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Henry Thornton - Contributors: A discussion of economic, social and political issues Blogs
Manufacturing - who can help and how
Date: Tuesday, September 06, 2011
Author: Henry Thornton

US jobs fail to rise and double dip recession looks more likely.

Europe debt levels coincide with rising fears of the breakup of the Euro, bad debts for banks and forced austerity.

Global economic and financial volatility rules and fear stalk global markets.

There is general agreement that Australian interest rates are on hold at least until global financial volatility declines to the point that reliable economic prediction is again possible.

The government's woes are now so entrenchged that it is having additional negative impact on business and household confidence.

The Reserve Bank has signalled that interest rates are on hold for the forseeable future.  I have no argument with that decision.  Global financial volatility is worsening global economic uncertainty.  While Australia’s overall inflation is predicted to exceed the RBA’s target, this is not by such a margin that great damage will be done if the RBA waits for global uncertainties to be resolved.

If things become sufficiently gruesome, either internationally or domestically, inflation will cease to be a problem and the next move in interest rates might be downward, as some bold souls have predicted.

The topic of Australia's manufacturing capacity has been much discussed in recent weeks, and in particular what opposition leader Tony Abborr calls 'heavy manufacturing' and Henry calls 'strategic manufacturing'.

While free trade is the modern economists’ mantra, the USA, Europe and Japan all protect their agricultural industries.  Furthermore, in other strategic areas, including defence, their rules of engagement clearly favour local industry, and why not, one is forced to ask?  While-ever the possibility of serious global conflict exists, no sensible nation should rely entirely on global free trade, trade that will immediately be disrupted in any serious conflict.

There are three things Australia can do to promote 'strategic manufacturing', and the first two will help manufacturing generally and other non-mining industries.

The first is to implement a rersponsible fiscal policy. The economy cannot accommodate massive spending on mining as well as wasteful, excessive and unnecessary government spending, and the net result is interest rates higher than they need be, a stronger currency than there need be and the squeeze on non-mining industries that we are now experiencing.  This ‘crowding out’ is a major consequence of inadequate fiscal policy and will continue unless and until a responsible government eliminates the excessive government activity.

A second thing that a responsible government could do, having achieved a substantial budget surplus, is to create a sovereign wealth fund that places almost all of its investments offshore.  Currency outflows from such a fund will ameliorate the rise in the value of the Australian dollar while building a war chest of spending power for use when the mining boom subsides or Australia is faced with a serious geopolitical risk.

The final thing that a responsible government could do would be to remove impediments to non-mining activity.  Cutting useless government activity will do this across all industrial sectors, but for strategic manufacturing I have far more targeted actions in mind. Australia’s current defence establishment is notoriously focused on ‘inter-operability’ with allies, especially our great American allies.  The cost is the demise of the ‘inter-operability’ with Australian industry that was so helpful in WWII.

I present three examples of what I regard as inappropriate treatment of Australia’s strategic manufacturing sector.

These concern ther Joint Strike Fighter project, the 'light-weight Bushmaster' project where anti-protection was implemented and the treatment of Metal Storm Ltd, not unlike the attitude of Australia Inc to the locally developed solar energy generation now used widely in China.

There are calls for the RBA to help by going easy with monetary policy, which are clearly wrong.

How can Glenn Stevens and the Reserve Bank help solve the problems of manufacturing, or non-mining industries more generally.?  The answer is obvious. Keeping interest rates lower than needed to contain inflation will do nothing to help Australian industry, and inflation will damage all industries.

It is the government's job to implement, the maximum safeguards for manufacturing and indeed for other non-mining industries.

Henry's fuller discussion is available here, or in today's Australian.

The travellers

Today we headed for Darwin to put the car on the train to Adelaide.

Mrs Thornton insisted, of course, on the compulsory viewing and route march.

We looked from a 'hide' over a vast lilly-filled lagoon with birds and no doubt man eating salt-water crocodiles hiding beneath the lilly pads.

The walk was through hideously hot dry scrub, but after half an hour or so a nice view over a vast bird nesting area, including multiple Magpie Geese.

The path was quite a way from the billabong, but frequent signs warned that 'crocodiles have been seen close to the paths'. Henry has been reading We of the Never-Never, published in 1902 by Mrs Aeneas Gunn.

Mrs Gunn helped pioneer the region we were travelling through, her husband managing Esley Station until he tragically died after not much more that a year of married bliss.

The book makes fascinating reading more than a century after the events it describes, and is both informative and quite moving.

Mrs T sparked right up on the the road to Darwin as we were passed by a long convoy of military vehicles including tanks, trucks and armoured cars with men in full combat gear behind wicked looking weapons - heading south.

Tomoow the car goes on the Ghan to Adelaide and we head for the airport to fly to Adelaide.

Global policy gridlock
Date: Wednesday, February 24, 2016
Author: Henry Thornton

The currency wars continue - Europe and Japan cutting rates below zero; China is in strife as it attempts to pivot to consumerism; America attempting to move slowly toward normality but now its monetary Chief, Janet Yellen is hinting that a stalling economy may stay her hand. The worry is that large deficits and already easy money leaves little room to move. Are the global policy-makers 'out of ammo?' the Economist asks this week.

The venerable mag asserts the 'faith in monetary policy is wavering'.  This loss of faith is as good a reason as any for depressed Animal Spirits producing market volatility and losses in values of share portfolios.  But more generally, there is loss of faith in the ability of governments to restore strong growth. The most worrying example is Japan. After its massive asset crash in 1989 and 1990 it has struggled to produce any growth, and an aging population is a further core reason for poor economic performance.  The western world suffered a substantial asset crash in 2007 and 2008 which produced dramatic cuts to cash rates of interest, bailouts of failing financial institutions and fiscal expansion just about everywhere.

Most developed nations are also suffering slow or even negative population growth, hardly a reason for cheerful investors or powerful investment plans.

While many governments are struggling to restore fiscal discipline, such actions run counter to the extreme ease of monetary policy.  The ever optimistic Economist says governments are not powerless.  Sensible infrastructure programs would create jobs and raise national productivity.  So would 'economic reform', and many economists would if asked line up to present their agendas. Slashing bloated bundles of red tape could also help create growth as (in theory) would the streams of immigrants from the Middle East into Europe or Mexicans into the USA.  Trouble is, timid governments avoid policy agendas, governments are usually not so good at picking effective infrastructure projects, and refugees are not always job ready, or even culturally ready.

