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Henry Thornton - Contributors: A discussion of economic, social and political issues Blogs
RBA pause continues; GDP rises strongly in June quarter
Date: Wednesday, September 07, 2011
Author: Henry Thornton

As widely expected, the RBA left interest rates unchanged yesterday.

Extreme global uncertainty is making prediction difficult.

The key point was right upfront: 'Conditions in global financial markets have been very unsettled over recent weeks, as participants have confronted uncertainty about both the resolution of sovereign debt problems and the prospects for economic growth in Europe and the United States. As a result, the outlook for the global economy is less clear than it was earlier in the year'.

Inflation is expected to decline by year end, and monetary policy is excersising a degree of restraint - with credit growth low and house prices falleing - not in Canberra it must be noted, although Glenn Stevens was not so undiplomatic to point this out.

And in conclusion: 'At today's meeting, the Board judged that it was prudent to maintain the current stance of monetary policy. In future meetings, the Board will continue to assess carefully the evolving outlook for growth and inflation'.

As someone said, they don't know either. The governor's press release is linked here.

Students of the monetary framework, putting recent decisions of the RBA board into context, will enjoy a nicely crafted speech by governor Stevens, linked here.

More later today when June Quarter GDP data are released and Henry has seen Darwin's major art works.  Our car is on the Ghan for Adelaide and we follow it by air shortly.

June Quarter GDP Figures released

Well, the figures for June Quarter GDP have been released here and show the Australian economy rebounding strongly from the flood-induced shrinkage during the March Quarter with Australian GDP growing at 1.2% on a seasonally adjusted basis during the June Quarter - an annual figure close to 5%.

The strong rebound suggests the RBA has been right to hold interest rates during the past few months and not cut despite the calls from many sectors of the economy. Interest rates are at historically low levels, and with an economy growing at nearly 5% per annum, it would be an unprecdented move to cut interest rates into the 'teeth' of this type of growth.

As further information becomes available about the state of the sovereign debt crisis in Europe, the RBA will clearly be able to take action accordingly in coming months.

Saturday Sanity Break, 30 April 2016
Date: Saturday, April 30, 2016
Author: Henry Thornton

It will be long, it will be hard, and there is always the chance that Bill Shorten will win, or there will be another messy minority government.

No point in pontificating today. All is being revealed before the official release. 'Living within our means' is the mantra, there will be a bandaid to prevent bracket creep for the year ahead. A start on cutting company tax, or a promise to do this if reelected. And cuts to superannuation tax benefits for the rich, and also for the merely well-to-do who place serious weight on living within their means after regular earnings have come to an end.

And increased tax on smokes, foreign tax-evaders - why was this never tackled before? - and a few other good things to do. Sadly no tax on capital inflow - far cleaner than agonising political decisions about good capital inflow (allowed) or bad capital inflow (buying the farm).

Do not miss the review of the Japanese economy by Nick Raffan, the Raff to Henry's readers.  This is a possible future for us all if Australian governments cannot take a grip on the budget and restore a sensible fiscal policy with budget balance on average over the years. 

Greg Sheridan tells all today about Japanese hurt and anger at Australia's rejection of their offer to build our new submarines. Their claim is that they were encouraged to get into the game by Tony Abbott, supported by the US government and then informed of their failure by leak and not deep and meaningful

From all accounts the French will quickly become our best buddies in ship-building and are also likely to teach us a fair bit about modern manufacturing along the way.

Great to learn that 'Tabs' has recognised his mistakes and is settling down to a new political career as an elder statesman and general good guy.

Presumably, China is probably a tad unhappy at Scott Morrison's decision not to sell to Chinese interests the Kidman empire, including its over 1 % of Australia's sacred soil.

For a satirical account of a previous attempt at an Australian land grab, read Banana Republic, Henry's take on the modern direction of university life and work in Australia.  Link here.


Henry is in the throes of excitement as his editor's exhibition gets set up on Monday and opens on Thursday.  Link to location below image of Henry's favourite painting at end of blog below.

Then with Mrs T he leaves for the USA and then Europe for immersionn in global economics and culture.

Sadly we shall miss the election although hope to follow it on our devices from Prato, near Florence, where Mrs T is teaching for several weeks.


