Professor Robert Gordon of Northwestern University has been pondering this matter for some time, and recently presented a paper than anticipates a forthcoming book.

The abstract begins: 'This paper raises basic questions about the process of economic growth. It questions the assumption, nearly universal since Solow’s seminal contributions of the 1950s, that economic growth is a continuous process that will persist forever. There was virtually no growth before 1750, and thus there is no guarantee that growth will continue indefinitely. Rather, the paper suggests that the rapid progress made over the past 250 years could well turn out to be a unique episode in human history'.  Read on here.

Professor Gordon says that six different but serious 'headwinds' are facing the US economy.

These are:  (1) changing and unfavorable demographics; (2) rising education costs and poor secondary school performanc; (3) growing economic inequality; (4) increased competition due to globalization; (5) energy and environmental costs and challenges; and (6) high levels of consumer and government debt.

These factors were all evident before the global crisis of 2007/2008. Pondering that experience one might add a seventh factor: 'wild speculation by bankers with missing morality and lost ability to assess and make proper allowance for risk'.

From colonial times to the present, economic growth has been powered by three separate industrial revolutions: (1) the introduction of steam engines and railroads; (2) the inception and widespread use of electricity and the combustion engine; and (3) the invention of computers, the web and mobile communications generally.

The third of these revolutions may turn out to have a weaker effect on growth that the earlier ones. Gordon ends his abstract as follows: 'A provocative “exercise in subtraction” suggests that future growth in consumption per capita for the bottom 99 percent of the income distribution could fall below 0.5 percent per year for an extended period of decades'.

Australia's growth may stay higher for longer because of our trade relations with China, India and the other quickly developing nations of Asia.

However, if the US economy is permanantly on a lower growth trajectory, a new psychology of limited growth is likely to take hold in developed nation culture, which will affect us all.

Furthermore, Australia's relative success, built on mining shovels rather than sheeps' backs, will further entrench mediocrity amoung leaders.

Twenty years ago, Australia's leading historian, Geoffrey Blainey, wrote in the Fourth edition of The Rush That Never Ended: 'In the short term, nothing did more for the standard of living of the average Australian than the chains of mineral discoveries.  Unfortunately they quietly bred an economic complacency, a sense that Australia was so richly endowed that all kind of blunders, delusions and extravagances could be afforded. The idea that Australia was the Lucky Country was to become, in the public mind and in many political and intellectual circles, a source of acute damage in the 1980s. Australians of the cities failed to grasp the important fact, that would have been obvious to most of their grandparents, that the resurgence of mining probably owed more to intelligence, effort and risk-taking than to natural endowments and unnatural luck'.

Has anything changed? As we sit here today, mining projects are being downsized or cancelled on a regular basis.  Costs, including regulatory and industrial relations costs, are rising inexorably, and 'sovereign risk' is being applied to Australia for the first time in decades. New sources of supply are being introduced by nations that are hungrier and whose governments are more welcoming to mining ventures.

Australia may need to adapt to the new normal of limited growth. As the famous piece of graffeti on a wall in Sydney's Kings Cross put it: 'Avoid the rush. Mutate now'. Or persuade our leaders that economic growth is better than stagnation.

'Budget monster out of control' as the lead on the Inquirer page is appropriately sombre, and it is going to take hurculean efforts by the next government to fix things. Below is a suggestion about how the next government should proceed.

But first, some analysis. Tom Dusevic's graph, drawn from budget papers, but curiously not available Online, provides ta very useful historical overview. Read on here.

Since the heady days of Billy McMahon, as shares of Australia's national production, outlays have risen by 6 % and receipts by almost 4 %.  That the current situation is not worse is because of John Howard's great big new goods and services tax (itself partly offset by some modest reduction of income tax creep) but with net receipts greatly offset by new spending initiatives.

