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Henry Thornton - Contributors: A discussion of economic, social and political issues Blogs
Anxiety builds
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.

Details here. 

And in distant Australia ...

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, 18 January 2014
Date: Saturday, January 18, 2014
Author: Henry Thornton

Some like it hot, as the movie asserted, but people living in areas suffering bushfires don't like it as hot as its been, and neither do tennis players. As usual, fantastic work by firefighters, mostly volunteers, has so far limited the damage, and in this, Australia's hottest summer since the 1930s, more vigilence and dangerous hard work is on the agenda.

Nobel laureate Brian Schmidt, has offered to bet Maurice Newman $10,000 that average temperatures will be higher in 20 years time.  Though Henry will likely not be around to collect, I would be happy to add my $10,000 to the pile if Mr Newman is taking more bets.  If you are not, old mate, at least spell out your exhaustive literature survey.

One of the stories of the heatwave is the inability of the alternative energy sources to contribute to meeting the peak power loads. Often in heat waves the wind is still, or blowing so hard that the wind turbines get turned off, and solar is still highly inefficient.  Given the massive hikes in power bills, partly to pay for inefficient 'alternative' energy sources (and partly to pay for delayed or overlooked infrastructure upgrades as privatised managements pursued bonusses) a new and more hard-nosed approach to national power supply is clearly needed. Item # 46 of the Abbott government's list, one imagines.

Australia's best friend in Asia, Indonesia, purports to be outraged at the accidental incursion of an Australian patrol boat into Indonesian waters. On behalf of Australia, Henry respectfully wishes to assert his outrage that Indonesia harbours people smugglers and sees them on their way to make incursions into our sacred waters. Fair go, fellows, we share this problem and outrage, real or confected, can only give comfort to the people smugglers.


Fiona Prior suggests you go immediately to MONA if you have not already made your pilgrimage to this cultural temple. It is just next to God’s parking spot, Hobart, Tasmania.


Mrs T is away, tending to her aged father, and the kids are mostly all over the globe, the youngest snowboarding in Canada at 30 degrees below zero.  So it is largely Jack the collie dog for company and the total freedom this provides has not been wasted. Henry's new leisure time regime includes reading whilst following the tennis and, when Australia is playing the PPs, cricket.

Henry has developed a technique for doing all three things at once that is so efficient that only an economist could have invented it.

Pick a book that is gripping enough to provide real focus while not so difficult that it requires fierce attention. Turn on the cricket, switch to the tennis, then in ad breaks one can just hit the back button on the TV remote to change channels.

Last night, the book was Dylan's Chronicles, according to the blurb on the cover, 'The most extraordinarily intimate autobiography by a twentieth-century legend ever written' (Daily Telegraph). It is certainly brilliantly written and full of insight into contemporary America and its music. He writes of recording for Danny Lanois: 'I would have liked to be able to give him the kind of songs he wanted, like "Masters of War", "Hard Rain", "Gates of Eden" but those kind of songs were written under different circumstances, and circumstances never repeat themselves. Not exactly. I couldn't get to those kinds of songs for him or anyone else. To do it, you've got to have power and dominion over the spirits.  I'd done it once, and once was enough.' (Volume 1, pp 218 - 219. Note - there is no Volume 2, not yet at least.)

Anyway, when the sounds from the TV rose to excitement levels that indicated something important had happened, immediate viewing was an option, and if it is a particularly exciting passage one can watch until the excitement ebbs and, if an ad comes on, one can switch channels, and if the second channel has an ad, its back to Bob Dylan.

I saw key moments of Sam Stouser struggling after a brilliant first set. And the night before I'd watched key bits of Rafael Nadal blasting the hapless Australian 17-year-old off the court, but Thanasi Kokkinakis was far from disgraced. I saw quite a bit of Nick Kyrgios dominating Frenchman Benoit Paire (who needs a forehand coach) for the first two sets only to run out of gas in the end. With Kokkinakis and Kyrgios, it seems like Australia has finally found some potential stars, including in this list Ashley Barty whose brave first round fight against Serena 'Goliath' Williams showed she has the right stuff.  In other good news, it seems as if Casey Dellacqua is back, another Aussie battler who lifts our spirit every time she steps on the court. When Mr Tomic gave up after a good first set against Nadal, all I asked was 'What would Lleyton have done?'

But last night, it was the cricket that stopped the night from being another page turner and channel hopper.  England batted first and accumulated 300 runs, with several good individual performances and a brilliant century by that stout honorary Englishman Eoin Morgan. Then the PPs took early wickets, holding two catches that English fielders would previously on this tour hardly have seen. Marsh and Maxwell each contributed well but, with only one wicket to go, James Faulkner came to play one of the great innings, with massive sixes and three fours from the three first balls of the last over. If you missed this glorious match, here is a video of the highlights.

