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Henry Thornton - Contributors: A discussion of economic, social and political issues Blogs
Rabbits in the spotlight
Date: Wednesday, July 13, 2011
Author: Henry Thornton

After yesterday's brutal selloff of global equities, another half percent fall overnight on Wall Street gives no hint of a relief rally today.

The particular trigger overnight was Ireland's debt reclassified as junk. But with Greece a basket case, the debt of Spain, Italy and Portugal all looking like junk already, and political jousting in the USA over debt reduction, markets will suffer further falls.

The Economist devotes several pages to the US situation.  'A US technical default would convulse markets. Nothing else is certain' says the venerable mag.

'AMERICA’S debt is supposedly the world’s safest, backed by trustworthy courts and an unrivalled capacity to raise taxes and print money. Yet thanks to a quirk of law, talk of default is not confined to the European side of the Atlantic'.

The Economist concludes: 'Even if Congress were to tackle turmoil by quickly lifting the debt ceiling, the stain would linger. “In the past our assumption was interest would always be paid on time,” says Steven Hess of Moody’s, a ratings agency which has cautioned that even a brief default would cost America its coveted Aaa status. “If an actual payment were missed once, might that happen again? If you thought it could, that is clearly not compatible with Aaa.” .'

In a seperate contribution, the Economist analyses the 'cynical political game' being played over the debt reduction imperative.

'This newspaper has a strong dislike of big government; we have long argued that the main way to right America’s finances is through spending cuts. But you cannot get there without any tax rises. In Britain, for instance, the coalition government aims to tame its deficit with a 3:1 ratio of cuts to hikes. America’s tax take is at its lowest level for decades: even Ronald Reagan raised taxes when he needed to do so.

'And the closer you look, the more unprincipled the Republicans look. Earlier this year House Republicans produced a report noting that an 85%-15% split between spending cuts and tax rises was the average for successful fiscal consolidations, according to historical evidence. The White House is offering an 83%-17% split (hardly a huge distance) and a promise that none of the revenue increase will come from higher marginal rates, only from eliminating loopholes. If the Republicans were real tax reformers, they would seize this offer'.

How similar is this to the game playing and misdiagnosis that was part of the Great Depression? We shall only know in retrospect, but right now world leaders look rather like rabbits caught in the spotlights.

But they were warned.  In October 2008, Ambrose Evans-Pritchard said we were facing 'a decade-long toil of pitiful growth – or none at all – as we purge debt. The world stole prosperity from the future for year after year, with the full collusion of governments, regulators, and central banks. Now the future has arrived'.

Even this humble scribe said as long ago as March 2008: 'There will be a vast de-leveraging of balance sheets.  Credit will shrink dramatically and when growth resumes it will be at a far slower rate. Failed financial institutions will be forced into mergers, as with the takeover at a firesale price of Bear Sterns by JP Morgan, or nationalised.... Asset values will decline substantially....'

Saturday Sanity Break 12 Dec 2015
Date: Saturday, December 12, 2015
Author: Henry Thornton

Stunning apparent rise in jobs is widely regarded as misleadingly positive, reminding some of us of the time when a large pile of forms was discovered behind the filing cabinet. But the 'trend' results are strong enough that we cannot ignore a message of strong overall jobs growth. The exception is youth unemployment, especially in the  poorer parts of state capitals, in regional cities and in remote areas of the nation where adult unemployment is also a sad and intractable problem. 'What can be done to promote youth unemployment?' a distinguished elderly economist asked this week. Henry advises young people to find chances to work if necessary as unpaid 'interns' to strengthen their cvs, but lower rates of pay are the economist's standard answer to such a question.

Combined with slow GDP growth, strong overall employment growth suggests low productivity growth. But strong jobs/low productivity growth is nevertheless welcome while we await the effects of a more innovative culture to emerge. And makes it likely that the next interest rate move will be up, despite the RBA's 'stand easy' bias.

There are two big global debates about economic growth. The first is 'why is overall economic growth low and falling?' The damage done to 'Animal Spirits' by the Global Financial Crisis plus the overhang of debt explains a prolonged period of slow growth. China's growth has slowed to an extent that sees commodity prices still falling, sufficient to create a bias to deflation of goods and services prices, an especially unhappy situation for Australia. Last night's plunge in key commodity prices and stocks listed on the New York Exchange point to further carnage in Australian stocks on Monday.

The second global debate concerns the US Fed's widely anticipated start of a return of super easy US monetary policy to more normal monetary policy cause disruption or even carnage in financial markets. Given the Fed's constant reiteration that rising rates will be gradual, and the length of time this message has been reiterated, Henry will be suprised if disruption is too great.  But there are skeptics about the strength of the US economy, notably Henry's Raff Report, whose latest report is linked here. 

In particular: 'Dear readers the truth is that the US stock market is supported by several handfuls of names, and supporting the market at a robust level. When the gamblers finally see the king riding by has no clothes the US market will contract sharply. Few people forecast October 1987 accurately but many including the Raff could see it coming and so it did, and so too will history repeat'.

