'THE worst month on the stockmarket in a year has taken the wind out of investors, with confidence retreating from highs earlier this year amid increasing concern about the global economy and the endgame for stimulus from central banks.

'For the fourth year running, the adage "sell in May and go away" held true as offshore investors booked profits from the falling Australian dollar, and yield stocks, such as the banks, were sold amid bets the US Fed may wind back its massive money-printing program earlier than expected'.  Read on here.

Australia's housing markets seem to be firing up, although there are many other dismal headlines today.

Here is a list.

* Manufacturing contracts in May.

* Cochlear profit weakens.

* Warning of more falls in ore prices.

* Telstra 'managing risk' of asbestos.

* Markets await China's manufacturing data.

But, clearence rates in both Sydney and Melbourne are high, and last week credit growth and building approvals both rose.

And 'Garnaut charts path to competitive edge'.

Henry and Professor Garnaut spoke the week before last at Melbourne University, as noted here.

The fin reports: 'Eminent economist Ross Garnaut believes the Australian dollar may have to fall to around US70¢ for the ­non-resources sectors of the economy to regain competitiveness.

'Dr Garnaut also urged income restraint from all levels in Australian society, starting with large executive salaries which had blown out by several hundred per cent since 2000, he told Financial Review Sunday on ­Channel Nine.

'An Australian dollar around the US70¢ mark would require a much ­bigger fall than predicted by most ­currency experts; even the most ­bearish currency strategies have the dollar remaining in the US85¢ to US87¢ range by next year'.

Article here, and do not miss the video.

How to achieve the necessary cost constraint is the key problem, comrades, as I shall explain tomorrow.

The two big events of the week were Labor's failed attempt to increase public funding of election and Eddie McGuire's inadvertant racial vilification of a great footballer.

The footy shows have been all over the second matter, and we think Harry O'Brian from Collingwood was definitive - there is a lot of casual racism in Australia's culture and it is time it stopped.

I feel confident that Caaaaarlton! would take Harry and Adam Goodes like a shot. Playing footy at the highest levels, and playing it better than all comers, is one obvious way to reform Australia's culture. (Caaaarlton! today faces Greater Western Sydney in what should be a percentage booster. Then games in the next four weeks are against Hawthorn, Geelong, Sydney and Collingwood. One win would be a pleasant surprise, two would cheer Henry's year, three would be wonderful and four would be sensational.)

But there is also the story of the severely disadvantaged schools in the far North, which have been reformed by powerful new leadership to ponder.  Shows, as we have argued, that fixing australia's pathetic educational standards is not just a matter of more money.  The real problem is cultural.

Paul Kelly puts the pollies at the trough story into context.

'THIS week, the Gillard government broke the agreement it signed to obtain a minority government commission from the Governor-General when it wilfully chose to flout the campaign funding reforms embodied in those documents.

'The Labor Party is desperate. It is in dire financial straits, kept alive by funds from a few pivotal unions. This is a threat to the political system. The risk for Labor after an election defeat is that it becomes a total prisoner of union funding. That would be a disaster.

'Yet this week Gillard Labor did it again. It mismanaged a reform because it was badly designed, with no ground prepared, as part of a hasty election-eve push and, would you believe, totally dependent on Tony Abbott.

'To call this dumb politics is being polite. Labor is beyond sound management'.

Much fuss about the state of the investment plans of Australian business.  The RBA's rate decision next week may well rest on its interpretation of those plans, but there seems little doubt that the economy is in real strife.

Here is Henry's take on the whole mess - miracle economy now more.

For another view, see Ross Garnaut's latest speech.

Garnaut_R__(2013)_Ending_the_Great_Australian_Complacency_of_the_Early_Twenty_First_Century__Victoria_University_2013_Vice-Chancellors_Lecture_28_May.pdf

Does fiscal austerity help or hinder economic recovery?

For a case for the Keynesians, see Paul Krugman's splendid discussion of both fact and theory in the friday fin.

Henry's attempt, in advance of Mr Krugman, to spell out a rational approach, is available here. 

We welcome fresh thinking, or comment. Volunteers may contact Henry here.