In any case, says the mag, politicians 'are weak and too quarrelsome to act'. The outlook for effective political leadership is bleak. 'America's political establishment is riven;  Japan's politicians are too timid to confront lobbies; and the euro area seems institutionally incapable of uniting around new policies'.

Perhaps, as the Economist says, 'a full blown crisis will force action' upon timid pollies. But this is by no means certain. 'Behind the worry that central banks can no longer exert control is an even deeper fear. It is that the liberal, centrist politicians are not up to the job'.

The full article is available here.

There are useful supporting articles, especially 'Slight of hand' on p 65.  If you do not subscribe, the edition of 20-26 will be readily available and is well worth the price.

And here is a useful article on the issue of negative interest rates, now in place in half-a-dozen nations.

Saturday Sanity Break, 20 February 2016
Date: Saturday, February 20, 2016
Author: Henry Thornton

It will be long, and it will be hard, like a test match of infinite duration on a flat pitch against boring bowlers.  Reminds one of the good old days before the Big Bash and before even the ODI was invented, with Scott Morrison as Bill Lawry and Malcolm as Richie Benaud.  The bowlers are the dullest of pommie trundlers, whose modern political counterparts are Bill Shorten and Chris Bowen, with the odd over from Tanya Plibersek. Looks like a boring season, with no Warners, or Voges or Khawajas on the home side and no demon quicks or cunning twisters among the visiting ranks.

Still, it will be one for the serious fan, Australia’s political tragics. Niki Savva reminded us all this week that Cap’n Turnbull has only to appeal to the centre of Australian voters to hold his place. Around the world – in the USA and UK at least - the ‘progressive’ parties are moving to the left while at least in the USA the less progressive side seems by the evidence of the success so far of Messrs Trump and Cruz to be well to the right.  Mr Shorten’s espousal of government spending and continue growth of Australia’s national debt gives him a renewed place among the lefties – Jim Cairns rather that Paul Keating.

But I digress. As Niki put it: ‘Malcolm Turnbull will succeed as Prime Minister of the Coalition government if he follows to the letter the prescription he articulated so well before Monday’s partyroom meeting.

‘Everything he said he would do, or that needs to be done, is the opposite of what occurred under Tony Abbott’s rule, which ultimately led to the latter’s ruin. Proper cabinet processes have to be restored; a competent energetic frontbench has to be put in place; consultation must occur within an infinite circle; respect has to be shown by the leader, his staff and all other staff towards all MPs regardless of their views; a decent communications strategy has to be applied, with the right personnel running it, ensuring policies are properly explained from inception to execution’.

Here is a link to Niki’s regular contributions.

From where Henry sits as a (self-funded) almost ‘retired’ (from making money) person it seems sad that Australia’s current economic woes cannot be fixed a bit faster and more decisively.  More like the cricketing era of Ian Chappell or Ricky Ponting, or perhaps the era of Steve Smith we are entering.  Still, if the major parties combine to get rid of the policy-free zones that represent such a blocking force in the Senate, or if Cap’n Turnbull remains popular and wins a double dissolution election, faster and more decisive remedial action may be possible.

Economy and markets

Global experts reported in an insert to Friday’s Oz, ‘including two Nobel laureates’ are generally gloomy about the state of global economies. Eugene Fama says: ‘China will hit a wall, or explode, unless they figure out how to make their political system much more open’. The author of this fascinating compilation, Adam Creighton, concludes by bewailing the state of economics: ‘mainstream economists’ comprehensive failure to foresee the financial crisis has burst the discipline’s pretence to a uniquely privileged into how the world works’.

Judging by Friday’s Fin, however, professional investors have overtaken the disappointing economists. “Time to buy shares’ was the big message, obviously a mistake if the twelve eminent economists’ gloom about the global economy is correct.

Henry remains in the camp of the gloomsters.


Fiona Prior visits the colourful artist Grayson Perry's exhibition My Pretty Little Art Career at Sydney's MCA.
"As you walk into the Grayson Perry exhibition, over a giant, golden teddy bear on the MCA’s stairway, then into the lifts with “My Pretty Little Art Career” graffiti, then into Grayson’s installed works on level three ‒ vast in scope and ranging from vibrant ceramics, to intricate silk embroidery, to oversized tapestries, to frocks, sketchbooks, videos … all in alluring splashes and squiggles of vibrant colours ‒ you think ‘Oh my God how gorgeous!’
Get up closer and you just think ‘Oh my God!’ as some of the details on the works reveal themselves as phalluses and fetishized scenes, or intricate maps (somewhat like a Tolkien rendition of Middle Earth) revealing carnage as every minority group from non-smokers through Catholics, through to homosexuals, through to the Royal family is bombing the hell out of everyone else’s minority settlement. In short, you realise Perry’s work is highly political. More here

And what about the stupidity of trying to tax backpackers? Two readers point it out, short and sweet.


In the real world of sport, Australia started well in its task of farewelling Brendon McCallum with another good thrashing, at least until McCallum himself came to the crease and began to hit the bowlers over or into the ropes   with gay abandon.

Friday night Caaarlton!’s largely new, very young players took on the might of the Threepeat premiers and we prayed in advance that the decimation would not be too brutal. In the event, the Hawkes were kind and the newBlues lost by only 21 points. Actually it was a low scoring game and Caaaaarlton! scored most of its points in the first quarter. Report here.

Image of the week

To be posted in the meantime, see Nicholson on p 37 of the weekend Oz

Saturday Sanity Break, 13 February 2016
Date: Saturday, February 13, 2016
Author: Henry Thornton

It seems that the economic case for substantial cuts to income tax funded by a rise in the rate of the GST is insufficiently large to be worth pursuing. While we are not privy to the evidence on this matter, one might have thought that a higher GST discouraging consumption (after compensating those people in genuine need) with income tax cuts providing greater incentive to work and to invest would provide some net stimulus to growth.

Cutting welfare entitlements would also boost efforts to work and to save for old age but will of course be agonisingly difficult as Joe Hockey's call for an end to the age of entitlement seems to have been lost with its lack of selling and his move to Washington.

