Date: Thursday, September 22, 2011
Author: Henry Thornton
'Asian stocks were mostly higher after a choppy session on Wednesday, with a U.S. monetary-policy meeting on tap for later in the global trading day and with European sovereign-debt woes never far from the spotlight'.
The Wall Street Journal reported late yesterday that Hong Kong's Hang Seng Index fell 1% to 18824.17, while the more volatile Shanghai Composite Index jumped 2.7% to 2512.96.
The Nikkei Stock Average rose 0.2% to 8741.16 in Tokyo, the S&P/ASX 200 index advanced 0.8% to 4071.80 in Sydney, India's Sensex fell 0.2% to 17065.15 and the Kospi climbed 1% to 1854.28 in Seoul after seesawing earlier in the day.
"Investors are waiting for more news on Europe and for the Federal Open Market Committee meeting," said Ben Kwong, chief operating officer at KGI Asia. "The trend remains uncertain, and sentiment remains cautious."
Sadly, however, Wall Street reversed this trend overnight, despite rumours of the US Fed introducing 'operation twist' for the first time since 1961.
Robert Gottliebsen reports that CCB International Securities managing director Paul Schulte, publisher of the CCBIS-China Credit Monitor, has agreed to keep him updated on changes in China banking.
'Last night', Gottliebsen said, perhaps helping explain Shanghai's market surge, 'he sent me important news saying that it looks as if China may now be joining the growing number of non-Western countries that are loosening in the face of Western economic stagnation.
“After 16 months of tightening, we are seeing an easing in the lending attitudes of the banks. More banks are expecting an increase in loan approvals. Demand for loans remains strong”.
Northern hemisphere eyes are mostly switching nervously between the Euro debt mess and the US Fed's meeting, where the smarties are hoping Ben Bernanke finds yet another way to spread global inflation.
Henry is leaving early today (Thursday) to travel to Sydney to the conference of the NSW branch of the Economic Society.
Stay tuned, there is sure to be interesting gobbets of fresh analysis to report.
And please consider booking for the launch by the Hon Andrew Robb of Henry's e-book version of Great Crises of Capitalism. Apart from a rattlin' good time, you will be sure to better understand the lessons of history as the world grapples with the biggest economic and financial crisis this generation will face, if we are lucky.
BHP Billiton Chair Jac Nassar and RBA Deputy Chair Ric Battellino gave relatively cheerful accounts of the future of the company and Australia respectively.
And well they might, so long as China powers on.
Saturday Sanity Break, 13 July 2013
Date: Saturday, July 13, 2013
Author: Henry Thornton
The biggest economic issue for the week has been further evidence of a worsening labor market in Australia. Our new 'Recession watch' column aims to keep up to date with the economic news and Henry's ongoing judgment.
Henry's latest advice to the board of the RBA lays out the state of the matter as it was in early July, and may be accessed here.
The image of the week at the end of this blog tells most of the story with crystal clarity. If any readers are able to construct a graph with employment, workforce and hours worked since 1980, it will provide a good illustration of what might happen in the 'realistic worst case' - ie even the ABS rate of unemployment over 10 % of the workforce.
The British Loins demolished our Rugby team, and took coach Deans out at the same time. Andy Murray won Wimbledon and is shortly to be knighted, or even elevated to the House of Lords. Now the pommy cricket team have their foot on our neck in the test match being played at Nottingham.
But despite another dismal batting performance from our top order, and our middle order, we hail Agar the 'Orrible (as the pommy tabloids describe our newest superstar cricketer). Has two wickets and should have three but sadly his bowling performance, good as it has been, pales into insignificance compared to his batting.
Ed Cowan, you'd better perform tonight, or your number three spot my go to the 'orrible one.
Henry presumes that Caaaaarlton! will get wacked by St Kilda tonight, and his advice to Mike Fitzpatrick and Mick Malthouse is simple. We need couple of key position players PLUS a real enforcer. Our good players get monstered each week and there is no fear of retribution. Think about it as you plan the spring cleaning that is to come. At least Gibbs and Kruezer are safe, unless Mick the merciless has some deeply devious play in mind.
[Ed: Henry is too pessimistic about the footy, and Carlton has kept its season alive with a good win against St Kilda. With four winnable games to come, its not over yet.
