Central banks to the rescue, but urgent problems remain
Date: Friday, September 16, 2011
Author: Henry Thornton
Leading central banks have agreed to pump US dollars into Eurozone markets, helping to produce a fourth day of gains to global equity markets.
(The banks involved are The European Central Bank, the US Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank, clearly a serious mob.)
A first sign of US goods and services inflation was ignored amid the general euphoria, as was an increase of initial claims for unemployment benefits and more evidence of weak manufacturing activity.
Debate continues to rage about the future of the Eurozone, with Anatole Kaletsky presenting a varient of Professor Alan Meltzer's notion discussed here yesterday. Kaletsky suggests that Germany (rather than a group of strong Eurozone countries as in Meltzer's plan) leave the Euro, allowing a defacto devaluation of other Euro currencies but without the risk of bank failure that would be inevitable if Greece leaves, followed by other weak nations. (Kaletsky's views are in today's Australian newspaper, but again without a link, like Meltzer's yesterday)
"This is the most urgent crisis facing the world today," said Zhu Min, the IMF's deputy managing director and China's voice at the institution.
"There is no room for politicians to muddle through: they have to take decisive action today. Banks must be recapitalised and made solvent."
In distant Australia, Henry has purchased some out-of-the-money puts in case the whole Euromess trashes equity markets. Meanwhile, politicians continue to trade abuse and to argue about items on the traditional pinhead.
However, the Australian Bureau of Statistics (ABS) has galloped (well, plodded actually) to the gummint's rescue by redefining the contents of the 'basket' of goods and services in the consumer price index to suggest inflation is less of a threat.
Treasurer Wayne Swan has removed from the 'independent' Reserve Bank the right to set the governor's salary. Apparently he learned of Glenn Stevens' million dollar plus salary only 18 months after the event, via the RBA's annual report.
If this is true, it almost defies reason because of the risk to a climate of low wage inflation that it posed. If Treasurer, most of us would expect it to be at least mentioned by the gov'nor in one of his regular chats. After-all the Treasurer is the representative of the parliament to whom Mr Stevens is ultimately responsible, despite the 'independence' notionally granted to the RBA by means of an exchange of letters. The Reserve Bank Act, which defines the relationship of the RBA and the people of Australia, makes it clear just who prevails in any conflict.
Former governor Bernie Fraser was on ABC radio defending (weakly Henry thought) the governor's salary, but Henry's sources say Bernie himself turned down similar largesse in his time, as reported here. (See the May 23 2011 entry of the author's Blog at GreatCrisesofCapitalism.com.)
If 'independent' salary setting can be removed at the stroke of a pen, so too can 'independent' decision making, and it would be one sure-fire way to get the Aussie dollar to depreciate.
Take care, Glenn Stevens. Mention of how much you give to charity each year (assuming it is quite a lot) might be wise about now.
G20 and US interest rates
Date: Friday, February 21, 2014
Author: Henry Thornton and Nick Raffan
Economic headlines today are mostly about the G20 meeting in (gasp!) Sydney and Australia's opportunity again to lead the world. Last time this was tried it was the brainchild of K Rudd, and he left us with the world's most extreme policy to fight global climate change.
This approach included a damaging carbon tax and a high required use of 'renewable energy', both policies that have helped to make Australian industry deeply uncompetitive. The current Treasurer plans to lead the way on a growth target when we have no official idea about how best to boost Australian growth from currently predicted sub-3 % performance. Is it to be 'fixing the budget emergency', slashing business regulation or reforming industrial relations by stealth? Or some of all three reforms?
The US Fed is supposedly beginning to consider (gasp!) raising interest rates. The complaints of Turkey and similar inflationist nations will, of course, be brushed aside, along with advice from deflationist Eurozone nations. Like previous hyper-powers, the mighty USA has no need to run its policies to help out lesser nations whether mad developers or ossified bureaucratic hellholes.
Just how strong is the US recovery is a subject tackled today by Henry's favourite analyst, Nick Raffan. The remainder of this blog presents the relevant part of the Raff Report for February.
'Any analyst who bothers to review the trends of US Installed Production Capacity and Utilization will see the effect on US industry caused by the emergence of China as a manufacturing powerhouse. In itself, just printing money cannot make US manufacturers competitive with China or any other emerging economy.
Now for some charts: Figure 1 shows US New Orders for Manufacturing Excluding Defense. This picture shows the dilemma facing the Federal Reserve. Growth in manufacturing keeps disappointing many mainstream commentators, seemingly these are people whom have probably never heard of, or whom do not have access to, Thomson Financial Datastream.
Figure 2 depicts new orders for computers and electronic products that are gapping down and surely reflect import replacement; this just but one example.
There seems to be a fixation on housing starts but these are only one facet of US construction. Figure 3 shows new orders for construction supplies and so covers residential and commercial construction. Note that the 12 month moving average looks set to top-out. The recovery has been slow relative to the last up cycle and we might ponder what would happen if the Fed pulled the rug from under its money printing programme.
Over recent years the US auto industry has done well as was shown in Figure 4. Henry’s readers will notice that the recovery from the depths of 2009 was very sharp and this same trend is obviously reflected in new orders for consumer goods. The pace of recovery has slowed a tad but when looked at from a historical perspective it seems likely that auto sales are set to peak, probably this year.