Fiona Prior pays tribute to David Page, music director of the internationally acclaimed Bangarra Dance Theatre by visiting the first Bangarra Dance Theatre performance she experienced back in 2002, Walkabout. More here

image by Edward Mulvihill : Bangarra Dance Theatre


The Shinboners brought the Doggies down to earth last night in a clinal display that represented their best start to a seasonm since 1890, correcvtion, 1971.  It warms the cockles of one's heart to see such a club from the inner suburbs of Melbourne doing so well.  Only the fact that yet another Caaarlton! reject - Vin Waite - helped with the game with a display well above anything he ever produced for the Blues.

Caaaaarlton! has the chance to go two wins in a row on Sunday when playing Essendon, the team of blokes too young or too old, but nevertheless a serious chance to win the battle with Caaarlton! to avoid the wooden spoon this year.

The top teams are just so far above the cellar dwellers that we need some sort of divisional split in Aussie footy.  Hawthorn, Sydney, West Coast, Adelaide, Geelong as well as North Melbourne and Footescray are all well above the rest.

Alternatively, a split of all sports into three groups - amateur, professional (clean) and professional (enhanced).

It is already getting hard to keep track of illicit drugs, and what happens when gene therapies become a regular feature of life?

Image of the week.

Uluru in the Gloaming

Exhibition opening Thursday May 5.  Details here.


Sunday Sanity Break, 25 April 2016
Date: Monday, April 25, 2016
Author: Henry Thornton

We apologise, with Telstra, for lateness of this report.  At our rural hideaway, one hour plus change from the Melbourne CBD, mobile phones do not work and this weekend was worse.  While the PC said it was 'connected' the Internet would not open. Great stuff, Telstra, what if there is an emergency?

Politically we could ask Malcolm Turnbull for an explanation based on his time as El Supremo of the NBN. But he's having  such fun running the nation that he presumably would be disinclined to account for his failure with the NBN, at least as it effects residents of Mornington Peninsula.

Redemption in sight, Tony Abbott admits to his flaws.  Read on here, in the third and final article in Quadrant's fine series, an edited version published in the Weekend Australian.

Just a glimpse. 'People needed a greater ­appreciation of the government’s aims. We needed to explain better that sensible economic policy is not an end in itself but the means to a better society and to people being more able to achieve their potential. In the busy-ness of ­public life and in the crossfire of politics, the Abbott government was too often unable to convey that its fundamental purpose was a stronger society and more fulfilled people'.

An early Double Dissolution election seems a sure bet. Both teams can claim underdog status.  Labor because of the mess they made in their last try and the Coalition because they have lost so much ground in the polls, there is clear evidence of disunity and the leader seems to have failed to present us with a coherent economic narrative.  It is an exciting time to be leading such a wonderful nation as Australia, but where, sir, are you leading us?

Presumably the budget will provide hints and the election campaign will become definitive.

Mrs T has a 'strange feeling' that the gummint is in deep trouble and may be facing the first first term loss by a government since 1931.


Fiona Prior enjoys Ralph Fiennes being really, really naughty in Luca Guadagnino's A Bigger Splash. More here  

Footy'n'Rio'n'stuff (ie idiocy)

An allegedly 'accidental' crash into the back of Geelong's new star, Patrick Dangerfield, started a quartertime brawl with Geelong struggling.  From then it was a comprehensive flogging of Port Adelaide, as so often results when a winning team gives offence to the losing team in a big day.

And Hawthorn won another game they could have lost by, you guessed it, 3 points after a late surge.

Caaaarlton! meet Freo in Perth! We watched in the hope of a miracle but was been advised by Mrs T not to hold his breath. But the Blues WON, comrades, restoring our faith in our footy team.

Australia's swimmers look to be in great shape and some of the younger athletes ditto.  Provided the venues are ready, and drug testing is of high quality, Rio may present happy viewing after a long run of ordinary performances by our young athletes.

Greg Craven, who should know, reported this week on the subject idiocy in our world.

'Craven’s Law of The Constant Proportion of Idiots [now being shared after long cogitation] holds that no matter how
 theoretically clever a group of people ostensibly is, it still will contain the same average proportion of absolute
dipsticks. And the corresponding number of seriously bright sparks'.  ...

'I thought deeply about all this, and came to an astonishing conclusion. In their distribution of mugs and magi, my fellow parcel heavers in Shed B at Spencer Street were just the same as the intellectual elite at dear old MU. The fact all my classmates had stratospheric ATAR equivalents made no difference at all.

