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Henry Thornton - Contributors: A discussion of economic, social and political issues Blogs
Return of the gold standard?
Date: Monday, July 18, 2011
Author: Henry Thornton

Serious support is at hand. In my book Great Crises of Capitalism I proposed the world consider a modern version of the gold standard.


'The Bank of England in the past manipulated its Bank Rate following the laws of the global gold standard to produce stability in an age of great innovation, with massive development of new lands and new industries. The gold standard as practiced in the nineteenth century was focussed on what economists called ‘external balance’, in practice as represented by the state of each nation’s gold reserves. One problem, as noted in Chapter 6, is the dependence of this standard on intermittent discoveries of gold.  Another is the fact that the stock of gold in a nation’s vaults is a lagging indicator. In principle, a gold standard or a broader commodity standard could work with inflation within a nation (or globally), as its principal target. Such an approach could allow for the fact that changes in the degree of tightness of monetary policy affects inflation with a lag and so it is future inflation (a ‘leading indicator’) that is an appropriate target for monetary policy'.


And: 'The current standard monetary policy regime has as its main objective controlling goods and services inflation by varying official cash rates.  A new commodity standard would start with steady growth in a monetary quantity, perhaps a bundle of commodities, and see what that implied for interest rates and other indicators of the state of the economy. This question deserve serious study, as it is perhaps receiving in the world’s leading central banks and universities'.


Ambrose Evans-Pritchard wrote on 14 July: 'Return of the Gold Standard as world order unravels'


'As the twin pillars of international monetary system threaten to come tumbling down in unison, gold has reclaimed its ancient status as the anchor of stability. The spot price surged to an all-time high of $1,594 an ounce in London, lifting silver to $39 in its train.


'On one side of the Atlantic, the eurozone debt crisis has spread to the countries that may be too big to save - Spain and Italy - though RBS thinks a €3.5 trillion rescue fund would ensure survival of Europe's currency union.


'On the other side, the recovery has sputtered out and the printing presses are being oiled again. Brinkmanship between the Congress and the White House over the US debt ceiling has compelled Moody's to warn of a "very small but rising risk" that the world's paramount power may default within two weeks. "The unthinkable is now thinkable," said Ross Norman, director of thebulliondesk.com'.




Saturday Sanity Break, 1 November 2014
Date: Saturday, November 01, 2014
Author: Henry Thornton

Inequality in Australia is rising, but only gradually from not-too-obscene levels.  This is one of the conclusions as Adam Creighton continues to fan the blaze after his boss Rupert Murdoch lit the flames in a major presentation to G20 finance ministers.  Henry has been trying to get a copy of the presentation so he can check it for himself, but so far, no luck. Anyway, inequality has risen far faster elsewhere and it is plausibly due in part to the massive monetary expansionary that is 'Quanitative Easing' (QE). Do not miss the nice video featuring Alan Kohler.


Another economist has joined the discussion. Henry Ergas sees QE as dangerous and must be welcomed to the 'old ratbag club' (orc) otherwise known as the 'economic elite'. As clear evidence of his status, Mr Ergas quotes Keynes and Milton Friedman: 'While very sparingly used until then, that approach had a long pedigree. Before he turned to government spending as his instrument of choice, John Maynard Keynes had proposed QE as a key element in responding to the ­Depression.  Mr Ergas speaks here. (Apologies if the link is not working, gentle readers, The Oz has done something different.)


“We cannot hope,” Keynes wrote in 1930, “for a complete or lasting recovery until there has been a very great fall in the long-term rate of interest throughout the world.” The problem, however, was that left to its own devices, achieving that fall was likely to prove “a long and a tedious process”. The answer was for central banks to “reduce the rate of interest to a very low figure”, while buying “long-dated securities either against an expansion of central bank money or against the sale of short-dated securities until the short-term market is saturated”.


'The Fed did just that two years later, with Milton Friedman, in the monumental monetary history of the US he co-authored with Anna Schwartz, crediting the policy with an important role in stabilising the American economy'. And, in conclusion, governments, and presumably, central banks, should be cautious, 'all too often, however, they have failed to heed Friedman’s admonition against “assigning to monetary policy a larger role than it can ­perform, asking it to achieve tasks it cannot achieve, and, as a result, preventing it from making the contribution it is capable of ­making”.  Or, as Friedman used say more pithily: 'Monetary policy cannot serve two masters'.


