods and services inflation is well above that modest level in Australia’s rapidly growing major trading partners, including China.  And asset inflation is a far larger problem just about everywhere, as this column with other dissidents has been saying'.

Goods and service (CPI) inflation has arrived 'sooner than you thought' Glenn Stevens, but I assume you will comfort yourself with the fact that the price of bananas is the most inflated price - contributing to what the hopeful people on you staff and in the press are calling a 'price spike'.

On the subject of imported inflation, the great American inflationist, Ben Bernanke, this afternoon in Washington, said he had no timetable to tighten America's super-easy monetary policy.

Back in what you no doubt think of as the dark ages of Australian policy making, gov'nrt Glenn, Treasury argued that it was the 'temporary' price hikes of potatos and onions that was blamed when global inflation was taking Australia's economy in its frenzied grip, but I am prepared to bet you did not buy the groceries for your family then , nor so you buy the bananas now.

But people on normal wage and salary packages do buy groceries and it is the actual cost of living, not some confected 'underlying' cost of living, that matters to them.  Even Blind Freddie can see it is the prices of petrol, utilities (electricity, water and gas) , school fees and (legal) drugs.

Wage and salary earners went for it in the early 1970s, and it is hard to see their grandchildren holding back now.  Only the flexible exchange rate is offsetting easy fiscal policy and monetary policy in the neutral zone - when it should be tight.

That is why my early April column warned of the pressures of wage inflation.

The terrible temptation of anyone in your high position, Mr Stevens, is that you begin to believe your own rhetoric. 'Brilliant gov'ner' say the younger men you have surrounded yourself with at one of you dry sallies, or (the anointed heir) 'absolutely spiffing Glenn'.

My April column warned in conclusion that 'The government is spruiking a tough budget, which will allow for a flood levy and big new carbon tax.

'The Reserve will be tempted to leave interest rates unchanged until the budget is delivered and assessed.

'That would be a mistake, but an understandable one.

'If the Gillard government cannot persuade the major unions to go easy on wage claims, it will quickly be seen as an important mistake'.

There can be losers as well as winners now.  Either a gunuinely tough budget and further rate hikes prevents a wage blowout or it does not.

If wages blow, your reputation will be trashed and the fate of the Gillard government will be sealed.

Ho, ho, on with the show!

Saturday Sanity Break, 23 August 2014
Date: Saturday, August 23, 2014
Author: Henry Thornton

Central bankers from the four corners of the globe are meeting at Jackson Hole. They key point is likely to be how nations can raise real growth.  A second question is whether super-easy monetary policy (near zero cash rates set by central banks) are creating asset bubbles rather than promoting growth. A third question is whether current and mooted changes to 'macroprudential policies' are capable of preventing asset inflation out of control and ending in asset bubbles that burst with awful consequences.

The US Fed's Janet Yellen is likely to dominate debate. She recently outlined the Fed's decision to leave monetary policy to manage overall economic stability with low [goods and services] inflation. And to use 'macroprudential policy' - lampooned by some as a return to the dark ages of controls over banks - to contain asset inflation or other developments that threaten financial stability.  Henry has no doubt this new approach is correct, though devising effective macroprudential policy will be hard and likely at first to be introduced with considerable timidity.  Various articles from this list are relevant here. (Click on a title to open the page.)

Growth is a largely separate issue. The US saw negative growth in the first quarter of this year, 'explained' by the severe winter, and a large bounceback in the second quarter, with strong employment growth in both quarters. This implies overall low productivity growth, dominated perhaps by the fact that shovelling snow is a low-productivity process.

The hot money is on super-easy monetary policy for a fair time yet, which means rising asset prices at least until the US Fed deems it is time to take away the punchbowl. Investors have been enriched by record interest rates which have been lower (near zero) for longer (since early 2009) than ever before.  Conspiracy theorists might well ask, 'what else would you expect when the Fed is privately owned' - as revealed in the latest Raff Report.

On the current market boom, Henry's favourite fund manager says he has a fair bit of faith on the 'three strike' rule.  This rule says share prices only start falling in a systematic way after the third increase, though Henry believes it will be sooner this time.

Mrs Thotnton has suggested that the Thornton superannuation fund puts another tranch of equities offshore. Her reasons are clear: the American economy is improving while the Australian economy is getting worse and the Australian dollar is too high and must fall dramatically before too long. 'After all, she advised, 'iron ore prices are 30 % below the peak, and China's housing industry is struggling'. One can easily discern in this matter the effects of educating women and letting them have serious jobs!


