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Henry Thornton - Contributors: A discussion of economic, social and political issues Blogs
Saturday Sanity Break, 17 September 2011
Date: Saturday, September 17, 2011
Author: Henry Thornton

Great to see the coalition's 'Food bowl' plan.

surely this is further evidence of positive plans for government rather than Noooooo!

Roiling Eurozone debt crisis

The next stage of the rolling (roiling?) maul that is the consequence of the still unresolved global crisis may be upon us.

Ambrose Evans-Pritchard reports for the Telegraph in Dalian, China

'Chinese premier Wen Jiabao was soothingly polite in his speech to the World Economic Forum in Dalian, insisting that his country will play its part to "prevent the further spread of the sovereign debt crisis".

'The language toughened a few notches when asked later how far China's Communist Party is really willing to go. The message was clipped and severe. Beijing will not sign a blank cheque for European states that have failed to carry out deep reform. "Countries must first put their own houses in order," he said.

'Mr Wen said he had spoken to José Manuel Barroso, the president of the European Commission, laying the conditions for Chinese intervention.

"I made clear to him that we are confident Europe will overcome its difficulties and make a full recovery. We have on many occasions expressed our readiness to extend a helping hand, and that we are willing to invest more in European countries."

"At the same time, we need bold steps to give redirection to China's strategic objective. We believe they should recognise China's full market economy status," he said, referring to World Trade Organisation (WTO) rules.

"To show one's sincerity on this issue ... is the way a friend treats another friend," he said, answering a question after his speech.

'Li Daokui, a rate-setter at China's central bank, warned that nobody should delude themselves about China's willingness to play the role of white knight.

"I don't think any country can be saved by China in today's world. Countries can only save themselves by pushing through reforms," he told a panel at the forum, echoing language from German Chancellor Angela Merkel.

'China's central bank must stop investing its hard-earned wealth in Western debt, switching instead into infrastructure, highways, railways and postal systems in countries such as the US, and even breaking the ultimate taboo by purchasing equities.

"The incremental parts of our of our foreign reserve holdings should be invested in physical assets," he said.

"We would like to buy stakes in Boeing, Intel and Apple, and maybe we should invest in these types of companies in a proactive way."

"Once the US Treasury market stabilises we can liquidate more of our holdings of Treasuries," he said.

Great Crises of Capitalism

Richard Gluyas in the Weekend Australian has discussed the search for 'answers after the debt binge'. Henry's book Great Crises of capitalism devotes most of Chapter 12 to this issue, and anticipates several themes in the 'answers' found by Mr. Gluyas.

The trick, of course, is not more regulation, but rather better regulation.

I have send an extract from Chapter 12 to Mr Gluyas and hope he has the time to read this material.

The recent share market rebound, which may represent like a second marriage, the triumph of hope over experience.  There are a lot of worried econocrats and politicians out there, as suggested by the earleir report above centred on the travails of the Eurozone.

Henry decided to buy some downside protection for half of the family's equity portfolio yesterday.  Naturally he is hoping the insurance payment is lost, since that will mean the portfolio is still broadly intact.

I have added a blog on the Great Crises website.  This covers the past three months, which have disappeared even faster than usual, perhaps partly because of a three week roadtrip into Australia's red centre and deep north.

Note the launch of the e-book version of Henry's book at the Celtic Club in melbourne on the evening of 27 September.

Image of the week

Courtesy The Australian

Saturday Sanity Break, 19 December, 2015
Date: Saturday, December 19, 2015
Author: Henry Thornton

The economic debate being fostered by Messrs Turnbull and Morrison is reaching heights achieved only by Messrs Hawke and Keating.  Now we are all being tutored on the subject of who in Australia pays income tax.  Net of pensions and other welfare items the answer is ‘just over half of us’ and if current trends continue this will be ‘less than half of us’. 

There are three key questions. Is this fair?  Is this sustainable? Is the great reliance on income tax efficient?  Australia’s international debt is rising inexorably and the pain of servicing will rise disproportionately as global interest rates rise, as inevitably they must.