To return to Mr Ergas; 'the “unconventional” measures the Fed is bringing to an end may become an object lesson in the costs ignoring that warning can impose'.  More here. 


Henry's collected recent advice on  Monetary policy is available here.


Kulture


Henry's Kultural Komissar, Fiona Prior, has travelled to Java.


I have not been to Indonesia for almost a decade ... definitely not since the Bali bombings and I was looking forward to discovering Java, an island I knew very little about except that it housed an ancient Buddhist temple of which my school art teacher had enthusiastically spoken.



Transporter God Garuda


A whiff of a clove cigarette at Denpasar airport accompanied the transition to my Yogyakarta flight. On arrival I sadly noted the rituals of post-terrorism Indonesia, as each time my driver pulled up at our hotel or any major public/tourist destination a long stick with a mirror attached to its end was walked round the car to detect attached explosives.


Read on here.


Footy'n'cricket'n stuff


What a catastrophe.  On a dead pitch, even Mitch Johnson can't put a batter, or preferable two, out of the game.  The formerly hapless Pakistani team is putting Australia to the sword. After scoring almost 600 for 6, the Pakistanis declared and snared the wicket of nightwatchman Nathan Lyon.  Personally, I blame australia's mothers. Don (Bradman), Jeff (Thompson), Dennis (Lillee), Ricky (Ponting), the list of good old aussie scrappers goes on. 'Nathan, move a few inches to the left, if you don't mind', is unlikely to scare the batter as much as 'Rip into the bas**rd, your b**tard', once would have unsettled the nice lads from Karachi.


Shane (Warne) set the new trend of Superstars with, in his case, only slightly sus first name. But 'Nathan'?  Mrs Lyon has a lot to answer for, as do Mothers who call their kids Trent, Jeremy, Fortesque, ... and other 'modern' names. Fill in your favourite first name.


In Footy, ASADA is still poised to pounce, but seem to lack the guts, or evidence, to do so.  Here is a modest suggestion. The Napthine government should pass a law, or promulgate a regulation, that asserts if ASADA fails to pounce by November 1 its all over.  Oooops, I meant November 4, by which time every one will be focussed on the Cup.  While they are at it, Mr Nahthine might ban foreign horses from The Cup. Either new policy would put the state Libs back in the election race.  Both would make an election win a dead cert.


Image of the week


Courtesy The Oz


 


Easy money and inequality
Date: Wednesday, October 29, 2014
Author: Henry Thornton

Rupert Murdoch has greatly contributed to the debate on the world's currently uncontrollable asset inflation. In a recent speech to the G20 finance ministers, he blamed asset inflation on money printing in the guise of 'quantitative easing'. He noted, according to Paul Kelly's report in The Australian, that this was the cause of widespread asset inflation. Most importantly, he noted that the net effect of this was to make rich people much richer, and therefore made income disparity far greater.


This is a consequence of overly easy money that is vital for the stability of modern capitalism. Zero interest rates and massive 'quantitative easing' has greatly inflated asset prices. This has made rich people richer, and has little benefit for ordinary people. The great thinkers, including Keynes and Marx, have seen excessive inequality as likely to damage, even destroy, capitalism. So, even without factoring in the likely (serious) economic consequences of withdrawing excessive monetary stimulus, there is a serious issue awaiting resolution.


This is an issue that should provoke widespread interest in the question about the causes and consequences of asset inflation that is not generally even debated in academic circles.(Macoeconomics is a largely overlooked subject in academic circles, being too hard for most economists.)  However, Mr Murdoch's speech is likely to have wide ramifications in the real world.


Today The Australian has continued the debate, courtesy Adam Creighton, who asserts that 'Economic elite back Rupert Murdoch’s inequality fears'. Henry acknowledges his editor's appearance in Adam's list of local economic gurus but believes concern at growing inequality within the rich nations is, or should be, a concern to economic thinkers everywhere. For the academic end of this debate, you need go no further than the much discussed work of Thomas Piketty.