The news of the week was the barbarous beheading of an American journalist and promise of more to come. Britian is said to have 500 British people fighting beside the terrorists in Syria, and perhaps with 150 Australians. Des Moore and Henry's blind seer reported and opined respectively in the blog immediately below this.  One sincerely hopes Australia and Great Britain have decided to cancel the passports of these people and that they will be refused entry, as will their families, if they try to return home. What would an Aussie teacher make of a seven-year-old who had posed with someone's head in his hands?  And what might be the actions of such a boy in an Aussie school?


Henry's Caaaarlton! were unable to even slow down a raging Port Adelaide in last night's game at the wonderfully refurbished Adelaide ground. The brave captain, Marc Murphy, was stretchered off and taken to hospital, in yet another nasty injury, in this case diving for a mark (which he took) despite an opposing player also diving. Beaten by over 100 points!  Coming after a run of glorious nail-biting defeats by other top teams, Mick the Merciless's analysis consisted of - 'Port are a top side and our boys are very tired'.  At least there will be few illusions at Princes Park over the summer and the coming pre-season.

The Wallabies fought out a brave draw last Saturday in blinding rain, in a game many thought was there for the taking. Tonight they are at Eden Park in New Zuland, where Australia has not won since Moses was a lad. Israel Falou, however, is confident our boys will give it a red hot go and CAN WIN.

Regular readers will be delighted to learn the Fiona Prior's medical problem has been remedied and that she will be in full flight in a few weeks. Henry is devastated that he failed to deliver on time a painting specially prepared for the Savage Club's annual art show. 

Image of the week

Courtesy The Oz

The barbarous beheading
Date: Friday, August 22, 2014
Author: Des Moore

US Response to Beheading

The best that Obama has so far been able to say following confirmation of the beheading of a US journalist by Islamic State  is that airstrikes will continue and “the US would do what it must to protect its citizens”. However, it now appears that earlier on Obama had approved an attempt by special forces to rescue Foley and, as previously announced, he had also contemplated the use of military to “rescue” the Yazidis on Mount Sinjar.

It is also reported that the Abbott government had considered involving an elite Special Air Services regiment if such a US rescue-mission had eventuated. It seems clear that Australia and some European countries would be prepared to send troops to Iraq if Obama were to decide to do so. That the beheader appears to have been British would likely confirm the implication that Cameron would join in.

With the continuation of US air strikes, it seems likely that the other US journalist held by IS will also be beheaded. But will the continuation of the now widely condemned barbarism, and the appeal from Iraqi Christians, lead Obama to reverse his decision not to put troops on the ground?

An article published in the Wall St Journal suggests a connection between what is being allowed to happen in Iraq and in Ferguson, US, where police forces have acquired military equipment to use in controlling the riots there. The author argues that, in both cases, the failure to prevent or control disorder has led to violence. He refers to the recognition in New York that “broken windows” sent a (successful) signal to the police force there that  neglecting disorder leads to crime. But he expresses no confidence that Obama will act to help restore order within Iraq.

Reactions in Australia and Indonesia

Abbott’s strong adverse reaction to the beheading has been widely reported, except in The Age which did not report his statements at all. Labor’s Tanya Pilbersek reportedly said it highlighted the brutality of the Islamic State and “the terrible risks faced more generally by foreign correspondents reporting in war zones”.

Abbott has also criticised the failure of some Muslim groups to attend the talks he held. With the heading “Evil threatens Australia” the Herald Sun editorial is also critical.

Encouragingly, in an interview with Greg Sheridan Indonesian President Yudhoyono has been very critical of IS and urged international leaders to work together to combat radicalism. He indicated that Indonesia is not an Islamic state (small s).

ED. Tiresias adds: 'What exactly is Team Australia? Who belongs to it and who doesn’t? Tony Abbott’s use of the expression suggests a sound-bite crafted by a ministerial staffer, possibly a graduate with a degree in media studies. It means nothing and stands for even less. Worst of all, it reveals the insecurities which we scarcely dare to acknowledge'.

If they chose to do so, Australian politicians can discriminate ruthlessly: Muslims who meet Western and Australian values half-way should be made welcome, Muslims who seek to reproduce the cankerous and bitter politics of Western or Southern Asia or North Africa should not. If Australia can cheerfully discipline political dissent from One Nation, it can do the same with supporters of even more rancid and inflammatory politics. Mainstream politicians can make it clear that illiberal, antiliberal and extremist politics have no place here, that those who support extremist causes (including jihad in any form or irredentist and revanchist Palestinian nationalism) cannot hope to exercise any influence on Australian policy. If Muslims wish to take up humanitarian causes overseas, by all means let them do so … but advocacy for violence against non-Muslims (such as we see at the so-called ‘peace protests’) should remain beyond the pale of mainstream politics.