Henry is happy holding on to the 'best 15 international stocks' provided by Australia's most dynamic fund management company. But Henry continues to reduce holding of Aussie equities.  The idea is that any international financial instability will punish Australian stocks disproptionately.  Also that there will be further falls in the Aussie dollar, possibly to 60 cents in the (US) dollar. As the AFR reported last night: 'The ASX slumped over 2 per cent for the week due to the ongoing commodities rout and as investors took stock ahead of next week's crucial Fed Reserve meeting'.

We must applaude Prime minister Turnbull's constructive optimism about global and Australian growth and his attempts to make Australia a more entrepreneurial nation. A cheery approach and a larger honeypot for academics will not, however, fix the budgetary crisis or reduce Australia's still growing debt.

The stellar US float of Atlassian, as well as the source of Mr Turnbull's wealth shows what can be done by people willing to have a go.  There are over a million Aussies living and working overseas, supposedly 20 K in Silicon Valley alone.  Silly to hope to get more than a handful returning to Oz, but realistic to work with Australia's entrepreneurial diaspora.  More here.

Tax reform

Treasurer Scott Morrison is leading a debate in which the end points seems likely to be a 'grand bargain' to raise the GST and possibly broaden its base, give the states a share of income tax to fund health and social benefits and remove inefficiencies throughout the tax system and compensate battlers but without reducing the overall tax take.  Henry doubts such an approach will fix the Federal Budget's enormous prospective deficits, but perhaps there is a fiendish puddin' being cooked in Treasurey that will square the circle and allow the Turnbull government to survive an increased GST tax collection.

This is like turning a magic puddin' into a stale bread roll on the kitchen bench, but may be a clever way to slip a well crafted pair of loafers into a slightly open door in the hope of selling said stale rolls to Mr and Missus Australia.


Fiona Prior sees the Belvoir production Mortido and warns that if you found the Coen brothers’ film No Country for Old Men frightening, Mortido will bring the violence of the drug trade even closer to home.


Encouraged by their son Bert, Henry and Mrs T recently attended the Nova theatre in trendy Caaaarlton! to watch a move called The Lobster.  This was about a dystopian future when singles are incarcerated in hotels with other single people and are encouraged to find a mate.  Those who do so are returned to civilisation, while those who fail are euthenised and somehow turned into an animal of their choice.  The hero determines he will become a lobster as these animals live a long life and are fertile throughout. But there is some sort of resistence group, where the hero finds true love and in the final scene asks for a steak knife to (we are led to believe) poke out his eyes so he will share the blindless inflicted on his true love.  We walked out before this climax to a nutty film that Nova staff all said is 'great', and sure to capture the attention of those who make awards in the film world.

Perhaps also relevant to note the critical success of Mad Max, Fury Road, whose time in cinemas was short, brutal and uncompelling.


The Windies are in a freezing Hobart early summer heading to a well planned first 'test'.  If this is a 'test' every Windies player failed except potential centurian Mr Bravo and one bowler whose name I have forgotten.  Sad contrast to the 1960-61 series that Henry listened to every ball of due to a nasty medical problem that meant no other activity was possible.

Image of the week

Courtesy AFR

Innovation front and centre
Date: Monday, December 07, 2015
Author: Henry Thornton

Today we see the first divergence between the policies of Tony Abbott and Malcolm Turnbull.  The 'innovation package' has been widely signalled, an approach also very different to that of Mr Abbott, and newspapers today feature the great and the good of Australia's innovation sector.  Given the almost universal tendency of promising Australian start-ups to seek serious funding in the USA we shall watch closely both the package and its effects.

'Malcolm Turnbull’s $1 billion innovation and science package to be unveiled today will deliver about $100 million in extra funding for the CSIRO and provide capital gains tax holidays for ­investing in start-up enterprises.

'The Prime Minister’s first signature policy announcement since seizing power from Tony ­Abbott 12 weeks ago will also ­include a push to protect the ­nation’s commercial and strategic secrets from cyber attack.

'Mr Turnbull will elevate innovation and science to the heart of the government by creating and chairing a special cabinet committee in a deliberate move to set a different priority to the Abbott government.

'It will co-ordinate all research and science spending across government, which is set to reach $10bn a year by 2020'.

Read on here.

The new 'national innovation and science agenda' focus on four themes: commercialising research; raising capital and enabling risk; making the government a model example for innovation; and boosting talent and skills.

It is reported that the package will relax Australia’s insolvency laws as part of a suite of measures to create greater incentive for investors to take risks, while industry insiders expect it to include (presumably larger) tax breaks for research and development.

For any package to be successful, it must alter incentives of university 'publish or perish' culture to include 'impact' - contribution to Australia's commercial future.

Here are Henry's efforts as an early contributor to the issue of Australia's poor performance in the 'commercialisation' game.

Saturday Sanity Break, 5 December 2015
Date: Saturday, December 05, 2015
Author: Henry Thornton

Alan Kohler is perhaps the doyen of Australia's economically literate financial journos. Today he writes: 'This week’s fairly decent GDP number has already been blown apart.