But now for Adam's contribution: 'VETERAN Reserve Bank economist Peter Jonson cheered yesterday when he read Rupert Murdoch had warned G20 ¬finance ministers that money printing by central banks had exacerbated inequality and fanned discontent with the global economic system.


'Mr Jonson, a Reserve Bank economist for 16 years and the former Henry Thornton columnist for The Australian, said he had been worried for years that so-called quantitative easing (QE) had benefited the rich by artificially boosting share and property prices. {NB - two typos corrected.}


' “Mr Murdoch has made the absolutely valid point that QE has done really nothing or very little for ordinary people,” said Mr Jonson, the bank’s head of research for seven years in the 1980s'.  ...


'Bob Gregory, professor of economics at ANU and a former Reserve Bank board member, said Mr Murdoch was “completely right: QE is causing rising asset prices and growing inequality, but the harder question is what should central banks do now, and what should they have done then after the financial crisis”.


' “The intellectual underpinning of QE is a kind of ‘trickle down’ economics whereby the rich feel richer and spend more,” he said, suggesting the policies would eventually stoke inflation in consumer prices as well as asset prices'.


The answer to Bob Gregory’s question – what to do about it – is that we never should have gotten into the situation we are in.


Having got there, we must take our medicine.  Ending QE will presumably remove some of the excess asset fiz, and raising interest rates will remove some more.


If the beneficiaries of the great asset boom are lucky, they will end up net net better than they would have been but not nearly so rich as they are now.  (If the smart, or merely lucky, ones bail out at the right time, they will remain rich.)


This will be what it will be.  The real lesson to not let it happen again. That's where macroprudential policies fit in.


But I am reminded of a comment John Howard once made: ‘No-one complains to me that the price of his house has gone up’.


Continuing with Adam Creighton: 'A new study by the US-based National Bureau of Economic Research written by eminent tax economist Emmanuel Saez, released on Monday, found the rise in wealth inequality in the US is “almost entirely due to the rise of the top 0.1 per cent wealth share”, noting that share had grown from 7 per cent in 1979 to 22 per cent in 2012 — a level almost as high as in 1929. “The bottom 90 per cent wealth share first increased up to the mid-1980s and then steadily declined.


' “The increase in wealth concentration is due to the surge of top incomes,” the authors said' .  ...


'Joe Hockey agreed that “loose monetary policy has helped people who own a lot of assets to become richer, and that is why loose monetary policy needs to be reversed over time and will get back to normal levels of monetary policy.”


'Labor Treasury spokesman Chris Bowen welcomed Mr Murdoch’s remarks, especially for their contribution to a growing debate about rising global inequality'.


Alan Kohler has also weighed in with some analysis of the  history of inequality. His headline is 'Roots of imbalance sown in the Reagan era', and he asks 'Are we seeing a return to the time when middle classes didn't exist?'


Henry is keen to foster debate on this vital issue. If you wish to contribute, contact Henry here.


Henry.Thornton@Henrythornton.com


Economic progress and risks
Date: Tuesday, October 28, 2014
Author: Henry Thornton

There are some welcome developments in economic management. The Prime minister has put Commonwealth-State relations on the agenda, which has widely been interpreted as implying a broadening and/or widening of the GST. As Mr Abbott said, the real issue is deciding which level of government does what and cutting out the overlaps, double guessing and double regulating.


This will save money but, if done thoroughly, there would be wider benefits.  Shared responsibility is no responsibility, and allowing states to have sole control over specified functions would make for far clearer lines of responsibility. There would also be opportunity for states to offer competition. For example, a particular state might opt for more technical training and less production of excess lawyers, economists and experts in gender studies.


Another good sign is that labor costs are now growing more slowly than for a long time.  Provided this can be maintained as the currency devalues, it might make a useful contribution to making Australian industry more internationally competitive. There is also the project of killing unnecessary regulation, and if we can get really serious about this, it will also be helpful. I worry that our international competitiveness is so compromised that best realistic endeavours shall not be enough, but I hope I am wrong.  Failure to boost competitiveness strongly is the biggest risk facing our economic well being.


The second biggest risk is failure to fix the budget.  I think Labor would be sensible to stop playing doggie in the manger and say they oppose various budgetary measures but they will wave them through so that the budget can be fixed.  If the side effects are excessively horrific, or if the budget is not fixed, one would expect the government's popularity to plunge. Ergo, Labor reelected with a reputation for allowing the voters to have their say.