The fact that the Federal Reserve and the Bank of England have foreshadowed record low interest rates for the foreseeable future is relished by stock markets. The reality is of course different. It’s bad news; business is terrible and does not want the cash. We have seen this many times when bad news is good news and to hell with what is really happening in the world.
The story goes like this: low interest rates keep the discount rate low on future cash flows. The value of cashflows increases and this allows the expansion of price earnings multiples because the value of the business rises. But one day the King rides by in all his finery until someone points out he is wearing no clothes.
G20 cracks gather in Sydney
Date: Thursday, February 20, 2014
Author: Henry Thornton
What fun. The cracks have gathered for the (G20) fray. The brumbies are galloping into the distance. The dark and weedy (well, relative to his past physique) Australian rider is urging his fellow riders to set a target for global growth, even though such a target has not been proposed for the home paddock and Joe's horse (aka Australia's Treasury) is groaning at the very idea as it has failed even to estimate the budget deficit to a couple of significent figures. Soon the great G20 gallop will begin and presumably a global growth target will be set as 'aspirational' and the riders can all go off to the pub for a well earned drink.
Will any of this manic activity help stem the losses in Australian manufacturing industries or in small businesses generally? Not bloody likely, comrades, but the discussion might just help shape attitudes. In his dialogue with Australia, Joe Hockey has started to hint that he will avoid what some have called 'mindless austerity' in framing the forthcoming budget. With every day it seems another manufacturing domino falls, most recently the Alcoa alumininium smelter, and yesterday the Sensis domino, and a very tough budget would seem overkill. A six percent rate of unemployment will soon look like a wonderful state of affairs, and it is good to see the good sense of workers and companies keeping wages growth well below inflation. This is lower than in the depths of the GFC, meaning falling real wages which is just what the Australian labor market requires.
Helped by wage restraint, but also cost cutting generally, Australia's companies are delivering stronger than expected (by analysts) profits and maintaining dividends when profits are not fully up to scratch. Good for confidence and stronger confidence will lift spending generally, and eventually stem the job losses.
What can the G20 bring to the party? Janet Yellen, if she arrives, will tell us all that she works for the USA and cannot shape US monetary policy to suit the rest of the world. Just as well, really, as 'emerging economies' would require continued inflation and that would soon mean a global outbreak of inflation. Note that 'inflation' here means 'goods and services inflation'. The world already has asset inflation in the form of recovering house prices and record share prices. In fact, a key question is whether the US Fed's 'taper' will produce consistent asset deflation, but Henry doubts if Ms Yellen will have much to say on this matter.
There is, of course, a generally awkward situation at meetings like those of the G20. Bringing together the most important heads of national administrations, finance ministers and central bankers sounds like a good idea, but each national representative is dedicated to his or her country's welfare, or when this conflicts with economic goods sense, his or her electoral popularity, in cases when democracy applies.The US Fed will not be pandering to 'developing nations' and the Germans will not be endorsing a global target for growth. As one wise owl, Jacob Frenkel, once of Chicage University, put it: 'It would be better to have a target for things governments can control'. Sadly he held back his opinion on what a national government can control. Budget deficit anyone?
So its on with the fun. By the end of the meeting our most senior pollies and bankers will be dazzled, but also confused at a higher level.
The 20:80 society, tittytainment and defence industries
Date: Tuesday, February 18, 2014
Author: Tiresias of Canberra
Henry, your passing reference to the 1% and the 99% in connection to the future world of work makes me feel ancient. Almost two decades ago, in late September 1995, the global elite, in the form of 500 leading politicians, businessmen and academics, gathered at the Fairmont Hotel which stands on San Francisco’s famous Nob Hill. The venue was the birthplace of the United Nations, so the enduring odour of corruption and the best of intentions perhaps worked like a pheromone to attract the ultra-rich. Amongst the 500 were Mikhail Gorbachev (the world’s greatest ever failure at economic reform), Margaret Thatcher (another failed economic reformer), George Bush Sr. and George Schultz.
Much of the discussion centred on the so-called “20:80 society”. This was this group's paradigm for the emerging socio-economic system: “In the next century, 20 per cent of the population will suffice to keep the world economy going … A fifth of all job-seekers will be enough to produce all the commodities and to furnish the high-value services that world society will be able to afford. The 20 per cent, in whichever country, will actively participate in life, earnings and consumption – to which another 1 per cent or so of people who, for example, have inherited a lot of money … A new social order is being sketched out at The Fairmont – one of rich countries with no middle class worth mentioning – and nobody there disagrees.”[*]
Such were (and remain) the expectations of the great and the good. The de-industrialisation of Australia fits easily enough into this agenda. The recent public whining about ‘Australian’ jobs lost on account of the decision of multinationals to pull out of Victoria and the moronic blame game which followed missed the point. There is a world-wide glut of manufacturing capacity of all kinds and there is no need for any multinational to locate any part of the auto-manufacturing supply-chain in this country. No matter how low Australian wages, those jobs are gone. This cannot be admitted without unsettling the electorate, which imagines that the right policy fix will assure them or their children of a place in the global workforce.