 Read on here.


It's a bloodbath, comrades
Date: Wednesday, August 20, 2014
Author: Henry Thornton

'What fun, comrades.  Mr Palmer insults us and his running dog (Ahem, (correction inserted) ), suggests our mighty People's Army might be deflected by a few missiles, even supposing the cash-strapped Australian government could afford to buy them. 'Mongrels', 'bastards', these are terms of endearment in Australia, are they not? Palmer, Clyde's iron ore is not that good anyway, so let's just buy more from Brazil.  But cancel the FTA, it seems too complicated for the Ozzies anyway.'

Henry awoke with a jolt.  Was this just a dream, or a message from Beijing for all of us? Being uncertain, there is is, gentle readers, hot from Henry's fevered brain, stoked by fine single malt from the Highlands of Scotland.  More here, and do not miss Culloden.

The morning news was equally baffling.  The 'budget emergency' is now just a little local issue, to be fixed with several months of negotiation (correction, 'vicious wrangling') with 'cross bench' Senators. Will keep Smokin' Joe off the streets for a bit, and it seems he's getting a bit of help from his colleagues, especially that nice Finance minister.  And, in any case, we are told that 98.7 % of the budget has been agreed by the Senate, and the budget emergency has been solved.

But the 'cost overhang emergency' has not been solved, and will become seen as the big challenge for the Australian people. Wages growth is already low and unemployment is rising, more sharply (Henry asserts) than allowed for in official forecasts.

The mighty BHP is going to shed its unstrategic assets, including unstrategic workers and perhaps even uncompetitive directors, improving the mother ship's productivity and giving investors a new plaything. Can Qantas take long to figure out the same strategy, shedding the highly unprofitable overseas routes in a last bold attempt to keep the domestic flight aloft. Or RIO? They must have made a few dud investments during the boom, surely. And perhaps the Finance minister will discover that some remote place, Tasmania or Northern Queensland, is not pulling its weight and propose a national spin-out.  Someone once said one cannot shrink oneself to greatness, but is Palmer, Clyde a counter example?

Henry apologises from the unserious approach to the economic news. But watching a slow motion train wreck, predicted two years ago, eg here, will do that to a bloke. One of Henry's fellow worriers said last night: 'Its a bloodbath in corporate Australia'. Do not be fooled by record profits, dear readers, this is a lull before the storm.

Saturday Sanity Break, 16 August 2014
Date: Saturday, August 16, 2014
Author: Henry Thornton

Joe Hockey shedding a tear for his own insensitivity on national television was the political high point of the week, and may represent a turning point for what was beginning to look like an economically inept government. The call now is for the government to recast the budget. However, the first task is to provide a believable narrative.

Once a believable and plausible narrative is in place, there are two things to get right.  Make the budget genuinely 'tough', and make it much fairer.  Henry's call for direct action to address the 20 % or so national cost overhang (and in the process create a plausible, because truthful, narrative is probably a bridge too far, but is linked here to remind readers about Australia's true 'economic emergency'. 

On the issue of welfare dependency, it is alleged by experts that 40 % of Australians contribute to helping the other 60 % who get assistance, and that Australia helps the bottom 25 % more than any other developed nation.  Surely 60 % of Australians are not 'battlers' and if they we have the balance wrong. But how to end the Age of Entitlement is far from obvious, but it must be done, dear readers, or we shall indeed achieve Banana Republic status, with all but a priviledged elite 'battlers'.

'Tony Abbott to step up budget sales job' is one relevant headline today, but there are others of equal importance.

Adam Creighton warns that 'If we're not careful, we'll have a full-blown jobs crisis on our hands'.

He points out that Australia's rate of unemployment is rising when in most countries it is falling. So much for the 'miracle economy', with even the tenured, highly remunerated men of the RBA pointing out that the jobs scene will be dismal for some time yet.

But the jobs crisis has been with us for years now, as pointed out here for an equally long time - and most recently in the blog immediately below this.

Mr Creighton nails the key point is a beautiful piece of economic prose: 'Economic theory says involuntary unemployment is impossible in a free market — if someone is out of work at the prevailing wage rate someone can simply offer to work for a $1 less and thereby become employed. But the reality could not be more different. Vast welfare states and bureaucracies, heavy taxation, transport and job search costs, and in some cases byzantine labour market regulations, dramatically dim prospects for full employment'.

Read on here and weep for official ignorance, gentle readers.

