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Henry Thornton - Contributors: A discussion of economic, social and political issues Blogs
What is to be done?
Date: Tuesday, August 09, 2011
Author: Henry Thornton

Like our loyal readers, Henry awoke this morning to news of a stomach-churning fall in European and American stockmarkets.

It is especially awful when a prophet who has sounded the warnings has failed to fully protect his family from a predictable market debacle.  (Refer http://greatcrisesofcapitalism.com/.)  

So what is to be done?

Developed nation policy makers will do their best to change the weak and indecisive policies that have produced this unhappy state of affairs.

Trouble is, most of the respectable ammunition has been spent.  Further fiscal stimulus would make the debt burdan of the deficit nations - ie virtually all 'developed' nations - worse.  'Tea Party' fanatics in both USA and Europe will stand in the way, preferring global depression to their turn on opposition.

With interest rates at zero, central banks of the debtor nations cannot be cut further, although further 'quantitative easing' (= printing money) is possible.  The cost, however, will be further global inflation, hardly a way to restore confidence to markets. 

The western nations are 'very close to stall speed' said Martin Wolf on ABC radio this morning.

By coincidence, Henry's favourite fund managers weighed in overnight with their 747 analogy.

'The Jumbo 747, since the early 1970's, became the icon of mass transport over long distance. In a similar vein, and over a similar timeframe, the American economy, via the consumer, became the mass driver of global economic growth.

'At cruising height the Jumbo can, and has stalled, at which point it loses significant altitude in a matter of seconds. If the flight crew panics and tries to start all 4 engines simultaneously the plane will crash as there is insufficient in-board battery power to execute such an attempt. It is possible to start each engine in sequence, however, thereby using the power from engine 1 to start engine 2 and so on'.

'Last week the Jumbo stalled mid-flight and most financial assets lost significant altitude in a gut wrenching hurry. To determine what will happen from here we must make a judgement call as to whether the flight crew, namely Messrs Bernanke, Trichet, Lagarde, Merkel, Sarkozy, Cameron and Kan, react in the correct manner'.

Read on here, gentle readers, and you will come to the good news. 

We need the Eurocrats and politicians to decide on a proper, Eurolandwide bailout - paid for mainly by Germans.  Alternatively, let the Eurozone fall apart and then bail out the banks that will be in trouble.

American politicians need to agree on a long-term plan to return the USA budget to modest surplus to allow some debt reduction and restoration of America's AAA rating.  Then Ben Bernanke can get on with the job of soaking up the excess liquidity he has been creating as a way of saving the global economy.

Australia's government must drop the carbon tax, reform the tax system, restore competitive labor markets and stop installing massive, poorly managed 'improvement' plans.

Once such a plan is agreed, which should not take too long, the government should call an election. 

This would give Tony Abbott the chance to present his plan for return to prosperity, and it would give us long-serving voters a chance to choose a decisive government.

Then the good news would emerge, as articulated by Harry Cator and Julian Mitchell.

'We think there is good buying now in selective Australian shares that are offering excellent fundamental value on a long term basis. Cautious buying today may not provide instant rewards but acquiring quality assets on cheap fundamentals makes money in the end.

'Australian shares remain cheap on a variety of measures which is positive for the medium term but valuations alone will not be supportive in the short term in the absence of clear cut policy responses. Australia’s ability to respond to further risk aversion is better than most of the developed world. We are in a position to cut interest rates significantly should the need arise. Our banks rely considerably less on wholesale funding than in the GFC, the budget surplus could be deferred and bank deposits could again be guaranteed. All of these measures are defensive in nature and in our view limit the downside.

'Addressing the structural issues that have given rise to the Jumbo’s engines stalling however would likely see a powerful rally and the base line set for the next bull market. Even some of the short term solutions we have discussed would in all likelihood see markets spike upwards but at some point in the future the US and EU will need to tackle their long term issues'.

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

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

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

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

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

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

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

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

Fiscal policy

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

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

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

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

Structural reform.

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

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

Here is a modest set of possibilities.

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

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

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

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

'Right now the big forces include:

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

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

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

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

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

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

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

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

And in conclusion.

'My final, fairly uncontroversial predictions:

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

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

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

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

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

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

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

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

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

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

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


Fiona Prior sizes up the latest James Bond movie.