Image of the week


Lost jobs and lost workers - the debate we have to have
Date: Friday, January 17, 2014
Author: Henry Thornton

'Growth in jobs worst for 20 years' screams the front page of the Australian.  Good to see this important national newspaper has discovered the systematic loss of jobs, especially full-time jobs, and the largely ofsetting loss of workers.  It is only a sharply declining participation rate that is keeping the officially measured rate of unemployment to a modest 5.8 %.

As the graph below shows, the more realistic measure of unemployment by Roy Morgan Research shows unemployment is already at 11 % and climbing. Allowing for underemployment, the total of under- and un-employed is more than 22% of the workforce. Here is a good discussion of the facts, from the Macrobusiness site.

Roy Morgan today reported a substantial fall in business confidence.

'Roy Morgan Research’s latest Business Confidence survey in December 2013 has fallen sharply from its immediate post-election peak of 136.3 in October to 125.2. This turnaround was expected to some degree after the election but a number of negative events since have contributed to a more severe drop than was considered likely. These December figures are the results of 1,841 interviews across all industries, business sizes and locations across Australia.

'The further drop in confidence among business in December was caused by a decline in positive feelings about where the economy is heading in the next 12 months and the next five years. There has also been a small drop in the proportion of businesses considering that the next 12 months are a good time to invest in growing the business'.

Many of Australia's iconic businesses are doomed unless there are dramatic changes in the current overblown cost structure. Labor costs have risen sharply, most obviously for apprentices whose wages have been greatly boosted by a decision of the 'Fair work' Commission. Now there are many potential apprentices who have 'fair' wages (in theory) but no jobs. Fair?  Bloody unfair, if you think about it for a nanosecond.  But also sharply increased are costs of power, stultifying regulations, confusing tax policy and an excessive exchange rate, despite the welcome falls so far. All areas provide great scope for reform, but Henry is worried that the urgency of cost reform is lost in the heat of the battle to fix the budget.  Please Joe Hockey, keep telling your cabinet colleagues two things.  Declining jobs, and a declining work force will surely wreck the budget - indeed, these scarey workplace facts have already done a fair bit of damage - and will also wreck your government if no solution is forthcoming.

Analysis business icon by icon may be helpful. Earlier this week we learned that Qantas is no longer sending its large planes to Tasmania.  Mrs Thornton's private research, seeking to use Henry's frequent flyer points for a trip to Europe, discovered a far more alarming set of facts. First, no spots for frequent flyer points to fly to Europe - 'you have to call exactly 12 months before the flight' trilled one helpful booking-clerk, who at least spoke good Aussie English.  But here was the worrying point.  Emirates has all the convenient flights to Europe. To travel on Qantas is to pay top dollar plus its flights all seemed less convenient.  One 'special deal' involved an overnight hotel stay in Dubai.  'Qantas's international routes are already taken over' was Mrs T's conclusuion.

Regular readers will recall that Henry has been saying for some time that Quantas's cost base for international competition is some 30 or 40 % above those of new best friend Emirates and other international airlines. 'Quantas's domestic costs are also 8 to 10 % higher than Virgin' a colleague pointed out during a meeting yesterday. Sadly, Qantas is doomed, except perhaps to have its brand utilised by Emirates on the international routes while it fights a losing battle with Virgin on the major domestic routes.

One of the better ideas following the decision by General Motors is to find some sort of boutique vehicle producer to take over Holden's infrastructure.  Here is a more radical version of this idea. The government should offer to broker a deal in which Holden's infrastructure is acquired by Holden's workforce, probably a consortium of unions. (This thought is not original. It was James Meade's suggested solution for dealing with Britain's antiquated coal mines in the 1950s). Henry is prepared to bet the unions would say 'no way, Jose', because the only way they could make the business even break even would be by cutting wages and conditions.

There is of course, a bigger play in all this for the Abbott government. Every economist Henry knows agrees excessive costs are crippling many of Australia's businesses. Joe Hockey has been building a case against 'special assistance', but the political risks of this for the government are both obvious and considerable.  The Treasurer should say 'we shall not even consider assistance unless a business has already reduced wages and conditions to the minimum specified in the relevant awards'. This approach would wedge Labor nicely, to the point that Mr Shorten would stand a fair chance of getting the blame if he supported the inevitable union cry of 'unfair - we deserve to be paid well above the global wage because we are Aussies'.  At least there would be the prospect of a decent national debate on the issue of costs and the sustainability of Australia's current industrial structure.  This debate is clearly needed.

True Unemployment by Henry Thornton's measure is at a new record high of 22.3% in December 2013. (ABS says 5.8% for November and December 2013).


Risk, uncertainty and controlling thugs
Date: Tuesday, January 14, 2014
Author: Henry Thornton

The new financial year is slowly cranking up to business as normal. All the main US equity indices were down by 1.1 % to 1.7 % while the yield on long-term bonds rose to 2.82 %. The Aussie dollar rose by over 1 %.  Commodity experts say iron ore and most metal prices will be lower this year as China struggles with its pivot to consumerism. All this seems to symbolise the fact that 2014 is likely to be a more difficult year for both the US and Australian economies.