'The entire reason the Australian economy grew 0.9 per cent in the third quarter was that net exports contributed 1.5 per cent. The domestic economy contracted 0.6 per cent – the biggest contraction since the GFC.

'In other words, as one economist put it, all of Australia’s eggs are in the trade basket.

'Then on Thursday the trade figures for October, the first month of the next quarter, came out and confirmed not only that that sort of contribution from net exports was unsustainable, it was already not being sustained.

'The trade deficit blew out by nearly a billion dollars, far more than expected'.  Read on here.

Here is a warning from 1993.

Alan Kohler again: 'The RBA’s statement yesterday had an air of satisfaction about it.

'The expansion is continuing, inflation is within target and will be for years, the housing boom has moderated and the dollar is adjusting. All good.

'Or is it? Actually, the Australian dollar is in the middle of a strange and inconvenient rally, despite plummeting commodity prices and a surging US dollar.

'Just when it seemed they couldn’t fall any further, commodities dropped another 3.9 per cent in November in Australian dollar terms, with big falls in iron ore and oil.

'Yesterday, the US dollar index touched a new 14-year high, breaching the previous March 2015 level; the foreign exchange market is fully pricing in a December Fed rate hike.

''The reason we “had to have” the recession, as Paul Keating said, was to try to bring demand for imports back to within sight of exports. The sledgehammer duly cracked the nut, and the current account was brought back to minus 3 per cent of GDP.

'What’s more, the US dollar is now more likely to fall than rise once the new US tightening cycle begins, and if that happens, the Reserve Bank of Australia may have a big problem on its hands'.

Here are Henry's comments on this matter, in 'The recession we did not have to have', written and published in August 2013.

Even earlier, Henry warned on the need to 'Tame the dollar'. What was needed then, and is needed now, is a tax on capital inflow.

Philosophy of fiscal policy. (A warning from 2015.)

We now repost a few paras from an earlier blog.

Here is a philosophic point of some importance. There will be vast debates about whether faster or slower growth of government will boost overall economic growth and jobs growth. In the medium term, a nation's growth depends on the three P's - Population, Participation and Productivity. Faster growth of government may have a short-run positive effect on growth of jobs, but the additional debt required to fund the government spending (in a nation with debts) will be a drag on growth.

If the extra spending succeeds in boosting productivity - as it may by increasing R&D or 'innovation' (which can be defined as R&D put to work) - there may be a net positive effect, but the larger the debt becomes the bigger the drag on growth.  And there is a particular trap in the form of today's super-low interest rates.  Debt is relatively cheap to finance now, but imagine a world of 'normal' interest rates.

There is, or should be, a lot of pondering to be done in Treasury under way now.

More here.  


We await monday's 'Innovation Statement' with bated breath. The Oz has been running lots of thought bubbles of this subject, and Henry is not convinced anyone has yet figured out which three policies would most change the game favourably.

Henry's three suggestions are as follows: 1. Create a national culture in which corporate failure is not necessarily the kiss of death; 2. Provide real tax incentives for enterprises that set out to turn Australia's relatively excellent research into businesses; and 3. Systematically engage with Aussie expats who have succeeded as entrepreneurs in other places.

Do not miss the cautionary tales in the latest Raff Report.


Fiona Prior is enjoying the current crop of movies.

Here is her review of the latest 'Hunger Games' movie, some think a report from a soon-to-be-enacted dystopian future.

Adelaide's relatively well-grassed pitch  and pink balls evened up the battle between bat'n'ball.  Australia scrambled home with three wickets to spare late in day 3 of a gripping contest.

Now our (rebuilding) team faces the once-mighty West Indies, grateful that Usain Bolt is now bowling for the Carribean funsters. Sod's Law predicts that the Windies might surprise Smith's Aussies in at least one test and wouldn't that be a surprise?

Image of the week

Monetary policy and fiscal policy
Date: Tuesday, December 01, 2015
Author: Henry Thornton

The RBA board meets today and will almost certainly sign-off for another two months 'standing easy', interrupted only by Christmas festivities.

Business investment fell by a shock 9 % while other indicators have been slightly better than expected. Goods and services inflation has remained low and Sydney house auctions have slowed, while Melbourne auctions remain bullish.  Share prices seem to have stabilised, but further falls are probably on the cards.

Low goods and services inflation would allow the RBA to ease monetary policy further, but Henry doubts that Gov'nor Glenn will want to make such a call when the US Fed is likely to raise US cash rates slowly but surely and this should change the strength of the Aussie dollar which has tended to rise despite lower iron ore prices, low goods and services inflation and weak investment.