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

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

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

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

Image of the week

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

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

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

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

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

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

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

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

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

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

'Volume four?

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

Further reading

The never-ending story

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

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

The Australian - 'The Commodity Calamity'.

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

The Attacks in Paris


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

More here. Western world facing all-out war.

Comments of world leaders

Francois Hollande

Barack Obama

Xi Jinping

David Cameron

Angela Merkel

Malcolm Turnbull

Julie Bishop


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

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

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

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

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


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

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

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

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

Traumatised veterans

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

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

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


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


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

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

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

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

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

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

Image of the week

Courtesy The OZ


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

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

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

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

The challenge of innovation

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

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

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

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

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

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


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


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

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

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

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

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

Image of the week

(Long) Weekend Sanity Break,
Date: Sunday, November 01, 2015
Author: Henry Thornton

It is time for Melbourne's quasi-religious racing weekend, long weekend if like many Melbournians you take Monday as a RDO (or, gasp!, a sickie) to be as fit for The Big Day as humanly possible. Henry's favourite journo, Paul Kelly, this weekend is discussing the geopolitical scene occasioned by America's brave visit to international waters claimed by China.  Supposedly there was a full-scale battle group just over the horizon in case of fireworks, but good sense prevailed and World War III is not yet upon us.

Have you ever employed a builder, dear reader?  Henry and Mrs T decided they needed a kitchen update and enlargement of an upstairs bedroom involving a new roof and a deck. We employed a builder previously used to great good effect. 'It'll cost about $40 K', said builder said. 'And I can start and finish the job quickly as I have found a team of carpenters I want to keep and it will fill in the schedule nicely'.

You got it, dear reader. After almost 6 months the kitchen is almost finished and the first 'progress payment' was a shade over $65 K. 'We found a bolthole in the roof that had let water in and the back wall was rotton' was the story. Apparently said builder mumbled something about the bolt hole to Mrs T, with the implication that it was a trivial matter.  Naturally we insisted on a hard quote - one to be kept to - for the bedroom extension/deck, but a month later this work has not started, and the festive season is rapidly approaching. Gor Blimey, comrades, is there no builder in Australia who keeps his word, provides progress reports and springs no unhappy financial suprises?

The US Fed is trembling on the brink of a rate hike but cannot quite summon the gorm to put us all out of our mistery and begin the long and difficult task of returning the global economy to normal.  The key factor holding the Fed back is, it seems, fear of deflation.

The economic story is taken up today by Henry's recalcitrant retired geologist, Louis Hissink. He delivers a wonderful explanation for apparent deflation.  And on the Fed's dithering about interest rates, please see today's Image of the Week below.

'It seems the ECB, and hence I presume other central banks as well, thinks there isn't enough inflation and that it needs to be increased by monetary easing. Not enough inflation? Not as measured by government it seems but a couple of days ago I came across an interesting phenomenon of the economic kind, the way in which sellers of manufactured goods can adjust their product to cope with inflation'.

Read on here.  You will learn a lot about Socialism. Capitalism and Fascism, along with the fallacies of the Monetarists. Then if you remain unsatisfied, cop this 43 year-old article by Australia's living national treasure and Henry's editor. After being rejected 5 times all those years ago, it is about to be published in a book about Lord Keynes.


Fiona Prior explores Sydney Open – Sydney Living Museums.


Only two more AGMs to go, dear reader, and Henry can begin winding down for Christmas, after what has been a Keating of a year. But before then we have ... the Rugby World Cup final, which began at 3 AM today. The All Blacks are fearsome favourites but Australia's coach, Michael Cheika, has sharpened and focussed the Wallabies beyond imagination and we are just about guaranteed a fierce struggle with neither side guaranteed to win.

In the event, Australia was dealt a big dose of shock and awe in the first half and in the first monents of the second half.  The good news is that they refused to curl up and surrender but staged a wonderful fightback.

The Kiwis deserved to win and did so comfortably 34-17 in the end.  It was a great game and Cheika's Wallabies will be number one in the world before long.

The World cup of Rugby has ended just in time for our attention to turn unhindered to the Melbourne cup.

Henry's choice is Red Cadeaux, an elderly (10 years) horse that just keeps coming and would be a deeply popular winner.  But there are plenty of younger, possibly faster horses so do not back Henry's romantic choice without consulting a real horse guru, like Henry's TP Mahar.