The emerging Aussie house price boom is I suspect stronger than the Reserve Bank boffins expected, and the RBA's mates in the press are shedding crocodile tears over the plight of first time house or unit buyers as they are elbowed aside by 'investors' using excessively generous negative gearing tax breaks. Abolishing negative gearing would be a great reform, but Paul Keating's attempt to do so ended in ignominy (try spelling that after a big night watching the tennis, and isn't Ashley Barty a goer) after a few weeks as the punters revolted.

Best hope for the Abbott government is to limit tax offset to interest paid on a case by case basis.  If this is too big a punt for Joe Hockey, what about allowing entrepreneurs to offset losses on new business ventures against income across their portfolio, including their cash income?  Simple equity, plus desire to promote new businesses, demands such a reform, and the rumor mills suggest the boffins are worrying that issue like dogs with a bone. Now, if a cash-strapped start-up cannot afford to pay directors and staff properly, and issues shares in lieu of cash, the ATO requires income tax to be paid on an imputed amount in excess of the issue price. an amazing turn-off.

Any way, to return to the crocodile tears, RBA staffers in the privacy of their offices should be shedding the occasional tear for having overshot in cutting interest rates, thereby making life more difficult than it need be for first home buyers.  This has been further than most experts (even old duffers like Henry) recommended and at least one result is a housing boom that is already squeezing young people out of the market.  Whether super-low interest rates will help the pivot to non-mining activity is yet to be seen, and our fingers are crossed. Encourage infrastructure repair and building is the cry from most of us, financed by selling assets still owned by government or by tax breaks to infrastructure builders or privately owned investment funds, including the booming superannuation funds.

'Policy needs to be designed around uncertainty' thunders Warwick McKibbin today in the Fin. McKibbin makes the powerful point that Treasury forecasts have ignored 'how uncertain the world already is', for which we offer a hearty 'hear, hear!'.  He does not offer any concrete proposals.  The RBA apparently puts error limits around its predictions these days, which is a classic way to take account of risk (which can be measured and allowed for) but not uncertainty.  Specification of 'realistic worst cases' is Henry's suggestion about allowing crudely for uncertainty. Another practice Henry used when he was responsible for forecasting was at the start of the year - ie around now - invite staff to provide predictions of 'unlikely but possible surprises'. Like a good dose of salts, this can loosen the relevant organs, ie brains in this case, to the point that useful insights are produced.  Doing just this in early 1986 was certainly effective, but career limiting for the principal loose-brained thinkers, so one can sympathise with more tight-brained folk who stay in their comfy burrows and say 'uncertainty is not my department, sir'.

Controlling thugs

Jennifer Hewett has been drinking in Mexican bars with young relatives during the holiday season.  She was struck (in her mind, not physically) with the lack of violence, despite the acknowledged presence of drug gangs, police corruption and other noxious aspect of Mexican culture. Ms Hewett attributes lack of violence to numbers of heavily armed police patrolling the fun-streets and booze-temples, which makes sense to Henry.  She asserts that the killers of one young person assulted here will be charged with murder, but a lawyer friend disputes this point, since the defence will be 'Temporarily insane due to drugs and/or 'There was no intention to murder the victim, yer honor, this was just a very sad accident'.

Presumably, a similar defence will be used by the mad person who drove at speed through a red light, killing a pedestrian and two people in a car crossing on green, and injuring others. (If this person was not 'mad' in any normal sense of the word, the word should never be used.)  As well as police presence in numbers, tough laws are also needed, so that judges have to give serious judgments, not 'six years with parole possible after four', whether on not the perpetrator was temporarily 'mad' or drug-crazed.

Read on here.

Henry also wishes to commend Nick Cator of the Oz for his expose of the  fiasco that is the 'national curriculum'.  It is long, it dense with educrat jargon and presents an amazingly noxious view of what is important in Aussie culture.  A real 'black armband' creature.

Since I am unable to access Mr Cator's article on my PC, despite being a subscriber for every issue since launch, and a contributor for over a decade, I shall leave it too interested readers to seek out his article. It is in today's fish'n'chip edition, on the opinion page.

Gird your loins, gentle readers, it is going to be a difficult year.

Saturday Sanity Break, 11 January 2014
Date: Saturday, January 11, 2014
Author: Henry Thornton

Well, bugger me, as Henry's old footy coach used say when surprises (good or bad) arose.  Perhaps straight from the Boof Lehman playbook. Henry's unhappy surprise today is disappearence of PC protection and inability to use the 'product key' provided by PC guru, who is in China on important family business. During Henry's conversation with Mrs PC guru, he asked about her son's ENTER score - '97.95' she said.

