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'.
'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, 30 May 2015
Date: Saturday, May 30, 2015
Author: Henry Thornton
'Just how bad is the investment outlook in the latest official survey of business capital expenditure? It's very bad, and the sort of number you do see in a recession'.
The penny drops slowly for even great organs of news and opinion like the AFR. Phillip Baker's article in the online version of the fin is headed 'Recession looks likely'. Gor blimey comrades, you heard this message here in August 2013 - 'The recession we did not need to have'.
Mr Baker's article continues: 'As Betashares chief economist David Bassanese [an economist in a betting shop!] said, that might not come to pass, but the weakness in business investment next financial year implied by the latest survey is of the magnitude that is usually associated with a recession.
'The risk now for investors is if some of the business confidence numbers down the track start to turn south in a big way and back up these latest disappointing investment intentions.
'There is no sign at all of the "animal spirits" the Reserve Bank is so keen to see.
'Instead, rather than businesses getting on the front foot and looking to be more confident now the political landscape has settled somewhat, the survey implies they are becoming more gun-shy.
'Spending intentions in the next financial year have fallen more than 20 per cent, while this year is also lower than what economists thought. And just to make sure the whole survey was a truly horrible set of numbers, previous reports were also revised down'. More here.
The great man himself, Ben Bernanke, has been here preaching on how he saved the western world from depression, why governments should provide stimulus now and how good it is that 'macroprudential' policies are being provided by the financial system regulatory organs such as APRA in Australia.
This is the man who followed Greenspan in saying asset bubbles could not be diagnosed or moderated by policy.
'The battle over the banking industry's reputation intensified on Friday, as two of Australia's top regulators took a simultaneous swipe at the culture at the heart of the nation's largest financial institutions.
"When culture is rotten, it often is ordinary Australians who lose their money. Markets might recover, but often people do not," Australian Securities and Investments Commission chairman Greg Medcraft said at the Stockbrokers Association of Australia's annual conference on Friday, in a speech calling on financial institutions to clean up cultural problems.
'The regulator is worried that a crisis of confidence among many members of the public, in the wake of a slew of governance scandals in some of Australia's largest banks over the past year, could weaken the integrity of financial markets. Commonwealth Bank of Australia, ANZ Banking Group, National Australia Bank, Macquarie Group, and UBS are among those that have dealt with the fallout from scandals over the past 12 months'.
The wiley old reptile who has presided over much rumoured and confirmed (by arrests) corruption in futball has been reelected. 'Soccer' as we know it here is booming, but we shall not give it real support unless and until the sport is cleansed. A new president and a new board, whose members are mainly honest women and men, would be a sign that corruption will be dealt with. 'Splatter the blatter' could be the rallying cry.
With Mick the Merciless gone, the Blues tried as hard as humanly possible to be competitive against the Swans last night and went down fighting. Buddy was awesome but got such clean and accurate ball that not even the game's best fullback could have held him back. Several Blues fought especially well - Rowe (acting cap'n), Armfield, Bell, Buckley, Carrazzo, Everitt, Henderson (but only workmanlike), Wood, but the real story was that everyone had, as they say, a redhot go.
Some big games to come today, and we celler dweller supporters can only watch and gape at the top sides' strength and skill.
One of the dailies featured several pages on the sheilas at play, and for a while Henry was tempted to suggest that a sheila infusion was just what the Blues need. But, sadly, last night's game was a timely warning. It should however be recorded that one of the great coachs once told Henry that he knew a sheila who was good enough to play in the AFL at the highest level. More here by Blues hero, Ted Hopkins.
Soon there will be test cricket to divert us from the Blues' diabolical loss of form. Up and at 'em, lads, the old enemy deserve a good thrashing, and nothing else will do. Mitch, hope you're back to your scary best.
Image of the week
Courtesy Macca, Herald Sun
Tax avoidance - simply borrow money
Date: Friday, May 29, 2015
Author: Henry Thornton
The Economist has delivered a telling attack on debt - which it calls 'The Great Distortion; Tax Free Debt'. With household debt a worrying 150 % of income, and households being urged to borrow and spend, it seems Australia is a prime candidate for tax reform.
The Economist goes on: 'A vast distortion in the world economy is wholly man-made. It is the subsidy that governments give to debt. Half the rich world’s governments allow their citizens to deduct the interest payments on mortgages from their taxable income; almost all countries allow firms to write off payments on their borrowing against taxable earnings. It sounds prosaic, but the cost—and the harm—is immense'.
'In 2007, before the financial crisis led to the slashing of interest rates, the annual value of the forgone tax revenues in Europe was around 3% of GDP—or $510 billion—and in America almost 5% of GDP—or $725 billion.
'This hardly begins to capture the full damage, which is aggravated by the behaviour the tax breaks encourage. People borrow more to buy property than they otherwise would, raising house prices and encouraging over-investment in real estate instead of in assets that create wealth. The tax benefits are largely reaped by the rich, worsening inequality. Corporate financial decisions are motivated by maximising the tax relief on debt instead of the needs of the underlying business'.