Soon the cricket test will provide Australia with a chance for revenge against a team from the land of the long white cloud.  Trouble is, Henry has not heard of most of our team's batters so lacks confidence in the outcome. The good news is that there is a great chance for a young bloke to make his name.

On with the show, and before long Santa comes then footy will be underway again.

Image of the week - Janet and the mob.

Ideas relevant to this painting may be found here - will she, or won't she, raise interest rates any time soon and (either way) will it scare the mob?

More of Henry's economic images here.

Global recession, new Chief Scientist
Date: Wednesday, October 28, 2015
Author: Henry Thornton

'China will keep growing at double-digit rates for the forseeable future'. This was the confident assertion of Australia's China-watchers until recently, when China began its 'pivot' to consumerism. Like Australia trying to transform its economy from mining to services - education, tourism, accounting, law - this was never going to be easy, but the difficulty was never understood or predicted by Australia's most prominant economists, those in Treasury, the RBA and the better universities. 

Commodity prices just keep falling and that is slicing great chunks off Australia's national income and from the incomes of many individual Australians.

Now we learn that 'global worries lengthen odds of Fed rate rise'. The US economy is sliding into recession, the Eurozone remains stuck in the mud and bedevilled by a flood of refugees that defies imagination, Japan's exports are declining and the world may be slipping into recession, certainly a growth recession.

Malcolm Turnbull has focussed on the opportunities provided by the current global turmoil.  Good on him, this is perhaps better than Tony Abbott's Churchillian vision of Australia surrounded by enemies and with enemies within - including Islamist sympathisers and nasty,  rapacious unions. But there is a long way to go to fix Australia's budget deficit, restore business and household confidence and encourage growth by removing obstacles including excessive and overbearing business regulation and especially industrial regulation.

New Chief Scientist

Australia has a new Chief Scientist, Dr Alan Finkel. He is a neuroscientist who went to the so-called 'Dark side' to commercialise high level technology and made a success of what is one of Australia's most difficult challenges. Turning science into business is something Australia does especially badly - ranking 29th (last) behind Mexico in one authoratitive survey - and Dr Finkel is ideally placed to do something about this. He was described as 'a scientist and an entrepreneur; an innovator; a communicator' by Prime minister Turnbull.

One of the articles about this appointment said that the word 'innovation' had been banned by the previous minister for industry and science.  What it failed to add that in Ian Macfarlane's view it had been replaced by 'competitiveness'. Emphasis on Australia's ability to compete is an even more general description of what we need to do than 'innovation' (or 'turning science into business').  But both words will be used to describe any highly successful economy, and we wish Dr Finkel well as he focusses on what will be his greatest professional challenge.

Tax relief for innovation is being talked about.  It is worth noting that the reform of the tax treatment of shares or options issued in lieu of cash for start-ups has already removed one blocker to successful innovation, and further moves in that direction will also be worthwhile.  Less red tape in programs like the highly successful Cooperative Research Centre (CRC) program would also make life easier for small companies to receive infusions of useful new technologies.  Go for it, Christopher Pyne.

Dr Finkal's enthusiastic advocacy of the nuclear option for cheap, clean future energy supply is also very welcome.  This was also a dream for Prime minister Hawke, and for a country with a sizeable chunk of the world's known supplies of uranium this is a completely natural development.  The idea will get the Greens going, and generally split the environmental lobby. Go for it, Alan Finkel.

Henry's contributions on the nuclear option include:

* PP McGuinness, 2006

* Report on Bob Hawke's views

Saturday Sanity Break, 24 October 2015
Date: Saturday, October 24, 2015
Author: Henry Thornton

Much ado about Malcolm today.  The Smage says Malcolm is 'set for big spend' on 'roads, transport and other infrastructure', financed by borrowings.I do not believe this is simple crude Keynesian thinking.  Rather than an attempted 'sugar hit', this is a strategy that seeks to improve productivity, which is a much needed challenge for Australia.  Of course, such spending has to be financed by borrowing, and each project should be justified by rigorous benefit-cost calculations.

Commentators have brought the line that Malcolm's government is 'strictly business', benefit-cost studies are the businesslike approach, and shareholders (ie the punters, aka voters) should be given the chance to scrutinise the relevant studies.  Malcolm's point that hating corrodes the personality of the hater is powerful magic, and needs to be heeded by every aspiring leader.  Joe Hockey's statesmanlike farewell speech set high standards in this matter.