Mr Stevens was reappointed for a further three years (following his 7 years initial term) on 3 April 2011. His recent speech to a meeting of Australian business economists had a strong valedictory air to it. He will want to leave monetary policy in a sound, uncontroversial state.  Keeping cash rates at 2 % for the next few months would both engender a general sense of confidence and leave for his successor the decision about further easing or (more likely) increases following the US Fed with a gradual return to a more normal monetary policy. [Ed: A later report says the Gov'nor Glenn is to retire in September 2016]

If the global economy remains mired in goods and services deflation by April (or September) next year, there will be a case for a new letter of intent that revises the target range for official cash rates from 2 to 3 per cent to 1 to 3 or even zero to 3.  The current range is very narrow, and will be achieved over a long run of years only by chance. A wider range would be more sensible and also allow more room for judgments about other economic variables including asset inflation.

Should Gov'nor Glenn retire a little early -  24 December, say -  then a successor would have around six weeks to ponder his (or her) substantial responsibilities.

 Whatever the timing, Glenn Stevens will retire with a resounding 'Well done that man' from Henry, and will be a tough act to follow.

However, with the retirement of such a competent leader, the composition of the board becomes especially important. There are three positions falling vacant in 2016. It is vital that they be filled with people of unimpeachable integrity and preferably also some proven knowledge of monetary economics and macroeconomic management generally.

Fiscal policy

While monetary policy seems safely under control, fiscal policy is an animal of a different stripe. The cost of spending too much during the boom and the largely unnecessary sugar hits during the global crisis have well and truly caught up with Treasury and the current government. Malcolm Turnbull and Scott Morrison face a massive task to balance the books during their time in government, even if that turns out to be equal to that of John Howard. 

There is a case for vigorous spending cuts but nothing that seems feasible will fix the issue. Worse, Australians are used to current levels of welfare spending and indeed various good ideas for increasing welfare and health services are in the air, including the billion of so for Climate control.  And the Innovation package is yet to be announced. 'Tough cuts', necessary for fixing the budget in the next decade, would almost certainly end this government's time in government.

Tax hikes will be hated by the conservative branch of the Liberal Party - think the Institute of Public Affairs - but will be reluctantly accepted by most other voters if it means minimal slashing and burning of welfare and health programs.  There is a strong case to raise the GST to 15 % and/or broaden the base.  Provided there is compensation for the battlers, cuts to income taxes (or at least substantial reform tax schedules to end bracket creep) and perhaps promises to cut company tax in due course this set of changes may eventually become accepted by a narrow majority of voters.

Combined with strong efforts to minimise growth of spending, this broad tax reform is about the best we will be able to manage. There has been a reasonable start to the necessary task of building a public case for that sort of package, but consistent and much repeated communication will be vital.

Here is a philosophic point of some importance. There will be vast debates about whether faster or slower growth of government will boost overall economic growth and jobs growth. In the medium term, a nation's growth depends on the three P's - Population, Participation and Productivity. Faster growth of government may have a short-run positive effect on growth of jobs, but the additional debt required to fund the government spending (in a nation with debts) will be a drag on growth.

If the extra spending succeeds in boosting productivity - as it may by increasing R&D or 'innovation' (which can be defined as R&D put to work) - there may be a net positive effect, but the larger the debt becomes the bigger the drag on growth.  And there is a particular trap in the form of today's super-low interest rates.  Debt is relatively cheap to finance now, but imagine a world of 'normal' interest rates.

There is, or should be, a lot of pondering to be done in Treasury under way now.

Structural reform.

The obvious way to improve economic performance, and therefore fix the budget faster and with less pain - political and economic - is to introduce genuine productivity raising structural reforms.

 The budget outlook continues to worsen, tightening the vice in which the government is caught. During the Banana Republic crisis, Treasurer Keating read out falls in the Aussie dollar to members of the expenditure review committee of cabinet to get continued cuts to budget spending. Time for Treasurer Morrison to have a list of genuine reforms to produce sequentially for every $10 billion worsening in the budget outlook?

Here is a modest set of possibilities.

Glenn Stevens reflects.
Date: Tuesday, November 24, 2015
Author: Henry Thornton

Lovely speech by Glenn Stevens last night deserves to be widely read. Especially by people who need to forecast the future of economic events or ponder the inevitable uncertainties of life.

Because I like this speech so much I shall present its most interest bits, within quotation marks but please go to the whole thing if you have time.  Here is a link.

'While small forecast changes get a lot of attention, the far more important question is whether we have recognised and understood the big forces at work. Even if we cannot predict the outcomes with great accuracy, an understanding of these forces ought to help us get policy responses roughly right. And that, in the real world, is probably about as much as we dare hope.

'Right now the big forces include:

* for Australia, the closing chapters of a very large and long-running terms of trade event, with all that means in terms of economic adjustment. This coincides with a household sector no longer being in a position to play a major role in leading growth by significantly increasing its leverage, because it had already done that in the past;

* a global economy growing but only moderately, affected by considerable structural change and facing legacy effects of debt, arising from a previous period of over-confidence and under-appreciation of risk;

* a disinflationary or deflationary environment for the production of goods and commodities, and even some services, accompanied by unusually low rates of wages growth;

* extremely low returns on safe financial assets, as central bank actions have removed a significant proportion of these assets from the market, and have encouraged investors to accept interest rate risk on the remainder by providing ‘guidance’, leading to:

* high and rising valuations on existing fixed assets, including dwellings, around the world, but not so much, thus far, in the way of new capital formation by most existing businesses in the ‘real’ economy.