The cricket team has to set a record to win, with a mere 311 runs to get on a wearing pitch. Still, it ain't over til its over.]
Image of the week
June 2013 - Henry's Real Un- + Under-employment Rate - 19.1%
The old razzle dazzle
Date: Friday, July 12, 2013
Author: Henry Thornton
The global monetary policy chief, Ben Bernanke, has again spread confusion in markets with a dose of the old razzle dazzle. More specifically, Fed minutes led market participants to expect an early end to current super-easy monetary policy and then, after markets panicked, Bene the Benificent said there was no immediate plans to do anything like that.
One is inexorably reminded of Bene's immediate predecessor, Alan Greenspan. The grizzled veteran of the interest rate wars once famously said, 'If you think you understand me, I must have misspoke', or words to that effect, sadly minus the Richard Gere razzle dazzle.
The misspoken minutes caused equity markets to drop and the US dollar to rise, while Bene's soothing commentary caused equity markets to rise and the dollar to fall.
The (small) Aussie dollar fell and then rose, mirroring the (big) US dollar but equity markets moved down then up in parallel. Welcome to the wild world of modern central banking.
Its not a breeze that's blowing through the global markets, folks, its building to a bloody typhoon. Imagine the carnage when Bene or his successor actually stops buying bonds and hints his/her's next move is to raise cash rates.
The mild-mannered men of Martin Place must watch all this and thank whoever's resignation it was who triggered the start of their salary rises. Then Governor R.A. Johnston got to $250 K, and the reward for turning up has now breached a cool million. Defined benefit pension too, comrades, we gotta have the best.
But I am diverted from my main task of keeping the ba**tards honest. 'Official' ABS unemployment has began to rise, reaching 5.7 % for June. Total unemployment, when measured more correctly by Roy Morgan Research, is almost double that, and it turns out a sizable majority of voters think the Roy Morgan numbers are more accurate.. Jobs ads are falling like a Stone, and I don't mean the former Secretary of Treasury John Stone who must splutter into his cornflakes whenever he sees a modern Treasurer in action. Think what rising unemployment is doing to the budget, comrades.
Chris Bowen has written a book, Hearts & Minds, which is to be serialised in The Oz. Can't wait, comrades, and Mr Bowen's boss, Kevin 747 Rudd, has already picked up his plan to reform the Labor Party. Fat chance comrades is the view in the union ranks. As former Labor heavyweight, Graham Richardson says, no-one is about to allow Kevvie to lock himself in as leader virtually forever.
Kevvie has 'held out the olive branch to business'. His seven point plan is like his plan for party reform - the dreams of a man determined to entertain everyone by zipping about at lightspeed, allowing neither himself or (nor?) others any time for careful reflection.
Henry says 'let's get on with the election Mr Rudd. You can take a few days off to attend the G20 meeting; take Tony Abbott with you and you can both have some quality plane time to reflect, or simply sleep.
Allowing the voters some time for careful reflection also. Fat chance, comrades, best keep zipping, and give them the old razzle dazzle performed so well by Richard Gere in the movie Chicago.
World trade, global recession?
Date: Thursday, July 11, 2013
Author: Henry Thornton and Nick Raffan
There is a lot of angst about slowing Chinese growth. Earlier this week we reported a seminar of eminent China experts at which there was a lot of honest comment about the problems facing China's new leadership group. The quality press today seems full of 'China slowing' stories, with plenty of highly relevant hand-wringing. Today we focus on a more general, but related, issue, the strong slowing of world trade. As the Director-Genetal of the World Trade Organisation (WTO) put it recently: 'The world needs more trade to stave off recession'. The graph below shows the aggregate picture, which looks suspiciously like the onset of a 'double dip' recession, or at least a very substantial 'growth recession' to Henry.
Henry's Rafff Report for July emphasises these disturbing facts. He points out that graphs provided by the WTO show imports and exports - all falling sharply - for the USA, Japan, EEC (external), China, Republic of Korea, Brazil, The Russian Federation and India. We repeat, all falling sharply. Nick Raffan continues to discuss implications for resource sector equities.
Regular readers of the Raff Report will recall that the recommendation has always been to buy resource stocks at or near the bottom of a business cycle and exit somewhere near the top. This strategy is perhaps more difficult with economic growth cycles out of sync. The USA seems on a path to recovery, although last time Raff Report considered US New Orders for Durable Goods it seemed that orders stood at or close to a cyclical high. Whilst at the same time, the unemployment crisis in Europe seems worsening.