The facts are scary.
* 'Economies biased towards debt are more prone to crises, because debt imposes a rigid obligation to repay on vulnerable borrowers, whereas equity is expressly designed to spread losses onto investors. Firms without significant equity buffers are more likely to go broke, banks more likely to topple (see Free Exchange). The dotcom crash in 2000-02 caused losses to shareholdersworth $4 trillion and a mild recession. Leveraged global banks notched up losses of $2 trillion in 2007-10 and the world economy imploded. * 'A [more] neutral tax system would also lead to more efficient choices by savers and lenders. Today 60% of bank lending in rich countries is for mortgages. Without a tax break, people would borrow less to buy houses and banks would lend less against property. Investment in new ideas and businesses that enhance productivity would become relatively more attractive, in turn boosting economic growth. * 'Removing the advantages that debt enjoys would also lead to a fairer system. Relief on mortgage payments is a subsidy that flows to people who need it least: studies show that the richest 20% of American households by income gain the most'.
Policy reform will be hard, but what to do seems obvious. The venerable mag suggests the following: 'The best approach is gradually to phase out tax breaks for debt at the same time as lowering the corporate-tax rate. That would make the policy revenue-neutral, and would also defuse the risk to governments who want to push ahead but fear losing a war waged on tax competition.
'Acting in concert or alone, countries should act soon. When interest rates are low, as now, the sweeteners for debt are smaller and thus easier to remove. When rates rise—as, inevitably, they will—the subsidy will become more valuable. This is the moment to tackle the great debt distortion. There may never be a better chance'.
There is a further, and longer, article in the same edition of The Economist, titled 'The senseless subsidy'. It begins as follows: 'Despite the fact that the world is mired in debt, governments make borrowing costs tax-deductable, cheapening debt and encouraging borrowers to pile on more'.
One hopes policymakers everywhere have read these two articles. If you are a policymaker or can influence policymakers, please draw a relevant person's attention to the May 16-22 2015 edition of The Economist.
Australia`s Innovative Manufacturing
Date: Tuesday, May 26, 2015
Author: Henry Thornton
MEDIA RELEASE Melbourne – 26 May 2015
New Industry-led centre to help transform Australian manufacturing
An ambitious venture to transform Australian industry has been announced today by the Hon Ian Macfarlane MP, Minister for Industry and Science. The venture is a new Cooperative Research Centre (CRC) designed to accelerate Australia’s transition into high value, knowledge-based manufacturing. The new Innovative Manufacturing CRC (IMCRC) brings together a powerful coalition of businesses and researchers. It will have its head office in Melbourne and operate from nodes around the nation.
The IMCRC is a collaboration of: • 14 initial manufacturing companies and end users who are already global, innovative and prepared to innovate further including many participants from the successful Advanced Manufacturing CRC • 4 peak industry bodies that will help recruit over 300 additional SMEs as ‘Portal Partners’ • 16 Australian universities, CSIRO and the Fraunhofer Institute for Laser Technology
IMCRC Interim Chair, Dr Peter Jonson, said, “The decision to establish the IMCRC is visionary and provides an exciting opportunity for Australian manufacturing. We shall be part of a powerful movement to transform the future of Australian manufacturing. Key members of this exciting cooperative venture will hit the ground running to help transform manufacturing in Australia. Ten major industry-research cooperative projects are ready to start just as soon as necessary formalities are finalised”.
Dr Jonson said that the Commonwealth’s grant of $40 million would be matched by more than $210 million of cash and in-kind contributions from industry, research institutions and State governments that will lift the total budget to over $250 million to seed the process of transformation.
The IMCRC’s four research themes will deliver high-impact programmes of collaborative research to intersect with the challenges of Australian industry. The IMCRC will focus on the needs of industry, which will be met by emerging technologies delivered by Australia’s finest researchers. IMCRC’s multidisciplinary research programmes will provide significant benefits to our participants and create important insights to be shared with our wider industry ‘Portal Partner’ community.
IMCRC's research programmes will be concentrated on the high-growth sectors recently identified in the Commonwealth Government's ‘Industry Innovation and Competitiveness Agenda’.The IMCRC will work in close cooperation with the new Industry Growth Centres (IGCs) to help companies build the innovative capacity to develop market-ready opportunities. Our participating peak industry ‘Portal Organisations’ will help facilitate the mission of the IGCs to better understand the needs of industry and to inform policy recommendations for government to improve Australia’s competitiveness.
Professor Robin Batterham, former Chief Scientist of Australia and a member of IMCRC’s Interim Board said, “Manufacturing in Australia has a bright future. It will involve change and it will involve innovation. It is about more science but primarily it is about more innovation – that is, when something new hits the market of end users prepared to pay real money. The IMCRC will be focussed on helping companies create new products and new businesses, assisted by an experienced team of researchers including scientists, engineers and business innovation experts.”
Dr David Charles, Chair of the Advanced Manufacturing CRC said,“the IMCRC is well positioned to build on the successes of the AMCRC and to contribute through collaboration to the change process both in industry and associated research organisations.”