Meanwhile the deeper thinkers are beginning to conclude that the western world is facing a long period of slow growth.  Aging populations, entrenched unfunded welfare entitlements, the steady rise of corporate and government debt, the shock to Animal Spirits from the GFC and the apparent onset of a bear global market in equities will all act to stifle growth.  Bold governments may by economic reform including a focus on innovation provide a countervailing force, but Henry advises readers not to rely on such initiatives coming to your nation, state or local council. 


Planned retirements and effective sackings have allowed a  bold reshuffle to refresh the government's ranks. More women and younger blokes in cabinet and promotion of some highly competent new ministers and assistant ministers all improve the talent base. Warren Truss and Andrew Robb will be missed, while Barnaby Joyce and Steve Ciobo will bring fresh faces and feet in large shoes.  Fiona Nash, newly elected Deputy leader of the Nats, provides a breath of fresh air to a party previously largely associated with rather elderly males.

Bill Shorten continues to sneer at any effort of the Turnbull government and having seen off (as he sees it) any thought of a higher rate of GST now offers in addition to a general tendency to soak the rich a limit on negative gearing and a reduction to one quarter to the discount on income tax for capital gains.  Great way to discourage entrepreneurial flair, Mr Shorten.

If you are deeply frustrated by local politics and puzzled by the state of American politics, here is the gold standard of politics - President Ronald Reagan's finest moments.


Henry and Mrs T were treated last week to preview showing of a delightful movie called Brooklyn. Reflecting as it does on the difficulties of a mixed (in terms of national origin of participants) marriage it will provide food for thought in today's highly mobile young people.
Here is a link to the trailer.

Fiona Prior sees the Oscar nominated Carol featuring Cate Blanchett.

"I must admit that I am Cate Blanchett-saturated and it was only at the wish of a dear friend that we went to see Carol, one of Cate Blanchett’s latest cinematic triumphs! The result of this excursion was that both the film and my friend had me viewing Ms Blanchett and her work from an entirely different perspective, a complete ‘zoom out’ from my usual position. More here.


Steve Smith won the toss and invited the brave black caps to bat on a pitch tinged with green. Just as well that Mitch Johnson and Mitch Stark were not bowling but their replacements played well and got the job done. Then our brave openers staged a mini-collapse but Capn Steve, Usman Khawaja (who earlier took a spectacular boundary catch) and Adam Voges (who survived due to an 'horrific' umpiring decision) settled in to build a large lead by the end of day two.

Soon footy will replace cricket in most households and this cannot come too soon for Henry. Not that he expects too much from Caaarlton! but he hopes they will at least lift themselves from the bottom of the ladder. Geelong are being promoted as the coming power, but Hawthorn, West Coast, Richmond and perhaps even Adelaide should make up half of the top spots in the 'eight'.  And, as someone once said, it is better to travel than to arrive.

Image of the week.

Courtesy The Oz

Saturday Sanity Break, 6 February 2016
Date: Saturday, February 06, 2016
Author: Henry Thornton

Here's the thing. The government's line is that budget woes will be fixed by cutting spending. An increase in the rate at which GST is levied on the current narrow base is still in the frame but widening the base to include health and education seems very unlikely.  Any GST changes will be used just to increase the overall efficiency of tax collection and will involve rigorous focus on 'fairness'

The enthusiastic amateurs who hold the balance of power in the Senate are most unlikely to agree to any serious attempts to cut spending.  Previous Treasurers Keating and Costello have urged the current Treasurer to follow their heroic efforts and cut spending.  Neither seem prepared to recognise Senate obstructionism that will almost certainly frustrate efforts to fix the budget in the most desirable way.  Any changes to superannuation rules, except possibly the rational approach of allowing a 15 % lower income tax on contributions, will be chicken feed but will presumably pass the 'fairness' test.

How cuts to government spending on health, education, disabled people and other pensioners can possibly be regarded by a majority of Australians is yet to be explained. Older Australians will be strongly interested in increased efficiency of tax collection and especially cuts to income tax, despite reaching a point in their lives where income, except pension income, is likely to be severely curtailed. 

If they are taxed on their pension incomes, self-financed despite paying scandalously high income tax throughout a long period of earning, this will be grossly unfair.  But this idea will be rejected by Labor and the Greens, and current cross-bench Senators. This bundle of rationality-deniers will be highly vulnerable to a 'Save our Super' party.  Is there a (privately funded) pensioner of statue who will stand up for all the Seniors who do not rely on public funding of their retirement incomes?

Lots of discussion in the serious press about the dilemma facing Messrs Turnbull and Scott, and their colleagues. 

Will they take a punt of real reform and risk being dry-gulched by a last-minute change of Labor leader?  Hawkie is probably too Senior to run, but Paul Keating looks like he'd welcome another shot at the (refurbished) Lodge.

The US presidential race has begun and is looking most interesting for decades.  Can Hillary hold off Bernie, an engaging old socialist? Will the younger men send Mr Trump  back to property development?  Will Mr Bloomberg provide a moderate alternative to relatively radical likely to emerge from the big party pre-selections.  Greg Sheridan today provides a fine overview of the coming 'revolution in American politics.

The RBA has maintained its relatively cheers review of the global and Australian economy. Its main caveat is the China question - 'Is the Chinese economy in far worse shape that official Chinese and global (IMF, BIS, etc) views assume. 

Here is the RBA's new year's gift to all economists and economy-watchers. It should be read carefully and thoughtfully.


Fiona Prior sees Room by director Lenny Abrahamson, based on the novel by Emma Donoghue.

I have never considered a movie a life changer until I viewed Room. This movie will have you riveted, so perfectly do ‘Ma’ (Brie Larson) and ‘Jack’ (Jacob Tremblay) introduce you to their world. That this world is a 10 foot by 10 foot room where Brie has been imprisoned since kidnapped as a school girl is the core of this movie. How Ma and Jack navigate their reality; her beloved Jack being the child of her own and her captor is the film’s exploration, and  we soon discover that Ma is  bringing up Jack to believe that ‘room’ is really all there is, and that nothing exists beyond its parameters … as you would. More here...


A lawyer friend has been to see The Big Short.  Greatly enjoyed it, and sent the following link to an interview with the 'genius who predicted the whole mess'.


Maybe Henry's 3 AM worries are not so silly after all.



The rampaging 'Black Caps' belted the Australian ODI team at Eden Park where apparently lies an immense hoodoo. With all the top batters failing, the current form batter, Usman Khawaja, has finally been given a chance. We wish him, and the team, better luck today.