Henry's search function, powered by Google.

Gentle readers, progress!

Type Henry Thornton and key word or words in Goole search box, and you get a far more efficient search than using the site’s own search facilities which, to be fair, were installed almost a decade ago.

Eg  Henry Thornton Mardi Gras
Henry Thornton Fiscal Policy, or
Henry Thornton Monetary Policy 

Henry's regular contribution on the latter subject will be available here and in The Australian on Tuesday.

You may already know this trick but Henry has only just discovered it.

Image of the week

 Courtesy Economist

In pondering what all this means, you may enjoy my review of Ian Morris’s ‘Why the West Rules – for now’.

The economics team at nab reported thus: 'Private Capital Expenditure fell 4.7 % in Q1, weaker than market expectations of a 0.5 % rise, and below NAB’s forecast of a 1.5 % decline. The Q1 fall comes after the 2.1% decline in Q4 2012 and again reinforces the weakening state of business investment as the mining boom eases. The weakness in Q1 was in both Building and structures (-5.5 %) and Equipment, plant and machinery (-3.3 %), while the industry results were also poor. Mining fell 6.2 % and manufacturing fell 0.8 %, while “other industries” were down 2.9 %. The nominal data suggests that only retail and media & communications saw decent capex rises in Q1'.

The nabsters say on capex in the immediate future: 'So while the outlook for non-mining investment appears to be improving, there is likely to be a large negative offset from mining and also manufacturing, which will result in very small overall growth in total capex of 3-5 % in 2013-14'.

Alan Mitchell of the Friday fin says 'stronger than expected investment outlook for the coming financial year and the recent depreciation of the Australian dollar mean the Reserve Bank should leave interest rates on hold next week.

'The March quarter’s official survey of business investment plans provides evidence that the 2  percentage point cut in the cash rate over the past 18 months is gradually being reflected in investment plans. It coincides with an encouraging lift in the number of monthly building approvals.

'The survey of expected business capital spending and the approvals data were greeted by a jump in the Australian dollar on foreign exchange markets'.

David Uren of the Monday (ie earlier this week) Oz suggests that 'the Reserve Bank and Treasury are divided over the prospects for business investment'.
 
'Treasury took an optimistic view of the outlook in the budget, forecasting that investment would rise by 4.5 per cent this year, reaching an all-time record 19 per cent of GDP, with a further 1 per cent increase in the following year.

'Resource investment, it said, would peak in the year ahead at 8 per cent of GDP before easing gradually over coming years, with the fall made up by rising investment elsewhere in the economy. The budget papers comment: "Non-resources-related investment is expected to strengthen over the forecast period, stimulated by low interest rates and a broadening of economic growth."

'Treasury expects these conditions to support manufacturing, with the revival in non-resource investment forecast to lift demand for machinery and equipment by 2.5 per cent in the year ahead, followed by a 5 per cent boost in 2014-15.

'The Reserve Bank does not publish its forecasts in this level of detail, but the review of monetary policy released earlier this month cast doubt on the findings of the last capital investment survey, which suggested that there would be growth in both resource and non-mining investment over 2013-14'.

Mr Uren's colleagues James Glynn reported Thursday that 'Capital spending slows sharply'.

Make of all this what you will, gentle readers, but it certainly ain't good news.

Building approvals provide happier news.  Nab again: 'Some better news for the economy came from the April building approvals data, also released today. Building approvals rose 9.1% in April, and while the
18 % gain in apartments, there was also a 2.5% increase in private housing which is more relevant for the dwelling investment outlook. That was the fourth consecutive monthly gain in private houses, supporting other housing data that point to a slow but steady upward trend in activity, albeit from a low starting point. All states are now trending higher in private housing approvals.

'Housing finance approvals (esp for new homes) and new home sales have also been improving of late, which would give some confidence that the construction sector and also housing related manufacturing and retail will see better conditions later this year and into 2014. Especially if the RBA cuts again, as we expect, later this year'.

Financial markets, on balance, seem to have reduced the odds on another rate cut when the RBA meets next Tuesday.

The quality newspapers did not report the live odds from Tom Waterhouse.