The IMCRC’s ‘Industry Portal’ will undertake the important task of ensuring the diffusion of the new manufacturing paradigm to a wide range of small to medium sized Australian companies who have the potential to become Australia’s ‘Hidden Manufacturing Champions’. Through its ‘Industry Transformation’ research theme, the IMCRC will be giving high priority to putting in place the conditions needed for success. The support of the IMCRC’s strong ‘Portal Organisations’, the Australian Industry Group, Australian Manufacturing Technology Institute Limited, prefabAUS and STC Australia, will be vital in this regard.
The IMCRC includes a focus in the Medical Technologies & Pharmaceuticals growth sector with a number of highly innovative programmes of research already well advanced in their planning.
As one example of the many exciting programmes to be undertaken, Professor Peter Choong from the Department of Surgery at St Vincent’s Hospital Melbourne will lead a programme that brings together advanced techniques in robot assisted surgery and additive manufacturing to give patients with limb cancer new hope for better survival while saving limbs.
Professor Choong said, “this collaboration between the University of Melbourne, RMIT University, University of Wollongong, industry partners Stryker and Anatomics and the CSIRO focuses on the delivery of just-in-time patient specific implants by developing new ways to acquire, manipulate and transfer data related to patient tumours to facilitate the role of robots in surgery, and 3D printing of limb parts. This programme will push the boundaries of personalised patient care in manufacturing and treatment”.
Further details on the many exciting programmes to be launched soon are available at the IMCRC website www.imcrc.org
The speech by Minister of Industry and Science Ian Macfarlane that announced the IMCRC is available here.
Saturday Sanity Break, 23 May 2015
Date: Saturday, May 23, 2015
Author: Henry Thornton
'Consistency is the sign of a middle class mind'. This is one of Henry's favourite aphorisms, and today Paul Kelly points out that Tony Abbott lacks consistency. 'Despite some relieving polls the flaw in the Abbott government’s reinvention project is obvious and will need to be confronted — it is the risk of confusion about the beliefs, consistency and principles that constitute Tony Abbott and his government.
'The beauty of political retreat is the reward of popularity. While necessary, it remains an overrated quality.
'The Abbott government will need time to sort a political reconciliation between its brutal 2014 budget measures and its bullish 2015 economic messages'.
Henry once shared a platform with Tony Abbott, who was launching Henry's editor's book Great Crises of Capitalism.
After the formalities were over, we conducted a seminar on economics that went on for 40 minutes, by tacit agreement each taking turns to respond to questions.
Mr Abbott showed on that occasion a strong grasp of economics and a consistent conservative orientation. Every prime minister takes time to find his essential voice when thrust into the fierce test that is that of governing a nation.
Henry agrees with Paul Kelly that Tony Abbott has to reconcile the very different approaches in the 2014 and 2015 budgets.
The view in the Thornton household is that not enough thought has gone into policies, especially into the 2014 budget, and that the Abbott government has shown a tendency to jump onto policies without sufficient thought. This is a constitutional weakness of anyone with a quick mind. Someone close to Henry once advised him to put his brightest ideas into a loop through his brain before offering them to the waiting world.
In a speech to the Fabian Society on 21 February 1940, Maynard Keynes is reported to have said: 'I am a highly teachable person. I learn from criticism and before now have laid myself open to the reproof that my second thoughts are often better then my first thoughts - which is an indication, some people think, of a dangerous instability of character'.
The Blues got belted by Geelong last night despite what an ever-optimistic Henry thought were glimmers of what economists would call 'green shoots'. Some of Geelong's stars were held, and one especially notes the wonderful work of Ed Curnow, but not everyone on the team showed the same resolve.
Mick the Merciless is annoyed because his overseers used the word 'rebuilding' in discussing strategic intent, and one wonders how long this gulf can remain. Henry if invited to take over would tell the lads to go out and have fun while playing like Ed Curnow, or the team that came from behind to win the premiership when 10 goals behind Collingwood at half time in the famous Grand Final.
More exciting games to watch in the rest of the weekend, but somehow Henry just cannot summon the energy.
In cricket, 'Watto' has decided to put his family ahead to the team, on the advice of coach Lehman. Good on yer, Watto, not doing this is one of the classic mistakes made by the dreary blokes with no family worth speaking on when their business career is over.
Dear readers, have you followed the fate of the old gaffers in the UK who pulled off an historic jewel heist? Sadly they have been nabbed but as the court case develops we may well learn that in the name of reform their pensions or superannuation balances have been slashed.
Image of the week
Growth through Innovation and Collaboration
Date: Wednesday, May 20, 2015
Author: Henry Thornton
The Hon Ian Macfarlane, Minister for Industry and Science, yesterday announced: 'An updated and more targeted Cooperative Research Centres Programme will build stronger connections between research and industry, as the Australian Government implements the findings of the expert review into the delivery of the CRC Programme'.
'An updated and more targeted Cooperative Research Centres Programme will build stronger connections between research and industry, as the Australian Government implements the findings of the expert review into the delivery of the CRC Programme.