'To this list of ‘conventional’ forces we might add:

* the ‘disruption’ of the increasing application of digital technology, which may mean, among other things, that growth in sales, capital formation and returns to capital are happening in entities and activities we don't measure very well – or at all.

Many of these sorts of forces are low-frequency in their nature. Most of the ups and downs in the time series from month to month, or even year to year, on which we all expend so much energy are just temporary fluctuations around these longer-run trends.

And in conclusion.

'My final, fairly uncontroversial predictions:

* The business cycle will continue. There will be economic downturns from time to time. If one of those turns out to be a big one, it will be very new experience for quite a lot of Australians. Close to half the workforce has never seen really high, nationwide unemployment. A lot of people in business have, I suspect, not seen how tough conditions can become when virtually every industry and region is contracting. That they have not seen this is a good thing – in the sense that it results from the fact that we have not a really serious downturn for a long time now. But if one comes, it will be a shock.

* A decade from now, I suspect the art of economic forecasting won't have changed much. In my 35 years as a maker, observer and user of forecasts, I think forecasts have improved. Part of that has come from learning more about how economies work. But a lot of it, I suspect, has come from what could be described as improved ‘now-casting’: finding ways of assimilating a host of disparate pieces of information to judge more accurately what the economy has been doing in the very recent past. (That's probably where ‘big data’ potentially has some use.) That provides a better ‘jumping off’ point for the forecast profile, which is important because most revisions to numerical forecasts for annual growth or inflation still seem to come from surprise about the current and most recent previous quarter. When all is said and done, however, it remains the case that ‘forecasting is hard, especially about the future’.

* But, finally, human nature won't change. That means that we, as human beings, will be irresistibly drawn to those who claim to be able to forecast the future, beat the market, and give us the illusion of certainty and control.

Saturday Sanity Break, 21 November 2015
Date: Saturday, November 21, 2015
Author: Henry Thornton

The civilised world is still mighty angry about the terrorist attacks in Paris.  France has upped the ante with its entirely understandable 'declaration of war' and there seems to be a deep reevaluation of Eurozone policies towards refugees which has simplified the coming and goings of the terrorist leaders. Australia's Tony Abbott has intervened to encourage the toughest possible response, and has been clearly marked out as a leader of conservative thinking globally.

The recent Canadian election was a sign for some of a swing to the centre, or even the centre left.  Malcolm Turnbull's accession could be seen as part of a similar trend if it wasn't so clearly the result of particular personality politics in a country that has become very quick to dump a leader who does not tick all the boxes - polite, good tempered, positive, articulate and with attractive policies in which there are  many winners and no or very few losers.

The US Fed seems to be steeling itself to begin restoring a normal monetary policy, while other nations or aggregates of nations - Japan and the Eurozone to cover both sorts of makers of monetary policy - are preparing for further easing, including even negative cash rates and bond rates.  Henry hopes that the RBA will sit where it is with 'accomodative' monetary policy that should enable further drops of the currency, especially relative to the US dollar, when the Fed finally acts.

The RBA has this week released a paper - reference below - that shows with graphic clarity its limited ability to predict movements in commodity prices.  Allowing us to peep inside the kimono is brave of the RBA, but the evidence presented reflects a methodological weakness. As Henry has argued before, professional forecasters should always include some attempt to elicidate the 'realistic worst case' as well as their best guesses.

During the late lamented commodity boom, what if someone had asked about consequences if the boom had been far stronger than 'best guesses' assumed - a 'realistic worst case' given the severe case of Dutch Disease suffered by Australian industry.  Would the Howard-Costello government have been more careful in its budgeting with less give-aways?  Would some brave soul have proposed a tax on capital inflow to prevent an exchange rate that seriously weakened non-mining industry? And when the commodity tide reversed, would a far more pessimistic set of commodity forecasts have prompted Treasurer Swan to implement serious economic reform?

Sadly, with the extreme Keynesian bias of Treasurer and Treasury in the era of Treasurer Swan, one has to assume the result would have been even larger shovelling  of money out of the Treasury, larger 'sugar hits' to stoke the age of entitlement rather than sober decisions to reform economic policies and rein in the budgetary deficits.  But a cannier Treasury and Treasurer might just have acted more prudently.

Australia's current short-term indicators, including jobs growth and household and business 'confidence' are looking better, while debt, especially household debt continues to grow, signalling trouble to come. Why is growth everywhere slower than expected, and slower than achieved in the so-called 'great moderation' of the 1990s, is a question Henry is often asked. One answer is the weight of debt affecting the 'Animal spirits' of the nations. In the case of Japan, high debt levels, the shock of the massive share price collapse of 1989-90 and a declining population are all factors of a type that are affecting developed nations, albeit Japan seems to have the most deeply ingrained national gloom. 