Unless government spending is cut, and substantially, either the GST must be widened and its rate hiked or income taxes must be allowed to rise via income growth and bracket creep, increasing the burden on the one-half (soon to be less than one-half) of net taxpayers.  A switch from income tax to consumption tax is clearly efficient as it would encourage saving rather than spending, and also fairer, as government spending would be spread over a wider tax base.

The world has survived the first tiny step to the return of a neutral monetary policy in the USA and eventually the world. Here of course there is still the potential for further rate cuts though Henry believes Gov'not Glenn will be reluctant to use the available margin.


As the first 100 days of the Turnbull government approaches, the verdict (of the polls and the pundits) is ‘great job so far’.  Some say that nothing has so far actually been done to fix the debt and deficit disaster, but Henry believes constructive debate is a real contribution that is vital if budget balance and then surplus is to be achieved.

Others say all will be well so long as Malcolm’s ego/temper is kept under control.  Henry observes that, so far, the PM has given every sign of having learned from the harrowing experience of being dumped as opposition leader.


Fiona Prior braves the cinematic event Star Wars: The Force Awakens and sits in a cinema that erupts in rapture each time a character from the 1977 original appears. Her verdict? A great way to spend a summer holiday afternoon. Read her insights here. http://henrythornton.com/article.asp?article_id=6865

The sporting life.

Last weekend’s Age had several stories about the transition among footballers.  The story (by Peter Hanlon) of the shoulder tapping of Jonathan Simpkin at Hawthorn  showed just how smart Coach Clarkson is: ‘We [Simpkin and Clarkson]  sat down, had a beer, a casual chat ... it wasn’t an easy chat but it all went pretty well’.

‘Clarkson told Simpkin that he didn’t want to put him through another year of playing for Box Hill when he deserved better.  It warmed him to be told he’d always be welcome at Hawthorn, forever part of its history, a premiership player. “That’s something I walked away feeling pretty special about”.’

The heat in Melbourne has been so intense that even the horse races are cancelled, though we have not yet seen birds dropping dead from the sky. Footballers doing pre-season training will really suffer, and the Calipso Cricketers will hardly be too cheered by their almost meaningless 2 day game. We await Boxing Day when we can visit the ‘G’ to queue outside the new and experimental security fence.

Season’s Greetings

The team at Henry Thornton.com wish dear readers all the best for the festive season and 2016. Drive carefully and watch out for wildfires and other hazards, natural and man-made.

Image of the week

Courtesy the Oz

The Force Awakens
Date: Thursday, December 17, 2015
Author: Henry Thornton

What a time to be alive. Star Wars makes its return and from all accounts has achieved something close to the original impact – trailer here.  A new potentially inhabitable (for humans) planet has been discovered a mere 16 light years away.  And the US Fed has blinked and raised cash rates by 25 basis points from near zero.  And US stocks have taken a jump in valuethe Force Awakens.

US Fed Chief, whose role as sheep herder-in-chief was cruelly lampooned here earlier this week, used ‘cautious’ and ‘prudent’ in announcing the beginning of the end to near-zero interest rates overnight.  Experts expect three or four 25 basis points in 2016, underlining the slow and measured tread of Ms Yellen and the mob.

The Washington Post said: ‘For the nation’s economic stewards, it has all finally added up to convincing evidence that the country is no longer in crisis and the recovery has taken root’.

This is the basic rationale for a rate hike causing stock prices to rise. One of Henry’s favourite fund managers holds that investors do not need to worry until the third rate hike. Henry argued that stopping QE amounted to the first two rate hikes, but that bold hypothesis seems to have been blown away by the sheep-herder-in-chief.

The Washington Post provides the best coverage Henry has found. Read on here.

The coverage includes a video. Janet Yellen is far more measured than Harrison Ford, but her bold first rate hike undoubtedly will have a far bigger impact even than the return of Star Wars and the hope of a new planet with a new set of plants and animals to displace.

What does it mean for Australia? The Aussie dollar rose slightly, like the rise in US stocks a move that confused market analysts. Far more important for us will be the government’s ability to rein in the massive official debt. While other nations have far larger debts – both absolutely and in relation to GDP - Australia’s households are world leaders in the debt to income stakes.