Timing is everything when buying resource stocks. This is because this sector usually pays miserable dividends and investors seeking yield invest elsewhere. The truth of the matter is that mining companies are right out of favour at the moment with canny investors focused on oil and gas. Even in the energy sector it’s hard to pick winners.
Very brief comments for the metals are: with respect to COPPER, price remains under pressure with COMEX inventory falling and LME stocks still on a rising trend and standing at a 5-year high. The price of ALUMINIUM is under heavy downward pressure, partly weighed down with low energy prices as major cost input. LME stocks of aluminium have been steady over the past 30 days but remain stuck near a 5-year high. NICKEL does not look flash with LME stocks rising and price continuing to soften. LEAD and ZINC look comparatively encouraging with LME inventories retreating from 5-year highs with prices looking like finding a bottom.
Past Raff Report cautioned that newly developed technology to extract GAS from shale (tight gas) would lead to collapse in price, not only of gas, but also of THERMAL COAL (now below the FOB cost for most Australian producers) and that is what has happened. The Raff Report also suggested that some plans to build nuclear power stations might be scrapped and replaced with gas turbines. This may or may not have occurred but one thing for sure is that the price of URANIUM has slipped below US$40/lb from US$52/b in May 2012. Most producers of U3O8 need US$60/lb to make a go of it.
The full Raff Report includes 3-year share price charts for six resource companies representative of their sector. These companies are listed on the London Stock Exchange (LSE), and the prices are shown in pence. There is no joy here. Even the price of successful Tullow Oil is below where it was 3 years ago. Tullow is an oil producer and explorer that have demonstrated exploration and production success within the African continent, principally Uganda, Kenya and Ghana. The first of these charts is for the world's leading diversified miner, BHP Billiton, and even its chart looks pretty sick.
Neither Henry nor the Raff are liscenced security experts, so we offer no advice. But readers should tread gently - its pretty gruesome out there.
The real China syndrone
Date: Wednesday, July 10, 2013
Author: Henry Thornton
Emerging global gloom is no surprise to serious economy watchers, especially those not focussed on an optimistic 'house view'.
The IMF has downgraded its growth forecasts and warned that downside risks are greater than upside risks.
Read on here if you feel the need to temper any excess optimism.
China’s economy, soon to be the world’s largest, is in the middle of transitioning to a new development stage. The Melbourne Institute and the Centre for Contemporary China Studies, both of the University of Melbourne, yesterday assembled five leading specialists on the Chinese economy to discuss where China’s economy is heading, in which way it will develop, and how China’s economy will affect other economies in the years to come.
Professor Yiping Huang from Beijing University was the star of the show.
He said the period of 'uninhibited investment expansion' was now over, and strongly hinted that the current growth potential was 6 - 8 % rather than previous double-digit rates.
In the past 30 years, product markets had been 'almost totally deregulated' but factor markets (including labor markets) were still highly regulated - sound familiar, gentle readers?
Three major matters would be different. * Investment as a ratio to GDP would fall from 50 % to 25 %. * Growing inequality needed to be reversed, and * Pollution had to be controlled.
'Rebalancing' is underway, and there will be three features going forward. * No major stimulus. * widespread deleveraging, and * Structural reform.
Professor Huang expects in coming years financial liberalisation, fiscal reform, rising factor prices and reform of land use amongst other reforms.
He returned in question time to offer some bold predictions about the future. We would see: * The first China-induced global recession. * China would become a source of global inflation, rather than deflation. * A new international division of labor, as the real incomes of China's workers rose. * China would become a 'global consumer of note'.
Other speakers discussed some of these issues in more details. Professor Christine Wong of Oxford, but soon to join Melbourne University, told us about China's totally arcane fiscal system and advised it needed great reform, both so that leaders know the true fiscal situation and the Ministry of Finance could control the fiscal situation - sound familiar, gentle readers?