Fiona Prior sizes up the latest James Bond movie.


The retirement of Mitch Johnston is a sad day for Australian cricket, especially as it was almost certainly in part due to the glassy batting paradise of the pitch in Perth. With Josh Hazlewood said to be very tired, some say just about burnt out, it seems Peter Siddle and James Pattinson  will get the chance to return to the Australian team, with Shaun Marsh replacing Usman Khawaja as a batter.  There is some chance that leg spinner Steven O'Keefe, with successful experience with the pink ball, will be part of a spin twin attack. Pink balls, and a day-night test, whatever will they think of next?

And the anniversary of the tragic death of Phillip Hughes will cast its pall as the sun sinks slowly in the west.

Footy hots up with trade week, and Caaaarlton! seems to have already recruited a bunch of young blokes who may become good players in three or four years, given good luck and some miraculous financial wizardry to keep the Blues from bankruptcy followed by collective black dog unhappiness.

Russian athletic drug cheats, cycling drug cheats, corrupt soccer administrators, footy players boosted by possibly illegal 'supplements', the list of real or alleged sporting malfeasence goes on and on until one is forced to conclude the lure of victory with winner take all rewards is just too great for sporting contests to be fair. We have also sickened by women cage fighters at work beamed into our living rooms in the past week. It's all getting a bit like the battles between gladiators in Roman times, and it cannot be too long before the filmic 'Hunger Games' is replaced by live versions of the concept.

Image of the week

Courtesy Reserve Bank of Australia, The Terms of Trade; Outlook and Implications, Alexandra Heath, Head of Economic Analysis Department

Global recession - phase three
Date: Monday, November 16, 2015
Author: Henry Thornton

'First America, then Europe. Now the debt-crisis has reached emerging markets'.  That is the first leader for The Economist today. Coincidentally, the OZ discusses 'The Commodity Calamity'.  This is sufficient to put at risk Australia's apparent recovery from its growth recession, and certainly suggests we are in for soggy asset markets.

We focus on the venerable mag's 'Never-ending story'. 'It is close to ten years since America’s housing bubble burst. It is six since Greece’s insolvency sparked the euro crisis. Linking these episodes was a rapid build-up of debt, followed by a bust. A third instalment in the chronicles of debt is now unfolding. This time the setting is emerging markets. Investors have already dumped assets in the developing world, but the full agony of the slowdown still lies ahead'.

The bust will not be as bad as those that created debt default, asset deflation and currency crashes in the 1980s and 1990s, but it will 'hit growth harder than people now expect, weakening the world economy even as the Federal Reserve begins to raise interest rates'.

Chronical one: capital flooded across borders, driving interest rates down and inflating debt and asset prices in first world nations. Booms went bust, and capital switched direction to flow into emerging markets where debt ballooned, egged on by rich nation 'quantitative easing'.  China's debt to GDP ratio increased by 50 % in the past 4 years. Now slower Chinese growth has reduced commodity prices and 'next comes the rekoning'.

'Some debt cycles end in crisis and recession - witness both the subprime debacle and the Eurozone's agonies. Others result merely in slower growth, as borrowers stop spending and lenders scuttle for cover'.

Developing nation economies fall into three catagories.  The first will involve 'a prolonged hangover, not a heart attack' and this seems to be the case in Korea, Singapore and China. These nations have the resources to forestall the risk of severe crisis at the cost of sapping growth. It is worth considering if Australia fits into this group, despite our status as an 'advanced economy'.  Australia's international debt is rising rapidly, and household debt is as high as anywhere in relation to (very high) household incomes.

In considering our asset markets, it seems that Australia's housing boom is cooling. Share prices will follow those in major markets, especially those of the USA, with especial downside due to the narrowness of of our markets. Prices of major resource companies, notably RIO and BHP Billiton, have already crashed, and in the latter case with the tragedy in Brazil adding to the gloom. Australia's banks are down by around 30 % from their peaks, and today's post-terror attack falls will add some downside. Australia's banks have plenty of room to fall further, and the fall will be especially severe if Australian households decide to begin saving at a faster rate.

The Economist does not, of course, follow the Australian economy, except for a quizzical occasional remark that reveals deep-seated ignorance of the economy that is the wonder down under.  But the venerable mag is pretty sharp on various global issues, and posts a chilling warning this week.

'Volume four?

'Europe’s open economy is most exposed to a cooling in emerging-market demand, which is why more monetary easing there looks likely. But America’s policy dilemma is more acute. The divergence in monetary policy between it and the rest of the world will put upward pressure on the dollar, hurting exports and earnings. And waves of capital may again seek out the American consumer as the borrower of choice. If so, the world’s debt crisis may end up right back where it started'.

Further reading

The never-ending story

The Economist  - 'The world is entering a third stage of a rolling debt crisis, this time centred on emerging markets'.

The Economist - 'What Paris's night of horror means for Europe'.

The Australian - 'The Commodity Calamity'.