'That's wonderful' Henry replied. 'Is ok', Mrs PC guru replied, 'but not enough to get scholarship'. Education is largely about the parental culture, and all the argy-bargy about money for schools is hot air designed mainly to help cement the teachers union members' places and power.

And did Henry read today in the Oz that the 'National curriculum' developed under Rudd'n'Gillard'n'Rudd guv'mints required information on indigenous Australians and multicultural matters to be included in courses on physics'n'chemistry'n'mathematics?  It is no wonder our students are slipping down the global scale despite larger and larger dollops of money being ripped from taxpayers to help the educators. Tony Abbott's back to basics approach to most things needs to be applied rigerously to education funding. 

What is going on about people smuggling, gentle readers? It seems Tony Abbott and Scott Morrisan are stopping the boats, but what is unclear is whether Indonesia is cooperating while pretending to be outraged, or quietly preparing for decisive unilateral action of its own. Come back Greg Sheridan, how can we know what to think without your wise counsel.


Janet Yellen prepares to take over the Fed.  She is regarded as somewhat of a monetary 'dove', which has cheered the souls of share investors.  'Interest rates lower for longer' is the cry of the dove-lovers, yet watch out for strong economic news ... or weak news ... or confusing news.

Overnight, US unemployment showed a sharp drop from 7.0 % to 6.7 %. This however, was the net result of a low 74,000 new jobs more than offset by a 347,000 drop in people saying they are looking for jobs. As one influential source said: 'Output has recovered and is above the prerecession level. But employment is still about two million below where it was when the recession started.' Presumably this is good news for productivity growth, which is often increased most reliably by hard times.  If Australia cannot find a reformist road to productivity hikes, hard times will at least help productivity growth.

News from Canberra includes the unsurprising information that there was almost no net hiring for the bureaucracy this year.  This helps to explain why Henry's oldest offspring failed to find the job he (and we) thought he was made for, and the CPS may have lost a goodun'.  Has lost a whole set of gooduns, the spurned intake of 2013/14 and, as the hard times grind on, the Canberracrats will lose more and more gooduns. 


The PPs have been more comprehensively trashed by their own press than by Mitch Johnson and Co, and are about to face some more fast stuff in the one day series. Henry has been catching snippets of 'Big Bash' cricket on TV news, and can begin to understand how test matches can finish in three days.

Sadly, we fail to see much of the ladies' cricket, and if there is any fan of this more gentle form of the game inclined to contribute, we would welcome regular reports. 

For the next two weeks, however, it is tennis that is in the news, and Little Lleyton's geat win over Federer in Brisbane gives us a flicker of hope for a miracle run from our old, but highest rated, superstar.  One can presumably get set with the bookies at about the same odds that were available for a 5-zip thrashing on the PPs before the first test began. (Disclosure - Henry did not benefit from such a punt.)

Will Mr Tomic do any better? This is the question, and we shall get a preview when Tomic plays Mr del Potro in the Sydney tournament tonight.

Nice story about a footy comeback on the fin today (P 52) and also a savage review (P 51) of the movie The Book Thief. Henry will confess that he liked this movie, and even Mrs T (a generally harsh critic) liked it also.  Here is a trailer.

Today Jack the Border Collie gets his summer wash and clipping and we may not get to see another movie for a while as Mrs T is off to Sydney to look after her old Dad.  Then she goes to NZ for a golf'n'sightseeing trip with her golfing pal, so Henry and Jack will just have to cope alone, with the help of occasional home stops from the various offspring who are like young birds testing the air outside the nest.

Image of the week

Courtesy The Smage

Bankers managing money managers (badly).
Date: Friday, January 10, 2014
Author: Henry Thornton

Henry once had a debate with a bank director about the importance of satisfying customers. I naively thought customers might be like women I have known – requiring satisfaction of various needs. “Bankers are focused on customers too,” this old snoozer snorted. “We are focused on getting every last drop of blood from every last customer.”

My attitude was based on a decade in the business of managing money and providing insurance protection, a short account of which is provided here.  Look after the customers and they will maximise your profits worked well a bit over a decade ago. Having trebled ANZ bank's profits from money management in two years, the bankers moved in. Henry was promoted from MD to Chairman of the money/wealth management activity, and decided not to wait round to see the bankers ruin a wonderful business.

Today we learn that the bankers have still not figured out how to run a money management business. Ruth Liew writes in the AFR: 'MLC could become a victim as [NAB CEO] Clyne looks at bottom line'. And 'The wealth management is performing poorly'.

Mr Clyne, the evidence is that you are a pretty good banker, and that you lead your bank well.  But I can guarentee that neither you, nor your senior colleagues nor even your board members know much about 'wealth management'.  Geoffrey Tomlinson, former CEO of National Mutual, should know a bit, but his business was sold out from beneath him. Ken Henry, AC, had a mixed record as Treasury Secretary, and stuffed up Australia's response to the GFC. Other members of the board are either bankers, lawyers, accountants or regulators, except for Chairman Michael Chaney, who ran a retail chain with great success.  Henry's guess is that Mr Chaney is the best placed member of the board to look closely at the supposedly failing wealth management business. (Board members described here.)