Footy is mostly off the radar but Henry was buoyed to see young Patrick Cripps has been signed by Caaaarlton! until 2019.  Pity about all that talk about his future as a captain, but he's handled that ok.  Key Essendon players are appealing against their being booted out for a year as drug cheats.  The court is in Switzerland and the proceedings are in French so one wonders how the lads will cope.  'Pourquoi avez-vous déranger moi?' ( 'Why are you bothering me?') may well be the response of the Judge.

Great upset in the Women's final of the Aussie Open was the highlight after two weeks of vigorous grunting and growling. Serena was the popular finalist but Angelique Kerber won a lot of fans for a near perfect game and great persistence in the long points.  Also a large bucket of money. 

Biggest sporting story of the week was the government's threat to cut funding to sports that do not provide equal travel opportunities to women and men.  Ridiculous that in many cases women travel economy/premium economy while men travel business class. Game over male sports administrators!

(Belated) Image of the week.

Courtesy The Oz

The Unknown Universe
Date: Thursday, February 04, 2016
Author: Henry Thornton

Astronomers believe that the Sun and other stars are nuclear furnaces. The Sun experiences times of great sunspot activity, solar flares that have fried the world’s electronic systems and times of relatively quiescent activity. This are the arresting facts summarised by one Stewart Clark in one of the ten chapters a fine book titled The Unknown Universe.

The book is a treasure trove of facts about the development of astronomy and physics. It is well written, engaging and tells its tales in a thinking person’s version of an exciting sci-fi novel.  Quite suddenly, I was captivated by a dip into the world’s climate cycles and understated advice on vital context for the debate on global warming.

I shall quote freely. ‘The only visible marks on the solar surface are sunspots’. Sometimes there are many and occasionally there are none. A German chemist named Heinrich Schwabe was encouraged to begin a study of the matter. He sold his business, purchased and set up a fine telescope and on every fine day he recorded the number of sunspots. (How Herr Schwabe lived is not recorded by Mr Clark.)

After around 15 years of patient and diligent recording he found a pattern of increasing numbers of sunspots from a low base, reaching a peak and then falling rapidly toward zero, the full ‘cycle’ taking around 11 years.  (At university in the 1960s, proto-economists learned that there was a school of economics that linked sunspots to the so-called ‘trade cycle’).

Sunspots are apparently magnetic, and in years of their greatest number, compasses on earth deviate significantly from true north, a fact known by mariners. Large numbers of sunspots ‘forewarn of gigantic solar flares that can unleash a billion times more energy that an atomic bomb’. Such an event happened in 1859 and is known as the ‘Carrington event’. The electronic technology of the time was the telegraph, which ‘stopped working in spectacular fashion as the aurorae spread across the sky’. Telegraph operators were electrocuted, offices burst into flames, global communication and navigation stopped.

At the start of the twentieth century, a pair of astronomers, Walter Maunder and his wife Annie, began to study a different type of event way back in the second half of the seventeenth century.  At this time, there was a long period (from 1645 to 1715) when there were virtually no sunspots. ‘This grand minimum coincides with the worst years of the so-called Little Ice Age.’ This catchy name is misleading, says Clark, because it was not a time of continuous frost, though Northern Europe was ‘beset by a greater-than-average number of savagely cold winters’.

Apart from northern Europe, Iceland became locked in miles of sea ice and many people died or left for warmer climes. New York harbour froze over and people could walk from Manhattan to Staten Island.

And it was not the first such event people could recall, or at least read about. Between 1420 and 1570, the Viking colonies on Greenland were turned ‘from fertile farmlands to arctic wastelands'. And, it turned out, this was a time of a plunge in the number of sunspots – though for economists it seems the so-called ‘cycles’ were shorter.

This is a controversial matter. Now the party line is that ‘man-made pollution is creating a greenhouse effect that is catastrophically warming the planet’.  And ‘to suggest the Sun is in any way responsible for what is happening in Earth’s atmosphere lays one open to be branded a “climate sceptic”.’ 

Models are all we have to try to sort out cause and effect and we all know, or should know, that models models can be horribly incomplete or just plain wrong. A case in point is the plausible claim that it is ‘Animal Spirits’ that has most to do with the ups and down of economies, yet such influences are (so it is said) impossible to measure and hard to understand or to put into models. (This author will have more to say on this specific matter in due course.)

The bald fact is that before the industrial revolution, and the subsequent rise of man-made greenhouse gas emissions, the planet had large variations in it’s climate. So any reasonably accurate modelling must take this fact into account along with the current (partial) models of the green-house gas issue.

As if providing an experiment, in 2007, the sunspots disappeared. No-one expected much sunspot activity for a bit but then there would be a large upswing. Then NASA scientists suggested – based on their models - that the upswing might be an especially violent one. With an obvious risk of another Carrington event imposed on a world that is far more dependent on electronics generally.

But the Sun remained quiescent, to an extent that was ‘extreme even for a minimum’. 2009 failed to deliver a strong upswing until December, when there was a large group of sunspots. The winters of 2008-09 and particularly 2009-10 were ‘unusually cold in Europe’, an ‘eerily familiar’ event. One Mike Lockwood led an investigation of average winter temperatures using a beaut British database that covers the time since 1659. Low solar activity were correlated with low winter temperatures, and when the hypothesis effect of greenhouse gasses were removed from the data, the effect was stronger.

But what are the mechanisms that are at work?  Spacecraft measurement show ‘beyond doubt’ that the Sun’s output of energy is ‘remarkably constant’, with only a relatively small (1%) variation between years of strong and weak sunspot activity. (I sense the Animal Spirits of climate sceptics waning.)  However, ultraviolet light is strongly linked to solar activity, and more UV light means more ozone is created in the Earth’s upper atmosphere, which in turn leads to more UV being absorbed. The stratosphere heats up, ‘driving faster winds up there’.

The most famous high level wind is the Jet Stream, which does respond to temperatures on high. When solar activity is strong, the Jet Stream blows hard.  When solar activity is low, the stream turns into a meander and distributes the weather differently, with a particular cooling effect on Northern Europe.