Imagine the mayhen if debt keeps growing and global interest rates double.

Janet and the mob
Date: Monday, December 14, 2015
Author: Henry Thornton

Finally, it seems, the US Fed is about to begin normalising interest rates. Since we seem to be living in an age of deflation, this is not so simple as might ordinarily be the case. Deflation means the 'normal' cash rate will be lower that the case in which commodity and goods prices generally are rising. Today I shall mainly draw your attention to fine contributions in The Australian and The Economist but also the work of Henry's virtual artist. We shall know the outcome, and the Fed's reasoning, on Thursday morning.

'Research conducted by the US Federal Reserve ahead of this week’s crucial meeting of its rate-setting committee shows it may have little scope to lift rates before they become contractionary'.

'The findings that the neutral interest rate — the level which is neither expansionary nor contractionary — has fallen sharply since the global financial crisis has implications for the Reserve Bank as it acknowledges that Australia’s growth path has shifted permanently lower'.

These are the opening paragraphs of David Uren's fine contribution in today's Oz. 

The Economist has a clutch of articles. The relevant leader concludes: 'This newspaper would not raise interest rates yet. America’s jobless rate, at 5%, is close to what economists consider to be full employment. And there are tentative signs that wage growth is finally picking up. Since monetary policy operates with a lag, central bankers must be forward-looking. But inflation on the price index for personal-consumption expenditure, the Fed’s preferred measure, is just 0.2%. The core measure, which excludes food and energy prices, is 1.3%. Although the headline rate will jump in the coming months, as the sharp fall in energy prices at the turn of 2014 drops out of the annual rate, there is little sign that underlying inflation is about to accelerate sharply, or exceed the 2% target'. Read on here.

A key issue concerns 'asymmetric risks'. While rates are close to zero, there is limited scope to reduce them should the economy weaken - as Henry's Raff Report sees as possible, indeed likely.

But if the economy roars and goods and services inflation again begins to build, then the Fed has 'unlimited capacity to raise rates to tame it'.

Buttonwood discusses likely impact on markets. 'Sentiment is bound to change once the Fed starts to tighten. Good news on the economy might not be positive for markets, since it could signal further rate rises. The first rate increase may be baked into asset prices; what matters from here is the pace of further tightening. Futures prices imply only two further quarter-point hikes in 2016. When the Fed raised rates more quickly than the markets expected in 1994, it instigated a rout in government bonds.

'The impact on markets makes it all the more likely that the Fed will proceed cautiously. The best analogy is with a parent teaching a child to ride a bicycle: the prudent approach is to stand close enough to catch the falling tot, and only remove the training wheels later on'.

Finally, effects on markets in developing economies are considered, possibly of special interest to countries that export commodities. 'The fear is that a golden era of growth, fuelled by China’s ravenous appetite for commodities, has come to a close, exposing deep cracks in their economic foundations. David Lubin of Citigroup, a bank, talks of a “broken growth model”. Governments cannot stimulate their economies because their creditors will not tolerate big deficits. Companies are also unable or unwilling to invest more because they have built up big debts. Exports are of little help because many of these economies are now overly reliant on commodities.

'The feeble state of manufacturing across emerging markets, with the exception of parts of Asia, means that many will miss out on the one big upside to lift-off. The Fed is set to raise rates because of America’s relative economic strength. America, in turn, should provide a boost to countries that make the things it wants to buy. But emerging markets such as Indonesia and South Africa that specialise in commodities have not just been hit hardest by China’s slowdown; they are also the least likely to benefit from America’s growth. To them, lift-off will sound like a cruel joke. They will stay pinned to the ground'.

Janet and the mob

(As these fine articles show, Janet's 'mob' include financiers (and normal people) in many nations - look for the sheep with the Salvador Dali moustache.)