So here is Henry's advice to the next government. When you sit down to consider fiscal reform, get Treasury to compare, as ratios to GDP, the various catagories of government outlays and receipts. Ask yourselves why each catagory of spending has risen so far, and whether on available evidence there are verifiable reasons for the increases (I suspect there will be no catagories where spending has fallen except defence!)

Then repeat the exercise with catagories of receipts, and see what conclusions leap immediately to mind.

Then publish the results and invite discussion. If handled well, such a national dialogue might lead to real fiscal reform and prepare Australia to participate with real zest in the Asian century.

Idiocy on asyum seekers

I get the idea that if we make things horrible enough, the flood of asylum seekers will dry up.

But making things more unpleasent by degrees is doomed to failure, and I doubt that Australian's lach the mongrel to do what might be necessary, short of an invasion.  For genuine refugees even five years on Manus Island will be no deterrent. People seeking better opportunities here should be able to be sorted quickly and returned.

Allowing asylum seekers to live in the community is sensible and humane. But not allowing them to work is just stupid.  We might as well get some contribution to Australia from them, instead of paying them an insufficent dole to sit around and forment trouble.

A lot of angry young men + insufficent resources to live reasonably well + no ability to work = Fill in the answer as you see fit. But Henry thinks the answer is 'TROUBLE'.

JUST IMAGINE ... though Henry cannot verify the numbers, YOU WILL GET THE POINT.

If you had bought $1,000.00 of Qantas shares one year ago, you would have $49.00 today.

If you bought $1,000.00 AIG shares one year ago,you would have $33.00 today!

If you bought $1,000.00 worth of Lehman Brothers shares one year ago,you would have $0.00 today!

BUT.... if you purchased $1,000.00 worth of beer one year ago,drank all the beer, then returned the aluminium cans for recycling....
YOU WOULD HAVE RECEIVED $214.00!!!

BASED ON THE ABOVE, THE BEST CURRENT INVESTMENT PLAN IS TO DRINK HEAVILY AND RECYCLE!

AND, DID YOU KNOW...

A recent study found that the average Aussie walks 900 MILES A YEAR!!!

Another study found that Aussies drink, on average, 22 GALLONS OF ALCOHOL A YEAR!!!

THAT MEANS THAT, ON AVERAGE, AUSSIES GET ..... 41 MILES TO THE GALLON.

MAKES YOU PROUD TO BE AN AUSSIE" DOESN'T IT?

IMAGE OF THE WEEK

Courtesy The Oz

The unambiguous bad news is that the asylum-and-better-future seekers are coming in ever larger number.

So there is another policy backflip - they will be incarcerated on the Australian mainland (and Tasmania) and released into the community with a low welfare payment and no right to work.

Here is the equation.  A lot of angry young men + insufficent resources to live reasonably well + no ability to work = Fill in the answer as you see fit. But Henry thinks the answer is 'TROUBLE'.

The retailers are moaning again, hoping to persuade the RBA to cut rates again - but see below. As someone said to Henry this week 'We all need to learn to live with lower growth', and the big retailers need to accept this sensible piece of advice.

It has been a big week for the RBA.

It's gov'nor, Glenn Stevens, spoke to CEDA, slightly short of Mount Olympus but mevertheless exciting.

Gov'nor Glenn, was back in 'glass half full' mode now that  he's over the hurdle of having to say, ever so gently, that there are serious risks facing us all.

In this latest speech he reviews: the terms of trade, which are still high and expected to remain high; mining investment as a ratio to GDP, is currently forecast to peak at 8 or 9 %, more than twice the two most recent peaks; household saving, which has recovered from a low of zero % of household income to about half of the ratios achieved in the 1960s and 1970s; and productivity, has shown a tiny upward movement, with more good news likely to follow.

As always, guv'nor Stevens' speech is well worth a read, and his graphs are to die for. Read the full speech here.

It RBA also released the minutes of its most recent board meeting.