The obvious flaw with the 20:80-system into which we are now surely falling is what to do with those who are not part of the magic circle, those whose labour is not in demand and who are economically surplus? The answer on offer at the Fairmont was put forward by Zbigniew Brzezinski, Jimmy Carter’s national security adviser. Brzezinski’s solution was simple: “‘tittytainment’ [‘tits’ plus ‘entertainment’] … not so much … sex as … the milk flowing from a nursing mother’s breast. Perhaps a mix of deadening entertainment and adequate nourishment will keep the world’s frustrated population in relatively good spirits.”
This sort of thing thrills the American plutocracy, but why should we settle for this? Why would we want to? Unfortunately, “tittytainment” sums up our existing national culture. It is undeniable that our education system is already geared for turning out a population unfitted to compete with the rest of the world. The revelation over the weekend in THE AUSTRALIAN about the incorporation of Aboriginal arithmetic into the national curriculum says it all.
Henry’s preferred alternative, maintaining a strategic core of industry under the aegis of national self-reliance in defence procurement, is worth exploring as a partial contribution towards a solution, but I will not be holding my breath. Defence procurement is both a murky and an exceptionally sensitive area. It remains to be seen if our politicians and senior bureaucrats have the ability to independently manage even a miniscule military-industrial complex. Judging by the Collins submarine fiasco, the answer would be an emphatic “no”.
The best way around this obstacle is very simple. Australia must follow my old-suggestion and form a consortium of defence related industries with key friends and allies who lack our greatest strategic asset: vast open spaces with plenty of remote locations that are ideal for road-testing new products in avionics and military hardware. Our friends and allies who are rich in human capital and technology are also overcrowded and poor in space: I refer to the UK, Japan, Israel, Singapore, Taiwan and South Korea. These countries have the capital, the managerial capacity and the technology to achieve great things. We do not. So we host the party on our shores and contribute whatever we can.
If we can get the more advanced nations to locate a fraction of their defence related production on our shores, we might just have a chance. Australia would have to swallow its pride and play a junior role in the consortium, but beggars have no right to any pride in the first place. Who knows, perhaps Australian managers might learn a thing or two from their peers from more advanced nations? Stranger things have happened.
Footnote: * T Hans-Peter Martin and Harald Schumann, The Global Trap: Globalization and the Assault on Democracy and Prosperity, translated by Patrick Camiller, Pluto Press Australia and others, 1997, pp. 3-4.
Saturday Sanity Break, 15 February 2014
Date: Saturday, February 15, 2014
Author: Henry Thornton
How to replace vehicle manufacture and retain a useful and productive manufacturing infrastructure? This is the question of the year and there is little but rhetoric on offer. Here is a modest suggestion. It is that we systematically develop the capacity to build and maintain Australia's defence kit in Australia, fuelled by state-of-the-art, even ahead of other people's art, research and development. Modern Australia has laughed at this idea, with government policy providing what is effectively anti-protection.
'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.
'I present three examples of what I regard as inappropriate treatment of Australia’s strategic manufacturing sector. The first concerns the Joint Strike Fighter (JSF) project. ...
'A second example concerns the Australian-made Bushmaster. ...
'A third example is the breakthrough defence technology developed by Queensland company Metal Storm Ltd. The company has proved its technology for American military clients but remains zealously ignored by the ADF. As in the solar energy space, Australia Inc has managed to turn its back on a fine Australian invention'.
This item from the archives is recalled due to an article on P2 of The Australian today - 'Defence system could earn billions'. Sadly, this warrior for home-grown defence procurement must conclude that the breakthrough technology is far more likely to be simply given to the Americans. Should a start-up company raise a few millions in an attempt to develop and sell this technology, it will be ignored by Australia's defence procurement agencies and will eventually go broke. Then it will be gobbled up by an American company with strong positive links to the American defence establishment. That was the fate of Metal Storm Ltd, and I hope the Abbott government does vastly better than its predecessors in utilising Australian R&D.
Make no mistake, this is a bell-weather example.
There are two further, closely related, issues. The first concerns industrial relations, where calls for reform will simply not go away. While WorkChoices is 'dead, buried and cremated', high labor costs and whole libraries of regulations are strangling Australia's businesses. Dennis Shanahan says 'If Shorten wants a plan [as he keeps demanding], Abbott certainly has one'.
'It means stopping the boats. It means fixing the budget. It means building the future. It means building an Australia where everyone can expect a fair go and everyone is encouraged to have a go'. So far at least, the Abbott government has not provided businesses faced by unsustainable IR rules with a fair go, although its decision not to bail out Holden, Toyota or SPC Adrmona has sent a powerful indirect message.
And, as Henry's favourite journalistic hound from hell, Grace Collier, also in the Oz, says of the coming royal commission: 'We are set to see ALP-affiliated gangsters for what they are, and all won't be apples'.
The second additional reason for the decline of Australian manufacturing, and the weakness of many other non-mining businesses, is an exchange rate that has been too high for too long. While our currency has been talked down, helped along by rate cuts that have gone too far, as witnessed by powerful house price inflation and rising goods and services inflation, it is still well above levels that will give a fair go to the relevant businesses. The RBA has tried its damnedest (spell check here), it simply lacks the necessary policy to give Australian business a fair go. More here on this puzzling lack of understanding.