Professor Dwight H. Perkins of Harvard discussed corruption, or 'rent seeking' to use Anne Krueger's wonderful phrase. Low level rent seeking is encouraged by the myriad of regulations, and would only be reduced by abolishing many regulations, promoting transparency (eg online applications) and removing discretion from officials. Eliminating high level corruption was a far harder task, as much of it was subtle and not necessarily illegal. The current leadership team is trying to grapple with this matters but it is a deeply entrenched issue. The judiciary is not independent of government, the system is not transparent and there is no fair arbitration system. Could this change! 'This will not happen!' asserted Professor Perkins with great energy.
Another key issue concerned the 250 million 'economic refugees' who are registered as living in rural ares but work illegally, and without the benefits available to citizens registered in the cities. The rural areas are denuded of adults of prime working age (18 - 40 years), children are denied education and if with their parents are living in crowded and uncivilised circumstances that are not conducive to doing homework. A trial solution, a school for the children of said refugees, came up with the homework problem and decided to provide dormitory accomodation during the week. The costs of doing similar for all (presumably) 250 million children involved, and also providing decent living for their parents, was four trillion dollar (take your pick, $A or $US the professor assertd) a large sum but doable over the next 50 (did I hear right?) years, subject to Professor Wong's MoF one assumes.
Much food for thought. Professor Huang said, just before rushing off to catch a plane to Beijing: 'My old professor Ross Garnaut (who lead the seminar) told me: 'The pessimists are more scholarly; but the optimists are more often right!'
And in the Great Southern Province ...
The economic team at nab says that their latest survey reports the weakest readings for business conditions & capacity utilisation for more than four years. Business conditions in retail, manufacturing and mining are particularly weak. Labour market forward indicators still point down and transition from mining investment is creating a big structural adjustment task.
We learned earlier this week that job ads continue to plunge. A leading remuneration consultancy says 'Expect no salary increases or bonuses folks'. The sizes of Campbell Newman's proposed salary hikes for ministers in Queensland have shocked everyone, and if not abandoned will further reduce his government's popularity and help Kevin 747.
Prime minister Rudd continues to dazzle us all with continuous action, about a day later per each item than in his first term as now he allows for 'consultation'. The latest move to make his once-great Labor party more democratic (and, just incidentally, locking in an incumbant leader) will not it seems be opposed by the faceless men. This is like an old-fashioned Blitzkreig, and right now it looks like finishing at Stalingrad.
The bookies still have the Coalition as odds on to win well. We are seeing a battle for credibility between punters and the pollsters. Henry's money is on the people who put money on the outcome.
Portugal`s lesson for us all.
Date: Monday, July 08, 2013
Author: Henry Thornton
Geoff Kitney from the AFR will have enraged former finance minister of the year, Wayne 'miracle economy' Swan, by hinting that Portugal may have lessons for us all.
'Lifting productivity is a slow process', and with the best will in the world can only improve an economy by a few per cent each year. That is why the 'lift productivity' team in Australia, while correct, have no immediate solution for current structural weaknesses in our economy, and especially our double-digit cost disequilibrium.
With its own currency, which we have but Portugal does not, there is another remedy. As Mitchell says: 'the quick way is to cut real wages and boost competitiveness is by devaluing'. That is what Australia did in the 1930s and again in the 1980s. In both cases the large currency depreciation was achieved by market forces, with the Bank of NSW leading the way in the early 1930s and the floating exchange rate doing the job in the 1980s.
In the 1930s is was the Arbitration Commission that lead the wage on labor costs, though business was happy to endorse the cut to its cost base. In the 1980s, it was Bob Hawke's 'Accord' with the ACTU that persuaded it to cop a 2 % cut in real wages. Can anyone see how to do this in Australia's current poisonous political climate?
Portugal had its own boom time in the past twenty odd years and failed to take advantage of it to reform then. Mitchell concludes as follows: 'Structural reform of the product and labour markets that would have been very much easier in the boom times now has to be completed in a time of severe economic weakness.
'There’s a lesson in that for all of us, don’t you think?' Read on here.
Graham Tuckwell and his wife Louise have donated $50 million to the ANU for students who have overcome disadvantage to become eligable for university.
They are in Australia to personally pick the first group of beneficiaries. Joanna Mather reports, and Graham Tuckwell is eminantly quotable.
"We're trying to unpick the whole history of the student. It's not what you've done, it's how you got there and therefore how good you are innately"/.
As one might expect from such a dynamic bloke, Graham Tuckwell dismissed the tendency for Australian universities to rely on the ATAR score based on mark from the year 12 exams as "Rubbish".