Since this is a message delivered by a 'wise man from the North' (the one part of the world economy that is totally stuffed) this is big news, witness the AFR's screaming headline today.

Local prophet's have been delivering this message for months, witness Henry's various attempts to tell the tale.  Here is a link to 'Three strikes for a rate cut', published in early October.

And here is a link to a report of the OECD's concern for the world economy from November last year.

Even as recently as this week, two of Henry's regular correspondents were on the case. Louis Hissink told the story of how wage demands are pricing workers out of jobs, and Nick Raffan pointed to the amount of trouble small mining companies are in.

Nick's use of the Baltic Dry Index of global bulk goods shipping presents a telling piece of evidence.

While the USA is doing better than expected, and Japan has had a sugar hit of stimulus, other major economies are mostly struggling.  The Baltic Dry Index is back to the levels seen at the worst point of the Global Financial Crisis

There is a long and winding road for Australia to travel now before good times are restored. Trouble is, Wayne Swan has been chirping so loudly about the 'miracle economy' that voters are unprepared for the tough action required to restore Australia to robust health.

Please allow me, gentle readers, to remind you of my summary from almost a week ago at Melbourne University.

'IAustralia's budgets have to be fixed, and this will be hard enough. Increasing competitiveness by reducing costs or increasing productivity is actually a far greater challenge than fixing budgets.

Australia substantially increased competitiveness in the early 1930s and again (to a lesser extent) in the 1980s. So it can be done, but it will only be done with least pain if the government takes the people into its confidence.

There is one powerful point to be noted. Feasible productivity improvements of around 2 per cent per annum would seem like the most that any policy reforms could produce. With Australia’s competitiveness in double digit disequilibrium, realistic policy action will need to focus on limiting the pass through of wage and cost increases generally following a large currency devaluation.

Whether this can be achieved without a severe recession will depend on the response of households, businesses and unions. A sensible response requires at the very least least truthful and sober communication by ministers, especially the Prime Minister and Treasurer, who must be told the facts by a bold, hard-headed Treasury Secretary.

The attached paper by Ross Garnaut contains much with which I agree. We both are trying to awaken Australia from its decade of complacency.

Garnaut_R__(2013)_Ending_the_Great_Australian_Complacency_of_the_Early_Twenty_First_Century__Victoria_University_2013_Vice-Chancellors_Lecture_28_May.pdf

The Raff only watches the Aljazerra and SBS News where there is good global coverage. Of interest the other day was the free-trade deal Germany is sealing with China which not all German politicians agree with. Some Germans want to impose import duties on imports of manufactured goods from China to protect their domestic industries, and of course jobs. The Raff believes that in years to come, savvy economists will look back on the concept of free-trade and the flat playing field and see those concepts as having been disastrous. All that will have been achieved is social dislocation in the West and piles on piles of human misery as the masses of unemployed fight for their very existence. Only a fool would not recognise the pace of social unrest growing.

Every Wednesday evening the Raff goes for a social session at the local bowling club. It’s a male only affair and mostly guys who have retired. The Wednesday night group is a real cross-section of skills and political allegiances. Every visit something new is leaned from the “Table of Knowledge (TK)” which the Raff will report on from time to time. Most of the group are self-funded retirees and manage their own financial affairs.

The TK is mighty concerned about falling interest rates and the soaring prices of banks and Telstra and any other industrial company offering a decent yield. The Baby Boomers are hurtling towards retirement. Twenty years ago they might have punted junior resource stocks, but with one exception at the TK not any more. This is a huge problem for the junior mining and exploration sector. The number of one cent share prices is scary. This is a market where there is no capital available for juniors, and Canada is apparently worse.

It is unfortunately true to say that some juniors are lifestyle companies paying too high salaries to the CEO and with too many directors chewing up shareholder funds for adding no value to shareholders. Gladly The Raff knows many junior companies with management committed to adding value to their shareholders. It is very sad to see the pressure mounting on some of the CEOs looking down the barrel of insolvency for their companies. Many junior companies will be wound-up later this year when the cash runs out. Already some companies are no longer paying for research cover. The last stage will be the inability to pay listing fees. The number of geologists unemployed is soaring and reported above 8% this year. The figure will probably grow and exceed the Euro Area unemployment rate of 12.1% by year end and move much higher in 2014.
 