Mitch, you are a marvel. You have reminded Cap'n Smith of the number one cricket team in the world of just how damaging a well-directed bouncer at 150 km per hour can be, and the six other wickets you garnered in destroying the Sth Efrican's first innings of this series just underlined you message. Then Messrs Warner and Doolan put the South Efrican bowlers - rated the best unit in the world - to the sword, and destroyed Henry's normal sleep patterns in the process.
The footy has started, and the Hawks looked invincible in disposing of a hapless young Lions outfit. But the big news so far is the effect of Supercoach Paul Roos on Melbourne, a joke team in recent years, who beat Richmond in a thrilling game. Caaaarlton's main new hiring Daisy Thomas is out with a chest infection, while Juddy is having his nerves cut so he can no longer feel the pain of his achilles tendon. Scary stuff!
The skiing and snowboarding has battled for watchers against the cricket in the Thornton household, with the second TV too far away (down the hall) for easy relocation. The Aussie females, as in the real Olympics, are doing us proud. And the woman who beat Sally Pearson and set a new record in the 100 metres is another example of wimmin power in Australian sport. Henry's daughter Emily Rose, was the only member of Henry's brood who received umpires votes in the underage gender-free footy though this is not a popular point with the young males when raised at the dinner table.
Henry and brood are going to attend the first showing in Australia of the Lego Movie, whose trailer is here. Seats are selling like hotcakes in the mighty USA, and it is being said this is one of the best movies of the year. Cheap but very cute actors also, helping the bottom line.
Image of the week
Henry Thornton's True Unemployment & Under-employment (22.5%)
Date: Friday, February 14, 2014
Author: Henry Thornton
'Economists expect little improvement in the jobs market in the months ahead, after the unemployment rate hit six per cent for the first time in over 10 years'. Our headline, like Donald Horne's The Lucky Country is intended to convey irony.
Australia's jobless rate for January rose to 6 per cent in December, according to seasonally adjusted figures from the Australian Bureau of Statistics, from 5.8 per cent. Thus reports the Herald Sun, whose headline says 'highest for 10 years'. The report fails to mention that 'Economists' expected no change, although it quotes St George chief economist Besa Deda: "The unemployment rate should continue to edge higher over the next six months or so and this expectation fits in with the Reserve Bank of Australia's outlook for the jobs market." Nicely done Besa - what was your prediction, pray tell?
ABC Radio was brave enough to say the economists were shocked by the number of jobs lost, and one previously unknown economist from Charles Darwin said the 'real' rate of unemployment - assuming no drop in the participation rate - is 7.8 %. 'Struggling reluctantly to the truth', as others will soon begin to do.
Net jobs were down by a few thousand, so the major fact is the continued fall in people saying they are looking for work. Of course, regular readers will recognise that Henry believes the official numbers greatly understate the real situation - e.g. here.
In other news today, a large mining services company in Perth has been put into liquidation, meaning another swathe of jobs will be lost - now, not when the vehicle manufacturers quit in x years time. Incidentally, do you believe that Toyota and Holden will keep their current workforces until their final Australian-made car rolls off the production line? If so, you presumably also believe in Santa Claus and the Tooth Fairy.
It is worth noting that both RBA and Treasury predictions put the rate of unemployment heading for, presumably peaking at, 6.25 %. This is another number still believed largely by believers in the Tooth Fairy. Glenn Stevens is presumably resorting more heavily than usual in a something and water - hold the ice - as he winds down for the day. I can hear him saying in a puzzled tone 'The bloody glass is practically empty, darling. Would you like to top it up?'
The Napthine Government has stepped in to help save SPC Ardmona with a $22 million grant that is to be repaid if jobs fall below 500. ABC Radio early today reported that SPC Ardmona workers would cop, or were seeking wages frozen for 18 months - or someone thought this would be a good idea. Now that would indeed be a good idea, especially if the workers had suggested it. But perhaps Henry was still in dreamland, the very dry dreamland inhabited by serious economists.
In other (less surprising) news, the International Monetary Fund (IMF) has advised there is a big budgetary clean-up job to be done in Australia. These people fly around the world at the front of big aeroplanes in order to pontificate in the most obvious ways. Frankly, I'd prefer the real Pope to visit, at least his attempts to save souls might be somewhat useful, at least to saved souls, and men of religion have been known to break droughts.
The hardened warriors of South Efrica were expected to brutalise Australia's batters and then put Mitchell Johnson and his fellow bowlers to the sword. The hardened warriors got off to a good start with Warner, Rogers, Doolan (after a promising 27) and Clarke back in the shed for not many runs. But Messrs Marsh (the biggest surprise of the summer so far), Smith and Johnson wielded the willow to great good effect. Despite an unusually subdued effort from the tail, Australia made 397 runs.
Cap'n Smith started well, with 10 runs off the first over of the match, although 4 of the runs came from an edge between third slip and gully. Then he faced Mitch J, who bowled one of the all-time great bouncers, straight at Cap'n Smith's chest at 150 k an hour, or, more relevantly, 20 odd metres in 0.4 seconds. (Check the maths please, Bert.) As the commentators put it, Smith was not just out, but humiliated. Henry forced himself to lie awake listening as the South Efrican's vaunted batting crumbled. It was never like this with the Mont Albert Fourths, gentle readers, but it was beautiful to hear. When rain stopped play the enemy was 6 for 140 and Mitch had fourfa.