The final two paragraphs of the minutes are as follows: 'Members noted that the staff's forecast was for underlying inflation to remain close to 2½ per cent over the next two years, apart from the temporary effect of the carbon price. With the disinflationary effect of the earlier exchange rate appreciation on tradable prices waning, this forecast was predicated on the assumption of ongoing productivity growth and some moderation in the growth of wages to contain domestic cost pressures.

'The Board's decision at the October meeting to reduce the cash rate had pushed borrowing interest rates a little lower relative to their average levels. The effects of the earlier reductions in the cash rate were, meanwhile, continuing to work their way through the economy, and members expected that further effects of these changes were yet to be observed. Members considered that further easing may be appropriate in the period ahead. However, at this meeting, with prices data for the September quarter slightly higher than expected and recent information on the world economy slightly more positive, the Board judged that the stance of monetary policy was appropriate for the time being'.
 
China may be stabilising (albeit at lower levels of activity than earlier assumed) and the US economy is showing improved performance, 'However, 'While significant uncertainty remained over the extent and effect of fiscal consolidation from early 2013, members noted that a positive resolution of this matter could result in better growth prospects'. This is a glass half full sort of comment, in which the glass contains some fine wine of the Grange range.)  More here.

Will interest rates rise after the December board meeting? On the latest indications, this is likely to be contingent on particular news items.  As guv'nor Stevens explained in his latest speech: 'As of the most recent meeting, as the minutes released earlier today show, the Board felt that further easing might be required over time. The Board was also conscious[good news that], though, that a significant easing of policy had already been put in place, the effects of which were still coming through and would be for a while. In addition, the latest inflation data, while not a major problem, were a bit on the high side, and the gloom internationally had lifted just a little. So it seemed prudent to sit still for the moment. ['Now, children, be still for a moment!'] Looking ahead, the question we will be asking is whether the current settings will appropriately foster conditions that will be consistent with our objectives – sustainable growth and inflation at 2–3 per cent'.

So your guess is as good as mine, gentle readers. All I know is that a lot of people are doing it tough out there, and next week it will be the turn of a lot of banking staff to feel the pain.

Other matters.

A nice comment on the Royal Commission, by Gary Scarrabelotti.

And Tiresias of Canberra weighs in on submarines.

You have asked for the views of Treasury and the RBA on implications of the USA going over the 'fiscal cliff'.  These views, sadly, are not available, so we have asked Henry to respond, no doubt inadequately.    

The first question is what would happen to the US and global economies?

Markets would be severely dislocated - equity prices would fall, reversing the jump when it looked like President Obama might avoid a cliff-jump.

US bond yields would almost certainly rise, reversing recent tendency to fall, as US would no longer be seen as a 'safe haven' for footloose money.  Bond yields in genuine 'safe haven' nations such as Germany and Australia would probably fall further.  The changes to relative yields, and falls in equity prices, would rapidly escalate if the crisis were prolonged.

The US economy would be headed for a severe recession.  The fear of this outcome might jolt Congress and the President into mindsets necessary to reach agreement on policies to solve the chronic US deficit-and-debt merry-go-round. If so, there would be no great worries for the rest of us.

If the arms of US governence remain locked in a wrestle that offers no solution, at least the long term debt problem of the USA would be less serious, and US businesses and households might understand their destiny is in their hands, not those of incompetent politicians.

An upsurge of private saving and debt reduction by households could be expected, plus even stronger than normal efforts to find paying jobs.  The latter reaction might be quite strong, as officials would have to announce cuts to welfare payments even bigger than those mandated by cliff-falling economics.

US business, however, would be doing its own deleveraging and de-hiring, adding to the general recessionary forces and fear of unemployment.

The US economy would fall quickly into serious recession.  How long it would last is uncertain.  We have great faith in the inherent dynamism of the US economy, but it would be in uncharted waters, at least by the standards of the past century.  The Great Depression of the 1930s is perhaps the best example, and it was long and it was brutal.

Partly this was due to the tightening of US monetary policy at just the wrong time, but we are confident that Chairman Bernanke would avoid this mistake.