Terror attacks in Paris
Date: Sunday, November 15, 2015
Author: Henry Thornton

The Attacks in Paris


French television and news services reported that dozens of people were killed and many more wounded in multiple attacks across Paris on Friday night.

More here. Western world facing all-out war.

Comments of world leaders

Francois Hollande

Barack Obama

Xi Jinping

David Cameron

Angela Merkel

Malcolm Turnbull

Julie Bishop


Saturday Sanity Break, 14 November 2015
Date: Saturday, November 14, 2015
Author: Henry Thornton

Malcolm is off on an 11 day trip during which he shall meet 14 heads of state.  Pictures of him with the Indonesian President were a welcome start to the trip. Choosing not to preach to Eurozone leaders about their refugee problems was another master stroke. We wish him a safe and productive trip, for his success is Australia’s success.

‘Nothing could more fully illustrate the fatuous idiocy of the United Nations than having North Korea, Iran and Egypt portentously criticising Australia’s human rights records we are sized up for whether as a nation we meet the lofty standards required for membership of the UN Human Rights Council’.  Good on yer, Greg Sheridan, someone has to point out obvious idiocy.

And in concluding the same article: ‘For the moment, Turnbull has the style of Keating and the substance of Abbott. So far, it’s a winning formula. Turnbull is absolutely right to avoid being caught up in needless symbolic conflicts. But eventually the substance of things means that if he governs well the left will grow to hate him. That needn’t be debilitating. As John Howard showed, a good leader can live with that and a few twinkle toe pirouettes to avoid needless cultural polarisation early on is no more than good political management.

‘But as even Bob Hawke found, consensus in democratic politics is a chimera, a temporary fantasy at best. Politics is rightly about choices. And conflict’.  Read on here.


More strong job figures and some improved confidence measures provide heart that the worst of Australia’s growth recession may soon be behind us.  Service sector jobs are the key point, with tourism going like the clappers on the back of the lower Aussie dollar.  The key to sustained recovery will be a strong increase in non-mining investment, so keep watching, dear readers.

Better statistics have increased the Aussie dollar slightly, but the start of the increase in US interest rates (from near-zero) is likely to have the opposite effect.  Henry is still betting on the Aussie dollar hitting 60 cents US before it improves.

Big 4-page wrap on Innovation Thursday’s Oz. Headline says ‘Wyatt Roy says Israel offers lesson in how to encourage start-ups.  Linked here.

The ‘Wrap’ has a lot of interesting views from prominent Australians who are, or should be, good at innovation.  Henry’s co-incidental report of Israel’s stellar performance is available here, along with other, some playful, contributions.

Traumatised veterans

On a recent trip to the Kimberly seeking interesting stories for Henry’s readers, (errrr, holiday) we met an old soldier.  Despite being in his late 70s, he was the fittest bloke on the trip and, we discovered over dinner, is passionately committed to getting a better deal for veterans of Australia’s wars.  He told his own story.  Having led his team of Special Forces into Vietnam for three one-year tours of duty, he said he suffered post-traumatic stress that cost him his marriage and did great damage to friendship groups.

Terry ultimately woke up to his problem and did something about it.  Now he is a far more normal bloke, good company at dinner and an acute observer and communicator while we were all in the bush hiking up gorges, looking at rock paintings, swimming in pools (with several keen eyed staff watching for crocodiles) and enjoying other offroad experiences.  ‘It’s not just the soldiers’, Terry explained, ‘also police, ambos, victims of crime and others who suffer traumatic experiences need help’. 

Since then Henry has detected several people speaking on this matter and now there is a film.  Here is a review, and let’s hope this gets widespread exposure.


Fiona Prior sees the Australian Ballet's 20:21 at Sydney Opera House


The Aussie batsmen have done it again, with Warner 244 not out after a day of fun in the sun on the WACA. This wicket was supposed to be fast and bouncy, like the WACA wickets of old, but sadly this was not to be. One felt very sad for the Black Caps, just as one grieved for the Aussie Rugby team in its doomed tilt at the Rugby World Cup.

[Postscrip. The Black Caps retailiated to great good effect and if the Aussie batters lose confidence the NZers can actually square the seties.]

Caaaarlton! has lost a bucket of green folding stuff to go with its last - 18th - place in the AFL competition this year.  There is talk of a radical challenge to the incumbent board but ‘Caro’ in the Age advocates existing board members being given further time to fix the woeful fiscal and player performances.  ‘Bring back Jack’ is the cry of the revolutionaries, or ‘Try (Jack’s son) Tom’, nearly as silly as trying Bill’s wife Hilary in the White house, or electing Trump the chump.

Meanwhile, Hawthorn has made a cool $3 M and seem set to sit atop the AFL table for a few years yet.