'This revelation has supported me throughout life. There is no group so clever, so august or revered it does not harbour its own village idiots.

This is a real gem of a contribution, and deserves to be read widely and thought about.  Click here.

Image of the week'

Courtesy The Oz

RBA's Stevens warns
Date: Wednesday, April 20, 2016
Author: Henry Thornton

'Reserve Bank of Australia governor Glenn Stevens has slammed calls for central banks to directly pump cash into the pockets of households and governments to resurrect moribund global economic growth, warning that such "helicopter money" drops would be almost impossible to stop once they start', reports Jacob Greber from the AFR.

"Are we that desperate," Mr Stevens said in a speech in New York on Tuesday, in which he also challenged a growing view that the world is suffering from an obsessive desire to save over investment, a growth-retarding trend dubbed the great "secular stagnation" by figures such as Barack Obama's former top economic advisor Lawrence Summers.

What can be done about this? The starting point is that the world needs to face the possibility that global trend growth may have been permanently lowered since the 2008 crisis.

'If true, that would mean savers, pension funds and even governments need to dramatically rethink expectations about rising future incomes, he said.
"It may be that this reconfiguration is, in fact, what is happening. That would explain why ultra-low interest rates are not, apparently, as successful in boosting growth in demand as might have been expected," he said.

"The future income against which people would borrow looks lower than it did, not to mention that the current income against which some already had borrowed has turned out to be lower than assume

'All of which, according to Mr Stevens, intensifies the need for governments to redouble their efforts at blowing away barriers to growth, which he listed as including teetering banks without enough capital; households and companies burdened by too much debt, and; protectionist government policies that impeded productivity or slowed the transitions from old industries to new'.

Read the full speech here.

It`s on - well, almost
Date: Tuesday, April 19, 2016
Author: Henry Thornton

Nicholson said it best, as he does so often when politics in Australia hots up.

Sunday Sanity Break, 17 April 2016
Date: Sunday, April 17, 2016
Author: Henry Thornton

A triumph in China, more warnings about Australia's AAA credit rating, Bronnie de-selected in Mackeller, a lovely week for the Prime minister of the greatest nation to be alive in. Seriously, dear readers, it's all happening and it is no longer a dead cert that the voters will fill in the voting forms with the blue pen.  Malcolm must have reflected just a bit about the weaknesses of democracy as he hobnobbed with the senior leaders of our great trading partner.

The Weekend Oz has lead with a big headline about the fact that almost half of Aussies are reliant on the public  teat.  Also we hear that the new disability support program when expanded from the relatively small set-up to the full disaster will be unsustainable due, you guessed it, cost.  And the same international credit rating agency that warned of our unsustainable AAA credit rating opined that we could not save this unless and until taxes were raised. Rolled gold conservatives will almost certainly dismiss this view with a snort, but what if it's true?  Higher borrowing costs, greater budgetary pressure, less money for people who cannot work. Cor blimey, comrades, what is to be done about it?

Even the RBA weighed in last week, with another edition of its splendid Financial Stability Review.  As I read it, the housing sector may no longer represent a threat, however remote, to Australia's financial stability, except for the gross oversupply of units. The fresh news concerns  'the possibility of large losses on lending to residential property developers and on banks’ commercial property portfolios'.

These and other risks should be 'managable', because Australian banks have improved their capital ratios since the recent global crisis.  The remote possibility of a global banking crisis is mentioned briefly in the same paragraph as New Zealand, where 'high levels of mortgage debt and rapidly rising housing prices have raised the risk that a price correction could adversely affect banks’ asset quality, while persistently low milk prices and declining land values have increased the probability of defaults and likely losses on loans to the dairy industry'. 

Read on here.

Seriously, dear readers, there is no stone unturned in this report. Here is a modest suggestion for Kelly O'Dwyer. Why not ask the RBA to write a regular 'Sustainability Review'. Or if the RBA pleads this is not its main job, Treasury could be asked to provide such a report with a mandate that it should be an independent view, to be written by the brightest and smartest young people in the service. 'Dream on, Henry,' I hear you cry, 'it ain't gonna happen Comrade'.  So what about the IPA? Or the Centre for Independent Studies?