Indeed, the US Fed would presumably increase the pace of money printing.

Tiresias comments: I do not doubt that Bernanke would “increase the pace of money printing”, but there must be some limit to the Fed’s love affair with the printing press? Surely a further increase in the money supply would push the US towards the a kind of FX doomsday and hyperinflation?  In any case, the US economy has had too many asset bubbles for its own good. Whatever happens, much of the phony wealth created by the asset bubbles and the grotesquely swollen money supply will have to be destroyed to make way for new wealth linked to actual output and productivity. The purpose of a crash (its only redeeming virtue) is that it acts like a bushfire that burns up the rubbish and releases nutrients for new growth. By avoiding/frustrating  the business cycle gov’ts have allowed the flammable stuff to build up to system-threatening proportions.

Sensible prediction is almost impossible, but we feel that the rate of unemployment in the USA would almost certainly reach 20 %. The ugly riots seen recently  in the streets of Athens and Madrid would be repeated across the USA, but with automatic assult rifles and worse in the hands of the rioters.

Once recovery began, we'd we watching out for signs of inflation.  Frankly, however, we would not be too worried about this.  A surge of inflation would further erode the real value of US bonds, and thus make easier the task of eliminating official US debt.

Our Chinese friends, who disproportionately own US bonds, would be mighty mad. As you said yourself, relations would be strained for a long time, perhaps not the 50 years of your (blind) prediction, but long enough to put considerable downward pressure on the US dollar, and offsetting upward pressure on the Euro and the Australian dollar.  China's growth would slow further, perhaps to a 'mere' 5 % per annum.

The rise of the Euro would worsen the Eurozone crisis.  So would the reduction of US imports from Eurozone nations.  Both factors would worsen the Eurozone recession. In fact 'deep depression' would be the summary for the heavily indebted nations of southern Europe, and who knows the political implications of that?

In Australia, the further fall of Chinese demand for commodities would mean another round of price cuts for exports of coal and iron ore, and indeed all of Australian exports. The Australian dollar would presumably fall, providing some relief for  the non-resource industries, but 'recession' rather than the current 'slower growth' would be the general expectation.  The government would presumably not urge Treasury to tighten fiscal policy further, so the promise of 'return to surplus' would need to be dropped, perhaps for several years.

We would, however, expect the Reserve Bank to cut interest rates further.  If pressure on the banks reappeared, almost certain, we would expect the government to again guarantee bank deposits and the overseas borrowings of Australian banks.

The global outlook absent sensible resolution of the US budget crisis is so horrific that one assumes that even the Tea Party Republicans will allow the President and the Speaker reach a civilised accomodation. But perhaps the Tea Party fanatics would prefer a collapse of the US economy and heavily armed protesters rioting in the streets. If this is the case, watch out, gentle readers, it will not be pretty. So why did Henry say: 'The benefit of a 'short sharp shock' for America now would be to capture everyone's attention and drive home a point made by Mr. Obama in his magnificent acceptance speech.  The answer to America's woes lies with households and businesses. The challenge is to abandon the creeping sense of entitlement and the reliance on bailouts on both a large and a small scale, and to reemphasise the need for innovation and entrepreneurial go-getting as the core values in American business'.

Provided the initial effects of the USA going over the fiscal cliff were as described, there would be time for everyone to get their acts together.  Please reread the start of the penultimate paragraph. But until America gets its own house in order, continued caution in investment policies is recommended.

Tiresias comments: Finally, I suspect that readers would be interested in some tips about how to protect themselves or even profit. My bet is (as always) stick to fuel (especially natural gas), minerals, food, timber and pharmaceuticals. The more daring  (that is the young and very ambitious) will put aside cash for the coming fire-sales (especially if civil order breaks down – remember the old saying, “when there is blood on the street, buy real estate!!!”)

I cannot speak for others, or advise people whose personal situation I do not know.  However, I can say the Thornton family wealth, such as it is, is long real estate, plenty of cash, some gold (in a safe-deposit box), only solid Australian shares (mainly resource companies and banks) and shares in leading global companies.