The political crystal ball

Henry's favourite journo, Grace Collier, has pointed out 'Labor's looming disasters'. First she summarises the government's recent blunders with enthusiasm, showing that Murdoch's minions understand 'balance' far more than do employees of the taxpayer-funded ABC.

'But speaking of Labor, here is the brutal truth: within the next year, three processes will be finalised and disaster is bound to strike. These processes are two police investigations and a royal commission into union malfeasance'.  More here, and google for more on the alleged police investigations.

Who owns the US Fed?

And does it matter?

The August Raff Report tackles these extraordinary questions. 


Caaaaaarlton! finally pleased its supercoach and gave til it really hurt.  Again narrowly beaten by a top side, Geelong, thanks to a dodgy free kick when the Blues were 8 points ahead with 3 minutes to go, Henry's heroes were gutted when the final bell sounded, having finished with three injured players and only one fit player on the interchange bench.

Henry is beginning to believe that better days are ahead for his beloved Caaaarlton!  And now supports the reappointment of Mick the Merciless and hopes that Juddie will stay on for years as a goalsneak and occasional midfielder.

Henry has heard, thanks to a taxi driver called 'Lucky', a Geelong supporter, that there is an international game of footy this weekend in a Northern suburb.

The game is between Pakistan and India.  The Pakistan team is made up by local lads of Pakistani origan, while the Indian team was said to have flown in from India. In what will clearly be a scoop, the result will be posted if 'Lucky' fulfills his promise to email them.

Tonight sees what should be a titanic struggle between the All Blacks and the Wallabies in the first game of the Bludisloe cup.  Henry will be glued to the screen, and asks readers not to feel sorry for Mrs T, who always has little mates to chat with by telephone, and books to read.

We commiserate with Henry's kultural advisor, Fiona Prior, who is having the cause of blinding headaches fixed in hospital. Fiona's many contributions are available here, and we look forward to her return soon, fit and well.

Image of the week

Courtesy The Oz

Creating jobs requires radical action
Date: Wednesday, August 13, 2014
Author: Henry Thornton

'The crisis the unemployment statistics don't reveal' is the headline for another expose of Australia's dismal labor market performance. The estimable John Black writes: 'Rather than join the ranks of those formally unemployed, these [middle class, middle aged] men and women, who had lost established jobs in industries such as wholesale, retail, hospitality, media, finance and recreation, joined the hidden unemployed while they worked out how to find a replacement job within a viable commuting distance for which they were qualified. But in May there were no jobs for them to find.

'The number of hidden unemployed has been steadily increasing, because the labour market in 2014 is generating only enough jobs for 100,000 persons every year, instead of the 210,000 needed to maintain employment levels. Most of the 110,000 persons not finding jobs have been joining the hidden unemployed'.

This revealing discussion strongly supports the alternative measure of unemployment developed by Roy Morgan Research with help from Henry Thornton.  Our results are summarised in the graph that is part of this Blog. The early part of Mr Black's article provides the best discussion I have seen on the reasons why the official (ABS) measure of the rate of unemployment greatly underestimates the real rate of unemployment.  It should be read by every senior bureaucrat and politician in Canberra, and interested academics.

As Mr Black concluded: 'At the heart of the problems for the labour market is the lack of any substantial industry drivers for jobs growth in an economy over-encumbered with regulation and on-costs and a lack of political leadership and meaningful vision'.  Read on here. 

Today Senator Day suggested that the young unemployed should be allowed to seek jobs and agree with an employer on the wage to be paid.  Immediately the cry of 'exploitation' want up, and 'remember Henry Bourne Higgins',but one must ask who are the exploited here. Currently it includes young people who cannot find jobs in a wealthy and supposedly dynamic country like Australia.

This Henry can report that all of his kids, and several of their friends, got jobs after gaining valuable but unpaid work experience, doing real jobs.  This is a common practice in Europe, while in America young people, and many adults, work for very low wages.  The philosophic question is whether it is better to get work experience for low wages or no wages and then a job that pays a living wage, or whether no job at a theoretical high wage is better. I have no doubts about the answer.

Of course, in a civilised nation, society needs to provide the basic elements of an income sufficient to live on for those who cannot earn a wage to do so without supplementation.  This must be provided after careful scrutiny to keep those who seek to bludge on society honest.  But the idea of forcing unemployed people to write 40 serious job applications a week is simply nuts.  It involves lots of wasted effort and much demeaning of the job seekers. I know how demeaned our kids felt, with 5 good degrees between them, useful parental 'contacts' and relevant work experience until they landed jobs with some chance of turning into careers.