Ms Liew continues: 'CLSA banks analyst Brian Johnson said apart from the group’s private banking business, most of MLC’s divisions “tremendously under-perform”. MLC posted a return of tangible equity of around 4 per cent last year, compared with CFS’s circa 21 per cent, according to CLSA', reports Ruth Liew.

'In a note to investors last October, Mr Johnson said there was market chatter that NAB could divest part of MLC, and expected banks to selectively shed higher capital-intensive businesses such as life insurance in favour of ­distributing external products.

'NAB bought MLC from Lend Lease 13 years ago for $4.6 billion. Like many of its wealth peers, it faced increased competition including the boom of self-managed super funds, and difficult conditions in the life insurance sector.

'One senior management wealth executive who declined to be named said he “could see it happening” that NAB would quit its wealth division. “What NAB could do is focus on distributing other [companies’] products like super. The theory is that there is still growth in wealth, you need access to wealth but you can get it done cheaply by someone else.”

This unnamed 'senior wealth management executive' is on the right tram with the latter statement. MLC's great success as part of Lend Lease was due to its approach of providing customers with the best of the best from the list of eligable fund managers, an approach Henry replicated at ANZ.  My guess is that under NAB's banker management, 'best of the best' products have been in part or almost totally replaced by 'home brand' product, which are capital intensive and inherently less attractive to customers than 'best of the best'.

Mr Clyne, if you would like some serious advice on this matter, Henry's 'Second Opinion' service is available here.

[Tepid] Global economic recovery, with a catch or two
Date: Tuesday, January 07, 2014
Author: Henry Thornton

Bene Bernanke has made his last speech as supremo of global monetary policy. His summary: 'Although the Fed undoubtedly will face some difficult challenges in the years ahead, our people and our values make me confident that our institution will meet those challenges successfully'.
His oration - linked here -  covers the Federal Reserve's commitment to transparency and accountability, reform of financial stability and financial management and monetary policy. His final subject is the prospects for the U.S. and global economies, which is our focus today. But this speech is a nice complement to Chairman Bernanke's recent book, which is reviewed here.

Bene says the economy has made considerable progress since the recovery officially began some four and a half years ago.
* Payroll employment has risen by 7-1/2 million jobs from its trough. 
* Real GDP has grown in 16 of 17 quarters, and the level of real GDP in the third quarter of 2013 was 5-1/2 percent above its pre-recession peak.
* The unemployment rate has fallen from 10 percent in the fall of 2009 to 7 percent recently. Industrial production and equipment investment have matched or exceeded pre-recession peaks.
* The banking system has been recapitalized, and the financial system is safer.

And, to conclude the positive factors: 'When the economy was in free fall in late 2008 and early 2009, such improvement was far from certain, as indicated at the time by stock prices that were nearly 60 percent below current levels and very wide credit spreads'.

But there are important caveats: 'Despite this progress, the recovery clearly remains incomplete'.
* At 7 percent, the unemployment rate still is elevated. The number of long-term unemployed remains unusually high, and other measures of labor underutilization, such as the number of people who are working part time for economic reasons, have improved less than the unemployment rate.
* Labor force participation has continued to decline, and, although some of this decline reflects longer-term trends that were in place prior to the crisis, some of it likely reflects potential workers' discouragement about job prospects.

The soggy recovery partly reflects unpredictable facts including the resurgence in financial volatility associated with the European sovereign debt and banking crisis and the economic effects of natural disasters in Japan and elsewhere.  (Were these things really unpredictable? Somehow I doubt it.)

But other factors that were allowed for but not as strongly as, in retrospect, they might have been, 'werethat the boom and bust left severe imbalances that would take time to work off. As Carmen Reinhart and Ken Rogoff noted in their prescient research, economic activity following financial crises tends to be anemic, especially when the preceding economic expansion was accompanied by rapid growth in credit and real estate prices.

'Weak recoveries from financial crises reflect, in part, the process of deleveraging and balance sheet repair: Households pull back on spending to recoup lost wealth and reduce debt burdens, while financial institutions restrict credit to restore capital ratios and reduce the riskiness of their portfolios. In addition to these financial factors, the weakness of the recovery reflects the overbuilding of housing (and, to some extent, commercial real estate) prior to the crisis, together with tight mortgage credit; indeed, recent activity in these areas is especially tepid in comparison to the rapid gains in construction more typically seen in recoveries'.

