Henry Thornton Home Page
"I am the master of low expectations." George Bush
Henry Thornton
Articles Articles
Comments Comment
Email Me Email

PD Jonson
Articles Articles
Comments Comment
Email Me Email

Nick Raffan
Articles Articles
Comments Comment
Email Me Email

Articles Articles
Comments Comment
Email Me Email

Gary Scarrabelotti
Articles Articles
Comments Comment
Email Me Email

Louis Hissink
Articles Articles
Comments Comment
Email Me Email
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!

Markets fail to allocate resources wisely – the affirmative case
Date: Friday, October 18, 2013
Author: Henry Thornton

Notes for Henry's contribution to a debate on 'Capital markets, as presently structured, fail to allocate capital wisely', conducted by the Paul Wooley Centre for the study of Capital Market Disfunctionality.

1. Two economists are walking down George Street.  Let us call them Fama and Schiller. Shiller says to Fama: ‘There is a $100 dollar bill. Let’s pick it up’.  Fama replies: ‘It that was a $100 bill it would already be picked up’.

2. This well-worn anecdote neatly sums up the debate between economists who believe every situation reflects some voluntary ‘optimal’ situation and those economists who recognise situations of disequilibrium, or non-optimal situations.  Some such situations can persist for long periods of time. This is in my view a normal state of affairs. 

3. Recognition of Shiller's point can lead people in two different directions:
- One direction leads into policy analysis – attempts to find ways to improve allocation of resources to restore the rate of unemployment to a more nearly normal, or ‘proper’ state. Often, such efforts merely make things worse, or have toxic side effects such as imposing great burdens of debt on future taxpayers.
- The second direction leads some individuals to attempt to take advantage to the situation, as when George Soros famously took advantage of a highly over-valued UK pound in 1992.

4. I have travelled down both paths in my career as an economist. The first direction is easily the harder, as it requires a large number of planets to line up, as for example when the Australian government agreed to float the dollar. This herculean policy reform occurred when the Campbell committee of experts  (which included our opponent today, Tom Valentine), the business community generally, the government, as advised by the Reserve Bank (but not Treasury) all agreed to free the Australian dollar to allow for a more efficient way to manage the Australian dollar and the Australian economy.

5. The floating exchange rate has meant that resources are allocated more efficiently than they were when the currency was fixed. However, resource allocation is far from optimal when a floating dollar becomes stubbornly high, as it has in the past few years. (The RBA governor's statement today that he is 'powerless' in this matter is surely a joke, or an admission that he is overdue for retirement. A tax on capital inflow would fix this problem, but the bureaucrats lack the courage to implement such a tax, fearful that it will cause capital inflow to dry up.)

6. As a young mann at the RBA I was more than once told to 'say it again with examples'. That is my approach today.

7. I will provide three cases of improper, or inefficient, certainly unwise allocation of resources.

8. The first is unemployment, the inefficient allocation of human capital.  Many people bewail the waste of resources with high unemployment that so worried Keynes. In various Southern European nations overall unemployment is in the range of 20 to 30 %, and for young people it is well over 50 %. Even in the mighty USA, overall unemployment is still officially measured at around 7 %, and this is despite near zero cash rates and so-called ‘quantitative easing’ that amounts to massive monetary policy stimulus. Europe has equally easy monetary policy, but tighter fiscal policy, as the Eurozone’s leading economy, Germany, sees austerity as the main answer to the Eurozone’s economic woes.  This will end badly, perhaps very badly.

9. Labor markets are everywhere among the most constrained, and for whatever mix of ignorance, institutional rigidities and outdated regulations generally, involves massive misallocation of resources.

10. There is a clear barrier to full employment globally – the prohibition on free international movement of people seeking a better life.  Most if not all economists agree that freedom of people to move internationally would increase the efficiency of the global economy. But few recommend such a radical policy, especially those running small enclaves of western-nation prosperity in the ocean of third-world poverty.

11. A softer version of labor market freedom is the modern trend to outsourcing of jobs to third-world work-forces.  This is usually strongly opposed by those who lose their jobs in developed nations but there are few examples of unions willing to allow their member’s wages to be cut to keep the jobs at home.

12. A second example is misallocation of scarce investment resources, this time involving the more conventional matter of where to allocate scarce financial resources.  In most western nations there are considerable tax advantages for investment in the family home.  Here in Australia, for example, there is no taxation of capital gains on the family home, and at various times there have been cash grants for first-time  home buyers.  Australia perhaps leads the world in production of McMansions, enormous and elaborate houses on the fringes of the major cities with swimming pools, spas, home theatres, good heating and cooling and room for several upmarket cars in which the family members battle heavy traffic on inadequate roads or scarce public transport.

13. Yet Australia, and other developed nations that invest a lot in houses still has a housing shortage, defined by the number of people who have no place rented or owned by them to provide adequate housing.  Economists might say that the homeless people lack adequate human capital, and this may well be true, but it is certainly another example of inefficient allocation of capital.

14. Whilst back on the subject of human capital, one should observe the overspending on acquisition of degrees to the point that people with more than one degree live at home for lack of a job or the inability to find a job that allows them to acquire a dwelling place of their own.  A ruthless economist might remark with surprise the sub-optimal number of unexplained deaths amount parents who so stubbornly refuse to die of natural causes.