I do not know how to solve all the problems inherent in the current system.  But I do think Senator Day's idea should be tried somewhere, perhaps in Tasmania where the plight of the homeless is particularly acute.

Come on Minister Abetz, stop peddling 1950s 'medical science' and try something radical in your area of actual responsibility.

Saturday Sanity Break, 9 August 2014
Date: Saturday, August 09, 2014
Author: Henry Thornton

Economic news this weeks included a surprise (to most economists) leap in the rate of unemployment. The image of the week at the end of today's blog shows the latest jump in the 'official' (prepared by the ABS) rate of unemployment and the more realistic measure prepared by Roy Morgan Research. Draw your own conclusions, gentle people. We thank Des Moore for his incisive analysis immediately below this blog.

The state of the labor market is far worse than believed in official circles, and officials are generally maintaining a 'glass half full' posture, although the RBA this week somewhat reduced its economic forecasts. With the budget stranded in the Senate, and no plan B, Australia's 'miracle economy' is struggling and the government is also struggling. Paul Kelly continues his criticism of Tony Abbott's leadership, and Joe Hockey is doing the rounds trying to get a budget, any budget really, up. He has started to whinge that no-one, not even business, is providing support.

Smoking cigars with the Finance minister started the process of self-destruction and release of a 'semi-authorised' biography that restated his ambition to lead the nation, and revealed his secret wish for a tougher budget, would have been unwise if the budget had been applauded by all, but instead it is becalmed with almost no-one from among business leaders, the economists of Australia or drinkers in the front bars of Australia's pubs is prepared to back it.

Leaving Malcolm Turnbull out of the loop on the discussion of new anti-terror policies, leaving more favoured but severely less competent ministers to try to explain, was a catastrophe. Time for a shake up, Tony, or continued unpopularity? 

Meanwhile, we are being warned to prepare for a hundred year war with radical Islam. Tony, you have proved you have the right stuff to be a great war leader, and Julie Bishop has shown similar mettle.

For goodness sake get the team together that can win the economic war.

Footy'n'other stuff.

Caaarlton! belted the Gold Coast Suns (minus Gary) in the first half and coasted for most of the second half.  With nothing to play for but the good opinion of their fellows, and perhaps the chance to play for the blues next year, one might have expected a red hot go from all players for the full 100 minutes.

For the rest, Hawthorn and Sydney look like runaway favourites, with a young Geelong and a puzzling Freo maling up the final four, members of which all have some chance of winning a grand final in which luck and the net result of character on both finalists sometimes throws up an unexpected win.

Features of Henry's week included a fine seminar at Melbourne Uni with a superstar Spanish economist discussing asset bubbles and what to do about them.  Read on here folks, you will find support for some notions you may have seen in the hallowed pages of Henry's folly

The RBA brains trust seems not yet to have absorbed either the Fed's new approach of the visitor's clever theoretical thinking. Rather they sit like rabbits in the headlights, wondering whether to cut interest rates to help the currency to fall or raise them to head off a housing boom.  'Don't panic' shouts the resident Mr Jones, but one suspects there is no old soldier (like Aussie Holmes in Henry's time) to help their key people see the blooming obvious. Sigh!

And do not miss Henry's geopolitical writers - Gary Scarrabelotti on the Ukraine and Tiresias on Israel and the Garzans.

Image of the week

Labor market shock
Date: Friday, August 08, 2014
Author: Des Moore

The increase in July unemployment to 6.4% seasonally adjusted rate (from 5.6% in July last year), and the accompanying small fall in employment since last month, highlight the need for reduced regulation of workplace relations in circumstances where the economy is growing below trend.

Unless regulations are reduced the Abbott government’s budget forecast of a 1.5% increase in employment in 2014-15 will not be achieved and productivity growth will remain sluggish.

The regulatory problem is highlighted by the fact that the growth in the working age population (WAP) is twice as fast as the growth in employment over the past 12 months – employment up by only 0.9% while the WAP increased at double that rate (1.8%).

Before the Fair Work legislation employment was growing faster than the WAP and the participation rate was growing. Over the past three years that rate has fallen from 65.4% to 64.8%.

On top of the twelve months increase of about 15% in numbers unemployed, this indicates continued large increases in those who have given up actively looking for work – the so-called drop outs

Labour Force – Increases Since July 2013 (Original Data)

                                                   000s               Percent

Employment                                1,041                0.9

Working Age Population                 3,421                1.8

Unemployed                                   96                14.9 

WAP is civilian population aged 15 years and over     

It is now abundantly clear that urgent changes must be made to the existing regulatory legislation, and the administration of it, just to reach the “sensible centre” and remove the bias evident in the existing arrangements.