Henry must repeat a crucial warning - for a modern nation, economic success is inversely related to sporting success. So enjoy the cricket, but do not complain when unemployment picks on you or your loved ones. And writers of complacent editorials, get real, boys and girls. It's bloody tough out here, as at least 10 % of you will discover before this recession is over.
The Road to Recession
Date: Tuesday, February 11, 2014
Author: Henry Thornton
'Road to recession' says the Age. 'The end of car manufacturing in Australia - confirmed with Tyota's announcement that it would shut local production in 2017, taking thousands of jobs with it - could tip Victoria and South Australia into recession, ...'. They're sharp at the Age, taking up a theme discussed in these pages from various perspectives from twelve months ago. The RBA is still cheery, raising its forecast of real growth even as it raises its predictions about the course of inflation. Time will tell, but it is probably too late to stop the grim recession now staring Australians in the face. Here is a link to our major contributions to this debate.
As well as the direct and indirect effects of the loss of jobs in vehicle manufacture and the associated componant manufacturers there is a tough budget to come, a savage drought in most of rural Australia and (most importantly) the ongoing effects of double digit cost disequilibrium. While the dollar's fall to around 87 cents was hailed as helping make industry more competitive, higher than expected inflation has restored the dollar to 90 cents of a US dollar, reflecting a widespread belief that interest rate cuts are over and that the next move may be up.
Slower growth in China, the beginning of the end of the US Fed's monetary policy 'taper', slower than expected jobs growth in the USA and generally sluggish commodity prices are all reducing optimism in anyone with the ability to read the very large writing on the wall. The latest edition of The Economisthas a characteristically more cheerful interpretation.
Politics is returning to a measure of normality as the improbable post-election honeymoon of Bill Shorten and the Labor Party is waning. Perhaps due to the opposition leader's disinterest in wage restraint proposed by Paul Howes and his attempts to fend off the great big searchlight being applied to alleged corruption in the construction industry by Tony Abbott.
Hang in there, gentle readers. Australian business is slowly learning that it needs to take a tougher line on business costs, the most important of which are labor costs. When a key uninion official says 'Workplace culture is killing jobs', as Paul Howes did last week, one sees the arrival of a new era of moderation. Depending on the severity of the looming recession, labor costs will decline fast or slow. It will be a recession we did not need to have, but blindness to basic economic forces has afflicted Australia's managerial class since the end of John Howard's government. Sadly, it is ordinary workers who will bear most of the burden, but that is the rules of the game in the second great global industrial revolution.
Saturday Sanity Break, 8 February 2014
Date: Saturday, February 08, 2014
Author: Henry Thornton
Well, who'd have believed it? The people smugglers are stopped, corporate handouts are severely curtailed, a Labor leader has called on his brothers to make love not war on industrial matters, drought has tightened its savage grip on much of Australia, the economy is picking up - and soon house AND common or garden inflation will be bothersome - and the AFR is writing about 'A New Age of Realism'. Does Henry detect a new era is all this? (See Laurie Oaks on Howes, Shorten and Abbott.)
1986 and now
It has been said that Australia handles prosperity badly but copes magnificently with adversity. It is around the thirtieth anniversary of the Banana Republic crisis. Then Treasurer Paul Keating, after hard advice from the RBA, that at first was violently resisted, turned a budget deficit into a surplus. Prime minister RJ (Bob) Hawke persuaded the unions to cop a cut in real wages by not demanding the full flow through of the effects of the large drop in the value of the Australian dollar that took hold when the full measure of Australia's lack of competitiveness was realised. With the Treasurer's agreement, the RBA tightened monetary policy. The trouble was, after a heroic recasting of economic policy, as the dollar recovered the RBA went easy in the mistaken belief that a rising dollar was tightening 'monetary conditions', against the advice of its then Chief Economist, who had earlier rung the Banana Republic bell. He resigned in disgust, and his successor went on to lay the foundations of 'the recession we had to have'.
The current situation is not unlike that in 1986. There is a large and deeply embedded budget deficit. There is a highly overvalued Australian dollar. Monetary policy is too easy. The differences are important. I suspect the underlying budget deficit is far larger. The labor market in is far deeper trouble, with realistic unemployment plus under-employment hovering near 20 % of the workforce. House prices are rising far more quickly than anticipated and common or garden (consumer) inflation on the RBA's preferred 'underlying' basis is for the past six months above the RBA's target range. The RBA was warned of the risks of inflation exceeding predictions but those providing the warning - eg here - were effectively told to rack orf.
So far as Henry is aware, the RBA has not rung the warning bell - indeed until recently we were being lectured that the glass was at least half full. Presumably the Treasury, an organisation asleep at the wheel in 1986, has been believing its own misbegotten and overly optimistic forecasts, peddled so foolishly by Treasurer Swan, Australia'sleast competent holder of that high office in many economist's opinions.
I could go on. The specific risk is like that in 1986. Strong budgetary action is likely to stave off the crisis that is virtually inevitable, and the government's tough line on corporate and personal responsibility may take the place of Mr Hawke's 'Accord'. A premature recovery may be aided by easy money for too long, and then we shall see 'the recession we did not have to have'. Henry's sober predictions about this matter are available on this site. Here is one important example.