'Minister for Industry and Science Ian Macfarlane said a key finding of the review was that the CRC Programme was valuable and effective, but had scope for improvement.
“Australia’s CRCs have a notable record of facilitating research and development in a range of areas by bringing together researchers, industry and the community,” Mr Macfarlane said.
'The Australian Government has committed more than $731 million to the CRC programme this year and over the forward estimates. Since 1991, the Government has committed more than $4 billion to the programme and has supported 209 CRCs on a merit-based system.
“CRCs have made an important contribution to diverse and high quality research, but more can be done to ensure the valuable research done by CRCs is translated into practical and commercial outcomes that not only benefit the Australian community, but also have the best opportunities for international applications.
“The review by prominent lawyer and innovation expert Mr David Miles AM found that the programme should continue with a new, more targeted focus to meet the Government’s priority of putting science at the centre of industry policy, according to a review released today.
“CRCs have delivered significant economic, environmental and social benefits over the last 25 years by successfully linking researchers with end users, but it was time to review the programme’s goals and structures to ensure Australia gets the best return on our significant investment in science and research.
“This comprehensive, high quality review has developed 18 practical recommendations that the Government will now implement.
“These recommendations put industry front and centre in the CRC Programme, ensuring that CRCs focus on improving the productivity of all Australian industries, establishing industry-led research, and improving research commercialisation.
“As part of this, CRCs will be the engine of innovative research to support the work of the five industry Growth Centres established under the Government’s Industry Innovation and Competitiveness Agenda.
“This comprehensive approach, utilising the full range of Australia’s research resources, will create new opportunities and jobs in sectors where we are globally competitive, developing and commercialising ideas identified by the Growth Centres, and taking them to markets.
“Strengthening the CRCs’ ability to connect researchers and industry in these sectors will ensure that our research investment drives a competitive and forward-looking economy.
“The report also recommends improving smaller organisations’ access to the programme by establishing an additional stream, CRC Projects or CRC-Ps, for short-term industry-led research designed to benefit small and medium enterprises in particular.”
'A new CRC Advisory Committee will be appointed to implement the recommendations of the review and to oversee the revised CRC Programme. Distinguished business leader Mr Philip Clark AM will Chair the group, working with Dr Megan Clark AC, Dr Michele Allan and Australia’s Chief Scientist, Professor Ian Chubb AC.
“An advisory committee has been a key part of the CRC Programme since it began 25 years ago. I would like to express my sincere gratitude to the outgoing committee for the work it has undertaken, its high quality advice and the outstanding service of its members. The new committee will build on this work and drive the revised programme forward,” Mr Macfarlane said.
'The CRC Programme Review can be found at www.business.gov.au/CRC-Review and the Department of Industry and Science will commence consultations on new CRC guidelines shortly'.
Saturday Sanity Break, 16 May 2015
Date: Saturday, May 16, 2015
Author: Henry Thornton
Terrible situation with Asylum Seekers to Australia's north. Much worse than that for the Asylum seekers who try to get to Australia - we pick them up, feed them and house them, provide medical attention, etc, and find them a new home or send them back to their old home. Surely now the time is right for a regional solution in which the Australian approach is adopted by all and there is similar treatment including serious attempts to put the people trading on human misery out of business.
The budget seems to have been well received though alleged descriptions of 'double dippers' for parental leave schemes as 'rorters' or 'fraudsters' was a welcome diversion for the opposition. The underlying issue here is whether one as a minister is entitled to obey 'the rules' or do what is morally preferable. But as Henry's grandad used say, people in glass houses should forebare to throw stones, obviously.
The government's budget seems based on two propositions, one unstated. Unstated is the possibility that commodity prices might recover, although there is also the possibility that they fall further. Assuming the tougher elements of budget 2014 do not get through the Senate, and any new attempts to remove goodies this time around are blocked, the hope of a return to budget balance is based on 'bracket creep', the automatic tendency of taxes to rise as inflation raises incomes.
Labor, however, in the dulcet tones of Bill Shorten, propose vast new spending plans without saying how these plans will be consistent with a return to budget balance, let alone surplus. One is forced to conclude that Labor's big spending on the national credit card is unaltered and that the opposition is uncaring about any solution but 'soak the rich', meaning anyone (not a politician or a senior public official) who has accumulated sufficient assets to enjoy a decent retirement. This would be easier to cop if Labor promised it would tax pensions of Pollies and public servants at the same rate as folk not in the receipt of pensions funded by taxpayers.
We also present this week a lovely article on 'Family Tax Equity' by Henry's political correspondant Gary Scarrabelotti.
'Think equity. If a middle class member of a two-income family that already benefits from two tax-free thresholds (or $36,000 tax free income per annum) gets paid welfare to go to work, then why can’t a single-income family split its income and have the same tax-free income while saving the state the cost of childcare?
'I mean, you’d have to be dim not to get the point. And I don’t think that dim people lead the government. Oh, sure, they made some almighty blues in 2014, but they want to be re-elected. That’s why I’m confident that, in 2016, Tony Abbott, Joe Hockey and Scott Morrison will deliver on a fairer tax treatment for single-income families'.