Saturday Sanity Break 12 Dec 2015
Date: Saturday, December 12, 2015
Author: Henry Thornton

Stunning apparent rise in jobs is widely regarded as misleadingly positive, reminding some of us of the time when a large pile of forms was discovered behind the filing cabinet. But the 'trend' results are strong enough that we cannot ignore a message of strong overall jobs growth. The exception is youth unemployment, especially in the  poorer parts of state capitals, in regional cities and in remote areas of the nation where adult unemployment is also a sad and intractable problem. 'What can be done to promote youth unemployment?' a distinguished elderly economist asked this week. Henry advises young people to find chances to work if necessary as unpaid 'interns' to strengthen their cvs, but lower rates of pay are the economist's standard answer to such a question.

Combined with slow GDP growth, strong overall employment growth suggests low productivity growth. But strong jobs/low productivity growth is nevertheless welcome while we await the effects of a more innovative culture to emerge. And makes it likely that the next interest rate move will be up, despite the RBA's 'stand easy' bias.

There are two big global debates about economic growth. The first is 'why is overall economic growth low and falling?' The damage done to 'Animal Spirits' by the Global Financial Crisis plus the overhang of debt explains a prolonged period of slow growth. China's growth has slowed to an extent that sees commodity prices still falling, sufficient to create a bias to deflation of goods and services prices, an especially unhappy situation for Australia. Last night's plunge in key commodity prices and stocks listed on the New York Exchange point to further carnage in Australian stocks on Monday.

The second global debate concerns the US Fed's widely anticipated start of a return of super easy US monetary policy to more normal monetary policy cause disruption or even carnage in financial markets. Given the Fed's constant reiteration that rising rates will be gradual, and the length of time this message has been reiterated, Henry will be suprised if disruption is too great.  But there are skeptics about the strength of the US economy, notably Henry's Raff Report, whose latest report is linked here. 

In particular: 'Dear readers the truth is that the US stock market is supported by several handfuls of names, and supporting the market at a robust level. When the gamblers finally see the king riding by has no clothes the US market will contract sharply. Few people forecast October 1987 accurately but many including the Raff could see it coming and so it did, and so too will history repeat'.

Henry is happy holding on to the 'best 15 international stocks' provided by Australia's most dynamic fund management company. But Henry continues to reduce holding of Aussie equities.  The idea is that any international financial instability will punish Australian stocks disproptionately.  Also that there will be further falls in the Aussie dollar, possibly to 60 cents in the (US) dollar. As the AFR reported last night: 'The ASX slumped over 2 per cent for the week due to the ongoing commodities rout and as investors took stock ahead of next week's crucial Fed Reserve meeting'.

We must applaude Prime minister Turnbull's constructive optimism about global and Australian growth and his attempts to make Australia a more entrepreneurial nation. A cheery approach and a larger honeypot for academics will not, however, fix the budgetary crisis or reduce Australia's still growing debt.

The stellar US float of Atlassian, as well as the source of Mr Turnbull's wealth shows what can be done by people willing to have a go.  There are over a million Aussies living and working overseas, supposedly 20 K in Silicon Valley alone.  Silly to hope to get more than a handful returning to Oz, but realistic to work with Australia's entrepreneurial diaspora.  More here.

Tax reform

Treasurer Scott Morrison is leading a debate in which the end points seems likely to be a 'grand bargain' to raise the GST and possibly broaden its base, give the states a share of income tax to fund health and social benefits and remove inefficiencies throughout the tax system and compensate battlers but without reducing the overall tax take.  Henry doubts such an approach will fix the Federal Budget's enormous prospective deficits, but perhaps there is a fiendish puddin' being cooked in Treasurey that will square the circle and allow the Turnbull government to survive an increased GST tax collection.

This is like turning a magic puddin' into a stale bread roll on the kitchen bench, but may be a clever way to slip a well crafted pair of loafers into a slightly open door in the hope of selling said stale rolls to Mr and Missus Australia.


Fiona Prior sees the Belvoir production Mortido and warns that if you found the Coen brothers’ film No Country for Old Men frightening, Mortido will bring the violence of the drug trade even closer to home.