Mr Clark then moves to discuss the (repeating, if not strictly cyclical) model of how the Sun works. There is an emerging theory that the Sun in its early days was less luminous, meaning if the Earth was where it is now we all be in the deep freeze. But ancient rocks show that water flowed freely when the Earth was young, and quite possibly that was because Earth was closer to the cooler Sun. A keen planetary scientist has worked out that early planetary collisions might have moved the Earth slowly away from the Sun as it (the Sun) warmed up.  Clearly this is a theory in search of a Lord of the Universe, or at least a Boss of our solar system.)

Obviously the full story is far from settled. What is for certain is that the partial models of the ‘bed-wetter’ climate worriers are far from fully validated. I remain of the view that we’d do our descendents a possibly large favour by acting as if there was a problem, and in the process reversing the trend to a grimmer environment generally. But we should also fund really good science so these vital matters can be nutted out properly.

Meanwhile, we must salute Stuart Clark for his brilliant book.  The climate story is only one of many that he chases down the scientific burrows with flair and deep knowledge.

In the dark hours
Date: Tuesday, February 02, 2016
Author: Henry Thornton

The RBA board meets today and is widely expected to keep its powder dry, perhaps with some hints of a bias for further easing.  The US Fed, meanwhile has indicated there may be three or four small rate hikes in the land of the free as the start of a gradual return to normality. Little to disagree with, but despite this questions keep surfacing, mostly at 3 AM when the world is dark and quiet.

The capitalist world has suffered great depressions, mad booms and serious busts, wars to end wars,  widespread environmental degradation  and extreme poverty in the midst of plenty. We cannot blame economists or economics for all these maladies, but it is certainly true that economics has been unable to reach a consensus about the causes of gross dysfunction in the economic system.

Nor can we blame central banks as their mandates are narrow. Central banks, however, failed to  prevent, or even it seems to moderate, mad booms, though in the wake of the recent Global Financial Crisis they acted in concert in ways that probably prevented the onset of the Great Depression of the 2010s.

Here are some of the questions that come unbidden in the dark hours before dawn. Why do modern capitalist nations fail to save? Common sense says people should all be willing to save in their years of peak earnings so they can accumulate assets to provide a sensible living in their twilight years. And in some cases to leave money to children and also some worthy philanthropic cause.  Yet most people in modern consumerist nations find far more pleasure in competing to accumulate things.

Can this go on? One doubts it at 3 am, and thinks modern society is living as if most people think there is no tomorrow.

Why are modern economies prone to booms and busts?  And does this matter? One famous economist wrote of the value of what he called the 'gale of creative destruction' created by the busts. Others have pointed out that great things happen in the booms. But readers of history know that mad booms create rubbish as well as great things, and often lead to busts that damage ordinary battlers as well as middling kind of people who get carried away during the booms.

Unravelling the causes of global or national challenges would be worthy occupations with those whose normal working life has run its course. Or helping with practical work on real projects. Or developing creative instincts suppressed in a normal working life.

Yet most people in modern consumerist nations apparently find far more pleasure in competing to accumulate things. With aging populations and entrenched systems of public charity, increasing numbers of people rely on help from declining numbers of taxpayers.

Can this go on? One doubts it at 3 am, and sees in these trends more evidence that most people think there is no tomorrow.

The history of capitalism has many examples of what one writer called the 'madness of crowds' and what is clear is that governments, central bankers and other financial system regulators have not yet learned how to limit the excesses of booms so as to more readily contain the damage of subsequent downturns. Nor it seems do governments (or markets) have the ability to limit the loss of species that signals serious environmental damage.  Nor to devise systems of taxation, welfare and education that give every child opportunity, encourages all people to improve their lot (and become self-sufficient) and allows a decent life for those who fail in the economic race.

At 3 AM come visions of various processes - financial, political, environmental - running out of control.

Do our leaders really understand what is going on in our economies and in the global financial system in particular? President Nixon gave the coup de grace to the gold standard in 1971. This standard was a semi-automatic stabilising part of global capitalism, far from ideal but better than what has replaced it.  The well-understood global monetary regulator instead became replaced by compliant money printers who encouraged growth of credit and created serious inflation, encouraged successive oil price bubbles, then asset bubbles more generally as real estate, great art and shares all boomed and in turn 'corrected'.

Systems with individually floating currencies,  'monetary' targets, 'check lists' and then (goods and service) inflation targets  were introduced in individual capitalist nations and all showed some promise for a time.  (This writer confesses to have championed each of these in turn, it must be said.)

The rise of China and other 'emerging' economies introduced a new age of deflation.  For a while the influence of new sources of highly competitive 'things' offset capitalist nation inflationism to make inflation targets look good. 

In the dark hours, one wonders what new 'policy rule' will be needed next.

As part of the development of 'improved' modern financial management, President Clinton abolished the Glass Steagall legislation of 1933 that ruled out commercial banks and investment banks being in one entity. There was a global rush to 'deregulate' financial systems (advocated by many people in Australia, including this writer). Regulatory frameworks were supposedly improved to contain stupidity and malfeasance by the new superbanks. Watch The Big Short if you doubt the failure of deregulated finance.

The true effect of these reforms was seen in the near meltdown of global financial system in 2007 and 2008.

In the dark hours one sees globally a heady confluence of continued new economy deflation, continued easy money, asset inflation volatility tending to asset inflation, extremely cautious monetary tightening in the USA, in Europe and Japan further easing and perhaps a bias to ease further in Australia.    In our case so far a distinct lack of required fiscal discipline and a distinct lack of energetic economic reform.

Global capitalism is still in deep trouble and there is a lot to disturb the dark hours.

Saturday Sanity 30 January 2016
Date: Saturday, January 30, 2016
Author: Henry Thornton

Gor Blimey, Comrades, 'Treasury secretary John Fraser has warned the Turnbull government its prized AAA-credit rating is in jeopardy unless urgent efforts are made to cut spending, raising the spectre of a federal interest bill of more than $2 billion a month within a decade'. This truth-telling is a commodity in short supply, but John Fraser is a wealthy bloke in his last full-time job so has nothing to prove but his reputation.

Adam Creighton continues: 'In a [recent] landmark speech in Sydney ..., the government’s top economic adviser sounded the alarm about Australia chronic fiscal malaise, arguing that weaker-than-expected revenues, falling commodity prices and forecasting errors were no excuse for not taking tough decisions about the nation’s budget deficit.