15. Then we come to the more conventional investment markets. Here the near-zero cash rates and ‘quantitative easing’ of recent years have played havoc with capital allocation. I have recently re-examined the data of Friedman & Schwartz to ask how the admission of asset inflation (specifically share price inflation) has altered the analysis. In most of the episodes analysed by Friedman and Schwartz, share price inflation moves in similar directions to monetary policy, as defined by the rate of growth of money.
- Money growth fast, both sorts of inflation rise
- Money growth low or negative, both sorts of inflation low or negative.

16. However, there are several episodes in which money growth is ‘moderate’, as is goods inflation, and share price inflation goes through the roof. The 1920s, the 1950s and the 1990s in the USA, and Japan in the 1980s are the most startling examples. Since in three out of these 4 episodes the share boom was followed by a bust that clearly created widespread economic distress, these aberrant episodes deserve far greater scrutiny than they have so far received.

17. The near zero cash interest rates of Mr Greenspan and the virtually zero cash interest rates of Mr Bernanke (plus ‘QE’)  is part of the fallout from the share crash at the end of the so-called ‘Great Moderation’ of the 1990s. Whenever there is a hint that the US Fed might begin to end its super-easy monetary policy financial markets take fright, which suggests to me that current levels of share prices and bond prices are not the result of wise allocation of capital, but rather opportunistic speculation.

18. This is fine for successful speculators but not the best we can do and should do for the majority of our citizens.

19. I would be happy to discuss how the world might move to a wiser system of capital allocation if time permits, but for the present debate it is sufficient to demonstrate that current policies and our present policy framework, fail to allocate capital wisely.  But let me pass on an iron law to the RBA people present here today. Milton Friedman said 'Monetary policy cannot serve two masters'. Manipulating interest rates cannot both contain inflation and overall economic stability (two tightly linked objectives) and also contain a housing bubble or restrain an overly buoyant currency.

20. To go back to my opening story, it is not a $100 bill that we might choose whether or not to pick up, but a mighty IOU that we shall all be forced to deal with very soon.

Psycho-history predicts US chaos
Date: Thursday, October 17, 2013
Author: Henry Thornton

'On the surface it seems inexplicable. The government of the most powerful country on earth has shut down and is dangerously close to defaulting on its debt. Its people and economy are feeling the consequences, and a new global financial crisis might not be far behind. And all this because a minority faction of one house of Congress will not approve a budget unless a healthcare measure that has already been passed into law is suspended.

'But for Peter Turchin, a mathematical ecologist at the University of Connecticut in Storrs, the stand-off was predictable. He is one of a small group of people applying the mathematics of complex systems to political instability. They have been anticipating events just like this – and they say that if we don't find some way to respond to the warning signs and change course, things are bound to get a lot worse before they get better'.

This has echos of Kondratieff's long cycles, even Asimov's psycho-historian Hari Seldon,'the only man who can see the horrors the future has in store: a dark age of ignorance, barbarism and violence that will last for thirty thousand years'.

'Turchin has found what he believes to be historical cycles, two to three centuries long, of political instability and breakdown affecting states and empires from Rome to Russia....

'Workers or employees make up the bulk of any society, with a minority of employers constituting the top few per cent of earners. By mathematically modelling historical data, Turchin finds that as population grows, workers start to outnumber available jobs, driving down wages. The wealthy elite then end up with an even greater share of the economic pie, and inequality soars. This is borne out in the US, for example, where average wages have stagnated since the 1970s although gross domestic product has steadily climbed.

'This process also creates new avenues – such as increased access to higher education – that allow a few workers to join the elite, swelling their ranks. Eventually this results in what Turchin calls "elite overproduction" – there being more people in the elite than there are top jobs. "Then competition starts to get ugly," he says'.

In Turchin's theory, the current phase in the cycle should also be marked by political polarisation and rising government debt – both current crises in Washington. Real wages, the minimum wage, trade union suppression, the share of wealth owned by the richest one per cent, even filibusters and fights over judicial appointments – all have changed at the same time in ways reflecting reduced social consensus. Meanwhile, the elite class has grown sharply. Between the 1970s and 2010, college fees rose, yet the numbers of doctors and lawyers qualifying per head of population nearly trebled. Workers have steadily lost out. The "real shocker", says Turchin, is that the average height of Americans peaked in 1975. It has actually declined in black women since then – a fact that could be down to falling nutrition standards linked to lower incomes. None of the trends shows any sign of reversing.

This approach deserves scrutiny and the most rigerous testing.  The only reliable test is to predict developments ahead of time rather than 'explaining' them after the event. Begin the scutiny here, and contact Peter Turchin if you can find him.  But if his approach works, a Nobel prize must be in the pipeline.


US budget impasse ... Plans A, B & C
Date: Wednesday, October 16, 2013
Author: Henry Thornton

The quality press in Australia is saying that a deal will soon be made to fix the US budget impasse, even if this is just a bandaid fix over what is best seen as an oozing, toxic fiscal mess.

The media, like market participents, has largely been saying the mess must be fixed because not fixing it would be 'unthinkable'.  'Logic must eventually prevail' is the line of thinking.

But even if the bandaid is applied and we all go back to enjoying the zero interest rate/quantitative easing fuelled asset boom, how does the US fiscal mess get fixed in the longer term?  This was the question fired at Henry by his visitor from Sydney yesterday.