Fiona Prior sees the performance of Savages by Patricia Cornelius,  top-notch theatre, though a play you feel reluctant to encourage others to see because of the challenging nature of its subject matter. Directed by Tim Rossen, Savages goes way beyond men behaving badly to men behaving like savage dogs - hence the name. To give you a hint of this chilling work, you would be forgiven for thinking the rape and murder of Dianne Brimble on a P&O cruise in 2002 at least in part, has motivated the work. More here


It's official, folks.  Aussie rules is the world's most exciting game, originating as it does in the world's most exciting nation.  So said our dear leader whilst in Singapore.  The Prime minister has offended a majority of Australian voters, who variously support one or both versions of Rugby, Futball (Soccer to we Aussies), Gaelic Footy, Gridiron, netball, the list goes on. 

Hawthorn again won a game logic said it should lose. With the help of Eddie Betts ('let go' by Caaaarlton!), Adelaide won a game it was headed to lose.  Meanwhile, judged by the unbalanced injury toll, Caaaarlton! won the fights but lost the game against the rising stars from Footscray. Actually, the Blues got absolutely flogged in the first half but won the second half and for a while in the last quarter looked as if it could cause a massive upset.

So there are green shoots to be seen at Caaarlton! and the fans are coming back in droves.

Image of the week

Courtesy Google Images

Global slowing, Australia could do better.
Date: Wednesday, April 13, 2016
Author: Henry Thornton

World economy slowing says the International Monetary Fund. Aussie economy picking up says various surveys, despite the persistent rebound in the Aussie dollar and the third year of falling income for Australia inc, itself due to a slowing global economy. 

Paul Kelly points out that 'In the democratic world dominated by America and Europe there is a growing and lethal nexus — economic tribulation and weak growth is linked to political dysfunction, rising populism and distrust in the political system.

'The world suffers from what former US Treasury secretary Larry Summers brands “The Age of Secular Stagnation”, the failure of economies to recover from the 2008-09 global financial crisis, the upshot being weak growth, low or negative interest rates, rising asset prices, more inequality and poor investment.

'The former governor of the Bank of England during the crisis, Mervyn King, in his recent book The End of Alchemy, argues that while the 1930s Depression produced a robust policy response this has not been replicated in the years since the GFC.

“Without reform of the financial system, another crisis is certain and the failure to tackle the disequilibrium in the world economy makes it likely that it will come sooner rather than later,” King says. “Since the end of the immediate banking crisis in 2009 recovery has been anaemic at best. There was a continuing shortfall of demand and output from the pre-crisis trend path of close to 15 per cent.”

Read on here.

Australian politics looks more and more dysfunctional.  The major parties are slowly unveiling their policy pitches for the widely anticipated Double Dissolution election that may be held on 2 July, if the Commander-in- Chief does not lose his gorm. Bill Shorten will have a spend'n'tax pitch, though he will de-emphasise the 'tax' bit.

Malcolm Turnbull will go for a 'prudent', living within our means kind of pitch that may prevail wiven Labor's horrendous record under Rudd'n'Gillard'n'Rudd.  Despite the track record that says his 'Liberal' government cannot find a way to cut spending effectively and cannot find the gorm to fix the budget by raising the GST to 15 % with a broader base.

However, there is a tiny, flickering light on the horizon. Grace Collier has gone in with great gorm in the Australian against the dreaded union'n'big.truckers companies attempt to push self-employed truckies out of business.  The even worse aspect of the relevant legislation, introduced by Bill Shorten when the last, much unlamented Labor government was in power, was that users of the services of self-employed truckies are liable to large fines.  Bloody hell, Comrades, what were you thinking?

Clive Palmer hits the headlines today with allegations that he siphoned $200 million from his corporate plaything, now sadly in the process of being wound up.  Why has ASIC or the police not called on Mr Palmer to check these allegations? The answer provided by an eminent lawyer over dinner recently was simple. 'The regulators have all the law they need to nail the bad guys but are very weak in their attempts to enforce it'. (Of course, Mr Palmer may be as innocent as a baby lamb.  But there is sufficient smoke to demand a proper investigation.)

Henry can attest from personal experience that the regulators go hard against the small guys, like Henry himself. Recently a first demand for payment for our tiny corporate vehicle never arrived, probably because the mighty $1 per letter postage system failed to deliver it. We returned from an overseas trip to find a second demand had arrived, with a large fine added to the original demand and the due date was overshot by 2 days. Our accountant wrote a respectful letter to ASIC requesting clemency, but no, the response was 'pay up or there will be another fine', making the demand more than 4 times the original payment.