'Mr Fraser called for further cuts to the government’s ballooning welfare bill and spending promises to be offset with new savings. He also signalled that federal government spending of more than 25 per cent of national income was unacceptable'. Read on here.

Mr Fraser will no doubt receive the AC when he retires as have his predecessors brave or craven or incompetent, and good luck to him.  Doubt he'll be Australian of the year, however, as doing a real job (or jobs) especially well is no qualification. As  Greg Sheridan put it yesterday: 'The Australian of the Year is meant to have been outstanding in their career and then done something extra. The something extra now apparently is entirely advocacy for any approved social cause. How about an Australian of the Year who doesn’t support the republic and has spent his or her life advocating fiscal discipline? Representative and useful at the same time'.


'What’s wrong with Australia?  After 228 years, the only thing we can think of to celebrate this nation’s great achievements, and the liberation of its native inhabitants from the Stone Age, is the appointment of a tin soldier who excoriates us for sexism, family violence and lack of patriotism'.

This splendid sentence from Geoffrey Luck in (on?) Quadrant Online is a powerful comment on Australia's evolving culture.

Mr Luck continues: 'It seems David Morrison is now to be turned loose on the country, licensed to lecture and hector all and sundry for their failure to conform to his barrack-room discipline on social standards. As a lieutenant-general, Morrison might have passed unnoticed onto the retired list but for his 2013 outburst in a video clip applauded by the usual coterie of feminists, left-wing ideologues and the campaigning broadcasters of the ABC.

'What we don’t hear often are the voices saying that Morrison demoralised the army with his “feminisation” of the service, which scandalously included taxpayer-funded sex-change operations. Or that his concerns about gender-bashing came very late in his career. The enthusiasm for his YouTube clip effectively snuffed out any analysis of the Morrison style: the fierce, almost jihadist fanaticism in his eyes, the tightened facial muscles, what might be taken by some to be a self-righteous vindictiveness lurking in his delivery'.

Read on here. dear readers, and consider if the trendy committee that oversees recommendations about Australia's awards is helping or hindering cultural development suitable for a difficult and dangerous world with many social and economic challenges.

While we contemplate committees, Fiona Prior enjoys the sharp wit of Meow Meow. Read on here.


Novak Djokavic dismissed Roger Federer imperiously in four sets and now plays Andy Murray in the final tomorrow night. Serena Williams proceeds even more imperially toward yet another grand slam victory. It is amazing just how politically correct are the top sportsmen and women these days. 'X is a really good player and I had to play at my very best to flog (correction 'narrowly defeat') him/her.  And thanks a million (literally) to all the spectators who have come here to support me, yer really bonza'. (Cheers from the stands).

Much better than YouTube moving images of a footballer apparently pleasuring a dog, it has to be said.  Still, who cares? Was it an Aussie spectator who accused Ray Lindwall of pleasuring himself while innocently shining the ball? Where has that old Aussie humour gone, Comrades? Lost in the ocean of political correctness that apparently bedevils current Australia's 'gongs'.

The cricket season is descending to the populist depths with the T20 bash-a-thon and Australia's form batsman Usman Khawaja cannot get a look in. (Correction, Mr Khawaja has been called up for the dead rubber, India having out-bashed our boys twice, and because Mr Finch apparently tore his hamstring.] Good on 'Watto' for pointing out just how well this bloke is batting, without of course pointing a finger or even a bone at the selectors who in Henry's view failed to give him a fair go.  It's got to be 'form' that decides these matters, or what are the great men about?

Image of the week

Courtesy The Oz.

The unfairness of being young
Date: Wednesday, January 27, 2016
Author: Henry Thornton

'Young, gifted and held back' proclaims a leader in this week's Economist. Everywhere young people are facing a struggle to find fulfilling jobs, and in some cases any paying job. As the venerable mag puts it: 'Roughly a quarter of the world’s people—some 1.8 billion—have turned 15 but not yet reached 30. In many ways, they are the luckiest group of young adults ever to have existed. They are richer than any previous generation, and live in a world without smallpox or Mao Zedong. They are the best-educated generation ever ... And they can look forward to improvements in technology that will, say, enable many of them to live well past 100. So what, exactly, are they complaining about?'

'Around the world, young people gripe that it is too hard to find a job and a place to live, and that the path to adulthood has grown longer and more complicated'. IR laws insist on 'copious benefits' and make it hard to fire people, a situation that favours older, established workers. In countries that Henry knows a fair bit about one regular path to paid employment is to work as an unpaid 'intern'. And there is strong use of family networks to get young people a foot in this door, or if the candidate is really lucky, a paid job right off the bat.

Labor markets are often heavily constrained and the biggest constraint is the fairly standard barriers to free international movement of people, including 'footloose' young people. Many economists rail against particular taxes or other impediments to the free market, but even free market warriors often, even usually oppose free movement of people. Yet, as the Economist claims: 'By one estimate, global GDP would double if people could move about freely', but that is 'politically impossible'. Look at Europe's confused response to the tide of refugees from the Middle East, or the attitude of relatively stable Middle Eastern nations to taking in their dispossessed brethren, or Donald Trump's plans to make Mexico build a wall along its border with the land of the free.

Regulation of housing is in many cities far more expensive than it needs to be, which makes life harder for young people than for generally wealthier older people. 'The old have always subsidised their juniors. Within families, they still do. But many governments favour the old: an ever greater share of public spending goes on pensions and health care for them.

'This is partly the natural result of societies ageing, but it is also because the elderly ensure that policies work in their favour. By one calculation, the net flow of resources (public plus private) is now from young to old in at least five countries, including Germany and Hungary. This is unprecedented and unjust—the old are much richer'.

In short: 'The young are an oppressed minority—albeit an unusual one—in the straightforward sense that governments are systematically preventing them from reaching their potential.

'That is a cruel waste of talent. Today’s under-30s will one day dominate the labour force. If their skills are not developed, they will be less productive than they could be'.

Read on here to see the Economist's suggestions to reform this situation. Specific remedies apart, young people need to vote, as they often do not.  And parents and grandparents might consider agitating for a better deal for their young descendants.

Investment ideas

If you need a second opinion on your investment portfolio, here is a view about Aussie equities from Henry's favourite fund manager.  The summary seems to be:  Avoid the banks and resource stocks and look to stocks developing or managing solid infrastructure projects or portfolios.