Make no mistake, the junior mining sector is facing the toughest times ever. It is not just the explorers that are affected, but so to are the service companies, drillers, consultants, and stockbrokers etc. But who cares? The current Government doesn’t, if it did it would consider immediate tax deductions for investors subscribing for shares in junior explorers. The Raff seems to recall that in order to support the Australian film industry there was a very attractive uplift for tax deductibility, but that was decades ago.

The full Raff Report for May is available here.

Henry's search function, powered by Google.

Gentle readers, progress!

Type Henry Thornton and key word or words, and you get a far more efficient search than using the site’s own search facilities which, to be fair, were installed almost a decade ago.

Eg  Henry Thornton chaos
Henry Thornton Baltic Dry, or
Henry Thornton Bank of England

(The latter search leads to a nice story on 'The Panic of 1825', which is available here.

The trouble is that the original Henry Thornton died in 1815.  Were the governors at the Bank of England in Brad DeLong's story dealing with a spectre, or a clone of the original Henry, or were they just confused?)

You may already know this but I have only just discovered it.

Seems the ACTU National Secretary, Dave Oliver, was interviewed on live TV this weekend and it was put to him that labour makes up 65% of the motor car component price produced in Australia, a fact which Mr. Oliver knew nothing about. Paul Zanetti lists some relative wage rates, $55/hr for Aussies, and $7/hr for Asian workers, for example and you can quickly work out why Ford and GM are closing up shop here.

Put simply, gentle readers, the Aussie workers have priced themselves out of a job – and that’s why both Ford and General Motors, and presumably Toyota, are closing their Australian manufacturing plants.

I call it the Australian Disease, symptoms of which I first noticed decades ago when I discovered that many Aussies would cash in their superannuation payouts on leaving the workforce to retire, go on an expensive overseas travelling trip only to return and, having blown their retirement package on SUV’s caravans and what not, then discover they can’t fund their retirement and demand to be put on the old age pension.  Perhaps it’s also the English disease, given our cultural background, but irrespective of where we came from, one fact is obvious – it isn’t the exchange rate that’s killing the local manufacturing industry but the ACTU pricing its members out of the market. .

Minimum wage legislation is another way of creating unemployment, for that regulation stops the unemployed from pricing themselves below the price the trade unions set; minimum wages are simply anti-competitive ploys and price fixing mechanisms.  This applies to the mining industry where everything is also overpriced, and if commodity prices collapse, as they are at the moment doing, do we then change our income rates to reflect the changed circumstances? Not on your sweet nelly – we’d rather throw people on the dole and maintain our wage rates than reduce our expectations under the glare of economic reality.

This attitude to work is a cultural one and I’ve never really worked out until recently when it dawned on me that it’s our cultural heritage based on Judaean-Christian mores. Huh you might say? Yes, you see, it’s quite simple – our culture is essentially based on the belief of getting something from nothing because that is what our religious beliefs are based on – God creating everything from nothing at the time of Creation. The sectarians among us are not any different either since their belief in the cosmological Big Bang is also a belief in the creation of something from nothing. Call it the lotto effect, call it a miracle, it doesn’t matter, it’s the belief in instant wealth without having first created it, that’s the cause of our problems, and it’s quite ingrained into our culture.

The political event was a celebration of Peter Costello's career as a politician, and his enrollment as a Life Member of the Liberal Party.

Great speeches, a wonderful video of his most dramatic/amusing/meaningful interventions in the House, and a cheerful meeting of old and current warriors and their supporters.

For me, it followed a debate with Ross Garnaut at Melbourne University on what turned out to be about the coming economic crisis.

The question I asked at the University talkfest, and answered with a resounding 'No', was the following: Can it be helpful for key industries to be discouraged for years by an excessive exchange rate, then encouraged for years by a low exchange rate? The market will ultimately decide these things, but discouraging a clearly over-valued currency, as now, by allowing completely free trade in capital is like a fanatical observance of the Ten Commandments.