Henry has been to the movies; Twelve Years a Slave will bring tears to your eyes; Philomena ditto; and The Wolf of Wall Street will remind you of those glorious days when money was freely dished out by gormless youths working for badly managed financial jugganauts. All three of these summer blockbuster 'based on a true story', incidentally. 'Wolf' far too long for most, but then that is the modern trend. Young Bert Thornton has described American Hustle as the best movie I have seen in a long while'.
The Ashes are over, with Australia's 'best in world' fast bowling attack ruining the PP's summer downunder. Now we even have a spin bowler who can turn the ball, and several rookie exponant of the same dark arts who have been coached by Shane 'Hogwarts' Warne. Batting is a bit of a broblem, as we rely for too much on the wicket keeper and the ability of the bowlers to make runs when the top order has crumbled.
Now this promising outfit is in South Efrica, where rain has limited training and the warm up games. The boasting about the bowling attack is a mistake, in Henry's humble opinion. It did not work for the Mont Albert fouth eleven, and is likely to stir the South Efricans, whose team after all is the undisputed number one, and is playing on home turf.
The more important news is the there are not too many sleeps til the footy season begins. Henry has seen no news that suggests Caaaarlton! can finish higher than 6th (its result in 2013) but the Thornton family will live in hope, as always.
A lighter moment
A young Sydney woman was so depressed that she decided to end her life by throwing herself into the Harbour.
Just before she could throw herself off Circular Quay, a handsome young man stopped her.
"You have so much to live for," said the man. "I'm a sailor, and we are off to Italy tomorrow. I can stow you away on my ship. I'll take care of you, bring you food every day, and keep you happy."
With nothing to lose, combined with the fact that she had always wanted to go to Italy , the woman accepted.
That night the sailor brought her aboard and hid her in a small but comfortable compartment in the hold.
From then on, every night he would bring her three sandwiches, a bottle of red wine, and make love to her until dawn.
Two weeks later she was discovered by the captain during a routine inspection.
"What are you doing here?" asked the captain.
"I have an arrangement with one of the sailors," she replied. "He brings me food and I get a free trip to Italy .."
"I see," the captain says.
Her conscience got the best of her and she added, "Plus, he's screwing me."
"He certainly is," replied the captain "This is the Manly Ferry ..."
Image of the week
Courtesy Sun Herald
Let them eat gumleaves
Date: Friday, February 07, 2014
Author: Henry Thornton
Henry has been in the heart of Australia's drought-stricken country attending the memorial service for his much loved Father-in-law after the funeral in Sydney. Both services were moving and strongly attended. Dr John Prior was a seriously good man, and after time serving in the occupation force in Japan the young medico purchased a practice in Boggabri where he served the community for 50 years.
All the signs are clear. The paddocks were pale yellow, sometimes reddish-brown when all the grass had been eaten. In one place, the remaining foliage was a pale mauve color, but no-one in our car knew what it might have been. We drove carefully through herds of cattle, some with ribs highly visible, apparently looking after themselves on the long paddock that is the roadside foliage. One old farmer I met in the street said he'd never known it so bad. 'The other day a large branch of a gum tree was blown down in the storm, and the cattle were eating the leaves - I've never seen that before' he explained.
Towns like Boggabri in northern NSW have been revitalised by coal mining. Houses have been painted and the dry grass of their gardens is carefully tended, and other plants kept alive with waste water. At Boggabri there is a vast camp for the fly-in fly-out miners which I spent two night sleeping, the family house being overflowing with Dr Prior's children and their children. Generally, the mining blokes were sitting on the small seats outside their rooms having a beer, while the mining wimmin were at corners speaking on mobile phones to (presumably) their loved ones. The blokes one passed in walking to and from the dining hall almost invariably said 'G'day mate, how yer doing' or similar, while the wimmin mostly kept their eyes on the pavement for the usual female reason of not encouraging any unwanted contact.
The dining hall catered for all tastes and a special notice said customers could order steak, chicken or fish cooked anyway they liked. The internet and aircom worked perfectly, in the latter case after one friendly mining bloke showed Henry how to rig up a piece of toilet paper to keep the motion sensor busy while the resident was away at the mines. Nothing in the rooms except the bare minimum, and after a first inspection Henry headed for the local IGA to acquired orange juice, apples, tea bags and shampoo. 'I get a lot of business from the miners for those items' the IGA manager said. The camp already holds almost as many people as the population of Boggabri and a planned extension will double the capacity.
The current big city debate on wages and conditions of employment seems almost nonsensical in drought-stricken Boggabri. The old bloke whose cattle were eating gum leaves has no income this year. 'Its not worth truckin' 'em back if you don't sell 'em', he told Henry, 'and prices are dreadful'. Yet back in the bigger towns and cities, most people people have generous welfare payments for doing not much or jobs with lots of over-award conditions, including a 'shiny tin' allowance for forklift drivers at SPC Ardmona (forklift drivers who have the skill to pack unlabelled fruit at the highest level). Failing companies live with ludicrously generously working conditions and then have the cheek to ask for help from taxpayers. Joy Hockey is right on the money when he says we cannot afford current levels of corporate or personal welfare.