Encouraged by their son Bert, Henry and Mrs T recently attended the Nova theatre in trendy Caaaarlton! to watch a move called The Lobster.  This was about a dystopian future when singles are incarcerated in hotels with other single people and are encouraged to find a mate.  Those who do so are returned to civilisation, while those who fail are euthenised and somehow turned into an animal of their choice.  The hero determines he will become a lobster as these animals live a long life and are fertile throughout. But there is some sort of resistence group, where the hero finds true love and in the final scene asks for a steak knife to (we are led to believe) poke out his eyes so he will share the blindless inflicted on his true love.  We walked out before this climax to a nutty film that Nova staff all said is 'great', and sure to capture the attention of those who make awards in the film world.

Perhaps also relevant to note the critical success of Mad Max, Fury Road, whose time in cinemas was short, brutal and uncompelling.


The Windies are in a freezing Hobart early summer heading to a well planned first 'test'.  If this is a 'test' every Windies player failed except potential centurian Mr Bravo and one bowler whose name I have forgotten.  Sad contrast to the 1960-61 series that Henry listened to every ball of due to a nasty medical problem that meant no other activity was possible.

Image of the week

Courtesy AFR

Innovation front and centre
Date: Monday, December 07, 2015
Author: Henry Thornton

Today we see the first divergence between the policies of Tony Abbott and Malcolm Turnbull.  The 'innovation package' has been widely signalled, an approach also very different to that of Mr Abbott, and newspapers today feature the great and the good of Australia's innovation sector.  Given the almost universal tendency of promising Australian start-ups to seek serious funding in the USA we shall watch closely both the package and its effects.

'Malcolm Turnbull’s $1 billion innovation and science package to be unveiled today will deliver about $100 million in extra funding for the CSIRO and provide capital gains tax holidays for ­investing in start-up enterprises.

'The Prime Minister’s first signature policy announcement since seizing power from Tony ­Abbott 12 weeks ago will also ­include a push to protect the ­nation’s commercial and strategic secrets from cyber attack.

'Mr Turnbull will elevate innovation and science to the heart of the government by creating and chairing a special cabinet committee in a deliberate move to set a different priority to the Abbott government.

'It will co-ordinate all research and science spending across government, which is set to reach $10bn a year by 2020'.

Read on here.

The new 'national innovation and science agenda' focus on four themes: commercialising research; raising capital and enabling risk; making the government a model example for innovation; and boosting talent and skills.

It is reported that the package will relax Australia’s insolvency laws as part of a suite of measures to create greater incentive for investors to take risks, while industry insiders expect it to include (presumably larger) tax breaks for research and development.

For any package to be successful, it must alter incentives of university 'publish or perish' culture to include 'impact' - contribution to Australia's commercial future.

Here are Henry's efforts as an early contributor to the issue of Australia's poor performance in the 'commercialisation' game.

Saturday Sanity Break, 5 December 2015
Date: Saturday, December 05, 2015
Author: Henry Thornton

Alan Kohler is perhaps the doyen of Australia's economically literate financial journos. Today he writes: 'This week’s fairly decent GDP number has already been blown apart.

'The entire reason the Australian economy grew 0.9 per cent in the third quarter was that net exports contributed 1.5 per cent. The domestic economy contracted 0.6 per cent – the biggest contraction since the GFC.

'In other words, as one economist put it, all of Australia’s eggs are in the trade basket.

'Then on Thursday the trade figures for October, the first month of the next quarter, came out and confirmed not only that that sort of contribution from net exports was unsustainable, it was already not being sustained.

'The trade deficit blew out by nearly a billion dollars, far more than expected'.  Read on here.

Here is a warning from 1993.

Alan Kohler again: 'The RBA’s statement yesterday had an air of satisfaction about it.

'The expansion is continuing, inflation is within target and will be for years, the housing boom has moderated and the dollar is adjusting. All good.

'Or is it? Actually, the Australian dollar is in the middle of a strange and inconvenient rally, despite plummeting commodity prices and a surging US dollar.

'Just when it seemed they couldn’t fall any further, commodities dropped another 3.9 per cent in November in Australian dollar terms, with big falls in iron ore and oil.

'Yesterday, the US dollar index touched a new 14-year high, breaching the previous March 2015 level; the foreign exchange market is fully pricing in a December Fed rate hike.

''The reason we “had to have” the recession, as Paul Keating said, was to try to bring demand for imports back to within sight of exports. The sledgehammer duly cracked the nut, and the current account was brought back to minus 3 per cent of GDP.