Mr Medcraft, I do hope you get reappointed, but I also hope the Treasurer grills you on matters such at this and extracts a promise to focus on the bad guys.  'Why have you never called on Mr Palmer?' could be the first question.

There is a link between Australian regulation and slowing global growth.  Yes, Prime minister, you could convert Australia into the fastest growing 'developed' nation, the best place in the world to be alive. But you need to reform the tax'n'transfer system and get the regulatory agencies focussing on the important issues, not harassing the small folk. And you need to fix the budget deficit, quickly, as Paul Keating did in 1986.

These reforms are even more important because of slowing global growth.

Sunday Sanity Break, 10 April 2016
Date: Sunday, April 10, 2016
Author: Henry Thornton

Treasurer and Treasury are beavering away trying to produce a saleable budget with little of substance to play with. No major spending cuts, as Paul Keating extracted from a Labor expenditure review Committee during the Banana Republic crisis of 1986 - discussed here last week

Judging by occasional comment, there is to be no GST increase, not much relief from bracket creep in the income tax schedule, at best delayed cuts to company tax, perhaps some fiddling to Superannuation contribution tax.

The problem of course is 'Australia has a wonderful future, its a great time to be an Occer', a belated message about living within our means when debt and deficits rock on, as in Julia's time in Wonderland, illustrated below.

Several important articles in the Weekend Oz yesterday.  Paul Kelly discusses the unaffordable and unfunded Disability pension scheme. One could add the unaffordable write-offs of dud loans for people to enroll in dud educational establishments and therefore fail to get a job and their dud loans get written off.  And unemployment relief for people who can't or won't pick fruit or find other hard jobs that no-one wants to do.  Joe Hockey's short time as Treasurer had one fine contribution, to draw attention to the nation's widespread culture of entitlement.  Can the current generation of econocrats and pollies not repeat Paul Keating's brave expenditure cuts?

Then there is the story by Grace Collier on the attempt by trucker's union and big trucker's companies to end the futures of independent, self-employed truckers.  Allegedly on grounds that safety on the roads will be enhanced.

'Stand with the people or stand with the mob' Ms Collier advises Malcolm Turnbull. 'The Turnbull government is concerned ... very concerned, just not enough to do what is required'. Sigh.

Then there is a man who I take to be new to the hallowed pages of the Weekend Oz. With the engaging name of Jack Marx. Mr Marx attacks the wowsers among medical and policy circles who try to stop us drinking alcohol on grounds of public safety and costs of repair to injured bodies, or premature death.

When benefit cost analysis is carried out, the wowsers allegedly leave out the pleasures of drinking with one's mates, convincing inebriated women to sleep (ahem!) with one and thereby have babies with one, and so on.  If Mr Marx is going to continue in this vein the weekly press scan will be even more entertaining than it is now.

If you want some old-time politics, when politicians were fair dinkum, David Kemp is about to publish a book called Menzies. A politician who argued for realism about what governments can do. Below is a link to an extract from the AFR, and here is an extract.

'For Menzies, "liberal thought" centred on the equal rights, the capacities and the entitlement of respect and dignity, of each individual person. He later spoke of "the supreme importance of the individual", and argued that "[t]he test of civilisation is freedom, freedom of the spirit and of the mind and of the body".'  But not, apparently, for the followers of the Mighty Ming freedom to work as a self-employed truckie, or to drink oneself into an early grave.


Fiona Prior: 'The reason I keep returning to the more classical iterations of Swan Lake is to witness that flock of exquisite white swans glistening and gliding on a moon-lit lake. Sublime. With eyes open to the beauty of the ensemble ‒ in this instance the Australian Ballet performing Stephen Baynes’ take on this iconic work – and ears open to the haunting Tchaikovsky score, every experience of Swan Lake is the chance to re-enter Tchaikovsky’s world on ‘unreal beauty’. More here

Footy and other extravagances

Henry apologises for the lateness of this weekly missive, but he was awaiting the Saturday night game between Caaaarlton! and the Gold coast Suns.  Then the internet was not working at Balnarring.