Paul Howes has cemented his place in Australia's economic history by his call for cooperation between unions and businesses to maximise jobs. This was a theme of Simon Crean's father in the dying days of the Whitlan government ('One man's wage hike is another man's job) and again with Bob Hawke's Accord in the 1980s. Tony Abbott is surely right to say it is up to companies and workers to sort out employment conditions that reward both groups. Any other arrangement is just not sustainable, and Bill Shorten's attempt to protect the role of unions may well make his party unelectable. Check out the proportion of workers who are unionists, Bill Shorten.
We drove through and then flew home over dangerously dry country and impoverished farming communities. There is already a jobs drought in the cities and it will get worse before it gets better. Stronger retail sales and higher exports has injected some optimism into the corporate sector, but recovery will be limited by the large cost overhang and unsustainable budget. It is indeed the end of the age of entitlement, and while-ever the Labor Party and Greens fail to see this they are condemning Australia to a mediocre future.
'Let them eat gum leaves', Bill Shorten and Christine Milne are saying in their economically illiterate way.
Saturday Sanity Break, 1 February 2014
Date: Saturday, February 01, 2014
Author: Henry Thornton
The debate on what will be called 'structural unemployment' has gone global. Spengler writes: 'The risk is that the unproductive, unskilled and unemployable portions of the industrial world’s people will decide to vote themselves rich. Their leaders encourage this by focusing on income inequality. That is President Obama’s message as well as the consensus at the World Economic Forum last week at Davos, and it is nonsense.
'The problem isn’t inequality of income, but inequality of knowledge. One pilot flying a modern military aircraft could destroy the whole of an ancient civilization. One farmer from Nebraska can replace a hundred in Egypt. A thousand years ago, everyone knew how a watermill worked; 200 years ago, most people knew how a steam engine works; how many people today know how a computer works?
'East Asia is faring better than the rest of the world in this great transformation because its culture imposes a merciless meritocracy. The West should be able to do better than this. If we can’t, we can see our future in Argentina'.
In the former 'miracle economy' of continent Downunder, debate rages also.
Henry's favourite journalist, Grace Collier, says in the weekend Oz that it is 'time to think again as players turn a blind eye to IR's corrupt heart'. Someone in the weekend fin has interviewed a builder, who says the government needs to erect a tougher barriers to union thugs before his colleagues will be willing to speak out. Fair enough, mate, but if there is a royal commission, you must be willing to stand up and be heard, as it will be the best chance in your lifetime to make a difference.
Judith Sloan, also in the Oz, has a nice - correction horrible - graph showing the decline in Australia's jobs from the peak in late 2008 (if I read the graph right) and the near parallel fall in workforce participation. The decline in participation explains why the rate of unemployment as measured by the ABS has 'only' risen from 4.9 % in April 2011 to 5.8 % now. As we have pointed out, if successively broader (and more realistic) measures are considered, there are 22 % of Australian workers who are actually unemployed (11 %), underemployed (another 8.6 %) or dropped out of the workforce (2.5 %).
Ather key bits of analysis come from international sources - the Economist and Ambrose Evans-Pritchard (click on their names for Henry's discussion) as well as Spengler, linked above.
We make no apology for quoting from the best journalists in the world, because economics, business and economic policy have been for many years a global matter, and these writers are dealing with vast global structural forces that are influencing Australia demand to be heard. Australia's jobs market was for a while protected by the China boom and then the mad, wasteful spending by the Rudd'n'Gillard'n'Rudd governments. The cost was the build-up of a disasterous cost disequilibriun and a monster budget deficit.
The RBA meets for the first time this year next Tuesday. RBA staff must now be feeling a bit shell-shocked due to the unexpected weakness of the jobs market, combined with higher than expected house price inflation and higher than expected goods and services inflation. The question members of the the board should be asking is this: 'Could the last couple of rate cuts, and the Governor's "glass half full" optimism have helped create the current mess?' This will not be asked, of course, as Governor Glenn and his minions have highly effective ways of dealing with dissidents, but outsiders can ponder these questions as they observe the journalistic cheer squad in action on Wednesday morning.
Henry's expectation is that the board will decide that the current 'bias to easing' should be removed, implying (even stating) that the next move of cash rates could be in either direction.
However, we should not be too harsh on the gnomes of Martin Place. The RBA employs the most professional group of economists in Australia, and Henry is sure they do their best inside a rather insular culture. More importantly, the problems facing the Australian economy are, in order of inportance, the double-barralled cost overhang built up in the mining boom and by the Rudd'n'Gillard'n'Rudd governments' indulgent vainglorious spending boom and the horrible budgetary situation now faced by the Abbott government. Not much that the monetary gnomes can do except hold monetary policy firm and offer advice to the government, should Glenn Stevens feel that is part of his task.
Tennis has come and gone, and how good was it to see Li Na and Stan Wawrinka emerge victorious at the Australian Open. The others will be back, but Henry enjoys an upset as opposed to the mechanical repetition of wins by the suprstars.
It is only 14 or 15 sleeps until the footy starts again, and we can begin to judge how our teaqms are likely to perform in the 2014 season. Caaaarlton!'s one rolled gold superstar Chris Judd is said to be raring to go, and will play more in this year's preseason NAB cup than last year when he was said to be 'underdone'. Teams like Hawthorn, however, have 4 or 5 rolled gold superstars, and there is no evidence that Caaaarlton! can match those above them on the ladder in 2013. Indeed, we have let go to players who would have been on Henry's top 22 this year, Betts and Hampson, and the preferred ruckman, Warnock has two clearly obvious bad habits that Henry feels should be eliminated if he and the team are to begin to trouble the top teams. (Memo Mick Malthouse: Henry is willing to help Mr Warnock overcome these habits.)