Sufficient evidence of the monopoly position of unions has already been given to the Heydon Royal Commission to warrant immediate reforms and allow employers much greater freedom to determine employment conditions. It is anomalous, for example, that the MUA has to be taken to the Federal Court in an attempt to reduce its monopoly powers.

The proposals to reform the ABBC and other minor reforms are welcome but have yet to be implemented and will not themselves change the behaviour of militant unions.

Henry comments: We agree with Des moore, and the HR Nicholls Society, that Australia needs serious labor market reform.

We have long argued that the labor market is in far more trouble than generally recognised (EG here).

We have also warned of 'The recession we did not need to have'.  With the budget jammed in the Senate, and a worsening labor market, the 'miracle economy' is headed for real trouble.

The latest RBA Quarterly Report on Monetary Policy is linked here, and presents a significently happier picture. Time will tell whether my relatively gloomy view or the RBA's far happier view is closer to the mark.

The main difference between us is my concern for Australia's competitiveness, which I believe we cannot overcome with current policies.

Asset/credit bubbles - advice to the RBA
Date: Thursday, August 07, 2014
Author: PD Jonson

There is justified credit and 'bubble credit'. The former is fine, indeed it is how the capitalist world makes progress, but bubble credit is not so fine and can, and often does, lead to asset bubbles that inevitably lead to asset busts.  As in the world learned at great cost in the 1930s, a sufficiently bad asset bust can influence the world and may lead to global depression.

That is the message of Professor Jaume Ventura, a visitor to Melbourne University. Last night Professor Jaume delivered the twelth Corden lecture, introduced by Professor Max Corden, who is still working and is a rolled gold superstar of economics.  He described Jaume as his best student and a brilliant academic. I agree, and would add that Jaume is a genuine macro-economist who admits this part of the profession has learned it knows less than it thought it knew about how economies work and about appropriate policies to control 'bubble credit'. As Mark Twain is alleged to have said: 'It's not the things you don't know that get you into trouble, but the things you think you know that ain't so'.

Jaume Ventura started with a graph depicting the global ratio of credit to GDP since 1970. This ratio fell below trend in the 1970s, rose sharply in the late 1980s, fell again and then set new records in the late 1990s. If 1970 is 100, after the fall associated with the Global Financial Crisis, the ratio is now 160. That is, since 1970, credit has on average grown faster than GDP. Worse, the growth has been variable, and associated with increasing ups and down.  Asset prices have followed a similar pattern.

We were shown similar graphs for a number of countries.  The booms and busts of credit were not unifom, but all showed a strong upward trend and decided volatility.  'Worst' were Spain, Italy, Island and Greece. These countries were the worst hit during the GFC, unsurprising given the size of their preceeding credit binges.

Then we saw data on gross and net credit flows by country.  The stunning fact is that all OECD countries both import and export credit. It is import and export of credit that dries up when something goes wrong for a country. 'In crises everyone goes home' said Professor Ventura. 'During crises, countries go back to the closed economy model'. Already we learned a reason not to rely too heavily on overseas credit and I recalled James Tobin's call for 'sand in the gears of global finance', or indeed the logic of taxing capital inflow to protect local industry.

Professor Ventura was careful to point out that lots of good things happen when credit grows quickly. Booms are good for countries. Indeed, he has drawn a distinction of 'collateralised credit' (backed by real assets) and 'bubble credit' (resulting from chaims of credit ultimately backed only by hype and overoptimism).  It is bubble capital that we should try to contain.  But there is no consensus among macroeconomists about this matter, and Professor Ventura is trying to clarify this vital matter.

In short, Professor Ventura has discovered by sheer logic and some mathematical analysis that there is an optimal mix of the two sorts of credit. So the problem for central banks is to find that optimal mix for a given nation and devise policy or policies to drive their economy toward that optimal mix, 'leaning into the wind' of asset credit.  This is because there is no way for the economy unaided to find this happy outcome.

As the lender of last resort, a central bank should be able to do this.  The basic idea is if a boom is based on 'real things', let it rip. If it is based on irrational exuberance, lean into it.  My own view is that as asset prices, or credit (as a ratio to GDP), get too far from their long run trends, action to 'lean into' the growth are needed, but this should be in the form of macroprudential policies, not (except perhaps in extreme cases) using interest rates.  This is because normal development - take GDP itself - suggests that fundamental forces of productivity and population are always close to a reasonable steady trend, so as asset values or credit depart greatly from trend, this is surely a sign of an asset/credit bubble.