If the global economy turns out to be as bad as it could be, I'll wish I had been even more cautious, but there will be some money available for bargain hunting.

Writing off debt is as old as credit itself – hence the Biblical Jubilees and the “seisachtheia” (literally ‘shaking-off’) of Solon in Athens. But this needs to be balanced by geo-political factors. If the US writes off debt owed to foreigners one way or another, then we would be left with hundreds of millions of thrifty and very angry Chinese all wondering where the sacrifices of a generation have gone. Chinese-American co-operation would be a non-starter for about 50 years, at the very minimum.

The US might take a leaf out of Japan’s book. After WW2 the Japanese econocrats conned Macarthur into believing that the old Japanese plutocracy had been the prime constituency behind Japanese militarism (they weren’t, but that’s another story). The Occupation Gov’t forced the zaibatsu owners and major bankers into buying non-negotiable treasury bonds which soon became worthless during a contrived period of hyperinflation. This euthanased the old upper classes pretty effectively and the bureaucrats have been running Japan ever since.

Hyper-inflation would inevitably ruin the retiring baby boomers, the first truly mass rentier class in history. The last thing the US really needs is a newly pauperised class of tens of millions of angry voters ... or their children , who were counting on cashing in on inheriting the family home as windfall that would make good stagnant real wages. But this might be the only way out.

A Wall Street melt-down would not necessarily cripple US capitalism (which is going gang-busters, the majority of the leading companies fund growth via retained earnings and have little or no need for the share or bond market) but it would ruin small and medium investors and ensure that it would take decades for the vital, jobs-rich, corporate start-ups to recover.

The task for Obama is to convince his constituents that soaking the rich (or apparent rich) is no  substitute for a sustainable, productive, economy in the long run. And also to convince Romney’s constituents that the generation-long experiment of government without taxation and mass debt-bondage in lieu of stagnant real wages is no longer viable. There is no evidence so far that Obama understands either challenge.

The real task for the rest of the world is to stop taking the US for granted. The US cannot function as the consumer of last resort. Neither can the US simply adjust to globalisation by yielding more and more market share of its manufacturing.

What we in Oz really need is advice from our leaders on what they will do in the event of the US going over the cliff, either in terms of fiscal or monetary policy. I’d like to know if Australian depositors will be shielded and how and at what cost. The current silence is deafening.

Ed: We invite Treasury and the RBA to respond, or other readers for that matter. Contact Henry here.

Somehow in a recent car trip she got onto the subject of the US recovery, the so-called 'fiscal cliff' and Henry's view that it may be best to allow the USA to go over the cliff.  (This iconoclastic view has since been echoed by Judith Sloan and possibly by a raddled Alan Greenspan who was wittering on about policy failures, including his own, on a talk show viewed only partly during the weekend.)

Mrs T reminded Henry that our son, Bert, was against the bailouts of US banks (and car makers) at the time.

'No bailouts, full scale depression', was Henry's reiterated neanderthal grunt.

'What about Iceland?, Mrs T responded, 'I hear it's doing not so badly'.

I agreed Iceland was a special case but stuck to my guns at the time.

This morning I decided to check up on the progress of this tiny, icey nation whose Prime Minister famously told the people to learn to go fishing again. (This suggestion is a rare example of a leader who told his nation the facts of life, but for his pains he was booted out and is being prosecuted.)

Courtesy of Bloomberg, here is the potted story. 

'Few countries blew up more spectacularly than Iceland in the 2008 financial crisis. The local stock market plunged 90 percent; unemployment rose ninefold; inflation shot to more than 18 percent; the country’s biggest banks all failed.

'Since then, Iceland has turned in a pretty impressive performance. It has repaid International Monetary Fund rescue loans ahead of schedule. Growth this year will be about 2.5 percent, better than most developed economies. Unemployment has fallen by half. In February, Fitch Ratings restored the country’s investment-grade status, approvingly citing its “unorthodox crisis policy response.”