Cricket is almost over at home, and since it included something like 11 wins out of 12 against the pestiferous Poms, with one big bash event to come we can at least feel we are approaching our proper level in world rankings again. But playing the number one South Efricans on their home turf is a truly great challenge, and if we win one test out of three with one hard-fought draw, it will be worth sitting up for.
Image of the week
Courtesy Sun Herald
A distopian future, even for Australia, former `miracle economy`.
Date: Thursday, January 30, 2014
Author: Henry Thornton
Well, what a surprise, the ABC has discovered that rorts, corruption, intimidation, even death threats are rife in the construction business. Warm congratulations to those brave souls who spoke out, and also to Grace Collier of the Oz who is pursuing IR matters like a hound from hell. As Ms Collier says today, it is not just the union but the big construction companies who are complicit in in the whole mess, and we must now hope that the police get on with the job of organising some really juicy prosecutions for the industrial version of the coward's punch that has been so much discussed in recent months. Where does Bill Shorten and the parliamentary Labor Party stand on this one, folks, that is the political question.
Senator the Hon Eric Abetz, Minister for Employment, is also on the case, and his recent speech is getting some publicity.
The AFR reported as follows: 'The Abbott government has signalled a broad-ranging royal commission into the union movement following fresh allegations of corruption in the construction industry, setting the scene for a drawn-out assault on Labor’s traditional support base.
'At the same time, Employment Minister Eric Abetz upbraided businesses which habitually cave in to unrealistic union pay demands, jeopardising their viability and risking a wages breakout.
'In a blistering attack on business and unions for their roles in lifting wages to unsustainable levels, Senator Abetz called on companies to band together and resist spiralling claims'.
This continues the government's theme that if a company needs government support is should first put its house in order, and as we have pointed out labor costs are an important set of costs that are rendering Australian industry globally uncompetitive. Part of labor costs are the rorts and corruption in the construction industry, which includes the out-of-control NBN
Here is a link. If past practice is a guide, a video of the event will eventually be provided by the Sydney Institute.
Last week's inflation shock has provided aftershocks as the analysts get onto the case. For the December quarter, CPI inflation was 0.8 %, twice the predicted 0.4 %. 'Underlying' CPI inflation, the main guide to RBA action, is said to be at the top or even above the 2-3 % range for the past six months. Worse, traded goods inflation and inflation of services provided by or heavily influenced by governments are running at almost twice the average. On top of the unexpected strength of housing prices, this would seem to leave little room for any more rate cuts, and suggests in fact that the two previous rate cuts were a mistake. Much egg to be wiped from the RBa's dial as this is the entirely predictable (and predicted) consequence of using monetary policy to reduce the overblown Australian dollar.
The various nasty economic currents include doubt about the strength of China's economy putting downward pressure on commodity prices, fears about the further 'taper' of American money printing policy putting downward pressure on share prices and problems for 'emerging economies' as money flows back to the USA.
We highly commend Gary Scarrabelotti's fine contribution on the theme of 'a floating dollar requires floating wages', published here on Tuesday.
However, the real global nastiness is the vast and accelerating change that is the result of the second great age of machines. A reader has drawn attention to an excellent diatribe by Ambrose Evans-Pritchard who asks the question 'Will the 2nd Great Machine Age be a frightening jobless dystopia?"
As the reader says, 'it puts our debate on the future of manufacturing to shame'. But we are a small country far from the big centres where competition raises standards of debate on most matters, so we must borrow from the best in class when we can. (This bodes ill for local journalists, incidentally, but that is another matter.)
The basic thesis is that machines have been displacing jobs for years and the rate is accelerating.
Ambrose Pritchard: 'Phillip Jennings, head of the UNI global labour federation, said it would be a "miscarriage of justice" to blame the 32 million job losses since the Lehman-EMU crisis on the iPad or the driverless car.
"You can't put technology in the dock for 50pc youth unemployment in Greece or Spain. I blame the EU Troika. It was the economic and political decisions taken that have led to the collapse of jobs. In Greece it has gone beyond depression into a humanitarian crisis," he said at the World Economic Forum.
'He said some $2 trillion of corporate cash is on the sidelines in the US, $700bn in the UK, and another $2 trillion in the rest of the world. "There is an investors strike. This is a problem of demand in our economies, they are comatose," he said.
'This has a kernel of truth. The current policy settings are pushing the global savings rate to a record 25.5pc of GDP, creating a chronic surfeit of capital over labour. It is a Marxian world'.
Today we learn thanks to the ANZ bank that Australian investment is falling off a cliff and regular readers will recall that real (as opposed to ABS) unemployment has been rocketing up. While the mining boom may have staved off the problems already endemic in other 'developed' nations, it seems distopia is finally reaching Australia.
Read on here, folks, and work as hard as you can to help get your children into jobs that cannot (yet) be done by robots.
This is a companion piece to those by the Economist reported on last week, and linked here.