There are only three ways to fix a fiscal mess of the size the USA has accumulated.  The underlying cause is spending in excess of tax receipts, a policy that Ronald Reagan got away with for some time.  Read Alan Moran's analysis of that historic policy, as told by Mr Reagan's budget director, David Stockman, courtesy Quadrant.

Stockman 'sees near-unresolvable economic problems, the cause of which he lays squarely at the door of successive governments with their extravagances, bad spending decisions, budget deficits, and artificially low interest-rate settings that have brought excessive investment in housing, savings disincentives and potential inflation. These are aggravated by what he sees as an undermining of the capitalist structure caused by owners’ agents, management, looting of company profits through financial engineering and by recent government bailouts of poorly managed firms.

'Stockman blames the present endemic US current economic crisis on politicians’ spending programs and loose monetary policy. The adverse effects of these have been growing like a cancer for almost eighty years, reaching a crescendo with the Global Financial Crisis (GFC) of 2008 and an aftermath that continues to plague the world economy'.

Plan A to fix the fiscal mess is to reverse America's 'extravagances, bad spending decisions, budget deficits, and artificially low interest-rate settings'. But the US legislators are finding it hard even to agree on a temporary rise in the limit on allowable borrowing by the US government, despite the possibility that the USA will have to default on its debt repayments, unleashing a global crisis that will make the failure of Lehman Bros look like a teddy bears' picnic.

Put a line through Plan A.

Plan B is to repudiate the debt.  The mighty USA act like a failed entrepreneur and abandon its commitment to the rule of law?  To be sure, the US corporate culture (and corporate law) allows failed business leaders to become bankrupt and start again, sometimes to fail again but occasionally to succeed beyond their wildest dreams.  'It works for American business failures, why not the US government' will be the cry of the Tea Party Republicans.

Global interest rates would leap, central banks would strive mightily to provide liquidity, but trust, that vital but often unstated pillar of global capitalism, would be smashed. Massive disruption of business, trade and capital flows would result.

For goodness sake, US Tea Partiers, put a line through Plan B.

This leaves Plan C - massive global inflation.  As already noted, massive monetary stimulus would be applied under Plan B, but even if the bandaid is applied successfully, this is the likely scenario when Plan A - fix the underlying fiscal problem - fails.

Historically, some nations have succeeded with Plan A - Australia in the 1980s (but the crisis came anyway, in 1991), Germany more than once, but only after terrible hyperinflation that wiped out both government debt and the savings of the middle classes, the UK up to a point regularly, with help from the international agencies.

But history says debt default or inflation, or some horrible mix of the two, is the usual solution to a proper fiscal mess. Tea Partiers say, explicitly or implicitly, 'bring it on' as they say only a proper crisis will get Americans to live within their means.

Countries that have defaulted, eg Argentina, are often allowed to borrow again, too soon for the proper messages to be absorbed in Henry's view. 'So USA will again be able to raise new debt before long' say the Tea Partiers, but Henry questions this view.  If USA and therefore the world is plunged into depression, borders will close, capital flows and most trade will dry up, and radical politicians of all stripes will battle for ascendcy.

At this Henry explained to his visitor that the implied China-USA economic compact was an economic version of the MAD ('Mutually Assured Destruction') balance of terror that governed US-Soviat relations during the cold war. China lends to the USA so that Americans can spend on Chinese imports. A US debt default would put a spoke in that wheel whose long-term effects would destroy world trade just a certainly as a nuclear strike would have flattened major cities if the cold War had hotted up.

By all means enjoy the equity boom that will go on if and when the bandaid is applied to the oozing, toxic fiscal mess in the USA.  But consider what you will do to protect your family's wealth and welfare when Plan A fails and some mix of Plans B & C is applied to the US economy.

Postscript: We note the Australian dollar stubbornly continues to rise again.  A rise in a worst case is more likely that a fall (unless Australia's economic policies fail, which is very unlikely under the current government).  Please re-read Henry's 2013 articles on economic policy and ask whether a tax on capital inflow is needed to tame the Aussie dollar, interest rate cuts and the RBA's open mouth policies having failed to achieve this worthy objective.

Why saving makes us happy
Date: Tuesday, October 15, 2013
Author: Henry Thornton

A dear friend of the Thornton family is visiting us from Sydney. Said friend is (I would judge) of the political left, but on this occasion admitted to taking Henry's advice in matters economic.

'I've paid off all my debts', said friend confessed, 'and I am amazed how happy I feel'. 'Why is that?' Henry asked, it being more usual for him to be punished for offering good advice than to be thanked. 'I just feel uneasy about the future. My business (which involves selling antiques) could dry up overnight.  But I am surprised just how good I feel now that I am debt free'.

Henry offered congratulations and also confessed to being free of any debt. 'Other friends make fun of me for having what they call a "lazy balance sheet", but we are not alone. Australian households are now saving around 10 per cent of their incomes, I suspect for similar reasons to you, a general feeling the financial crisis is not over and reducing debt will improve the resilience of their family finances'.

'Reducing debt is one thing, but what about saving?' asked said friend.  Reducing or eliminating debt puts an individual, or a family, in a stronger position to cope with hard times. Saving, building a positive war chest, provides even greater resilience, as well as the opportunity to take advantage of hard times.  Buying shares or houses during a big asset bust is one way to get financially comfortable, so long as it is a risk one can afford to take. The same logic applies to nations as to individuals or families'.