A third risk, far harder to deal with, is rising inequality. This has been greatly exacerbated by the super-easy monetary policy since the GFC. Many great thinkers, including Keynes and Marx, have seen excessive inequality as putting capitalism at risk. Rupert Murdoch has put this issue squarely on the global agenda with a speech at a meeting of G20 Finance ministers. How leaders respond will be vital, but even removing excessive monetary policy ease will be a major challenge to the stability of the global economy.


The next biggest risk to Australia's prosperity concerns the state of the world economy. As Larry Summers has concluded, high growth, especially in authoritarian nations, can and usually does end badly with a return to global average growth.  A dramatic slowdown in China and/or India would hit hard a world economy that is already struggling to recover from the severe recession induced by the GFC.  There is another iron law of economics, which is that nations with large debts, private plus public, take a long time to recover.  Think Japan after its asset bust in 1989/90. And this was the first 'miracle economy' of the modern era.


Some will say Australia was also a 'miracle economy', and so it seemed at the time.  With current policies, Australia is adding a mountain of government to debt to everests of household debt and company debt. This comes at a time when our cost structures are out of whack and there are growing doubts about the likely strength of global growth, and some chance that the Chindia boom will slow severely, even if there is no bust to follow the boom.


What would you do if your household had built a debt mountain and priced itself out of the market, gentle readers?


Sunday Sanity Break, 26 October 2014
Date: Sunday, October 26, 2014
Author: Henry Thornton

The most reliable measure of above average growth is spending on research and development (R&D.) Spending on 'commercialisation' or, more generally 'innovation' is also vital, as shown by the experience of Israel and Singapore.  And will be further evidence as China embraces innovation. Henry's pleas about this matter are available here. But high level help is at hand. 


To its credit, The Oz is running a series called Innovation Challenge.  As well as case studies, the Oz is providing opinion. This weekend's opinion piece is by master entrepreneur, Alan Finkel, 'Why closer ties with industry is needed'.


We have ridden on the sheep's back, profited greatly from the activities of gold prospectors and hitched a ride in the cabin of iron ore trucks. But collaboration between Australian industry and research institutes like CSIRO and our great research universities is the weakest in the OECD area.


And there is less government funding of business-relevant research in Australia than in any OECD nation than Mexico.


Alan Finkel predicts us slipping to last now that Commercialisation Australia funding has been junked and the Cooperative Research Centre (CRC) program is under threat. He notes the new Industry Innovation and Competitiveness Agenda (including the new Growth Centres program) is expected to redress the situation, at least to some degree.


More on prospects for growth here.


Dealing with fundamentalist terror


A constant theme is summed up as follows: 'SECURITY agencies fear Australian jihadists may have used the ­recent Hajj pilgrimage as a cover to leave the country to fight for ­Islamic State and other terror groups in Syria'.


And: 'Tony Abbott yesterday defended the policy of cancelling the passports of would-be fighters, despite claims that this might increase the likelihood of those people launching attacks in Australia. “What we don’t want is people coming back more capable of doing us harm than they were before they left. Going overseas brutalises them, it militarises them, it gives them far more capacity to do us harm then they had before they left,” the Prime Minister said'.


My question is this.  Why would it not be better to let suspected terrorists leave and, 24 or 48 hours later, cancel their passports?  If such people wanted to return, they could provide an explanation of where they went and why. If this failed to satisfy immigration authorities, they would become stateless and would have to remain with their fundamentalist mates in Iraq and Styria.


Footy'n'cricket'n'stuff


Caaaarlton! seems still in limbo on the trading market.  ASADA 'refuses to be rushed' in issuing 'show cause' notices to Essendon or ex-Essendon players. Henry resolutely believes Essendon and other clubs using banned or unknown drugs or supplements should suffer harsh penalties. But Gor Blimey, Comrades, how long can this be allowed to be dragged out? ASADA failed to require Steven Dank to give evidence. Now they fiddle while the reputations of Essendon and its players are trashed. How long can they be allowed to dither? Act or get off the pot, supposed guardians of a fair go in sport.