In the wider world of asset allocation, Henry advocates being long real estate (excluding flats in Melbourne which are soon to be a drug on the market), around neutral with prime  international equities and short the Aussie dollar. And remain aware that cash is king and if there are further substantial falls in equity values there will be glorious buying opportunities.

Above all, if you feel nervous find a sensible advisor to discuss these matters with, and if you are highly risk averse seek out a registered financial planner. Even such people are sometimes in thrall to particular managers or sectors, or even conmen. Your response to this risk, above all, should be to apply robust common sense to your financial decisions.

For reasons hinted at in the following graph showing the record indebtedness of Australian households, repay debt if you can and avoid new debt like the plague. (Further hint - what happens when interest rates double or even triple?)

If you are young, Henry's advice on the vexed question of becoming financially self-sufficient is here. Point 1 is 'Earn well', which has to start with getting a paying job.

Saturday Sanity Break, 23 Jan 2016
Date: Saturday, January 23, 2016
Author: Henry Thornton

Equity market carnage continues, albeit with Friday's relief rally which may soon be seen as a 'Dead cat rally'. There is an apparently growing sense that the Chinese economy is in serious trouble, the US economy may be headed for recession and there is not a lot of fiscal or monetary policy firepower around to provide stimulus. It's beginning to look as if the Icelandic PM who advised his people to learn to go fishing again during the GFC was on the money.

Henry's Raff Report is a start-of-the-year blockbuster, appropriately so given the sharpest decline in share prices in recorded history - but presumably not in 1929 - 1933. The Raff's focus is the price of oil, but here is a more general thought.

'Thanks largely due to the market’s fear concerning China’s economic stability 2016 has got off to a rotten start. If you think it’s bad now, wait and see what happens when the US economy looks like sliding into a recession, perhaps not a recession under the technical definition of three quarters of negative growth but a significant slump is due.

And: 'If the US is going gang busters it is difficult to account for the decline in net business investment in fixed assets that in nominal terms in 2015 was 10% below the start of this century, and in real terms down nearly 20%. And let’s not the mention the 102 million souls or 41% of the adult population that are not gainfully employed'.

After dissecting statistics on US jobs growth - very low in not-seasonally adjusted terms - and a look at China and several once booming 'BRICS' plus Roy Morgan's realistic Aussie unemployment rate - high and rising - the Raff summarises: '2016 is shaping up to be perhaps the toughest year in the Raff’s [long]working career'. Read on here.

But wait, it could be worse. What if, asks Thomas Friedman:
*  'We’re at the end of the 30-plus-year era of high growth in China,...
*  'The $100-a-barrel oil price era is over ...
*  'Average is over for countries? ...
*  'The rise of robots, software and automation mean that ['average'] countries can’t rely on manufacturing to create mass labor anymore, that the products they can make and sell can’t compete with Chinese goods, that climate change is pressuring their ecosystems and that neither Russia nor America wants to have anything to do with them because all either wins is a bill?
*  'The E.U. era is over? ...
*  'The era of Iranian isolation is over, just as the Arab system is collapsing and the two-state solution between Israelis and Palestinians is history?
*  'All this is happening when the two-party system in America seems to be getting most of its energy from the far left and the far right?
*.. 'What if the era of Iranian isolation is over, just as the Arab system is collapsing and the two-state solution between Israelis and Palestinians is history? How will all those molecules interact? ...
*  'All this is happening when the two-party system in America seems to be getting most of its energy from the far left and the far right? ...
*  'All of this is happening at a time when our government’s ability to stimulate the economy through either monetary or fiscal policy is constrained? And
*  'We’re having a presidential election but no one is even asking these questions, let alone “what if” all of these tectonic plates move at once? How will we generate growth, jobs, security and resilience?'

Wow! Thomas Friedman, you are the 'What if' thinker of the decade, even the century. Mark this report, dear readers, it will provide endless admiration for many decades to come. Read the full article here.

Climate Change

Seven eminant scientists have given permission for Henry to repost an article on the fallacies, as they see them, of conventional climate change science.  They conclude:

'In the context of the analysis in this submission of psychological research and new revelations of how bias can affect decision making, the Authors of this submission recommend the case for reduction of CO2 emissions is not well founded and certainly no Australian post-2020 emissions reduction target could be justified'.

The full article is available here.


Adam Creighton enjoyed The Big Short, or at least that is my impression. Henry saw the movie last week also and enjoyed it, so there are two expert judgments to consider.

Adam Creighton said: The Big Short, a film released in Australia last week, is an entertaining drama about the unravelling of the US mortgage market in 2007. But it is also, more subtly, an economic tragedy, a rolling catalogue of entrenched, insidious incentives that were bound to elicit disaster.

'Hollywood’s take on Michael Lewis’s book of the same title, about a handful of swashbuckling Wall Street traders who cotton on to the maleficent underbelly of global finance before most, is a must-see for anyone interested in what caused the greatest economic crisis in a century and how to avoid another.

'The traders’ multi-year quest to bet big on the implosion of the US mortgage market against the conventional wisdom revealed a hopelessly conflicted set of structures within banks, among banks, between banks and regulators, and between banks and other financial vehicles'.

I'd add two points.  The first is the block-headed attitudes of everyone, including Alan Greenspan, to warnings about the looming disaster. The second is the fact that when the massive bet against the US housing market began to pay off, the owners of the 'big shorts' had to battle and it seems accept a discounted value for their bold investment to get anything from the ashes of the financial sector.

Fiona Prior enjoys the musical magic of Joanna Newsom at Sydney Festival.

Image: Joanna Newsom on stage courtesy  of Prudence Upton/Sydney Festival


What a farewell it was for Little Lleyton Hewitt.  As is his nature he played his heart out and was beaten, but not bowed, by a high rated player.  Current superstars lauded him with praise, his kids came into the centre court to be with him, the crowd applauded enthusiastically following their massive applause, including several standing ovations, during the game. We wish him well for his new job as Captain of Australia's David Cup team.  His success will be Australia's success.

The other highlight of the Australian Open was Fernando Vadasco's (info here) massive first round victory over Rafael Nadel, reversing the opposite result in a 2009 final of some sort.  Both matches were games for the ages, as of course were Lleyton's grand slam performances and Davis Cup triumphs.