But Graham Richardson has taken the prize this week, with his brilliant satire on the 'double dipping' issue and the 'entitlement' mindset.
'How could I have been so bitterly critical day after day, week after week, column after column of such a good and decent man?
'God bless the Treasurer, who not only has a deep, firm commitment to middle-class welfare but a fundamental acceptance of the need for upper-class welfare as well.
... 'As a sole trader, with a turnover of less than $2 million a year, unincorporated but having an ABN, I am a big winner. Until June 2017 I can deduct assets that cost less than $20,000. I can replace the family’s nine-year-old Toyota Aurion with a three-year-old version as long as it is used in the business. A new computer and a range of new office equipment also beckon. No wonder Gerry Harvey has a spring in his step.
'I will have no trouble in providing the tax man with invoices for $40,000-$60,000 in that period. For the next two years I will get an extra $20,000-$30,000 in the hand — but wait, there’s more. I am eligible as well for a tax offset capped at $1000 a year for the next couple of years.
'While I earn less than $2m, I would be less than truthful if I didn’t concede that I earn a little more than the average citizen.
'Upper-class welfare does not end with me, though. There are well to do couples earning up to $400,000 a year out there who will happily accept government handouts for childcare'.
Gor blimey, comrades, maybe Henry can get his snout in this trough.
Image: Courtesy of the photographer and Sydney Theatre Company - Boys will be Boys
Image of the week.
Courtesy The Oz
Saturday Sanity Break, 9 May 2015
Date: Saturday, May 09, 2015
Author: Henry Thornton
RBA drops forecasts, what a shock! Australia's budget is in the danger zone and our cost structures are way over any sustainable level. Australian peoples' greatest economic concern is becoming unemployed and there is great apprehension about next week's budget. Most people are fearful it will remove some benefit, while a few of us are worried a compelling path to surplus will not be demonstrated. Failure to drop forecasts, now that would have been a real shock.
Peter Costello has reminded us that he produced ten surplusses in a row. His budgets were helped by the biggest mining bonanza the world has ever seen. The only other Australian treasurer to produce a budget surplus since the war, Paul Keating, produced his surpluses because he was especially well advised and had the force of personality to do something about it.
Joe Hockey has identified the 'Age of entitlement'. Grace Collier today sums up the attitude of a prototypical Aussie battler so well. 'Oops, I have found myself with no job, no money, 15 children, an ice habit and three of my teenagers are involved with Islamic State, what is the government going to do about it?'
Collier continues: 'I wish our leaders had some sense of how people outside the Canberra bubble feel. Our small population has to support three layers of expensive government. Substandard people are able to enter politics or the public service and suck huge amounts of money out of the system for themselves at levels they’d never earn in the real world.
'Politicians can retire early and live out their days on a pension that requires between $5 million and $6m apiece, an amount even an extraordinary achiever would struggle to amass in a lifetime. Our Prime Minister earns significantly more than the US President. An affluent public service is addicted to annual wage increases of 4 per cent.
The big economic news this week was a global bond market rout which sent money market yields sharply higher and equities prices lower. Global oil prices have lifted. Signs of long awaited increases of US wage inflation seem to have allayed fears of extreme deflation. Sharemarkets were propped up by so-called 'Quantitative easing' (QE), near zero cash rates and low bond yields. The US Fed has yet to test the waters of a gradual return to sensible cash rates. The RBA is participating in the 'currency wars', spending ammunition (rate cut opportunity) and credibility. US Federal Reserve chair Janet Yellen said this week, 'there are potential dangers in all this'.
The editor-in-chief of the AFR, Michael Stutchbury, yesterday in a long article in his newspaper's Review section looked at our post-1970 booms and busts. His sobering conclusions should be the BBQ stopper of the year.
'The history of Australia's great prosperity is also the story of how this commodity-exporting and capital-importing economy at the foot of Asia has ridden the two great industrialisations of the past half-century, Japan and then China, now our two biggest export markets. Both booms helped make us rich. But they also politically overinflated our expectations before running into global crises - the stagflation of the 1970s and the extended financial crisis from 2008. Once again, Australia's economy is underperforming our closest developed-world peers. Our jobless rate is back above America's; our budget deficit is bigger than New Zealand's, our economic growth last year was below Britain's'.
Clearly what is needed is some far-reaching economic reform. Every responsible economist, notably this week ANU's Warwick McKibbin, has pointed out that continued falls of Australian cash interest rates are not the answer to the heavy headwinds our economy is battling. The only sustainable approach is a combination of a credible approach to return the budget to surplus and widespread economic reform.
We hope that Tuesday's budget will deliver a credible budget and we offer a plan for economic reform here. We sincerely hope that our government can somehow muster the courage and communication skill to pull off this difficult double. For all our sakes, we fervently hope that we do not have to wait for a nasty crisis to get on with highly desirable economic reforms.