Meanwhile, Australia's world standard cricket team is being belted by Pakistan. 'Just what we needed to get rid of the cobwebs' someone in authority will presumably say. Sigh!


Henry's epic crossing the Nullarbor is over.  Here are links to his three trip reports.


Kalgoorlie    


Crossing the Nullarbor  


The Barossa  


Image of the week



Vale Gough Whitlam; and issues for economic growth
Date: Tuesday, October 21, 2014
Author: Henry Thornton

We salute the life of Gough Whitlam, 98 good years for a great Australian. Flawed, like the rest of us, but a visionary leader who gave hope to the battlers and helped to create a better deal for women, indigenous Australians, bright kids from battler families, ill Australians and improved Australia's international image with his early recognition of China.


Economics was Mr Whitlam's great flaw. 'His weakness was inability to tell a million from a billion' said one of his loyal supporters. Trouble with social reform is that it costs real money, and more generous welfare or premature wage increases can blunt incentives and cost jobs..


It was Time, as the slogan (and the song) said, but we got too much too fast.


Greetings from Port Lincoln, gentle readers. From Port Lincoln, after crossing the Nullarbor, Henry reported in the  style of Jack Kerouac. Available here.


Brilliant landscape, with lots of painting ideas.


Totally missed the weekend papers, but got a free Monday Australian at hotel here to catch up. Plus a special newspaper at Port Lincoln tourist info specially for Seniors. 'Leave our pensions alone' was the headline.


Heard of new Growth Centre ideas before leaving. Sounds like an innovative new way to get university researchers to work with businesses, focussing on areas where Australia has already achieved global high standard, or needs to do so.


This is sometimes derided as 'picking winners' but Henry's view it should more sensibly be described as 'supporting winners'. The world economy is more competitive than ever, and we need to focus on things we already do well.


The examples provided by the government include:


* The food and agribusiness Centre may assist food manufacturers to work with packaging companies and researchers to consider packaging solutions to extend the shelf life of products, especially into regional export markets where the lack of refrigeration is a problem.


* The mining equipment, technology and services (METS) Centre may identify global market opportunities to enable establishment of METS consortiums to target opportunities with product and service export packages and access to information on global supply chains.


* Through the medical technologies and pharmaceuticals Centre, businesses may be assisted to identify new opportunities through linking with medical device and materials researchers to develop new biomedical devices and platform technologies to improve health outcomes and business profitability.


* The advanced manufacturing Centre may bring together researchers and small chemical manufacturers to enable them to adopt new chemical flow and carbon fibre technology, in turn allowing them to develop new, low cost chemical products which are competitive with those produced overseas.


* The oil, gas and energy resources Centre may assist businesses to lower costs through greater collaboration, better sharing of infrastructure and logistics support (especially on remote projects), greater development and uptake of new technology and innovation, and improved planning across all areas of the resources value chain.


More information here.


Economic growth.


David Uren delivered a very interesting discussion in Monday's Oz. He reports on a study led by Larry Summers, former US Treasury Secretary, now practicing economics at Harvard.  In summary: 'The history of countries enjoying rapid growth is that they return to the global average, usually very rapidly'.


It is always possible to assert 'this time its different', but in my view the sort of historical experience like that investigated by Summers et al is the best guide to future economic developments.


If this universal law - 'regression to the mean' - applies to China and India, the future will be far rougher than the past decade has been for Australia.


This possibility should give us added impetus to fix the budget and get on with some serious economic reform.  Please, political heirs of the visionary Gough Whitlam, buckle down and let the government do their best. In my view, this will give you the best chance to again govern, and it will be a far stronger country when your turn comes again.


The bipartisan tributes to Gough and Margaret Whitlam today show parliament  at its best.  Being constructive about economic policy would lift the tone and outcomes greatly.


Sunday Sanity Break, 19/10/2014
Date: Sunday, October 19, 2014
Author: Henry Thornton (In Ceduna)

Growing inequality is damaging the USA, and especially its great tradition of equality of opportunity. This is unsustainable said US Fed Chairperson Janet Yellen on ABC TV yestertoday. (Or words to this effect.) Can it be very different here, gentle readers?


A simple google search provided access to the entire speech. Here is the summary paragraph.