The game followed the 2016 usual pattern of a mighty Caaaarlton! effort to stay in the game followed by a gradual pulling away by the opposition who eventually won handsomly.  The good news is that the Blues are delivering a red hot effort and Levi Casboult kicked at least one goal and crashed a couple of marking packs to great good effect. And Messrs Cripps and Weitering showed consistent brilliance under great pressure.

Henry's editor has been invited to show his art at a nice gallery on the Mornington Peninsular.  This will include most of the landscapes still in his posession, including one dated 1969. Here is a link to our lad's Econart, his attempt to create a new genre.  The latest in this series features the Bubble Meister, Alan Greenspan, blowing bubbles in his bath, page down to the third image.

Image of the week - Julia in Wonderland


The CAD, the same old CAD
Date: Thursday, April 07, 2016
Author: PD Jonson

At last, someone gets it. Terry McCrann writes about 'The other deficit time bomb'. He starts with a trip down memory lane. 'ON TUESDAY, the Australian Bureau of Statistics released figures showing the country running a huge and threatening multi-billion-dollar deficit and hardly anyone noticed. And if they did, they essentially yawned.'

In my memory it was the April 1986 current account deficit (CAD) that jolted the universe's greatest Treasurer (UGT), Paul Keating, into action advised by me but previously said by UGT to be 'impossible', the product of someone (me) who 'did not understand his government's policy'.

McCrann continues with the story. '30 years ago it was precisely this deficit that prompted then-treasurer Paul Keating to make one of his extravagant — in my judgment at the time, arguably his most infamous of — comments: that it signalled Australia was at risk of sliding into becoming a “third-rate economy, a banana republic”.'

'The figures on Tuesday showed that Australia had racked up a deficit of $3.4 billion on its basic trade in goods and services for a single month, that of February.'

Adding the interest payments to the trade balance gave Australia a CAD of (McCrann again) 'a thumping $75 billion of national red ink for the 2015 calendar year. Another number which elicited at most a big yawn, if anyone noticed.'

'Why don’t [these numbers] seem to matter? Essentially, because the policy perception — and it is a perception which is drenched deep into both Treasury and the Reserve Bank — is that ‘the market’ will sort it all out.'

A large part of the 'market solution' to such a problem in economic theory is a fall in the exchange rate.  But the horrendous CAD has prompted no major sell-off by the Aussie dollar - indeed it has recently been rising.  This increase has had the trusties among Australia's leading journos - receiving the Treasury/RBA so-called 'quality  information drip' - are calling for further cuts to interest rates.  I will return to this point shortly.

In 1986, the UGT accepted my advice to cut spending to an extent that would turn the budget deficit into a surplus, to get 'old Silver' (AKA Prime minister Hawke) to persuade the unions to cop a wage cut and allow the RBA to raise interest rates.  The exchange rate plunged, a text-book response to an announced economic crisis.

Given the recent policy shenanigans - the Turnbull government ruling out just about every tax solution, and the Senate's refusal to accept most of the Abbott government's spending cuts - can you imagine a rapid switch from budget deficit to surplus now?  Or any voluntary cut to real wages? Or an increase in interest rates? The Aussie dollar may eventually drop, following perhaps a cut in Australia's aaa credit rating, or public recognition that there is indeed a problem, in Sydney if not this week in Houston. This possibility is despite the PM's cheery and repeated comments about what fun it is to be alive and an Australian. (One can of course acknowledge that it is better than being dead or a live citizen of most other nations.)

The UGT's bold actions quickly quelled the crisis in 1986, and similar action now would go a long way to fix our very similar problem.

But just as Treasury and the RBA are hung up now on the idea that 'the market will fix things', there was a serious misdiagnosis about the effects of monetary policy in the late 1980s.  While in the wake of the Banana Republic crisis I continued to advise the board of the RBA that monetary policy should be tightened, that is, interest rates should be raised, and the board apparently accepting this advice, interest rates fell instead of rising.  Clearly someone above my pay grade devised the argument that a rising exchange rate was in a sense tightening monetary policy and so interest rates falling was no great problem.

As we now know, this lead to an unstoppable, inflationary boom and then the 'recession we had to have'.  In 1990, when I was no longer advising the board of the RBA, or the UGT, I published a paper that outlined the many costs of goods and services inflation.  I called for an independent central bank that focussed as its main aim on containing goods and services inflation. It is available here.