And did Smokin' Joe really tell us to borrow money and spend? Has nobody told him that household debt is 150 % of household income and when interest rates rise many households will be in deep doo doo? Not to mention the massive government deficit. We are a country already deep in debt, and global interest rates must begin to rise soon.
Mad Max is back! And opens soon on a big screen near you. Here is a trailer. Henry's reviewer, Bert Thornton, rated this movie highly - 'road rage in the outback; not to be missed'
The surprise win by the Conservatives in the UK has shown that the polls can be horribly wrong. Just maybe this is happening here. Say you're voting Labor to keep the fire to the feet of the gummint.
A weekend of surprises in the footy, especially GWS toppling Hawthorn, but also the Saints beating the Bullies after the greatest turnaround in living memory. Most of the rest went as expected and Henry will not be watching on Sunday when the Blues take on Brissie.
And did Smokin' Joe really tell us to borrow money and spend? Has nobody told him that household debt is 150 % of household income and when interest rates rise many households will be in deep doo doo?
Image of the week
Courtesy The Oz
Date: Thursday, May 07, 2015
Author: Henry Thornton
Henry's favourite fund manager (FFM) concluded a fine presentation two days ago by saying: 'We are still in a sweet spot for equities'. This was despite a conclusion that it is too soon to load up again with resource stocks and banks were still ok despite Westpac's slight fall from grace as Mr Hartzer settles in. And the possibility of Australia slipping into recession.
That is the summary, dear readers, and it supports Mrs Thornton's relative optimism rather than Henry's relative pessimism. There is a very interesting question that came at the end of the meeting that I shall leave until the end, but it deserves to be answered, or at least pondered.
Henry's FFM divided his presentation into five themes, and my report follows that format. There was what Henry regards as a proper focus on measures of optimism and pessimism, including some measures Henry had not seen before.
1. The Millenials.
These are young people who became adults at the start of the new century and who so far have had a poor suck of the sauce bottle. A story was told of a member of the FFM's firm who once attended a reunion at his old school of Eton. Peole were in tents according to their year of attendance by decade. Those in the 1920s were partying like there was no tomorrow. Those from the 1930s wore somber suits and frowned a lot. Etc, etc,
Given the ages of all concerned, this story was apocryphal but it struck a chord with the largely baby boomer audience.
Millenials in the USA went from a 79 % employment rate in 2007 to below 74 % in 2009 and recovery has been slow, to only 76 % in 2014. Student loan delinquencies have risen sharply since the GFC and are now hovering at 55 %. Millenials who are employed are clinging to their low-paid jobs and keep most of their modest assets in cash .Net household formation fell sharply in 2007 but has just shot up - a sign of better times ahead perhaps.
The 'Economic Surprise' Diffusion Index (below) showed positive surprises in 2014 in the USA and negative surprises in Europe. This pattern has been reversed in 2015 as the US economy slows seemingly almost to a halt and the Eurozone shows some recovery.
The bottom line? 'Households are not responding in the traditional fashion to jobs, oil price, low interest rates. This means the Fed in on hold (possibly for longer than anyone thinks.
2. Australia living beyond its means.
The FFM asked if anyone present could remember very high interest rates in Australia. Only the baby boomers could - 1992/3 when even the trams in melbourne were touting for business, which Henry felt was of sufficient interest to so inform Bernie Fraser.)
We were shown a graph in which debt as a ratio to household disposable income had flattened at 150 %. A similar statistic for the USA had also reached this fuigure but had fallen to around 100 % since its peak. We were invited to imagine what would happen if interest rates doubled from current levels.
Another storm warning was the ratio of dwelling prices to household income, a monsterous 10x in Sydney compared to London and New York at 6x. Another graph showed Real Median house prices in Melbourne twice the level of Melbourne prices in 1890, which was followed by the great depression of the 1890s.
We were then shown a few graphs from the Intergenerational Report (IRG) that quite blunted appetites for the fine lunch provided.
We were presented with a list of 'Which promises will be broken' by governments'. This had ten items on it, starting with 'Aged and Service pensions' and ending with 'Infrastructure Spend'. Henry refused a second glass of Shiraz.
The bottom line? 'Tough times ahead structurally as well as cyclically', or 'Recession likely'. This means interest rates and government bond yields likely to head lower and possibly for an extended period of time.
3. Oils aint oils.
The price of crude oil has returned almost to its level in late 2008. Crude oil in storage has been rising since 2004 and recently took a massive leap upwards. A measure of speculative long position was rising from 2003 but has just plunged, suggesting perhaps that the oil bulls have just rolled over.
Bottom line? The very best oil companies may be worth buying soon, but not yet.
We were told there were some 'green shoots' emerging. Greek risk is so far contained and there is a '$1.2 trillion liquidity pump from the ECB.
Bottom line? The Eurozone situation is 'supportative of risk asset generally', and the USA QE material in the next section will show why this is a supportable conclusion.
Our host had a lot of fun with a photo of the Greek Finance Minister as Mr Spock.