The clear evidence of Russkie overenthusiasm in athletic competition should lead to banning the pestiferous drug cheats from the next Olympics, along with their mates in the UN. Please remember Henry's solution, dear readers.  The world needs three classes for sporting competitions - Amateur, Professional and Enhanced. Like Professional Wrestling, the Enhanced Olympics would capture the attention of young men everywhere, and would help with the redesign of of warfighters and bank traders. (NB. 'Enhanced' should include the genetically reengineered as well as those boosted by drugs.)

Lying half-asleep this morning, Henry heard a fine piece of advice to people who would like to be rich: 'How did your family become so rich?' a Rothschild was asked. 'By selling too soon' replied the wizened old mega-millionaire.

Image of the week

Courtesy The OZ


Saturday Sanity Break, 7 November 2015
Date: Saturday, November 07, 2015
Author: Henry Thornton

We are told today that the Reserve Bank is confident that the economy is rebalancing away from mining towards services. Put another way, the economy is switching from high productivity mining production to low productivity services activity.  As the press has amply illustrated, high penalty rates means it costs too much for some activities to take place on weekends and public holidays. This is surely one of the vital areas for reform.

The RBA also said that inflation is under control - in fact it is technically below the so-called 'target range' of 2 to 3 %.  If further rate cuts are needed, the RBA will therefore be able to implement them without too much hand wringing.  RBA Chief, Glenn Stevens, has of course reminded us all that there is only so much that can be done by varying monetary policy.  The biggest policy challenge - well, equal to the need for serious IR reform - is to devise and then implement a credible and widely accepted fiscal policy to fix the budget. 

The generally agreed fiscal package includes a 15% GST with far fewer exclusions, lower income tax rates, lower company tax rates and some 'reform' to superannuation programs. A separate current of opinion looks to lower taxes for all savings vehicles, clearly needed if Australia is to adopt Treasurer Scott Morrison's 'work, save and invest' mantra.

The challenge of innovation

The most difficult challenge  of all is to make Australia a more innovative nation. This is a topic that Henry has pursued for some time now. Here is a modest contribution. It is inspired by Prime Minister Malcolm Turnbull, who recently asked Vice-Chancellor Glyn Davis why universities were so bad at helping companies innovate.  As Henry understood the answer it was not especially focussed, which is itself a telling fact.

Of course, this is a hard question. 'National Complacency' is one answer - riding on the sheep's back or in a mining truck has been a relatively obvious path to prosperity. 'Poor tax arrangements for innovators' deserves consideration. 'The university culture of publish or perish' is part of the answer.  'Australia's national culture of aversion to risk and fear of failure', gets close to Henry's favourite answer.

A famous New York Times best seller, Start-up Nation. The Story of Israel's Economic Miracle, provides a fascinating case study for one successful innovative nation.

The book begins with a discussion of a plan hatched in Israel to create a widely used electric car. As well as helping reduce global pollution, success of such a plan would make oil far less attractive as an energy source and greatly reduce the ability of terrorists to launch attacks on Israel, not to mention the rest of us.  The electric car project is an unfinished story, and the opening chapter moves on to discuss Israel's mighty performance.  In 2007-08 it lead the world by a vast margin in Venture Capital Investments per capita.In 2009, Israel beat Canada into second place, with other nations performance tiny, in listings of non-US companies on NASDAQ. And from 2000-2005 it was first ahead of Japan and the USA in Civilian R&D Expenditure as a share of GNP.

These compelling facts are all the more impressive given the history of Israel. For yours after its formation is was bedevilled by tiny size in a harsh climate, food rationing, frequent wars for survival, a highly heterogenous population and many other potential barriers to entrepreneurial flair.  As authors Dan Senor and Saul singer say: '[This] is a story not just of talent but of tenacity, of insatiable questioning of authority, of determined informality, combined with a unique attitude to failure, teamwork, mission, risk, and cross-disciplinary creativity'.

More on the story of Israel's stellar rise as an innovative nation here.


Fiona Prior visits the big buzz exhibition The Greats, presented by the Art Gallery of New South Wales until 14 February 2016.


Trade week has come and gone with Caaaarlton! flying well below the radar.  Only clear result seems to be signing Jack Silvani - Grandson of Serge, Son of Stephen, both great stars for Caaaarlton! in times past.

The Rugby World Cup is best described as a triumph for the ANZAC tradition.  The game was dominated by ANZAC teams,

and finally the All Black team won what was a moderately brutal encounter.  A keen (Kiwi) supporter freely conceded that a clear forward pass leading to a try may have broken the Aussie spirit.  He added that in a previous World Cup, NZ had been put out after the same referee 'missed' a clear forward pass by the Frenchies. Such is life, as Ned Kelly reportedly said just before they hung him.

Cricket is offering some better news with two highly talented youngsters starring with the bat and the two Mitchs (Starc and Johnston) plus youngster Josh Hazelwood demolishing the Black Cap's top order.   As a selector might say ata prize giving ceremony in 2019: 'Always bet on yoof, lades and gennelmen'.

Experts plus the black box recorder say the Russian plane was downed as the result of a bomb. When the pestiferous Russkies reluctantly accept this, a more determined attack on ISIS should be the result. 

Image of the week

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