'What’s more, the US dollar is now more likely to fall than rise once the new US tightening cycle begins, and if that happens, the Reserve Bank of Australia may have a big problem on its hands'.

Here are Henry's comments on this matter, in 'The recession we did not have to have', written and published in August 2013.

Even earlier, Henry warned on the need to 'Tame the dollar'. What was needed then, and is needed now, is a tax on capital inflow.

Philosophy of fiscal policy. (A warning from 2015.)

We now repost a few paras from an earlier blog.

Here is a philosophic point of some importance. There will be vast debates about whether faster or slower growth of government will boost overall economic growth and jobs growth. In the medium term, a nation's growth depends on the three P's - Population, Participation and Productivity. Faster growth of government may have a short-run positive effect on growth of jobs, but the additional debt required to fund the government spending (in a nation with debts) will be a drag on growth.

If the extra spending succeeds in boosting productivity - as it may by increasing R&D or 'innovation' (which can be defined as R&D put to work) - there may be a net positive effect, but the larger the debt becomes the bigger the drag on growth.  And there is a particular trap in the form of today's super-low interest rates.  Debt is relatively cheap to finance now, but imagine a world of 'normal' interest rates.

There is, or should be, a lot of pondering to be done in Treasury under way now.

More here.  


We await monday's 'Innovation Statement' with bated breath. The Oz has been running lots of thought bubbles of this subject, and Henry is not convinced anyone has yet figured out which three policies would most change the game favourably.

Henry's three suggestions are as follows: 1. Create a national culture in which corporate failure is not necessarily the kiss of death; 2. Provide real tax incentives for enterprises that set out to turn Australia's relatively excellent research into businesses; and 3. Systematically engage with Aussie expats who have succeeded as entrepreneurs in other places.

Do not miss the cautionary tales in the latest Raff Report.


Fiona Prior is enjoying the current crop of movies.

Here is her review of the latest 'Hunger Games' movie, some think a report from a soon-to-be-enacted dystopian future.

Adelaide's relatively well-grassed pitch  and pink balls evened up the battle between bat'n'ball.  Australia scrambled home with three wickets to spare late in day 3 of a gripping contest.

Now our (rebuilding) team faces the once-mighty West Indies, grateful that Usain Bolt is now bowling for the Carribean funsters. Sod's Law predicts that the Windies might surprise Smith's Aussies in at least one test and wouldn't that be a surprise?

Image of the week

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

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

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

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

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

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

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

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

However, with the retirement of such a competent leader, the composition of the board becomes especially important. There are three positions falling vacant in 2016. It is vital that they be filled with people of unimpeachable integrity and preferably also some proven knowledge of monetary economics and macroeconomic management generally.

Fiscal policy

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

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

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

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

Here is a philosophic point of some importance. There will be vast debates about whether faster or slower growth of government will boost overall economic growth and jobs growth. In the medium term, a nation's growth depends on the three P's - Population, Participation and Productivity. Faster growth of government may have a short-run positive effect on growth of jobs, but the additional debt required to fund the government spending (in a nation with debts) will be a drag on growth.

If the extra spending succeeds in boosting productivity - as it may by increasing R&D or 'innovation' (which can be defined as R&D put to work) - there may be a net positive effect, but the larger the debt becomes the bigger the drag on growth.  And there is a particular trap in the form of today's super-low interest rates.  Debt is relatively cheap to finance now, but imagine a world of 'normal' interest rates.

There is, or should be, a lot of pondering to be done in Treasury under way now.

Structural reform.

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

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

Here is a modest set of possibilities.

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

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

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

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

'Right now the big forces include:

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

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

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

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

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

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

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

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

And in conclusion.

'My final, fairly uncontroversial predictions:

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

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

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

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

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

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

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

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

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

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

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


Fiona Prior sizes up the latest James Bond movie.


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

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

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

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

Image of the week

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

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

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

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

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

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

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

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

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

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

'Volume four?

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

Further reading

The never-ending story

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

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

The Australian - 'The Commodity Calamity'.

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