5. The search for yield.
We first looked at some horrendous graphs of government bond yields from the 1700s until now. In the USA and the UK these yields peaked at around 16 % in the early 1970s and are now not much above zero. In Japan and Switzerland, current bond yields are around zero, in the latter case negative. 'how can they be negative?' asked a participant. 'You pay the government to mind your money for a decade, say, and there is a chance you will get most of it back', said an old reptile. 'Tell that to the Greeks' was the obvious reposte.
A nice graph showed how the USA Fed Funds rate has led the bond rate down from the early 1990s but showed just how abberant is the 6 year near zero rate. Another dramatic graph (below) showed how the series of 'Quantitative easings (QEs) have been strongly correlated with successive surges in the US S&P index.
Whether stocks will continue to rise if the US Fed merely delays rate rises is one of the great questions for investment managers and their (nervous) baby boomer clients.
Bottom line? 'Quality high income producing securities remain attractive relative to alternatives and inflation'.
Readers must draw their own conclusion from this and similar presentations. Henry's FFM made no recommendations and neither does Henry. Seek independant advice from a licenced financial planner, provided he is not using your money to play churn and burn.
Henry shall remain nervously long equities - mainly in stocks with good yields - while thanking his lucky stars that the Thornton family put a fair proportion of equities offshore when the Aussie dollar was $US 1.05.
But a final question remains unanswered. 'The Future Fund has over $100 billion of investments and holds only 10 % or so in australian equities. What does Peter Costello know that we do not?
Low wages - blessing or curse?
Date: Tuesday, May 05, 2015
Author: Henry Thornton
Australia's budget deficit keeps rising as commodity prices fall, previous spending commitments keep on rising and wage inflation keep on falling. Canada shares with us the first challenge, most countries share the spending blowout and just about everyone has falling wage inflation. It is some time since we lauded ourselves as the 'miracle economy'; hubris has turned to nemsis.
It is probably cold comfort, but many other nations are suffering with low wages growth, in important cases, negative in 'real' (after inflation) wages growth.
The Economist has investigated this matter, and the resulting article is worthy of being publicised. Quotes are from the venerable mag. The dramatic first set of facts are: * 'Despite five years of growth American real wages are still 1.2% below what they were at the beginning of 2009. * 'In Britain, real wages fell every year between 2009 and 2014, the longest decline since the mid-1800s. In 2014 median pay was 10% below its 2008 high. " * 'Germany, a haven during the euro-zone crisis, has done better, but wages are still 2.4% below their 2008 level'.
The graph is worthy of careful study.
Many advanced economies have shared America's experience. From the second world war until 1960, wages rose in line with productivity and from 1947 to 1960 both rose by 51 %. Since 1960 productivity in America has risen by almost 220%, but real wages by less than 100%. This is a major contributor, on top of rampant asset inflation, for the dramatic rise of inequality that concerns some economists and most merely human people.
'Scholars seeking to explain this decline in the labour share reckon a number of big forces are at work. One is that the income from capital—especially from housing—has been increasing more than the income from labour. Another is that, in many industries, capital goods have become a lot cheaper and/or better. Bosses can choose whether to spend money on machinery or people, and declines in the price of the kit required for a given amount of output—which can come about either because existing machines get cheaper or because new ones can do more—reduce demand for labour.
'Globalisation can reduce the demand for rich-country labour, too. Michael Elsby of the University of Edinburgh and Bart Hobijn and Aysegul Sahin of the Federal Reserve have shown that in industries where imports became a more important part of the supply chain between 1993 and 2010 the labour share fell the most. And the decline of trade unions reduces labour’s bargaining power. The share of the American workforce unions represent has fallen in every decade since the 1960s, and similar declines have been seen across the G7'.
Another important factor beloved of economists is the old 'Phillips curve'. 'The usual assumption is that once unemployment gets below a certain rate, idle labour becomes scarce and competition to hire already employed workers heats up'. Australia's unemployment is still rising, and one survey says people's greatest economic concern is fear of unemployment. But in many developed nations, unemployment is now falling, in some cases below the so-called 'natural' rate of unemployment that used to signal rising wages.
'There is evidence' says the venerable organ, that wages might now be shaking off their sloth. 'In late February IG Metall, Germany’s largest union, brokered a 3.4% raise for its members, well above the current inflation rate, 0.3%. The latest British data show average salaries up by 1.7% in a year; with inflation close to zero this is a decent real-terms rise. In America, average real pay is up by 2.2% over the past year. If this continues as unemployment falls it would mean a return to pre-crash normality, with sustained wage inflation eventually triggering central-bank interest-rate hikes'.
But there is another possibility. 'It may be that the damage this recession did to the labour market—the loss of skills and the mismatch between industries where workers have experience and those where there are vacancies—is being expressed not in the form of long-term unemployment but as lasting low pay'. If this turns out to be the case, it will help lock in low inflation. I would be very surprised if the RBA board did not consider this possibility at its meeting today.