The discussion continued. Was Norway, with its massive sovereign wealth fund, being prudent or merely excessively paranoid? Why did the Howard government not save more of the bounty provided by the mining boom? Will the Abbott government do any better?

All good questions, with no easy answers. The bottom line for Henry is that being debt free makes a person, or a family, or a nation far freer than if him, or her, or it, is saddled by debt. A nation with no debt plus a large sovereign fund, plus a solid program of wise investments, eg in infrastructure, and adequate defence personnal and kit, should be well into the happy zone, and those of its people who are similarly well positioned should at least have less anxiety than their debt-ridden over-committed friends and relatives.

So endeth the lesson. Here is Henry's advice for the young, first published here almost fifteen years ago. Building a financially strong family or nation takes time, but in the end will create happiness, or at least remove an almost certain cause of unhappiness.

Saturday Sanity Break, 12 October 2013
Date: Saturday, October 12, 2013
Author: Henry Thornton

Clive Palmer's ascent, travel rort repayments, sagging jobs market, it's all happening folks.

Fortunately for Australia's political stability, clive's men and women are likely to vote mostly with the government, provided they are treated with appropriate civility.

Travel rorts are an endemic challenge for politicians and should somehow be done away with, eg by provision of standard amounts on a sliding scale from small for backbenchers, to moderate for opposition front benchers to large for the PM, Treasurer, Minister for Finance and Foreign minister, or perhaps for all holders of high office.

(Inspired by this, a similar approach could be taken for the general run of taxpayers - eg abolish all deductions in return for a lower rate of income tax.)

The sagging jobs market is a far more serious matter, and various pundits are stumbling reluctantly to the truth, as the late Aussie holmes would have put it.

From years ago there is Henry and Roy Morgan, last weekend John Black in the Oz and this weekend its the fin.  This lagging source has on its front page 'Boomers finally hit retirement', and Alan Mitchell on p 22 says 'The labor market is weaker than it looks'.  Mitchell includes a graph showing a reasonably steady fall in the ratio of employment to population aged 15 and over.

Various gurus have been touting economic reform, including (gasp!) reform of the labor market.  Sadly this will not happen fast, and we shall need to rely on improved household and business confidence to give some upward stimulous to the market for jobs.


The great Non-race for the leadership of the once great Australian Labor Party is almost over. As someone said over lunch this week 'Statistically, neither candidate stands the slightest chance of becoming Prime minister'.

The week's big story, again in the Oz, is by Chris Kenny.

He documents Labor's refusal to grant legitimacy to John Howard's time in office, Tony 'unelectable' Abbott's time as opposition leader and professes to see the same useless failure to face reality now that Mr Abbott is actually the boss, and failing to bring on war with Indonesia..

Here is the killer conclusion: 'If you style yourself as the antithesis of a successful mainstream politician you must, by definition, push yourself to the margins'.

See also 'Reform lag puts billions at risk'.


Buddy goes to Sydney (unfair!), Eddie Betts goes to Adelaide (sob!), Daisy Thomas comes to Caaarlton! (one hand clapping) and perhaps the JPod also (three cheers!). Imagine the Blues with a powerful 33 year old crashing the packs at Centre-Half-Forward, with Judd, Garlett and Yarran cleaning up the crumbs and kicking goals.

The Aussie cricket team lost its 20/20 game in India, and now will settle down to five one day games, in which one win would be cause for celebration.  Then its the return visit by the pestiferest poms, and the prospect of yet another belting. Cannot out once great cricket team be paid by results - $10,000 for turning up, $40,000 for a win, $20,000 for a draw and zippo for losing?  Also, for Henry's sake, bring back the Sheffield Shield.

George Thomas, part of the dynamic editorial team at Quadrant, has kindly allowed us to reproduce his review article from the 500th issue of the venerable mag, which will be celebrated in Sydney this week.  Good stuff about the demise of amateurism and the wonderful career of Bert Sutcliffe.

See 'The game they play in heaven'. 


Henry has finally got around to reading Norman Mailer, thanks to a $10 book, Harlot's Ghost, courtesy the Book Grocer in Bourke Street. Snippets of insight may be offered as time goes on.

Do not miss 'A Field of stars in a darkened crypt', Fiona Prior's latest. 

Image of the week

Courtesy AFR

Economy - Americans being sensible ... we hope
Date: Thursday, October 10, 2013
Author: Henry Thornton

Special correspondant, Treasurer Joe Hockey, reported via ABC radio from Washington that American legislators will almostly certainly behave sensibly over the matter of raising the US debt ceiling by a cool trillion dollars or so.

Apparently the game is to find the money to pay the interest on the debt, a cool 6 billion a year, which the Tea Partiers regard as 'not defaulting on the debt'. Sounds too good to be true, like President Reagan's 'voodoo economics', reviewed here by David Stockman and Alan Moran.

Mr Hockey contrasted the likely sensible behaviour of American legislators with that of Wayne Swan, who left the new government with a debt ceiling that will bite by about Christmas.   Wall Street confirmed the Aussie Treasurer's positive view by pushing shares higher, while Uncle Joe told us that a 1000 point drop in US equities would signal things were actually not Aok.