This is the story of Japan following its great asset booms in the 1980s and subsequent crash. It seems odd to this writer that the US Fed, with all its resources of highly intelligent economists, could have underestimated this set of factors. But there are further points that seems to me to have considerable contemporary relevance.
* US 'Federal fiscal policy was expansionary in 2009 and 2010. Since that time, however, federal fiscal policy has turned quite restrictive; according to the Congressional Budget Office, tax increases and spending cuts likely lowered output growth in 2013 by as much as 1-1/2 percentage points. In addition, throughout much of the recovery, state and local government budgets have been highly contractionary, reflecting their adjustment to sharply declining tax revenues'.
* 'The weakness of the recovery [also] reflects the overbuilding of housing (and, to some extent, commercial real estate) prior to the crisis, together with tight mortgage credit; indeed, recent activity in these areas is especially tepid in comparison to the rapid gains in construction more typically seen in recoveries'.
* Another factore is weak productivity performance, whose effect was initially overlooked because of problems of measurement, a major problem for any set of forecasters. 'The reasons for weak productivity growth are not entirely clear: It may be a result of the severity of the financial crisis, for example, if tight credit conditions have inhibited innovation, productivity-improving investments, and the formation of new firms; or it may simply reflect slow growth in sales, which have led firms to use capital and labor less intensively, or even mismeasurement. Notably, productivity growth has also flagged in a number of foreign economies that were hard-hit by the financial crisis. Yet another possibility is weak productivity growth reflects longer-term trends largely unrelated to the recession'.

However, Bene Bernanke is determined gto go out on a positive note. The 'headwinds' afflicting the US recovery seem to be abating. 'The [tepid] U.S. recovery appears to be somewhat ahead of those of most other advanced industrial economies; for example, real GDP is still slightly below its pre-recession peak in Japan and remains 2 percent and 3 percent below pre-recession peaks in the United Kingdom and the euro area, respectively. Nevertheless, I see some grounds for cautious optimism abroad as well. As in the United States, central banks in other advanced economies have taken significant steps to strengthen financial systems and to provide policy accommodation. Financial-sector reform is proceeding, and the contractionary effects of tight fiscal policies are waning. Although difficult reforms--such as banking and fiscal reform in Europe and structural reform in Japan--are still in early stages, we have also seen indications of better growth in the advanced economies, which should have positive implications for the United States. Emerging market economies have also grown somewhat more quickly lately after a slowing in the first half of 2013.  

The International Monetary Fund (IMF) has a less optimistic take. Ambrose Evans-Pritchard reports that its view that much of the Western world will require defaults, a savings tax and higher inflation to clear the way for recovery as debt levels reach a 200-year high'.

' The IMF working paper said debt burdens in developed nations have become extreme by any historical measure and will require a wave of haircuts, either negotiated 1930s-style write-offs or the standard mix of measures used by the IMF in its “toolkit” for emerging market blow-ups.

“The size of the problem suggests that restructurings will be needed, for example, in the periphery of Europe, far beyond anything discussed in public to this point,” said the paper, by Harvard professors Carmen Reinhart and Kenneth Rogoff'.

Read on here and ponder Australia's place in the global debt overhang problem, and what it means.

Please note that almost no-one, except Australia's failing businesses, a few journos (especially Grace Collier) and the odd economist - eg here - give prominance to Australia's even more problematic cost overhang.  More on this worrying issue shortly.

Saturday Sanity Break, 4 January 2014
Date: Saturday, January 04, 2014
Author: Henry Thornton

Global equities have continued to boom, and Australia's Super funds have had their best year in a while.  House prices have risen nationally by almost 10 per cent, illustrating concerns expressed last year that the next housing bubble was building strength.

Could the RBA have overdone the stimulus in its desire to cut the value of the Aussie dollar?  'Probably' is the answer, but there are powerful forces, including a growing population and artificial limits on available land and housing density also pushing prices higher.

Here is a clear warning, issued by the AFR in August of 2013.

Despite the rises in house prices in 2013 (see chart below), only in Sydney have new records been set, and then only by the width of a cigarette paper.  But if like Henry you have children struggling to find jobs despite being neat, polite and well credentialled, you cannot help wondering if they will ever be able to find dwelling places they can afford to buy.

Global growth seems to be slowly but reasonably surely picking up, good news of course. But there is continued uncertainty about the pace of recovery, with China leading the charge but trying to slow its own housing boom.

Ben Bernanke has started the long anticipated 'taper' reducing US Fed bond buying (= money printing) an event that was widely expected (including by Henry) to end the share boom with a bang. Instead Bene also said official cash rates would remain low for a long time, which cheered market participents.  Bene soon hands the task of unwinding massively easy American monetary policy to Janet Yellen.

Can America tighten its way to prosperity is the big question for global economics in 2014.  As a supplementaty question, can the US (and therefore global) share boom continue.

More here on the first lady of monetary policy.

Random bashing

The random 'king hit', often followed by a brutal head-kicking or head-stomping, is worrying parents throughout Australia's major cities.