Australia's latest tennis hero, Daria Gavrilova, formerly of Russia, beat Kristina-Mladenovic in three hard fought sets, the final set ending only at 11-9. More here.

And tonight we see Bernard Tomic tackle John 'Gypsey' Millman. Do take in the article in the Oz on Mr Millman's 'long hard road to Rod Laver Arena'.  Millman's story reminds me of a cousin, named Hewitt (a relative of the superstar), who used to phone from Heathrow to ask if he could stay with Henry and would Henry pay the cab fare.  'Yes and yes', was the reply, and Coz Hewitt would trun up and sleep for 24 hours, then head off into the cbd to cadge shirts, shoes and on one memorable occasion a raquet, and work casually to rebuild his war chest.  When he was again financial he'd head off to India or some equally strange (to Henry) place to play tennis - and, incidentally, he always refunded the cab fare.

The Aussie ODI cricket team continues to flog the Indians who presumably are beginning to think the umpires are on the home team's side.  Maxwell's match-winning 90 plus innings saved the third game, and a sensational bowling performance saved the forth after the India's top order batters threatened to chase down 350 odd runs. Wow!  It is not the big bash but the mighty slog-fest.

The early week revelations by former Essendon coach James Heard did little to improve most people's views about the great AFL supplements debacle. Threats of class actions by the players are understandable and are likely to cost the club many, many millions. A friend of Henry, a previously loyal Essendon supporter, opined that the club was doomed, and indeed should have an administrator in place already. Guess there is no-one on the current board who even knows what that means.  ('Think Clive Palmer' gentlemen.) But they will in due course.

We are delighted to bring to our dear readers a short educational video.  This will be of special interest to foreigh people thinking of emigrating to the big brown land downunder.

Image of the week.

Courtesy: http://www.henrythornton.com/article.asp?article_id=6870

Sluggish growth - economics or politics?
Date: Monday, January 18, 2016
Author: Henry Thornton

'Income growth lowest in 50 years' screams the front page of the Oz. Today's press, at least at the quality end of the spectrum, expresses and disseminates considerable gloom. This is as it should be, and was warned about in the Oz, and on this site two-and-a-half years ago.  Now the vultures are coming home to roost.

Fortunately, a note of contemporary realism has come from an unlikely source, which we shall come to shortly. Why the government is not spruiking similar sober realism is uncertain to this humble scribe, but I guess that's the nature of modern politics - smile cheerfully, bag the opposition and hope something good turns up.

Sluggish Chinese growth is the main cause for concern, though some also fret about the US economy despite massive (low productivity) jobs growth. The state of the Chinese economy is as enigmatic as usual, with official estimates for 7 % growth in the year just ended widely mistrusted. Overinvestment, heavily indebted State Owned Enterprises, and therefore banks at risk, and an at best slow 'pivot to consumerism' seem to be the major causes.
Australian incomes are cut by cost cutting in most sectors, due in turn to still-falling commodity prices and chronic absence of wage flexibility. To the credit of those still employed, as well as worried employers, wage growth is very low. With the government's 'softly, softly' approach to budget correction and IR reform, Australia is effectively trying to maintain an unsustainable lifestyle. 

Henry's advice as to causes of the coming recession was simple: 'Put crudely, Australia has pissed the proceeds of the mining boom up against a wall of gullible voter expectation.  In the process, mining companies allowed their cost bases to expand to unsustainable levels. Cost bases expanded in sympathy in the non-mining parts of the economy in a climate of easier than desirable monetary policy and encouraged by those vainglorious spending programs of the Rudd and Gillard Governments'.

The cure was described also; acceptance of the fragile state of our economy and sober realism in government; leading to budget repair, cost reduction generally and reducing an uncompetitive exchange rate by introducing a tax on capital inflow. The market slowly but surely has got the exchange rate to a level that restores a degree of international competitiveness, but what will never be known is how many businesses went to the wall during the low, slow sinking. The Abbot government failed to sell a soberly realistic outlook and its attempted rapid budget repair in 2014 was rejected by the voters. Mr Turnbull's approach has included cheerful talk about the virtues of being an Australian at this particular time and a policy of 'softly, slowly, sustainably' about budget repair and IR reform and (the third 's') political success.

Henry's theorum is as follows: if fixing economic policy is needed, sell the concept and then move fast. Provided there is a generous welfare system in place, (as in Australia), fast adjustment will create less pain than the long, drawn-out recovery current policy seems to be aiming to produce.

The unlikely source of commonsense comes from Cardinal George Pell in Rome, courtesy of Tess Livingstone in an article headed 'Pell calls on rich to pay debt to future'.  What follows are quotes from Tess Livingstone (with single indicators) or Cardinal Pell himself (with double quotation marks.)

* 'Societies such as Australia were unwilling to admit they were living beyond their means and that immense national debts had to be contained'.
* “Naturally enough, political constituencies do not like sacrifices and this imposes severe ­restrictions on democratic governments, especially when they have to address the irresponsibilities of their predecessors".
* “The willingness to make sacrifices for future generations is even lower, although rarely articulated, and helps to explain the largely unfunded liabilities of many or most government pension funds.".
* 'The future belonged to those with children, he said. “And a final teaser: is there a link between economic stagnation and a declin­ing population, where there are too few taxpayers to finance welfare and pensions?".'
* "It is sobering to realise that someone around the US poverty level of $11,000 a year is in the top 15 per cent of world income distrib­ution and that the bottom 20 per cent of the world’s popul­ation earns less than $550 a year, despite the fact that the World Bank recently stated that the percentage of people across the globe now living in extreme poverty has fallen below 10 per cent for the first time," he said.
* “We no longer make a distinction between the deserving and the undeserving poor, but it might be useful to introduce a category distinction between the deserving and undeserving rich".
* “Big bonuses for executives who have presided over big losses seem incongruous — just as incongruous as having the same marginal tax rate for a doctor on £160,000 ($332,000) a year and a CEO on £5 million a year".

Do read the whole report, dear readers, and the full speech, which we have so far failed to find. (If anyone finds it, please send it to Henry here.)

To answer the question posed at the start: Sluggish growth is inevitable unless and until (1) the budget is on a clear road to surplus; (2) tax, welfare and industrial policies are reformed to encourage growth over complacency; and (3) there is clear articulation of the need for these changes and broad exceptance by the voters. Points 1 and 2 are economics. Point 3 is politics.


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