Henry dares to suggest this initiative is more or less in line with his thoughts that it is culture, not cash, that is the main problem with Australian education.
Saturday Sanity Break, 6 July 2013
Date: Saturday, July 06, 2013
Author: Henry Thornton
Australia's latest (and former) PM, Kevin Rudd, is zipping about seeking friends.
The Indonesian President has come up with an idea, hold a meeting of all nations involved in the people smuggling/receiving business to try to nut out a solution. This is so obvious that one wonders why Mr Rudd did not offer it when he was foreign minister. (I mean no disrespect, Mr Yudhoyono, it is only the very best leaders who readily grasp the obvious.)
The Australian'sPaul Kelly asks today if Mr Rudd's Treasurer, Chris Bowen, will have the ticker to curb his boss's temdency to spray money about like water from a firehose at a barbeque that hs gotten out of control. (I use more colorful language because I am merely blogging, and because it makes me feel better.)
RBA Chief, Glenn Stevens, has delivered a necessary sermon on the need for tidy fiscal policy along with a warning that growth will be slower in the future than in the past. The glass will still be half full, possibly more than that, but it will be a smaller glass. Methinks a change of mood is taking place among Australia's econocrats. Read on here.
The AFR's David Bassanese points out that bond yields have already risen by almost 1 per cent in the USA and by more than that here. Bond yields hit 8 % in Portugal a few days ago, but the ECB applied the firehose of 'softer for longer' with ECB monetary policy and the crisis was over, for now.
Make no mistake, gentle readers, the global economy is in a difficult space. I have been reading Ben Bernanke's expose on modern monetary policy, American style, which includes Q&A with students. My respectful question to Mr Bernanke is as follows: 'Imagine, Mr Chairman, a demand curve for money and a supply curve for money, intersecting to define an interest rate that defines an equilibrium in the market for money. Then the Fed imposes a near zero interest rate, thereby creating a major disequilibrium in the market for money, and therefore in other markets. Please explain how it all works out over the next ten or twenty years.’
There is a free lifetime (Henry's lifetime) Goldmembership for anyone who provides a half-coherent answer, and if it comes from Bene himself we shall throw in some free movie tickets.
The Wall Street Journal reports: 'After five years of unconventional measures and policies aimed at supporting the economy through severe financial crisis and sluggish recovery, Federal Reserve officials could see the strong June employment report as another sign that their efforts are finally paying off.
'The jobs figures mean the Fed is likely to stay on the course Chairman Ben Bernanke plotted last month and begin to scale back its $85 billion-per-month bond-buying program later this year. He said if the economy continues to evolve as the Fed expects, it would continue to reduce purchases and wrap up the program by mid-2014'.
Mini-politics. Fans of opinion polls have mostly been baffled by the almost instantaneous swing in the polls to give Rudd's Labor a fighting chance in the forthcoming Federal election, or in Roy Morgan's latest poll, a winning position.
Maxi-politics. Henry's blind seer in Canberra, Tiresias, has tuned in to an obscure HBO television series screened in 2003: “K Street".
'If I understand it correctly, “K Street” is an insider’s sly, prescient, pointer to disturbing developments then under way in America. It may well provide a useful resource for analysing the Obama presidency in all its sickly-sweet idealism and rancid realpolitik'.
Caaaarlton!'s last chance to be seen as a credible finalist when out the window in front of a massive crowd at the 'G' last night. The players let Ratts down against weak teams last year, and now after a string on near misses againt top teams they have given up on Mick the merciless against a very good team. Should be a major spring cleaning in September, that is if Mick can be bothered.
Now we shall turn our attention to the Rugby, and George Smith's return after several years overseas, on top of the comeback win last weekend, fills Henry with hope. Coach Robbie Deans is said to be in line for a sacking, which Henry would not approve of, but it is certainly the modern way of doing business.
'Boof' Lehmann's return to the Australian cricket team as coach has, however, cheered Henry. Some simple, direct 'you know what to do, now just do it' Aussie coach instructions have worked wonders, and we fans are all hoping the tide has turned for the Australian cricket team.