The International Monetary Fund (IMF), best regarded as a lagging indicator, has lowered its forecasts for global, Chinese and Australian growth for, I seem to recall, about the sixth time.

The imminant appointment of Janet Yellan, to succeed Ben Bernanke, will entrench a monetary 'dove' in the US Fed, which presumably will allow current super-easy monetary policy to continue for longer. It is best remembered that government debt is most easily rendered harmless by a good burst of inflation.  So far we have seen a lot of asset inflation, firstly shares, latterly houses, and other types of inflation cannot be too far behind. (Our first recognition of Ms Yellen was in 2006, and shows just how well the dreaded GFC was predicted by all and sundry - a powerful message, comrades.)

It seems that the switch in the Australian government from Rudd to Abbott and from Swan to Hockey has greatly boosted business confidence.  Holden Australia is apparently unconfident about ever exporting a vehicle, even to New Zealand, so that should fix its claim for even more taxpayer assistance.

Ordinary Australians, however, are almost as worried as they were during the height of the GFC-induced frenzy about losing their jobs.  As we have repeatedly said, Australia's labor market is in far worse shape than commonly believed, and later today we shall get another reading from the seriously deficient ABS numbers. 'Economists' apparently expect that the flawed 'rate of unemployment' will remain at 5.8 %, and if it rises this will be just another signal that things are worse than expected by unnamed 'economists'.

If the ABS rate of unemployment is stuck at 5.8 %, or even (gasp!) falls, readers are encouraged to applaud the ABS staff for their attempts to keep us all happy, at least until the pre-Christmas shopping season is successfully completed.  Pity about that pesky 'Supply' difficulty, Australia's description of a debt ceiling inconvenience.

The global crisis: another view
Date: Wednesday, October 09, 2013
Author: Alan Moran

The following extract is from Alan Moran's review of David Stockman's The Great Deformation: the Corruption of Capitalism in America. We thank both Quadrant and the IPA (where Alan Moran is Director of the Deregulation Unit) for permission to publish this material.

As a chronicler of economic history and a policy advocate, David Stockman combines economics training with an inside operator’s knowledge gained at the highest levels of government and finance. Back in the 1980s he was plucked from relative obscurity as a junior Congressman to become President Reagan’s Budget Director. In The Triumph of Politics (1986) he lifted the lid on the Reagan revolution with its successes and its failures. The failures were associated with the “supply side” budgetary policy involving tax cuts without associated spending cuts. He vigorously opposed that at the time and considers it sowed the seeds for an acceptance of the excessive deficits now in place.

In The Great Deformation, Stockman extends and enlarges that historical analysis. He sees near-unresolvable economic problems, the cause of which he lays squarely at the door of successive governments with their extravagances, bad spending decisions, budget deficits, and artificially low interest-rate settings that have brought excessive investment in housing, savings disincentives and potential inflation. These are aggravated by what he sees as an undermining of the capitalist structure caused by owners’ agents, management, looting of company profits through financial engineering and by recent government bailouts of poorly managed firms. ...

Stockman blames the present endemic US current economic crisis on politicians’ spending programs and loose monetary policy. The adverse effects of these have been growing like a cancer for almost eighty years, reaching a crescendo with the Global Financial Crisis (GFC) of 2008 and an aftermath that continues to plague the world economy

Prosperity in the 1990s was, for the most part, fuelled by money-printing and a cumulative $2 trillion trade deficit. But this created financial crises, each one more serious than the one before.
With the dotcom bubble bursting in 2001, even more liquidity was added, with near-zero interest rates leading to the housing boom and a supercharged Wall Street from then to 2008. However, liquidity injected into the system must eventually be spent on goods and services, the supply of which is impaired by the money supply boost misallocating spending away from new productive investment.
Loose money reached its apogee, marked by near-zero interest rates which pretty well exhausted its further potential to fuel demand. In spite of this documented failure of pump priming, this Keynesian policy was turned to in 2008 by Friedman’s pupil, the Fed chairman Ben Bernanke, and the former Goldman Sachs “bond salesman”, Treasury Secretary Henry Paulson. The USA launched its $800 billion stimulus and $700 billion Troubled Asset Relief Program (TARP).

The inevitable frittering away of these funds on faddish and heavily lobbied expenditures was seen in the exotic energy-spending failures like Solyndra and Tesla. And the USA had its equivalent of our own pink batts and superfluous school hall expenditures. The TARP included among its loans a $200 million facility to a business that planned to make auto loans set up by two totally inexperienced housewives whose husbands were executives of the already bailed-out Morgan Stanley Bank.

Deficit spending as in the 1930s has failed and left enormous debts. And there is no end in sight:

The much ballyhooed budget of [Vice Presidential candidate Paul] Ryan for fiscal 2012 added $7 trillion to the national debt, for instance, before it would achieve a balanced budget twenty-five years later; that is, in 2037. Eisenhower would have thought such a fiscal plan the scribbling of a madman.

Massive deficits cumulating year on year were added to policies like the creation of a highly unstable housing market. Low interest rates and political pressures on banks to lend to high-risk borrowers compounded this. The government-controlled re-insurer, Fannie Mae, fuelled the frenzy by facilitating debt. Home loan assets grew from $1.7 trillion in 1994 to $6 trillion in 2008, by which time the prices were falling. The securitisation “innovation” of the 82 per cent of sub-prime loans is now recognised as badly mistaken and hiding rather than smoothing risk. Similarly, the merger and acquisition frenzy of the past thirty years has been shown to have destroyed rather than created value.