Kids are left severely damaged, facing death or long and usually partial recovery.

So far as we can tell, the offenders are almost always treated leniently by the courts.  Usually their identities are protected, and penalties are trivial.

Why not force them to sweep streets wearing a sign saying 'I am a cowardly head-kicker', or some equally explicit message.

Perhaps for a second offence the message could be tattooed on the offender's forehead.

Such public shaming might be used more often for rape, pedophilic acts, murder and other heinous crimes, in addition to whatever goal term is decreed.  This would include messaye in T-shirts while convicted offenders are released on parole (or tattoo if they are in for a second offence) to warn the innocent person going about their usual business.

Contact Henry here if you wish to express a view here, or offer a different solution.


Australia's top order batters have again been saved by Brad Haddin, this time with the help of Steve Smith.

Now we can sit back and watch Mitch and the boys torturing the PPs. (Eg early today, Cook out, night-watchman Anderson cops nasty hand hit.) Then it will be off to meet the scary South Efricans (SSAs) on their home soil, but at least by then the footy will be cranking up and we can focus there if the newly resurgent Aussies are struggling.

And in the meantime, there is the tennis, with Little Lleyton still Australia's best chance of tennis glory.

Image of the week

House prices - 2013 increases - see images here. (With bonus video.)

Our major economic challenges
Date: Wednesday, January 01, 2014
Author: Henry Thornton

Here's to a safe and more productive 2014 for all Australians, and especially for Henry's readers.

The main economic theme seems to be fixing the budget, and we learn today that Messrs Hawke and Keating, and John Stone, advise Tony Abbott to fix the budget fast. The former pollies have 'form', as the local copper might put it, having heeded advice to do exactly that in 1986.  It can be done, Joe Hockey, but doing so will take every last bit of self-belief and concentration.

The trouble is, your efforts, though greatly needed, will address Australia's major economic challenge only indirectly. The bigger challenge is to recognise and deal with a cost overhang that is in the range of 30 to 40 % relative to cost levels that apply in competitor and customer nations.  Fiscal austerity will encourage moderate wage settlements in some places, but there is in Australia no widely accepted way for costs to be cut in absolute terms, which is what is needed.  Severe recession will hasten the necessary correction but that is a policy of last resort - 'the recession we had to have', as the Great Man put it.  After, it might be noted, a return to budgetary surplus had been achieved following Mr Keating's 'Banana Republic' crisis, but failed to solve the then prevailing cost overhang.

Soft monetary policy was partly to blame for this failure, but this is also being repeated in the interests of reducing the over-valued dollar.  A lower dollar is another necessary but not sufficient condition for avoiding or minimising severe recession, it might be noted.

The problem of excessive costs is widely discussed by failing businesses, especially in recent days by businesses who have to either operate at a loss due to massive 'holiday' pay loadings or stay closed for the holidays thus failing to provide service for customers.

To her great credit, Grace Collier of the Oz, the journalist who most understands the issues, has promised to give publicity to the unsustainable cost levels of every business that asks for help from taxpayers.

Examples already discussed include Holden's and Tyota's raft of above basic award conditions and SPC Ardmona's decision a year ago, when its management must have known the enterprise was in trouble, to agree to a 5 % wage hike.

In similar future cases like this, Ms Collier has promised: 'There is a queue of corporate beggars forming at the door of government, but I am putting the people in the queue, and their wealthy international owners, on notice.

'Try to get your hands on our money, and you will find me shining a great big torch up your jacksi'.

If you have paid the ferryman's toll to read Ms Collier's artice online, here is the link.

Otherwise, this important contribution may be found on P 10 of yesterday's Oz.

Go well, gentle readers, and be resolute if you are a business leader and be sensible if you are a worker.  As Simon Crean's father said all those years ago: 'One man [or woman]'s wage rise is another man [or woman]'s job'.  We have already had the wage hikes and now jobs on offer are sliding and will almost certainly slide faster during 2014.

Day 4 - the sledging continues
Date: Sunday, December 29, 2013
Author: Henry Thornton

Is the Pup a genius? Will the PPs show any real fight?  Will Watto's groin hold up so he can bat Australia to victory?  These are the questions, gentle readers, and they will all be answered today.

The Aussies started well.  Rogers, whose technique, and possibly his test career, seem to have taken great leaps forward since he was hit on the helmet in the first innings, and led Warner in the scoring. He edged one past the keeper, who looked like a garden gnome dressed as a wicket keeper, watching out of the corners of his eyes as a ball he should have caught was spilled by his hapless captain after a despairing dive from first slip. Four runs. The next ball, a bouncer, Rogers scooped over the slip corden for another four, a shot that only the cheekiest Indian stars have previously employed in tests.  Was it the very next over when Warner tried the same scoop shot, only to be caught by the gnome-keeper?  In between the hapless captain dropped a ball that went straight into his hands. Henry began to feel sorry for the PPs, even considering a new nomenclature, the HPs (Hapless Poms).