 'The extent of and continuing increase in inequality in the United States greatly concern me. The past several decades have seen the most sustained rise in inequality since the 19th century after more than 40 years of narrowing inequality following the Great Depression. By some estimates, income and wealth inequality are near their highest levels in the past hundred years, much higher than the average during that time span and probably higher than for much of American history before then.2 It is no secret that the past few decades of widening inequality can be summed up as significant income and wealth gains for those at the very top and stagnant living standards for the majority. I think it is appropriate to ask whether this trend is compatible with values rooted in our nation's history, among them the high value Americans have traditionally placed on equality of opportunity'.


The dread disease of Ebola is racing ahead, and experts are warning that soon it may become a global pandemic.  The isolated cases in developed nations show the risk, as does the upward curve of deaths in Africa. Henry has been told that in principle a vaccine should be possible, but none has been developed because poor Africans cannot afford to meet their cost.  Inequality is not just an American challenge.


Henry has spent the night in Norseman.  This is a typical declining rural town, that reminded Mrs Thotnton of her ancestral town of Boggabri in Northern NSW. Here the ratio of closed to open shops is far higher to that in Kalgoorlie, about 70 % we guess.  Talk at the bar before dinner revealed that two out of three gold mines in the vicinity of Norseman are closed, reflecting high costs and a generally falling price of gold. Henry's travelling companion, a former mining mogul, offered the view that most of Australia's gold mines were at the 90 th decile of costs.  Henry's report on the Super Pit in Kalgoorlie is available here.


Henry's visit to Kalgoorlie is reported here. Next post covers the crossing of the Nullarbor.


Cricket'n'Rugby'n'stuff


Australia's cricket team whitewashed the pride of Pakistan in Quatar, or some similarly strange cricket powerhouse. The final over was a ripper, with Pakistan failing to score the two runs needed to win.  Great work, men.


Last night, like lambs to the slaughter, the Aussie Rugger bu**ers faced the mighty All Blacks. As we said: 'A win would be glorious, a draw would be wonderful but a thrashing would not be unsurprising'. Sadly, there was a near win, but the coach fell on his sword. Smart man.


This is the dead time for sport in the Thornton household, with only the footy trading to relieve the boredom. Essendon is letting go players likely to be banned in return for other players who will not be banned.  Caaaarlton! has let Waite go, and have traded Jeff Garlett and it said to have fired Mitch Robinson. Hard to see how we can do better next year, Mighty Mick.


Henry, Mrs T and the Mining Mogul have travelled the mighty Nullarbor and report in from Ceduna.  Nice hotel motel on the waterfront, but no internet connection, decent TV or newspapers anywhere.  It will be better tomorrow.


Image of the week



Global finance - `anomalies` and `dangerous combination[s]`
Date: Tuesday, October 14, 2014
Author: Henry Thornton

There are 'a number of anomalies present in financial markets in terms of pricing and volatility. There are also some misplaced perceptions amongst market participants about the degree of liquidity present in some market segments. That strikes me as a dangerous combination and unlikely to be resolved smoothly'.


This is the conclusion of a speech by Guy Debelle, RBA Assistant Governor (Financial Markets). The speech is called Volatility and Market Pricing, and is worth reading carefully.


It can be accessed here


Henry is escaping all this to visit the arid delights of the road across the Nullarbor from Perth to Adelaide. Having listened recently to an expert on feral cats, we shall not be camping out, but hunkering down in whatever motels we can find.


Be assured Henry shall be monitoring the global markets and domestic politics as well as checking the wildlife, indigenous and imported alike. But transmission may be intermittant.


Weekend Sanity Break, 11 October 2014
Date: Saturday, October 11, 2014
Author: Henry Thornton

The risks of a global recession are increasing.  The shadwos in the China story are lengthening with renewed emphasis provided by China's decision to impose tariffs on the import of coal. Spread of protectiomist policies greatly worsened the global depression in the 1930s and this action by China is like the death of the first canary in an old-fashioned underground coal mine. The fighting in the Middle East will become worse as airpower alone fails to subdue the Islamist fanatics. Serious damage to oil production would further damage prospects for growth.  Growth in the Eurozone is sputtering and there are deeply adverse population trends to reduce everyone's 'Animal Spirits'.