I have been told by a former Secretary of the Treasury that a very senior RBA man snorted 'ridiculous' when this idea was later suggested by an international econocrat, but in 1996 the same high official meekly agreed to such a proposal as a condition of signing a job contract.

If you think this is all fanciful, the RBA's official historian has confirmed that my account of the late 1980s and early 1990s is essentially correct.  We await the publication of his opus to see just how much official guidance has been applied to his account.

But my main point is the same as that made by Terry McCrann in today's Sun Herald.  The enormous CAD is a very bad sign of an economy out of joint, or in 'severe disequilibrium' as an economist might put it.  It needs urgent and bold action to restore balance.  Turning the budget deficit into a surplus, restoring Australia's international competitiveness and, when recovery begins, keeping the recovery from exploding into a crisis like that in 1990-91 by a firm monetary policy, meaning rising interest rates.

The missing link is some way to achieve a competitive economy.  Wage growth is already low. Talking the currency down will do little good, except perhaps when announcing a national crisis, as the UGT did in 1986. A far lower exchange rate, achieved by a tax on capital inflow, is the policy no-one will ever discuss.  Here is my go at explaining why we need such a tax, published in The Australian several years ago.

Saturday Sanity Break, 2 April 2016
Date: Saturday, April 02, 2016
Author: Henry Thornton

Malcolm Turnbull's bold attempt to offload some financial responsibility for revenue collection has been well and truly dismissed by the state premiers. The idea is best described as a 'thought bubble'. It is theoretically fine - 'let the states compete' - but horrendously impractical.  How does the central government answer Tasmania's plea of relative poverty, a plea that would be taken up by at least 3 or 4 of the other states and proto-states? Surely it would lead to more tax overall, although Australians had better get used to that idea as current spending aspirations  are impossible to fund without extra tax.

Income is already taxed well past the point of optimality, and this will get worse as middle income earners enter higher tax bands due to so-called 'bracket creep'. Company tax is higher than in major competing nations. Even in a world where spending could be reined in, Australia's economy would be in better shape if income and company tax rates could be reduced thanks to a GST at a higher rate with a wider base.

If I am right that even with a double dissolution election that removed fringe Senate members spending will be impossible to rein in, a wider and higher GST is the most obvious way to achieve budget balance whilst allowing some reduction (relative to what will be the case for income tax with bracket creep with tax rules unchanged) in taxes on income.

Malcolm Turnbull is obviously clever. There are those who say he will finally go back to the GST solution having demonstrated that there is no other acceptable solution. More likely he will find himself up the proverbial creek without a paddle. While floating on the incoming tide of decisions not to do that, or that, or that the PM has failed to provide a plausible narrative about Australia's economic situation, with a sensible answer or set of answers.

Australia's AAA credit rating is looking increasingly likely to be downgraded, and this would provide a massive stick with which to beat the government.  How about AA+ arriving in the middle of a Double Dissolution election?  Or that option being abandoned despite the union reform bill not being passed?  'No ticker' would be the obvious judgment, and falling popularity the likely reward.


Fiscal gridlock is Australia's chief economic problem. Continuing deficits will make Australia's debt position quickly worse, and a credit downgrade would add to the deficits. Rising global interest rates would have the same effect and, combined with a credit downgrade. would be double trouble.

A second problem is the renewal of upward pressure on the exchange rate. Journos are to a man are saying the only solution to that problem is for the RBA to cut cash rates. That was a solution attempted by New Zealand but after an immediate kneejerk fall in the NZ dollar it quickly became 3 cents higher that before the rate cut. Taxing capital inflow is the logical alternative, but all the journos seem incapable of even asking why that solution is unacceptable.

A newly rising exchange rate plus fiscal gridlock is a recipe for 'Banana Republic #2'.  That would fix the overvalued currency and might even convince members of parliament that the deficit must be fixed, but surely that is not the PM's plan?

Bloody hell, comrades, what is to be done?


Fiona Prior sees Tom Stoppard’s Arcadia and is suitably impressed by the playwright. More here.

Henry and Mrs T saw Sherpa recently. Great viewing if you like rocks and snowy mountain peaks and enjoy ethical debates and attempts to get wage justice for poorly paid workers facing unavoidable dangers. Here is a trailer, with a proper review to come in due course.