Here is a link to the paper, and it provides a link to Ross Garnaut's slides, which above all show what I call Australia's 'double digit disequilibrium'.

The AFR's page one screamer contains a garbled account of Ross Garnaut's conclusions, but naturally omits any mention of my role in the dabate, except on the p 41 spill of the front page story the three (three!) writers solemnly reported that  ‘Professor Garnaut also suggested capital controls could be considered to depreciate the Australian dollar’.

It may be, of course, that Ross Garnaut has been persuaded by my plan, but somehow I doubt it.  Just another example of sloppy journalism, presumably, and if the AFR could be bothered it should apologise to both of us, to Ross for misquoting him and to me for attributing my plan to Ross.  Naturally I now regret again subscribing to the fin after years of declining to do so.

Henry's favourite political economy journo, Paul Kelly,  provides his usual wise counsel today, curiously not so different to Henry's view. 'THE bells tolled this week for a tougher politics - Joe Hockey said no new tax cuts until the budget was fixed, Ford's closure exposed the scale of industry policy failure and independent analysis showed achieving a budget surplus was tougher than admitted'.

The Great Gatsby

The American and international (so far) box office seems to be doing well, and not all the critics are spewing bile.

Henry greatly enjoyed Peter Craven's story, headed 'Baz nails the Gatsby enigma'.

The ever measured David Stratten gave three and a half stars to 'Baz Luhrmann's Gatsby is an ode to the art of excess'. ('Ode' is surely the wrong word?)

Henry's movie mates reckon there is a negative correlation between critical reviews and the box office, so we anxiously await the local box office.

Footy'n'stuff

Sad to see ugly racial abuse of Adam Goodes but at least the lass has apologised. Slowly but surely this racist bullshit will be rooted out, but is it too much to hope it will not take another decade?

Collingwood hit a wall called the Swans last night, and one wonders if Eddie is beginning what a blunder he hs made in backing Buckley and gifting Malthouse to Caaarlton!  The boys in Blue face another danger game tomorrow, against Brisbane, so there goes Sunday afternoon, but do seem to be slowly adapting to mighty Mick's demanding approach and tough love.

Another test for Essendon, a team seemingly in the edge of falling apart, and who could blame them, when they play Richmond tonight. Henry will be at a party tonight, but fortunately at a footy-loving household, so the odd glimpse at the screen might be in order.

Image of the week

  Courtesy The Oz

(If the bird was a brunette and the bloke had hair, this could be Henry and Mrs Thornton relaxing with some cheap red wine and background drone of a Wayne Swan rant.)

Henry's search function, powered by Google.

Gentle readers, progress!

Type Henry Thornton and key word or words into the search box at Google, and you get a far more efficient search than using the site’s own search facilities which, to be fair, were installed almost a decade ago.

Eg  Henry Thornton chaos,
Henry Thornton Baltic Dry, or
Henry Thornton Bank of England

(The latter search leads to a nice story on 'The Panic of 1825', which is available here.

The trouble is that the original Henry Thornton died in 1815.  Were the governors at the Bank of England in Brad DeLong's story dealing with a spectre, or a clone of the original Henry, or were they just confused?)

You may already know this but I have only just discovered it.

Three dramatic 'surprises' and one dilemma, at least for those who always look on the bright side, have rocked markets.

China's manufacturing data has continued to slump. 

The AFR even has a graph, which shows an 'activity proxy' at the lowest level since the depths achieved in 2008, at the height of the GFC.

This is a predictable part of China's great transformation from world champion exporter to a country driven more by the needs of its own people.

We have opined, or reported the opinings of others, about the possibility of a worse than expected Chinese downturn, since early 2012.

For example in January 2012.  

In February 2012. 

And in March 2012. 

In one of these missives we concluded: 'A hard landing would do immense damage here, with falling GDP, double digit unemployment and a massive shake-out in house prices.  Government budgets would be thrown into disarray. Finally there would be real regret that so much government revenue had been spent on inefficient projects during the early stages of the Global Financial Crisis'.

Ben Bernanke dithers and confuses folks.