Such activities have undermined previous standards of prudence on the part of businesses. One outcome has been a hollowing-out of listed companies as Wall Street brokers combined with management to create value by buying stock on the basis of which executives were rewarded.

The largest twenty-five companies on the Fortune 500 list [had] net income aggregated to $242 billion during 2007, but only 15 per cent ($35 billion) of that hefty total was reinvested in their own businesses; that is, allocated to additional capital expenditures and other working capital after funding depreciation and amortization of existing assets. By contrast, these same twenty-five companies ... invested nearly $345 billion in financial engineering and shareholder distributions. This stupendous total represented 140 per cent of the aggregate net income of these leading companies.

Stockman’s focus on monetary policy and the harm from very low interest rates is well placed. However, it does lead him into some doubtful judgments. Among these is his dismissal of the shale oil and gas revolution that is now under way in the USA. He considers this has been artificially stimulated by low interest rates undervaluing the cost of capital. It is much more plausibly a function of genuine innovation in the location and tapping of hydrocarbon reserves previously uneconomic. As in the dotcom boom, there are doubtless over-exuberant investments in shale oil, but gains from the new technology are real.

Spending increases, the TARP and company bailouts were justified as a counter to prevent meltdown. But the decline in inventories that signalled the downturn (15 per cent) was little different from earlier downturns and only one quarter that of the Great Depression. Stockman considers therefore that panic was uncalled for. The Fed and Treasury’s deficits meant a massive increase in government bonds and the attempts by the authorities to restore growth by pushing liquidity onto the market meant money from these bond sales was not on-lent as there was no demand. Stockman says of those deficits, “Specifically, the excess consumption enabled by subnormal household savings resulted in year after year of recorded GDP growth that amounted to little more than theft from future generations.” There was no payoff in terms of growth, which remains at its lowest since the Great Depression. But government debt grew from 67 per cent of GDP in 2006 to 103 per cent in 2011. The liquidity was used to fuel the stock exchange, and with every move to end it the market panics. This process continues.

In 2008 the main beneficiaries of the government bail-outs and the TARP were the major banks, which had invested in the housing market, and such businesses as GM which had developed excessive costs based on poor labour market management. Among financial institutions only the majors, very highly leveraged on mortgage and other toxic debt, were in trouble. By contrast, regular banks with under-performing mortgages on their books would not collapse but would instead incur losses that would be taken over many years.

But the GFC and governments’ responses is now history. The present Armageddon is the result of the frantic efforts to stave off a financial crisis set up by government measures designed to rectify spates of excessive credit creation over the past sixty years. Stockman offers a route back to stability involving measures that include:
• allowing interest rates to be set by the market and not determined by the Fed
• allowing only deposit-taking banks not engaged in trading and derivatives to have access to Fed funding support
• requiring balanced budgets, eliminating subsidies, abolishing the minimum wage, Obamacare and a clutch of government departments and agencies
• instituting a 30 per cent wealth tax payable over a decade to eliminate government debt

Little of this is going to happen. Stockman gloomily says:

In November 2012 the people voted for the only real choice they were presented; that is, for paralysis and stalemate. Now it is only a matter of time before the state finally fails as a fiscal entity. It is ... so overloaded with mandates and missions that it cannot move forward and it cannot move back. Instead, it will become ever more paralyzed and dysfunctional. The cruel corollary is that free market capitalism cannot help, either. It has been abused, burdened, demoralized, and impaired by decades of central bank money printing and the speculative raids and rent-seeking deformations which it fosters.

Read Alan Moran's full review here.

Business confidence surges; but jobs declining
Date: Tuesday, October 08, 2013
Author: Henry Thornton

Roy Morgan Research’s Business Confidence survey in September showed that Australian business confidence rose to the highest level since January 2011 following the federal election. The rise of 14.7 points to a score of 134.3 is the biggest monthly increase in Business Confidence recorded since the survey began in December 2010. These figures are the result of 2,787 interviews with business decision makers representing all types, sizes and locations of businesses around Australia.

The two biggest factors contributing to the increase in confidence were businesses reporting they expect good economic conditions in Australia over the next 12 months, which increased by 10% points to 75% of all businesses; the proportion of businesses believing that now is a good time to invest in growing their business also increased by 10% points to 66%. In both cases these scores were the highest ever recorded for these two measures. The proportion of businesses reporting that they were better off than 12 months ago also increased by 4% points to 28%, as did the proportion expecting their business to be better off in 12 months (up 8% points to 47%). The proportion of businesses expecting continuous good times over the next 5 years increased by 7% points to 77%, also the highest ever recorded for this measure.

A Roy morgan representative said: 'The challenge for the new government is to meet these very high expectations held by the business community. If businesses continue to have confidence in the future of the economy, and therefore invest, that confidence in itself should contribute to improved economic growth. So far the global economic uncertainty caused by developments in the US and Europe have not impacted on Australian businesses, but as Roy Morgan’s Business Confidence figures during the US Debt-Ceiling Crisis in July 2011 show, we are not necessarily immune to such effects'.