Image of the week
Asset prices and economic stability
Date: Friday, July 05, 2013
Author: Henry Thornton
Milton Friedman said that monetary policy cannot serve two masters. This means that monetary policy (ie interest rate manipulation) should focus on overall economic stability and controlling goods and services inflation, while some other way must be found to control asset inflation.
Ben Bernanke in his recently published book The Federal Reserve and the Financial Crisis accepts this logic.
In particular, he says, in response to a question from a student: 'So, yes, we have learned that asset price bubbles are dangerous and we want to address them if possible, but when you can address them through financial regulatory processes, that is usually a more pinpoint approach than just raising interest rates for everything'. (P 24)
Mr Bernanke comes back to this issue more than once.
On p 54 he says: ‘Interestingly, probably the strongest correlation across countries that you can find to house price increases is capital inflows, ...’ (Ring any bells, gentle readers?)
On pp 58-59 he says: ‘And generally speaking, the right way to use monetary policy is to achieve overall macroeconomic stability. Now that does not mean you should ignore financial imbalances. I think the Federal Reserve could have been more aggressive on the supervisory and regulatory side ...’. And: ‘... we should never rule out the possibility that, if all our regulatory and other types of interventions do not achieve stability and the financial; system we want, monetary policy, as a last resort, be modified to some extent to deal with that question’. (Emphasis added by Henry.)
Importantly, Mr Bernanke focusses on the housing boom and bust rather than the share price boom and bust on the grounds that it was the housing bust that caused more trouble in the US economy on his watch.
And he does not hold back from some healthy self-criticism: 'The Fed made mistakes in supervision and regulation' (Pp 50-51). but he is more critical of the overall regulatory regime. '... essentially what was missing here was enough attention being paid to things that could affect the system as a whole, as opposed to just individual firms'.
In a paper written by Claudio Borio and Philip Lowe is 2002, these now prominant men wrote of the financial system and its regulation: 'Currently, the primary focus [of prudential authorities] is on preventing the failure of individual financial institutions, ... and there is a tendency to treat macroeconomic risks as exogenous with respect to the institutions’ behaviour’.
Clearly the Fed had been warned, but one of the weaknesses of central banks is to become cocooned in a warm place of their own making.
As it happens, Mr Borio, now Director of Research at the Bank for International Settlements (BIS), is in Australia where he has shared a platform with Philip Lowe, now Deputy-governor of the RBA. The headline in the AFR says 'Policymakers urged to target asset prices', which gets one tick from Henry whose research on this matter has recently been presented at Australia's leading research universities.
The opening sentance of the report in the fin, however, fails to get a second tick. We are told that Mr Borio 'urged global policymakers to "lean" against asset price booms to reduce the chances of a future economic crisis'.
Henry would be far happier if 'global policymakers' took the trouble to sort out their advice on this matter. Ben Bernanke is surely correct when he says ... essentially what was missing here was enough attention being paid to things that could affect the system as a whole, as opposed to just individual firms'. The same point made by Messrs Borio and Lowe in 2002.
'Global policymakers' while they are at it they should try to decide if Mr Bernanke is correct to say that monetary policy should only be used as a 'last resort' to control asset booms. And also while they are at it, they should make sure that someone really good is at the helm of the regulatory authority overseeing the effect of asset market gyrations on the overall economic system.
Claudio Borio, image courtesy AFR
Does Kevin Rudd get it?
Date: Wednesday, July 03, 2013
Author: Henry Thornton
Henry awoke this morning to the dulcet tones of Kevin 747 Rudd explaining that the China boom was over and Australia was facing difficult times.
Could he be getting some good advice on this matter comrades? Could he be in the process of outflanking Chris Bowen, Joe Hockey and Tony Abbott on the economy? Time will tell, but the RBA is still cheerily contemplating an economic glass half full.
The RBA wisely did not cut interest rates further yesterday, but maintained its 'easing bias', without saying that explicitly.
The concluding para says: 'At today's meeting the Board judged that the easier financial conditions now in place will contribute to a strengthening of growth over time, consistent with achieving the inflation target. It decided that the stance of monetary policy remained appropriate for the time being. The Board also judged that the inflation outlook, as currently assessed, may provide some scope for further easing, should that be required to support demand'.
Clearly it is not the RBA that is advising the Prime minister, and presumably if it is Treasury its Secretary's presence at the RBA meeting would have injected a greater note of realism into the report of the meeting.