Professor Ventura said there are three ways to contain asset/credit bubbles.
1. Improve law enforcement and contract design,
2. Improve corporate governance, and
3.  Macroprudential policy.

Macroprudential policy includes reserve requirements of lending institutions and capital controls.  These should be 'owned' by the central banks and be seperate from monetary policy.  Given the key role of overseas credit - both inward and outward - there is a potential role for taxes on capital inflow, or if the economy is on the nose with international investors, subsidies.

As we walked out of the lecture, I said to one old friend 'I rest my case'. He observed that Professor Ventura had brilliantly made my case.

Further reading, from Jaume Ventura

Economic Growth with Bubbles (with A. Martin)
American Economic Review, 102 (6), 2012, 3033-3058

 Bubbles and Capital Flows
Journal of Economic Theory, 147 (2), 2012, 738-758

 Understanding Bubbly Episodes (with V. Carvalho and A. Martin)
American Economic Review: Papers & Proceedings, 102 (3), 2012, 95-100 

 Theoretical Notes on Bubbles and the Current Crisis (with A. Martin)
Read a non-technical summary on VOXEU
IMF Economic Review
, 59 (1), 2011, 6-40

By PD Jonson

Monetary policy and asset inflation, July 2014

Asset inflation and monetary policy (with Elizabeth Prior Jonson and Ka Mun Ho), June 2013

Great Crises of Capitalism, January 2011

Saturday Sanity Break, 2 August 2014
Date: Saturday, August 02, 2014
Author: Henry Thornton

Innovation is (probably briefly) in the news, thanks to new BCA Chair, and former CSIRO Chair, Catherine Livingstone. Her comments came about the same time that Henry heard the news that 800 scientists from CSIRO's Brisbane offices have been or are to be, made redundant.  This was (allegedly) the entire coal division, meaning a dispersal of the group responsible for research into this vital exportable resource.

Ms Livingstone and the BCA suggested that research and other support should go to 'proven winners'. Rod Sims of the ACCC immediately leapt into the debate with critical comments about 'picking winners', missing the point almost entirely. The Hon Minister Andrew Robb said the government had been spruiking the BCA view for years.

The relevant policies of The Industry Group for 'Growing the Trade Exposed Industries' are as follows.

In a study called The Mystery of Economic Growth, Israeli economist Elhanan Helpman reviewed all the available research on the sources of above average economic growth, especially growth of productivity. He found that the only single clear reason for higher productivity growth was corporate and Government spending on Research and Development (R&D) as a share of GDP. Singapore and Israel feature near the top of any list of nations that have commercialised inventions.

Australia’s total spending on R&D is not especially high on lists of international spenders and as the budgetary situation allows needs to be increased. The long established Cooperative Research Centre (CRC)  Association conducted a review by Allen Consulting Group in 2014. This review reported that, relative to the funds committed to the CRC program by the Australian Government, the CRC program has generated a net economic benefit to the community, which has exceeded its costs by a factor of 3 to 1.

We must stress, however, that it is not just R&D that matters. ‘Innovation’ requires successful commercialisation of R&D. By contrast to our average performance with R&D in the international league tables, Australia often ranks lowest in tables comparing successful implementation of the results of R&D. (See John Bell, ‘Innovation policy linked to productivity boost’, ATSE Focus, April 2014.)

Australian Venture Capital Association Ltd (AVCAL) has pointed out that the flaw in Australia's current policy prioritisation is that it does not invest enough in bringing its innovation to market.

AVCAL quoted a recent PricewaterhouseCoopers study that flagged venture capital as being one of the potential ‘game changers’ in contributing to Australia's innovation system: a position that has been echoed in many forums in recent years. It also highlighted the fact that the US spends over four times (per capita) what Australia spends through venture capital investment.

The 300 page Strategic Review of Health and Medical Research report referred to what it called the“valley of death” being the hiatus between discovery and successful commercialisation.

The evidence suggests that there are two key factors involved, firstly the availability of risk capital for commercialisation, and secondly the transfer of development to staff sufficiently trained and with the business skills required.

Another generic issue concerns the early sale of successful new Australian ventures to large foreign companies. The causes of this perhaps includes cultural obstacles and also lack of explicit tax benefits for investors, to compensate for the higher risk attaching to early stage innovation and development.

There is a further uncertainty with foreign owned companies as to the question of retaining the benefits of Government supported innovations and commercialisation within the Australian economy.

It may be necessary to focus assistance to smaller Australian companies. Larger global companies in the main have their own resources. For example, the German company Bosch, has 38,000 staff worldwide working in innovation and development and on average registers 14 patents each day.