'You can say that again. Iceland’s approach was the polar opposite of the U.S. and Europe, which rescued their banks and did little to aid indebted homeowners. Although lessons drawn from Iceland, with just 320,000 people and an economy based on fishing, aluminum production and tourism, might not be readily transferable to bigger countries, its rebound suggests there’s more than one way to recover from a financial meltdown'.

The government offered homeowners with negative equity debt write-offs of amounts above 110 % of the property value.  Homeowners were provided with means-tested help to reduce mortgage-interest expenses. Then the Supreme court decreed that debts in foreign currencies were illegal - another effective write-off as repayments could be made in greatly devalued krona.

Iceland also reduced government spending and increased revenue by raising taxes and cutting deductions that mainly benefited the well-off. A deficit that reached 13.5 percent of gross domestic product in 2009 fell to 2.3 percent last year. The IMF predicts Iceland will have a primary surplus (excluding interest on debt) of 1.5 percent this year.

'As for the banking industry, Iceland never had an option to adopt the too-big-to-fail policy that led governments in the U.S. and Europe to prop up their banks. Assets held by Iceland’s three largest lenders had swelled to nine times the size of the economy. After they defaulted on $85 billion in debt, the government seized control of them.

'Initial plans to repay foreign creditors, mostly U.K. and Dutch depositors, collapsed in 2009 as street protests led to the demise of the government. Repayment of obligations to overseas creditors was either postponed or written off, leaving the reconstituted banks with much smaller domestic operations. Twice, Icelanders rejected national referendums on repaying foreign depositors, who are pressing their claims in European courts'.

And in conclusion: 'Devaluation of the kind Iceland suffered is never fun. Reneging on debts leaves a legacy of violated trust. But it still looks better than recession with no obvious way out'.

Much food for thought, gentle readers.  As we have been saying like a broken record, currency depreciation and debt reduction (by refusing to pay if the burden is too great) is the only civilised solution to the sort of mess the USA and the 'southern' Eurozone nations have landed themselves in.

And on the weakening Australian economy, a nice summary here.

David Uren, 'Worrying Signs of a softer Economy', The Australian, November 19, 2012.

Work through his article in today's Oz and you may agree, if you do not do so already.

In the Thornton family, a modern 'mixed' (with respect to lapsed religions) marriage with kids who went to non-catholic (state plus private) schools, we regard the government's ploy as designed chiefly to have yet another shot at Tony Abbott, a professed catholic.

The fact that Australian politics is at a low ebb has been demonstrated in a Newspoll taht reports people's overall attitudes rather than the usual football scores.
 
'A TURBULENT period in national affairs has left Australians disillusioned with their federal system' says Imre Salusinszky.

Not much economic news this week, apart from the global outlook looking more gruesome, especially in Europe, and divergent economic news in Australia, a classic sign of a turning point.

Judith Sloan today says she is 'one of the few economists around who thinks the appropriate response to the fiscal cliff in the US is to jump. Everyone else wants congress to dream up some sort of compromise that will only kick the can down the road'.

Not 'the only one', presumably because she noticed Henry's pointed comment on the morning after President Obama's reelection.

'The benefit of a 'short sharp shock' for America now [going over the fiscal cliff] would be to capture everyone's attention and drive home a point made by Mr. Obama in his magnificent acceptance speech.  The answer to America's woes lies with households and businesses. The challenge is to abandon the creeping sense of entitlement and the reliance on bailouts on both a large and a small scale, and to reemphasise the need for innovation and entrepreneurial go-getting as the core values in American business'.

Australia's future submarine program is discussed this week by Minister for Defence Materiel, Jason Clare, a man likely to play a far larger role in the next Labor government.

Henry's comment is here.  It concludes:

'We need working and crewed submarines far sooner than currently planned, and these should be an effective deterrent.  'Effective deterrent' means in my view the ability to inflict great damage on an enemy's home nation, which means powerful missiles armed with even more powerful bombs fired from at least six powerful submarines lurking at any one time undetected somewhere in the Pacific or Indian Oceans.