Other features of the weekend commentary on Malcolm's government are the attempted collegiality (aka taking his colleagues into the decision-making process), attempting to restore dignity and good order to parliament and making some much needed changes to Australia's IR framework.

On the policy front, the fact that broad-based tax reform is also allowed to be discussed, including (gasp!) widening the GST and/or raising its rate, is a great relief to economists everywhere. There is some brutal arithmetic at play here.  Spending decisions already taken are incredibly hard to roll back. Tax reform whose main effects are to improve the budget bottom line, while also increasing incentives to 'work, save and invest', are needed to provide the quickest and fairest return to overall budget balance.

There is also Malcolm's point that there is a lot of luck in business or indeed in life generally.  As fair-minded people recognise, this provides a cast-iron case to tax more heavily incomes or assets of the well-to-do.  Success is also due to powerful focus and hard work, so redistribution must be limited to an extent that most people, including well-to-do people, accept. Australia's current tax and welfare system is by no means the worst in the world, but Australia needs to establish a more sensible balance of equity and efficiency.

Labor is trapped by this approach and also by the fact that many of its supporters believe Malcolm is a better Prime Minister than Labor's Bill Shorten is ever likely to be.  Will there be a Bill-spill?  The ALP's new rules would seem to make this impossible, and there is also Joe Hockey's point that the revolving door should be jammed for a bit.

It seems that Malcolm's government has accepted that growth will be slower and that budgeting will therefore be more realistic.  Predicted budget deficits will also be larger and there remains an urgent need to bring a better balance between spending and raising revenue.  How this is achieved is one of Malcolm's greatest challenges. If the rebalancing merely blunts incentives further, it will fail. If tax and welfare reform improves the budget balance that is good news for the Australian economy  but if it does so while improving the efficiency of the tax and welfare system it will be a great success, especially if most Australians accept the need for necessary reform.

The housing market is apparently cooling off in the hot-spots of Sydney and Melbourne. Casual observation shows massive blocks of new flats everywhere in Melbourne, so there will probably be significent rental savings available before long.  But the overall price structure for houses has shifted up to really difficult levels, so trouble remains for many young people, who are also struggling to find decent jobs.


Fiona Prior dons her walking shoes to enjoy this year's Sculpture by the Sea, still one of the world's most innovative sculpture exhibitions.


Rugby football is Henry's main focus this weekend and possibly next. He assumes the All Blacks will beat South Efrica in their semi-final, but hopes the men from the veld give the men from the land of the long white cloud a terrific pounding. Australia, from the land of drought and flooding rain, take on the men from the Pampas and national insolvency. The Argies have been playing sublime Rugby and look good in comparison to Australia's relative poor victory over the canny and committed Scotsmen last weekend. Henry will watching the latter game at 2 AM Monday, so do not expect too much good sense later at the start of the week of work.

Our cricket team is lacking practice and grappling with different color balls. 'What a balls-up' is all that can be said, and we wish well the newbies, including new Captain Smith, that make up our next test team.

Plenty of 'Stuff' around, including the flood of refugees from the Middle East into Europe.  For some reason Henry's favourite magazine, The Economist, was unable to be delivered to a boat travelling from Broome to Darwin, so Henry is playing catch-up. It seems the Eurozone's credo of compassion has been stretched to the limit and The Economist said two weeks ago even the compassionate Germans have reached thier limits.

'On the night of September 4th Angela Merkel made the most dramatic decision of her decade as German chancellor: to suspend European asylum rules and allow tens of thousands of refugees stranded in Hungary to enter Germany via Austria. It was a moral gesture that fitted the mood of the moment. ...

'In Germany, however, that altruistic embrace has caused a backlash that could weaken a chancellor so far considered all but invincible. Using uncharacteristically missionary language, Mrs Merkel said repeatedly that the right to asylum has “no upper limit”. But Joachim Gauck, who as president is expected to keep out of workaday politics, responded that “our reception capacity is limited even when it has not yet been worked out where these limits lie.” As though on cue, the political tone turned against Mrs Merkel'.

Thirtieth anniversary of Uluru's return to indigenous custody.  All's well and the Great Rock remains in superb form.

Image of the week - The Spirit of the Rock

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