By lunch, with Rogers and Watson scoring confortably at 4 runs an over, Australia had less than 100 runs to go. Henry was therefore required to visit the gallery to see the American exhibition.  Our Paddington host described this as 'disappointing', with only one Hopper, 'not his best' and others similarly mediocre. Henry will be viewing this exhibition with his radio earphones in place, and his opinion may well be influenced by the course of the cricket in what should be the last session of the forth test, score zip-four.

Henry's gift in the kris kringle was Paul Keating's collected bile, correction pronouncements, called After Words. The Post-Prime Ministerial Speeches. I have picked from the first few of these pronouncements three, shall we be generous and say gems, gems in the dark arts of political sledging - (comments in brackets).

* 'The [Howard] government is responsible for the shameless politicisation of the public service' (P 18). {Gor blimey, comrades, what about Labor's (Republican) G-G, stacking the RBA board with labor mates, etc, etc.}

* 'When John Howard famously advertised his wares in the 2001 election, his advertisements said 'We will decide who comes to this country and the circumstances in which they come'. The 'we', of course, was not meant to be all of us but only some of us' (p 25). {Did Mr Keating govern for all Australians? Bob Hawke might credibly have made such a claim, but not PK.}

* 'I have never understood why the Howards and the Blaineys are so defensive. So resistent to novelty and to progress. They are more than conservatives - they are reactionaries' (P 41). {Mr Howard and Professor Blainey 'defensive? Rubbish - Mr Howard was a greatly respected PM and  Professor Blainey must be rated among Australia's deepest and most innovative thinkers.}

I had run out of interest in this partisan drivel at just the time Watto replaced Warner, and immediately set about helping Rogers finish turning the lions of mid-year into the cricketing pussy cats of late 2013. This was no easy hundred, as his fine century was said to be in Perth, but a serious though aggressive contribution to the demolition of the previously unbeatable Poms with the game still in the balance. Rogers batted confidently toward his century, Watto to a half-century until the newly minted centurian-on-Australian-soil-in-tests fell to Monty Panasar for 112 and Captain Clark joined Watto for the last rites.

The sledging of the PPs (now downgraded to HPs) continued after the stumps were collected and taken away.  A fan called the ABC team to opine that Australia was lucky that Captain (James) Cook was not as hapless as Captain (Alastair) Cook, 'or else we'd all be living in Southampton or Antarctica'.

Life can be cruel, gentle readers. Before this series various pommie pundits predicted a five-zip whitewash.

We head to Sydney, where a whitewash seems possible - but if there is one it will be zip-five.

The Pup is already a genius, whatever the result.

Day three at the `G` - the Pup is a genius
Date: Saturday, December 28, 2013
Author: Henry Thornton

The morning headline pointed out that the government's plans might be in disarray if WA requires a new Senate election, the coalition vote having collapsed while that of Labor and the independents having soared since the recent Federal election. Can it really be true that after three short months the voters already prefer Shorten and Milne to Abbott and Hockey?

There was at least better news at the 'G'. Haddin was getting stuck into the PPs, well supported by Lyon.  Ian Chapple was commenting, showing us just why he was such a good leader of the Australian team in his day. 'The bloke at mid-on is waving his arms, the bloke at mid-off is arguing with him about what the bowler should be doing and the captain is at first slip saying nothing'.

Another four to Haddin. Chapple: 'It looks like  there is no-one in charge. Or, if someone is, he hasn't got a clue'. After some splendid batting, Haddin finally lost his wicket for 65 runs leaving Lyon stranded on 18 and Australia within spitting distance of the PPs first inninings score of 250 odd. We learned that Lyon, 18 not out in this innings, is the only player from either side not to get out at some stage of this series.  This means, if Henry recalls the rules, he has the splendid batting average of infinity!

By this vital stage we had arrived to the family Christmas in Strathfield, and a cricket blackout was in place. After kissing all the women (some with more enthusiasm than others) and shaking hands with the blokes, Henry self-medicated with a bottle of crisp white wine. There was a long-lived period of nibbling and drinking while the young lady of the house showered, dried her hair, applied make-up and decided if she was going to grace us with her presence for lunch.

Bert cheered Henry considerably by reporting his smart phone had advised him that the PPs were four down for 60 odd runs, and at that point the TV had to go on.  But first the family Kris Kringle had to be completed, and said daughter left for a wedding (not her own), allowing the rest of us to ingest some food. It was a fine feast, cheered by the regular news that another pommie wicket had fallen cheaply, and then that Lyon had five-for. 

We finally left for our accomodation in Paddington, as Rogers and Warner came out to bat.  Having successfully navigated the final 30 minutes for 30 odd, this leaves Australia with only 201 runs to win the forth test in a row. Seems the colly-wobbles have finally been shaken loose, and tomorrow should prove ...


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