'And we also have to rebuild our defence capability generally, now hampered by a budget at its lowest level in relation to GDP since 1938'.

New milestones

Henry's site now boasts (if that is the right word) over 2450 blogs and more than 6500 articles.  An expanding digital time capsule.

Image of the week.

Courtesy The Oz

'The Future Submarine Project will be the biggest and most complex defence project Australia has ever embarked upon.

'It will involve thousands of workers and hundreds of companies.

'It will involve Federal and State Governments, Defence and industry, universities and technical colleges working together.

'By the time all 12 are built – we will need to replace the first.

'That means it's not like other defence projects.

'We are not just building 12 submarines – we are building an industry.

One that could potentially last for a century or more'.

This is the vision laid down by Jason Clare, MP, Minister for Home Affairs, Justice and Defence Materiel.  The occasion was 6th Biennial Conference of the Submarine Institute of Australia, held in Canberra earleir this week.  The vision is idealistic but utterly unrealistic.  It deserves to be read carefully and discussed by all Australians in the coming BBQ season.  Here is a link.

I commend this contribution by a politician who is obviously a man with a big future in his chosen field of endeavour.

But I must question his basic premise, which is that  Australia can build twelve state-of-the-art submarines and in the process build an industry from the smoking ruin of a hollowed out industrial base that cannot even keep our current, home built, Collins Class submarines running effectively.

An economist's perspective.

The overwhelming view of any economist worth his or her salt is that a nation that wishes to be successful needs to focus on doing what it does best.

In Australia's case, this is agriculture, mining, medicine, education, sport, tourism and consumerism.

Sadly it is not ship building, nor is it highly skilled manufacturing generally.  Things a nation cannot do at world standard are best imported from people, like Americans and Brits in the case of submarines, who are best in class.

The current government has also demonstrated that it is not good at implementing even small projects, such as putting pink batts into people's ceilings, keeping the prices of water and electricity under control or economically providing fast internet access to all Australians.  Nor has this government, or its predecessor, managed to keep the Collins Class submarines working, and should be noted that at present only one crew can go to sea at any one time, which conveniently matches the usual limited availability of submarines.  (So much for our ability to recruit skilled seafarers or to maintain existing submarines.) These strategic shortages mock Minister Clare's vision of Australian built submarines protecting us from invasion.

There is also the whole question of whether Australia's defence forces generally could resist invasion once the enemy had reached our shores. To be sure, most of our bridges would collapse under the weight of their tanks and, if coming from the north, an enemy might end up, like Burke and Wills, expiring in the desert for lack of food and water.

But, in all seriousness, we need working and crewed submarines far sooner than currently planned, and these should provide an effective deterrent.  'Effective deterrent' means in my view the ability to inflict great damage on an enemy's home nation, which means powerful missiles armed with even more powerful bombs fired from at least six powerful submarines lurking at any one time undetected somewhere in the Pacific or Indian Oceans.

And we also have to rebuild our defence capability generally, now hampered by a budget at its lowest level in relation to GDP since 1938.

Henry's full discussion is available here.

Further reading

Submarines Downunder, January 2012.

Defending Australia's manufacturing. , September 2011.

Australia's independence strategy. , December 2010.

The Westpac-Melbourne Institute Consumer Confidence jumped in November, up by 5.2 % to 104.3, the highest reading since April 2011.  The NAB said: 'This came as a bit of a surprise, after the RBA went against expectations in November and left interest rates on hold'. 

'A plausible explanation is that the 150 basis points of rate cuts since October is having a positive effect on consumer sentiment, augmented by the uptrend in house prices which has been evident over the past three months'.

Wages growth in the September quarter came in with a rise of 0.7 %, slowing from 1 % in June quarter for an annual rate of growth of 3.7 % (this measure is hourly rates of pay ex bonuses).  Private wages slowed to 0.8 % from 0.9 % or 3.7 % in the year to September quarter.