Avoiding a protectionist plague is vital, but will such self-restraint be uniformly maintained?  To add to the pressures, every developed nations' budget is mired in deep debt and any push to tighten budget policy will reduce growth further, at least in the short run, which means for several years.  'Budget gridlock' is the technical term.  If former Treasury Deputy-Secretary John Fraser, now a globe trotting wealthy capitalist, takes a deep breath and accepts the job of heading Australia's Treasury he will quickly find a government bereft of any consistent budgetary policy with 'Budget Gridlock' the situation,


As noted yesterday, monetary policy is also in Gridlock. Globally, the US Fed has to find a way to begin to return monetary policy to normal without bringing on global recession. There is plenty of bad news to smash share proces, but the news that American 'Quantitative Easing' is ending is most often claimed as the prime cause of the deep correction now reducing paper wealth globally. Henry hopes his favourite fund manager further reduced his exposure to global equities in recent weeks, but picking when to do this is one of the toughest decisions a fundie has to make.  John Fraser will know the feeling well.


In Australia, Glenn Stevens is facing a falling dollar ('Hooray, Comrades' is the cry) but also rising house prices ('Do something APRA').  Australia's monetary policy is also in gridlock, and may stand easy, like the Good Soldier Schwejk, for well into 2015.


Paul Kelly wants Tony Abbott to 'muscle up' to the economic challenge. This description will appeal to the Prime minister, who has a good record in confronting the challenge of the terrorists but has let the economic debate be hi-jacked by the charge of 'unfair'. The problem is twofold.  The first problem is adopting Wayne Swan's overoptimistic forecasts, for which we must blame Treasury and Treasurer Joe Hockey.  Always allow for the 'realistic worse case' is one of Henry's (Thornton not Ken) rules for forecasters and policy makers. This is a rule apparently unknown in Canberra, and Treasury and the Treasurer seem to have assumed that the Australian parliament would allow then to adopt a few tough (but unfair) budget improvement policies and the budget would 'whirr back into surplus'.  And now the PM has ruled out tax increases, during a quick break from the war front.


The second problem is an almost total inability to tell a coherent economic story.  It is pretty somple really. Australia's largent mining boom is over, and no former mining boom has ended without serious recession. The particular problem the government seems not to have noticed is a national cost base that has made all sectors of Australian industry uncompetitive. To compound the problem, the world is slipping back into recession and in any case is in a debt trap that will enforce slow growth for the forseeable future.


My prediction is this. Australia's budget will never again be in surplus until the GST is widened or its rate increased, or preferably both. Much as I hate tax increases almost as much as Tony Abbott, Australia's ability to remove supposed 'entitlements' is almost zero, and certainly so unless we can find a 'genius communicator' to devise and sell an economic narrative just as compelling as Tony Abbott is on geo-political matters.


Footy'n'stuff


What a great Rugby League grand final is was, gentle readers, and Greg Inglis' Goanna Walk will become an icon of Black Pride, whose time has come.


Meanwhile, the Essendon supplements saga must, surely, be ending soon.  Most people are saying Mr Hird will coach no more, and if 34 infraction notices are issued and remain on the table it is hard to see how the once mighty Essendon can field a team next year.  We grieve for this situation, but did you notice Dean Cox's book launch included reference to drugs problems in the West about the time they were laying waste to their opponants. ('Don't mention the war' seems to be the AFL's response.)


The Aussie netball team are again at their peak, and the wimmin's basketballers played well in losing to the mighty USA and again in winning the bronze medal in the playoff against Turkey.


Cricket will soon be with us. With a very busy season before us, serious viewers may find their drinking arm packing up like Watto's calf, so one hopes there has been adequate preparation.


Image of the Week


Linked here.


Slower growth and economic policy
Date: Friday, October 10, 2014
Author: Henry Thornton

The IMF has reduced its forecasts for global growth. With commodity prices plunging, Australia's budget deficit problem is getting worse. Australia, like other so-called 'developed nations' has a budget crisis.  As growth prospects worsen, what can we do?


Global monetary policy remains 'set easy'.  The RBA's monetary policy is not so easy as that of the nations with near-zero interest rates, like the USA and Europe. But monetary policy cannot perform miracles. The budget dilemma is obvious and clear.  Slow growth makes budget deficits larger, limiting the use of fiscal policy to  increase growth that seems to elected leaders 'too slow' and unlikely to help their chances of reelection. 