Yesterday, Henry presented his paper on 'Asset inflation and monetary policy' to a meeting of the Economic Society of Australia's Victorian branch. There was a lively discussion and some progress in the understanding that 'monetary policy cannot serve two masters' and that asset inflation needs to be dealt with in ways other than by changes to monetary policy. This is a theme in Ben Bernanke's thoughtful 'four lectures' memoir which Henry is reading and will review shortly.
Ross Garnaut remarked that all Australia's big downturns have been sparked by falls in the terms of trade after large rises. That is exactly our situation now, and it demands an immediate rethink about economic prospects and policy.
Australia`s coming recession
Date: Tuesday, July 02, 2013
Author: Henry Thornton
Signs of the coming economic firestorm are legion. Most important is the state of Australia's labor market, often trumpeted by Treasurer Swan as proving Australia has 'the best economy in the developed world'. Official employment statistics, and especially the headline rate of unemployment, are misleading, with the major flaw being the assumption that paid work of one hour a week means the person is classified as 'employed'.
The cancelling or delay of many resource projects will have enormous adverse effects on employment in the resource sector, indeed already is with Australia's global mining companies shedding workers, a process that has been underway for some time in the so-called 'junior' miners that do much of the basic mineral exploration. Non-mining ventures are cutting costs by laying off workers, in some cases moving jobs offshore and in other cases just cutting job numbers.
The fuss over 457 visas no doubt owes its intensity to the weakening Australian labor market. And last night's Four corners has reinforced the problems facing many Australian battlers.
The Roy Morgan survey, which uses a more realistic set of assumptions than used by the ABS, has consistently reported a rate of unemployment twice the official number, and a rate of underemployment (people working fewer hours than they would like to work) also close to double-digit rates.
Another source of adverse news for those who care to look is the number of small businesses struggling to survive or going under. Farmers bulldozing fruit trees, retailers offering stock below cost, manufacturers closing shop or reporting plans to close the business when they retire, are all trends unlikely to filter to Canberra where for the past six years there has been more work to do than people to do it. The plain fact is that Australia is suffering a double-digit cost disequilibrium relative to both competitor and customer nations.
The broader economic statistics also reveal some alarming developments. Employment in manufacturing has been declining for decades, but retail jobs have recently joined the trend. Exports of wine and processed foods have fallen dramatically. Overseas enrolments in Australian universities have fallen sharply from the recent peak and numbers of Australians travelling abroad now greatly exceed inbound tourists. All these trends have been reported in an important recent paper by Professor Ross Garnaut. He has calculated Australia's real exchange rate, which adjusts the actual exchange rate for inflation in Australia relative to overseas inflation, and is therefore the best measure of the extent of the overall cost disequilibrium. This measure increased by 69 % from the end of 2002 to a peak in March 2013. The currency depreciation since then has perhaps reduced this by 10 %, but this leaves a lot of adjustment still to come.
The excessive level of the Australian dollar is widely blamed for trends such as those discussed above, along with ruthless behaviour by monopolistic retail chains and widespread imports of cheap goods purchased over the internet. The Australian dollar looks like it has started a long fall and its level is likely to overshoot any sensible equilibrium level, as asset market always tend to do. This will alleviate one source of pressure on businesses, but it will only help if cost increases are contained.
Australia's economy is in effect highly indexed, meaning it is designed to compensate just about every significent group from the impact of inflation, and privatised utilities and toll roads typically have contracts allowing indexation plus. A large fall in the value of the Australian dollar will create serious inflation, and if this is automatically passed through to income recipients, including welfare recipients, and utilities, our double-digit cost disequilibrium will not be reduced much, if at all, by a falling dollar.
But a falling dollar will mean the Reserve Bank will have to modify or suspend its inflation target, with possibly severe consequences for its credibility. This is already strained by its relatively sanguine 'glass half full' rhetoric, just as Treasury (and therefore the government) has been far too optimistic in its predictions about both the economy and its assumed return to surplus.
One hopes Treasury's initial briefing for the incoming Treasurer has been more realistic about Australia's economic conditions and prospects than those parroted by Treasurer Swan, and also that Treasury has told Mr Bowen what they think should be done.
We feel constrained to publish as often as we can make time, reference to published comments, or provided by readers on significent items of news or opinion that reflect on Australia's uncertain economic future.