Business regulation and taxation arrangements can be unhelpful for commercialisation of ventures. For example, entrepreneurial people granted shares in cash strapped start-up companies immediately pay the full amount of income tax based on the theoretical value of the shares - value that may never be realised.

No comment on innovation is complete without recognition of staff in the workplace being able to recognise the opportunity for innovation with improvements to processes and products. Smith referred to the value of workers contributing to innovation. He said: “A great part of the machines made use of in those manufacturers in which labour is most subdivided, were originally the inventions of common workmen, who, being each of them employed in some simple operation, naturally turned their thoughts to finding out easier and readier methods of performing it.”

Today his comments would apply to a wider range of employees.

Such innovations can support the management philosophy of continual improvement known in Japan as Kaizen management. Toyota benefits from a sophisticated system whereby employee ideas are given consideration and where adopted the employee gets a benefit reflecting the value of the innovation.


1. It is recommended policies be put in place to raise the overall spend (Government and corporate) on R&D as a percentage of GDP, to global best practice levels.

The program would need to ensure that relevant business and administrative skills and experience are available to use any Government support effectively.

2. To attract capital to this high risk area, tax concessions would be appropriate. For example, for  approved projects foundation shares could be capital gains tax free and further calls up to set limits tax deductible. This could reduce the requirement for payments by Government to support innovation and commercialisation.

3. Remove the tax penalty applying to shares issued in start up companies commercialising innovations.

4. It is recommended a task force be constituted to review best practice arrangements in countries which lead the table of performance with innovation and commercialisation. The outcome be a basis to review and implement policies which would be relevant for Australia.

The internal process, if available, of successful companies in this field such as Bosch, would also be relevant.

5. The Government consider claw-back of grants and/or tax concessions within, say, five years as a way to discourage too early sale to overseas interests.

6. Ensuring tax certainty and consistent long term policy settings for innovation and commercial development.

Read the full report, including policies in related areas, here.

Geopolitical tragedies

The events in Gaza make one weep. We have a natural sympathy with the Israeli side, but the terrible price they are exacting from the inhabitents of Gaza seems dispropionate. That said, no country cam allow regular rocket attacks on its territory.

The failed attempts to rescue the bodies remaining on the crash zone of the downed Malaysian airplane get more farcial by the day. Horrible for everyone involved, except perhaps for whoever gave the order to destroy the plane and its almost 300 passengers and crew.  President Putin has a lot to apologize for, and one hopes that severe trade and financial sanctions will eventually bring him to heel.

The various other global atrocities in Syria, Iraq, Africa, the list goes on, show the need for an effective global policing group.  That seems at least as far away as good sense in Australian economic and welfare policies.


Caaaarlton! cheered Henry with its brave attempt to beat Freo on its home turf, but left him almost weeping with frustration at yet another loss by a tiny margin.

Coach Merciless Mick Malthouse said he did not know why this was the case, but it seems clear the team has just forgotten how to win. Partly, perhaps, due to morale sapping coaching.

Like 'Innovation' it is a difficult subject, but Henry is certain in footy it requires occasional shafts of kindness to the players, not constant criticism, which is what Mick the Merciless seems to dish out. Henry learnt this lesson by changing his coaching style for an under-age footy team a decade ago, and is available for psychological councelling at Caaaarlton! if needed.

Meanwhile, in Scotland, the Aussie women and men are acquitting themselves with honour.  The swimmers seem to have rediscovered their mojo, the marathoners have exceeded expectations, ditto the shooters, and Sally Pearson looked terrifyingly focussed when she won a heat or semi-final by a second or two. From the other side of the world, this seems like a happy team, and the sacking of the apparantly merciless head(?) coach will have lifted team morale further. Go Sally!

Image of the week


Inflationary expectations and monetary policy
Date: Tuesday, July 29, 2014
Author: PD Jonson

Inflationary expectations have also risen, as reported by Roy Morgan Research. Here is the graph.

We are not yet embrioled in an inflationary fiasco but there is a dilemma, that last week we tried to set out in slightly satiric terms. (See Blog two down.)

I have for some time also been worrying like a dog with a bone how to define the stance of monetary policy, and I have now solved this, to my satisfaction at least.

I have also made progress in showing with Economics 101 supply and demand graphs - albeit drawn in the air - how monetary policy might transmit itself to goods inflation but also to asset inflation.

Here is the link, and I am keen to receive feedback.

Is there any competent macro-economists out there?  If there is, am I on the right train? Was this all said in an unpublished note 50 years ago? It is trivially obvious, or wrong, or both at the same time?

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