Ben Potter of the fin provides the best analysis we have seen.  It says in part: 'The topsy-turvy market reaction to the Fed’s confusing utterances proves one thing. The central bank’s bond plunge – whatever the benefits – is distorting financial markets in a major way, notwithstanding Bernanke’s assurance they have the risks covered.

'Investors are on tenterhooks at every utterance by top Fed officials, despite concerted efforts to present as united and consistent a front as a disunited board of governors can present. That confirms that the Fed’s eventual exit from its $US3 trillion bond portfolio will either be rocky or so protracted that normal conditions in financial markets will not return for many years. ...

'But the fact that the world’s largest economy and deepest financial markets still require the Fed’s belt and braces nearly five years after the collapse of Lehman Brothers is a big drag on confidence.

'Bernanke made clear that he favours a softly, softly approach to unwinding the Fed’s giant balance sheet, which will take a long time'.

Ford cactus

'Swan blames dollar' said one story, and the only surprise is that a seperate story was not headed 'Gillard blames Abbott', but perhaps that is still being canvassed by the PM's spin doctors.

As the proud owner of a Ford Territory, Henry is upset by this development, and even more by the massive subsidies paid to Ford and other Australian car builders to induce them to keep making cars people mostly no longer want. But the most outrageous aspect of this matter is that local managements allegedly agreed rescue plans in return for serious financial help, but, while the help was delivered, 'Detroit' cancelled Ford Australia's part of the deal.  Free trade anyone? What about enforcing contracts?  (Source: ABC Radio this morning.)

But this is another major step in the dismantling of our mnufacturing industry, with the carbon tax and the high dollar are both implicated. Also lousy procurement policy that discriminates against Australian products, eg check out the Metal Storm story, well worth the time of a seriously investigative journalist.

The pesky dollar

Henry is off to 'the Shop' to debate monetary policy with Ross Garnaut.  Ross of course, has the greatest collection of slides in recorded history, with a memory to match,while Henry has a few paragraphs about what monetary policy can and cannot do.  We will agree that Oz is in big trouble, and mostly about what is needed to rescue the economy from the hubris and policy mistakes of recent years.

Henry's plan for a tax on capital inflow will no doubt be howled down by devotees of the religion of free trade who are expected to be dominant in the audience, but Mrs Thornton woke up with two further good ideas this morning.

'Why not make it a whole lot easier for Australians to invest offshore?' she asked.

This reminded Henry of his earlier plan to establish a sovereign wealth fund to invest offshore, with a subsidy equal to a franked dividend.

Mrs T's next question was even smarter: 'We have a range for inflation', she tweeted, 'what's wrong with a range for the dollar?'

We agreed this required deep thought and 'more research' (as the boffins always say, reaching for their grant pad), but it certainly is better than simply letting 'market forces' raze most of our economy.

Henry's key question for the seminar today is: 'Can it be helpful for key industries to be discouraged for years by an excessive exchange rate, then encouraged for years by a low exchange rate? The market will ultimately decide these things, but discouraging a clearly over-valued currency, as now, by allowing completely free trade in capital is like a fanatical observance of the Ten Commandments'.

I rest my case, m'lud.

Apart from loss of jobs and downward adjustment to standards of living, when Ben Bernanke stops buying, it will be too late to quit the risky asset markets.

'The latest poll of Morgan Stanley's top clients from across the world says it all' says Ambrose Evans-Pritchard of the Telegraph.

'Chief economist Joachim Fels tells us that not a single investor at the bank's Florence forum thought the world economy would rebound with any strength later this year.

'Just a quarter expect a return to trend growth. Some 57pc think there will be no escape from the "twilight" conditions afflicting the western world, and 20pc expect an full-blown global recession. That is a remarkably bearish set of views. Yet the same investors are overwhelmingly bullish on stocks and property'.

'Four fifths think equities will gallop on upwards over the next year. Complacency is rife. "It became very clear – and many investors were quite explicit about this – that markets are lulled by the lure of liquidity resulting from negative real interest rates and global QE," said Mr Fels'.

Another guru said markets seem to think they are in a "no-lose" play: if the economy gains traction, stocks will rise: if it doesn't, central banks will pump in more money.