Government sector wages growth slowed from 1 % in June quarter to 0.7 % in September quarter or 3.4 % in the year to September.  The NAB speculates, plausibly enough, that this reflects the fiscal tightening which is underway across the country.

This is good news for the inflation outlook.  Annualising the private sector component gives 3.2 %, a modest rate of growth and consistent with core inflation running within the RBA target band ahead.

The NAB's economics team says: 'This will give the RBA confidence in the inflation outlook they published last Friday, where they anticipated moderating wages pressures, because of the soft labour market'.

There is no simple message for economic prospects or the outlook for interest rate.  A soft NAB business survey was reported yesterday, and today we get slower wages growth and a surprise bounce in consumer confidence. The team at NAB asks: 'But how do we reconcile perkier consumers and gloomier businesses?

Possibly the consumer confidence survey is a rogue reading, as the Roy Morgan measure of consumer confidence did not change.

Henry observes that conflicting signals from normally reliable economic indicators are a classic sign of a turning point.

A sign of an economy 'wobbling on the edge'?

Further reading.

David Uren, 'Worrying Signs of a softer Economy', The Australian, November 19, 2012.

The summary is: 'Business conditions stumble to weakest level in more than three years, with wholesale and manufacturing conditions especially subdued. Capex index points to further softening in business investment, credit demand fell to record levels, while forward looking indicators suggest Q4 clearly below trend. Confidence also edges lower. Activity forecasts unchanged but 25bp February rate cut on the cards, providing modest Q4 CPI.

Further comment also interesting.

'Consistent with fairly uninspiring activity readings, indicators of future demand (forward orders, capital expenditure and capacity utilisation) were poor and point to continued soft near-term demand. The survey’s capital expenditure index fell to its lowest level since August 2009, suggesting the brakes may be tightening on the business investment boom – especially mining. Overall, the survey implies a pronounced slowing in underlying demand and GDP growth in December quarter 2012, to around 2¾% and 2-2¼% respectively – clearly below trend.

'Labour costs growth eased again in October, consistent with a softening in employment conditions. Product prices growth remained subdued, while purchase costs pressures rose a touch. Retail prices growth was weak'.

Henry suggests that you reread the RBA statement on Melbourne Cup Day, linked here.

While there is nothing totally contradicting the NAB's report, RBA's tone is distinctly cheerier.

A recently released Research Discussion Paper documents just how uncertain are the RBA's forecasts.

It is not just the global economy that is edgy and uncertain.

Greek economy - and Spain's, Italy, Portugal and Ireland - sometimes called the PIIGS

Did anyone else see the ABC's wonderful feature overnight on what some enterprising Greeks are doing to stave off the effects of the crisis - now at Great Depression when 20 % of key working age people are unemployed and 58 % of young people. 'Going back to the land' is the answer, where in a worst case veges can be grown to feed the family.

At the highest level, 'Divisions over Greece burst into the open on Monday night when Christine Lagarde, the IMF chief, publicly contradicted Jean-Claude Juncker, chair of the eurogroup of finance ministers, over whether they had agreed to give Greece two more years to get its burgeoning debt levels down to 120 per cent of economic output'.  More here.

The only viable solution, for Greece, Spain, perhaps Italy, probably Portugal and Ireland, involves two radical policy changes: repudiate debt (or have at least half of it forgiven); and devalue the local currency.

These are both actions that could only be achieved if the relevant nations left the constraint of the Eurozone, and there would be major adverse consequences for the Eurozone banks.

The suffering nations and their failed economies, must be given the relief that these radical policies demand, or their peoples will demand political solutions that few of us would relish.

Australian politics

Paul Kelly today compares Obama's campaign against Romney with Gillard's campaign against Abbott.

Certainly worth a read, and some careful thought if you are a member of the coalition leadership group.

Read on here.