The men's T20 team was knocked out of the World cup by India, plausibly by bowling unimpressive quicks at a key time rather that a young leg spinner who had previously: (a) been belted out of the park, and the game; and (b) had bowled very tightly in two later games. Looks like a risk mitigation policy gone wrong by Steve Smith.  Henry's cricket experience did not extend much past captain of the Mitcham U16s in the long-ago era when men were men and the sheep were nervous, but he rarely played safe when there was a more exciting option.

The Aussie sheilas did far better, making the final and being favourites to win for the forth time in a row. We wish them well, and will be cheering for the West Indies to flog England in the men's final. (Regular readers will be aware that Henry would support ANY team playing England due largely to Jardine's monstering our brave boys in the Bodyline debacle.)

Caaarlton! gave their fans something to be cheerful about in nearly beating Richmond in the first game at the 'G'. The young players gave their all, and the imports fought hard also. The Blues were beaten only in the last ten minutes of the game due to sheer exhaustion, and will deliver far in advance of pre-season expectations this year. But surely have no hope against the Swans on Sunday afternoon.

Henry is blogging while watching Adelaide crushing Port Adelaide. Latest Adelaide goal came from a lovely pass from Eddie Betts to Sam Jacobs, both players Caaarlton! 'let go'. More evidence that Mick Malthouse was sent to Caaaarlton! by Eddie McGuire in order to bury them for at least a decade!

Image of the week

Courtesy The Oz

The currency wars and us
Date: Wednesday, March 30, 2016
Author: PD Jonson

The US Fed has issued a timely warning that it will not rush to raise interest rates.  Compared to the 3 or 4 rate increases expected for 2016 several months ago, signs of a slowing economy and unhappy response to the Fed's first rate hike for almost a decade has changed the outlook. At the same time, the ECB, Japan and New Zealand have recently cuts rates, in the first two cases to a point where a customer has to pay the bank to hold their cash. Such 'negative interest rates' are a policy innovation that has little or no sense, as Alan Kohler points out in today's Oz.

This has produced a 'currency war' as nations or blocs compete to get their exchange rate down. Australia's central bank is more conservative than most others (thank goodness) but its policy of holding cash rates at an already low 2% has resulted in the Aussie dollar rising, breaking through 76 cents US and headed, some traders say, for 80 cents.  This presents a familiar dilemma for the RBA. This has not so far been handled well, and represents an unnecessary blot on an otherwise excellent copybook.

Australia's jobs market has been suprising by its apparent strength.  Of course, a rising dollar and (dare I suggest) lack of a coherent economic 'narrative' from the Federal government is not helping confidence (or 'Animal spirits' as some economists like to call this elusive concept.) Now we learn, thanks to the Business Insider's David Scutt at 4.30 am today, that expectations of job losses have been rising.

As David says, this puts pressure on the RBA to join the currency wars by cutting interest rates.  But there is a serious problem with this approach. This I wrote about in early 2013, when the Aussie dollar was above parity and strangling the trade exposed industries.  I pointed out the problem of trying to use interest rates (aka 'monetary policy') to both maintain overall economic stability, including low goods and services inflation, AND influence the currency markets in an helpful direction, had been tried in the late 1980s.  Failure lead to 'the recession we had to have'.

Now the first casualties of the newly misplaced approach are being felt and well-informed Australian workers are beginning to fear for their jobs.

My conclusion in 2013 was as follows: 'Our floating exchange rate with an independent, inflation fighting central bank has generally served Australia well, supported by helpful international conditions.  The policy now needs the support of a direct, non-discriminatory control over capital inflow. If not resolved, this problem with cause great damage to Australian industry, as it did in the late eighties, when the correct conclusions were not drawn.  A similar problem [in the late 1920s] helped lead America, and then the world, into a Great Depression'.  Read on here.

The currency wars are here to stay. The revival of upward pressure on the Aussie dollar and  worsening of expectations about job stability are closely linked. Prime Minister John Howard famously said that ‘we will decide who comes to this country and the circumstances in which they come,’ and this is now a clear and politically bipartisan policy. It is equally clear that we have the right to discourage the excess capital inflow that is creating a rising exchange rate and renewed pressure on many Australian industries.  This is the best way to resolve the current dilemma for monetary policy.  The problem of uncompetitive industry cannot be solved by monetary policy in its current setting or by further rate cuts.

There has to be a better way, and there is.  Contact your local member and suggest he or she looks into this matter.

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