Australia's soggy labor market.

Last Saturday saw a report of a very important piece of analysis of the state of the Australian labor market. John Black, former Labor Senator, said: 'IN the year to August, the potential Australian workforce grew by about 335,000 people.

'With a long-run participation rate of 65.5 per cent, we would expect to see about 210,000 of these people joining the labour market as employed and a further 10,000 joining the labour market as unemployed and actively seeking work.

'About 115,000 would typically remain outside the labour force, as students, carers, retirees or the hidden unemployed. This is what we would normally see from the Australian labour market with unemployment running at a steady 4.5 per cent - about half a percentage point above the level inherited by the Rudd government in November 2007.

'However, during the past 12 months, the growth in the number of employed was half the longer run target figure, at 106,000.

'Instead of 10,000 additional unemployed, we saw unemployment grow by almost 90,000, pushing the unemployment rate up by 0.7 percentage points to 5.6 per cent.

'The year-on-year growth in unemployment numbers has increased for the past two years and the 90,000 figure is higher than we saw during the stock market crash of the mid-1980s and the Asian financial crisis of 1997. We are now closing fast on the 112,300 jobless created in the year to October 2001, during the dotcom bubble'.  Read on here.

This is another way to examine a theme Henry and Gary Morgan have been banging on about for years. Mr Black uses ABS data that we regards as highly distored, essentially because the ABS definition of 'Employed' means for one hour or more in the past reporting period. However, even the ABS data can no longer hide the very poor state of the Australian economy, which has two implications.

The first is that the Australian economy is in rather a lot of trouble, a fact that most economists recognose but feel unable to acknowledge.

The second implication is that the Abbott government and its senior economic ministers have a lot of heavy lifting to do.  'Free up the labor market', and eliminate anti-business regulations generally, are the only policy actions likely to help much, but pre-election promises plus Mr Abbott's innate cautious conservatism means we are likely to hasten slowly on this matter.

Henry's most recent discussion of this most serious issue may be accessed here.

Saturday Sanity Break, 5 October 2013
Date: Saturday, October 05, 2013
Author: Henry Thornton

Australia is the first nation in modern history to secure full unification without killing anyone; Australia is the first major nation on earth to have achieved independence and sovereignty without killing anyone; Australia is the first nation in modern history to appoint a Jew as commander-in-chief of its armed forces; Australia is the first nation in the English-speaking world to have elected a Labor government led by a Labor prime minister; the first native-born governor-general of Australia was a Jew; and Australia, of course, is the only continent on Earth never to have been shamed by the institution of slavery.

Claudio Véliz has contributed to Quadrant for more than thirty years. After holding professorships at a number of universities in several countries, including Australia, he now lives in retirement along the Great Ocean Road in Victoria. Read on here for his full essay about crucial facts of australian history that are omitted or distorted, courtesy Quadrant.

Australia's labor market.

Today sees the report of a very important piece of analysis of the state of the Australian labor market. John Black, former Labor Senator, says: 'IN the year to August, the potential Australian workforce grew by about 335,000 people.

'With a long-run participation rate of 65.5 per cent, we would expect to see about 210,000 of these people joining the labour market as employed and a further 10,000 joining the labour market as unemployed and actively seeking work.

'About 115,000 would typically remain outside the labour force, as students, carers, retirees or the hidden unemployed. This is what we would normally see from the Australian labour market with unemployment running at a steady 4.5 per cent - about half a percentage point above the level inherited by the Rudd government in November 2007.

'However, during the past 12 months, the growth in the number of employed was half the longer run target figure, at 106,000.

'Instead of 10,000 additional unemployed, we saw unemployment grow by almost 90,000, pushing the unemployment rate up by 0.7 percentage points to 5.6 per cent.

'The year-on-year growth in unemployment numbers has increased for the past two years and the 90,000 figure is higher than we saw during the stock market crash of the mid-1980s and the Asian financial crisis of 1997. We are now closing fast on the 112,300 jobless created in the year to October 2001, during the dotcom bubble'.

Read on here.

Mr Black is not the first to spot the fiction that is Australia's official labor market statistics, as this week's image of the week suggests. But good on you maaaate! Nothing like a fresh whiff of reality to focus the government's minds on economic reform.


This was the week in which Tony Abbott was hailed as a real Prime minister with his performance in building bridges to Indonesia, and obtaining cooperation in restoring a sensible policy toward illegal boat arrivals.

Greg Sheridan reports.

And we must not ignote Julie Bishop's Chairing of the UN Security Council, reported by Ellen Connelly.

Climate change

Henry has been a confirmed agnostic, not on the question of climate change, which is unarguable as a feature of life on this planet, but rather on the issue of how much of recent (mild) warming is due to human influences.

Two recent contributions have shaken Henry's agnosticism.

The first is a brilliant setting of what one farmer called 'rabbit traps' at each of the arguments of the worriers about human influences, linked here.

The second is a review of the latest IPCC Report, reviewed here by Tom Quirk.

I urge all readers who are interested in this major issue for the modern world to read these fine contributions carefully.

Sensible comment (not simple abuse) shall be welcomed. Contact Henry here.


Buddy Franklin's move to Sydney, and its clever manipulation of the Cost of Living Allowance (COLA) has dominated the sporting news. More here from Luke Griffiths.