If lasting low pay keeps inflation and interest rates low, it may come to be seen as a blessing. If it merely allow capitalists, and highly skilled workers, to grind the faces of unskilled workers, it will be a curse and there will be retribution
The full article discuss several related issues that will delight the specialist. Many economists, including Henry, see 'more flexible wages and prices' as a desirable way to achieve optimal economic outcomes. The Economist has a final warning in conclusion: 'Work must be a route out of poverty, not a way to stay stuck in it. To that extent new political interest in stagnant and falling pay is welcome if it really boosts what poorly paid workers take home while not deterring job creation. But although the new world of ultra-flexible labour markets has its flaws, those on the left looking for a restored rigidity are playing a dangerous game: the unemployment that could result would help neither those rendered jobless nor those scraping by'.
Saturday Sanity Break, 2 May 2015
Date: Saturday, May 02, 2015
Author: Henry Thornton
The RBA board meets next Tuesday and seems poised uncertainly between another rate cut and leaving monetary policy unchanged. The brutal fact is that further cuts in interest rates will penalise retirees, add further fuel to housing markets and fail to ignite a broad-based economic recovery. All that can really help the Australian economy is a dose of far-reaching economic reform. Here is Henry's prescription, with several colleagues, a submission to the Newman committee.
'How much do you need to retire?' asks the AFR. 'More than you might have thought a decade ago' and 'much more than most Australians are going to have accumulated' are the general answers. Imposing a modest tax on pensions for the 'rich folk' - those who have worked hard and saved a lot, despite horribly high marginal tax rates - will simply force effots to become self-sufficient into other channels, such as negative gearing.
The Abbott government is going to revive 'Rewards for elderly to stay at work'. As an elderly person still at work, Henry applauds this idea in principle, without any expectation that he will receive any of the tax-payer-funded-lolly himself. Of course, taxing those still at work in order to subsidise the employment of other elderly persons is the sort of tax'n'welfare scam that bedevils the western world's economic system, and helps to explain why we can expect slower growth in future. Especially if real reform is not forthcoming.
While agreeing that keeping the elderly in work is a good idea, the rate of unemployment among the young is at least 20 % and rising. (In addition, some of the best young folk are working for nothing as 'Interns'.) Again we must insist that thorough-going economic reform is the only way for Australia to avoid the low growth future that major 'developed' nations are facing.
Another weekend announcement is that there is to be a 'Hit on foreigh property buyers'. Henry has half a cheer for this. It is in fact a large but clumsy tax on a particular form of capital inflow. Far better would be a broad-based tax on all capital inflow, at a much lower rate, as advocated by Henry over two years ago - link here.
The new large but clumsy tax on capital inflow to buy property will of course inhibit property development, at a time when rapid house price inflation in Sydney and Melbourne is worrying all who think hard about their children's future, and that of their children's children.
Tony Abbott has said taxes should be simple, fair and as low as possible. He will eventually see the point of his new property tax, but far better that had happened before the latest bright idea was announced. There is an emerging pattern of bold announcements followed by sad backflips that should be overcome by serious thinking in advance of announcements.
Fiona Prior visits Beckett’s tragi-comedy masterpiece Endgame. You will laugh while you look for the razor blades! Read more here ...
The liquidation of two Australian drug dealers in Indonesia has excited Australians more than most judicial events in recent weeks. Three things upset Henry in particular, apart from the final barbaric act. The disrespect to the family, especially on the last day. The official refusal to let Messrs Chan and Sukumaran be comforted by their own choice of religious advisors immediately before their executions. And (if it is true) that Indonesian law allows clemancy for those who are genuinely rehabilitated, as these men appear to have been.
The massive earthquake in Nepal shows just how uncertain life can be. One hopes Australians are especially generous in their donations and even that perhaps a fair bit of our assistance to Indonesia could for this year at least be channelled to help the Nepalese recovery.
This said, our difference of opinion in the matter of execution of people who have committed horrendous crimes was handled well by Tony Abbott and Julie Bishop.
There are also some sensible post-execution comments from Indonesia, and it looks possible that mutual damage will not be the ongoing result of the cultural fault-line revealed by this tragic matter.
To move to far more trivial matters, last night Caaarlton! was absolutely flogged by old enemy Collingwood. Watching the game on TV, even Henry's Collingwood-supporting mate was sympathetic. Unless and until Caaaarlton! shows some fight, Henry shall refer them as 'the blues' to represent the feelings that they arouse in loyhal supporters' minds.
The week leading up to this flogging Caaaarlton!'s supercoach Mick the Merciless has been filled with conjections that he is about to quit, or be fired by an even more ruthless board.
So far this AFL season has confirmed the power clubs - Fremantle, Port Adelaide, Hawthorn, Essendon, plus several others (compared to the blues).
The Bombers have been cleared due to lack of concrete evidence that banned substances were injected into their players but face another hurdle. Totally logical when thought about, WorkSafe Victoria is investigating. There is no doubt that a variety of substances were ingested by, or injected in, the players.
Lack of evidence of what "pharmacologically experimental" substances were given to which players was a key point that frustrated ASADA in its attempts to prove banned substances were provided. Henry is no lawyer, but the fact that there is no record of which players got what substances might be construed as a violation of practices in a safe work environment.
It's going to be a bleak winter in the Thornton household.