Sadly governments like those of Rudd'n'Gillard'Rudd in Oz have wasted the benefit of 'fiscal stimulus', and now governments cannot afford to tighten fiscal policy.  Or are not allowed to tighten fiscal policy, as in Australia with its recalcient Senate. None of this should be a surprise, gentle readers.  It was even predicted (gasp!) here.


So we have fiscal gridlock, gentle readers.  And monetary policy gridlock. Nations with near zero interest rates and 'quantitative easing'  need to withdraw excessively easy monetary policy - hardly likely to strengthen growth, and almost certain to reduce asset prices. The end of booming asset prices is already evident, and plunging asset prices are also unlikely to strengthen growth. Countries with excessive debt will be unable or unwilling to to tighten fiscal policy, at least until budgets under control again raise 'Animal Spirits'.


The only answer with these constraints is 'economic reform', but shell-shocked businesses and households - due to excessive debt, slow growth and high unemployment - are unlikely to welcome 'economic reform'.  In any case, to encourage growth requires years of steady, consistent economic reform, not twisting and turning like wounded rattlesnakes.


The only other 'solution' to the slow growth that is now widely expected is to cop it sweet and let nature take its course. Do not upset the voters with painful 'economic reform. Allow nature to fix fiscal deficits ever so slowly, and let monetary policy stay loose as an Ebola-infected goose. (Apologies for such an awful vision, gentle readers.)


As someone once said, 'When ignorance is bliss, it is folly to be wise'. So dream on, wise leaders. Muddle through.  Soon a real economic or geopolitical crisis will appear, and all this concern for overly large budget deficits and overly easy monetary policy will evaporate.


Then instead of slow growth or mild recession will shall all face deep depression.


Germany - a case study


'The German model is ruinous for Germany, and deadly for Europe', says Ambrose Evans-Pritchard


'France may look like the sick of man of Europe, but Germany’s woes run deeper, rooted in mercantilist dogma.


'The Kaiser Wilhelm Canal in Kiel is crumbling. Last year, the authorities had to close the 60-mile shortcut from the Baltic to the North Sea for two weeks, something that had never happened through two world wars. The locks had failed.


'Large ships were forced to go around the Skagerrak, imposing emergency surcharges. The canal was shut again last month because sluice gates were not working, damaged by the constant thrust of propeller blades. It has been a running saga of problems, the result of slashing investment to the bone, and cutting maintenance funds in 2012 from €60m (£47m) a year to €11m.


'This is an odd way to treat the busiest waterway in the world, letting through 35,000 ships a year, so vital to the Port of Hamburg. It is odder still given that the German state can borrow funds for five years at an interest rate of 0.15pc. Yet such is the economic policy of Germany, worshipping the false of god of fiscal balance.
 
'The Bundestag is waking up to the economic folly of this. It has approved €260m of funding to refurbish the canal over the next five years. Yet experts say it needs €1bn, one of countless projects crying out for money across the derelict infrastructure of a nation that has forgotten how to invest, sleepwalking into decline.


'France may look like the sick of man of Europe, but Germany’s woes run deeper, rooted in mercantilist dogma, the glorification of saving for its own sake, and the corrosive psychology of ageing'.


Read on here.


The graph says it all, really.



Turnbull and the NBN
Date: Tuesday, October 07, 2014
Author: Michael Porter

The fact that accounting for the NBN as a losing business will (correct) the budget deficit is no cause for delay, contrary to Malcolm Turnbull.


By allowing multi-technology competition Turnbull will reverse the ‘de-commissioning” of businesses competing with NBN – HFC cable, copper and so forth. Allow competition. Reduce waste of our taxes by $40-60 billion.


Malcolm Turnbull seems intimidated by Hockey and Abbott’s foolish adherence to the accounting fiction in the deficit. Combined losses by the private sector investment in broadband will be replaced by a booming broadband market if we remove protection on the contrived NBN government monopoly.


The reports commissioned by Malcolm from both Bill Scales and Michael Vertigan are spot on – and should be acted on. A row with Hockey and Abbott on this would be a plus! And the savings would finance real quality service to the regions ten times over.


Read on here.  


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