Henry is devastated that Eddie Betts is moving to the city of Churches, although Daisy's Thomas's arrival at Caaaarlton! will be partial compensation, provided his dodgy ankle holds up.

We must not overlook the NRL's annual punchup - correction grand final - and Henry advises AFL tragics suffering withdrawal to back the Roosters.

The Aussie netball shielas play New Zuland tonight in what has been predicted to be a 'brutal' encounter. Bring it on ladies, nothing like a good punch-up between friends.

Lovely to see Prince Harry and the G-G reviewing the ships with guns on Sydney Harbour. Memo to G-G - why not a navel uniform (Admiral rank of course) for occasions such as this?  A tight skirt and heels are not a good look in our nation's most senior citizen.

And, for cricket lovers, here is a lovely meditation on the perils of professionalism in the game they play in heaven.

Image of the week.

Date: Wednesday, October 02, 2013
Author: Henry Thornton

Henry yesterday had the pleasure of dining with three of Australia's leading economists in one of Australia's great dining rooms.

All three felt that the best outcome for the next year or so was slow economic growth, with  severe recession the realistic worst case.

The news last night included debate on whether the housing markets of Sydney and Melbourne are booming or entering bubble territory. Henry especially liked the ball-busting female Sydney estate agent who said demand is outstripping supply and while interest rates remain at record lows nothing will change. 'Get used to it, sucker' was no doubt in her mind.

The RBA declined to cut interest rates further but experts say the 'bias to ease' has been dropped. The RBA faces a weak economy, an excessive exchange rate and a booming housing market. Three targets, one weak (pop-gun) of rate moves. Not even a rising pop to worry the ball-busting female real estate agent or, on the other hand, a falling pop to reassure the near 20 % of Australians currently unemployed or underemployed. Just the sound of silence.

The economists said what was needed was now called 'macro-prudential' policy to contain house prices - 'like the old quantative lending limits' one of the economists said with a laugh.  'What about the currency?' Henry asked. 'People and businesses just have to get used to it' said one of the others. 'Glenn doesn't see there is a problem'.

Henry arrived home to find an email from Gary Morgan reporting that, in September, an estimated 1.3 million Australians (10.4% of the workforce) were unemployed. This is up 46,000 (0.3%) from last month. The Australian workforce was 12,467,000 (up 90,000) comprising 7,413,000 full-time workers (down 27,000), 3,757,000 part-time workers (up 71,000) and 1,297,000 looking for work (up 46,000) according to the Roy Morgan monthly employment estimates. These figures do not include people who have dropped out of the workforce and given up looking.

Among those who were employed 989,000 Australians (7.9% of the workforce) were under-employed, i.e. working part-time and looking for more work. This is 17,000 fewer than a month ago (down 0.2%).

In September in total an estimated 2.286 million Australians (18.3% of the workforce) were unemployed or under-employed. This is up 0.1%, or 29,000 from August, but much higher than 12 months ago in September 2012 (up 170,000, 0.9% from 2.116 million).

Of those looking for work an estimated 607,000 Australians (down 24,000) were looking for full-time work, while 690,000 (up 70,000) were looking for part-time work.

The latest Roy Morgan unemployment estimate of 10.4% is a substantial 4.6% more than currently quoted by the ABS for August 2013 (5.8%) – the Abbott Government needs to immediately establish a working committee to demand the ABS release the true and complete unemployment figures each month.

Gary Morgan said: 'When Tony Abbott took over as Prime Minister last month unemployment was 10.1%, some 4.4% higher than when Kevin Rudd took office in November 2007. At the time of the Federal Election 1,251,000 people were unemployed, more than double the Roy Morgan unemployment figure in November 2007 when there were 606,000 unemployed Australians.

'There is no good news in today’s Roy Morgan September employment estimates with unemployment continuing to rise, now at 10.4% (up 0.3% since August). In raw figures, now 1,297,000 Australians are unemployed (up 46,000 since August).

'While the overall level of employed Australians has risen to 11,170,000 (up 44,000), most worryingly full-time employment has dropped to 7,413,000 (down 27,000) – now at its lowest since January 2013 (7,196,000). Australia’s under-employment has dropped slightly to 989,000 (7.9%, down 0.2%) meaning a total of 2,286,000 (up 29,000) Australians are either unemployed or under-employed (18.3%, up 0.1%).

'With this level of real unemployment, there is no doubt the new Coalition Government will be reviewing all the 'drivers' of employment – Industrial Relations laws and practices; restoring confidence in Australian businesses and the Australian economy'.

« PREVIOUS   | ... 5| 6| 7| 8| 9| [10] | 11| 12| 13| 14| 15| ... |   NEXT »
For member services:
Forgot Password?
Online Opinion »
Online Opinion
The Australian »
The Australian
MacroBusiness Blog »
MacroBusiness Blog

Other sites we like »
Membership to
is FREE and the benefits, are overwhelming!
ONLY AUD $55.00 pa
Show your real colours and signup as a
proud, card carrying friend of Henry
HOME | NEWS + Views | Economics | Politics | Investments | Corporate | SMERSH | Lifestyle | FORUM | SIGN UP
Sydney web design by Sydney web design by Wiliam web developer
© 2009. henrythornton.com Pty Limited. All Rights Reserved. The Herald Tribune is powered by the New York Times.