This thinking 'overlooks a nasty possibility that the Fed will start to wind down QE before the US economy has fully recovered'. As previously reported, 'the minutes of Fed's 19-20 March meeting shows growing worries about a new asset bubble, a worry shared by the BIS and the IMF: "A number of participants remained concerned about the potential for financial stability risks to build".'

Seem familiar, gentle readers?

Evans-Pritchard cites a paper presented earlier this year in which former Fed Governor Frederic Mishkin and three colleagues discussed 'Fiscal Crises and the Role of Monetary Policy', and the coming 'Crunch time'.

This paper shares concerns expressed here in early February, when Henry also wrote of a coming 'global crunch'.

Mishkin et al warned that the Fed could struggle to extract itself from QE from 2014 onwards. The longer it goes on, the more dangerous it becomes.

It argued that rising long rates could lead to a bond market rout, inflicting big losses on its $3 trillion portfolio. This could "wipe out" its capital base several times over.

Mishkin said the Fed is badly exposed because it has stretched the average maturity of its bond holdings to 11 years, and the longer the date, the bigger the losses when yields rise. Trouble could compound at an alarming pace by the middle of the decade, with yields spiking up to double-digit rates by the late 2020s.

'By then Fed will be forced to finance federal spending directly to avert the greater evil of default. By then, the US really will be facing the sort of hyperinflationary denouement long-feared by QE sceptics.

'Just to be clear', Evans- Pritchard notes, 'this is the Mishkin concern, not mine. I think exit risks are greatly exaggerated. The Fed extracted itself from Great Depression policies without any losses, and such losses are in any case irrelevant'.

Today the OZ brings us the thoughts of a visiting guru, the OECD's Adrian Blundall-Wignall, under the headline 'Currency war, quantitative easing sowing seeds for new GFC'.

Clearly the best global guru's are wringing their hands in concert, but Blundall-Wignal was unusually frank for an international econocrat.

"Australia is in a very unfortunate position," said Mr Blundell-Wignall, speaking at a business forum in Sydney yesterday run by the Institute of Chartered Accountants.

"Having done the right thing, having no capital controls, Australia is now facing the whole avalanche of world investors seeking out Australian assets."

Australia was being forced into the position of having low interest rates otherwise a rising currency would kill the economy, Mr Blundell-Wignall said.

And there is more.

'Quantitative easing had created a gigantic bubble in global bond markets, whose bursting would cause enormous damage, and had pushed equity markets "above fair value", he said.

"The idea we can have free or cheap money forever is ridiculous," he said, suggesting that quantitative easing had helped restore global banks to profitability without fixing serious flaws in the global banking system.

'Mr Blundell-Wignall's prognosis for Europe was dire. "The south (of Europe) is being absolutely cremated," he said, noting that youth unemployment in Spain and Greece, for whom the euro was an economic straitjacket, was now 56 per cent.

'He predicted widespread emigration from southern Europe if the eurozone held together, just as the Irish had left Ireland during the 100-year currency union from 1820 with Britain, then a much richer country'.

Australia's deflating economy

Today's headlines support the gloomster from Paris, and Henry, as it happens.

'Resources boom falls to earth', says the AFR.

 'Treasury rings alarm on surplus'.  

The problem for investors is when to reduce their bets on risky assets. The large downward correction could come at any time, but this includes more than a year from now. Henry's tactical approach is to choose levels of relevant share prices or indices in which he would be happy to quit said assets, and begin to lighten off progressively and systematically as markets rise toward those levels.

Obviously, this assumes that the correction will not come quickly, but if this is wrong it will be short commons for the Thornton family.

'SOME schools will receive so much money under Labor's proposed Gonski school funding reforms they will not know how to spend it and, in other cases, will not be able to buy the resources needed to make the crucial difference in students' education.

'Prominent education experts in two states have called into question how the National Plan for School Improvement will deliver appropriate accountability and oversight for schools, particularly in small and remote institutions where students will receive multiple disadvantage loadings under the scheme'.

Like the previous 'GFC cash splash' for schools, lack of money is not, repeat not, the cause of our schools failing to match best global standards for literacy and numeracy. And not in children acquiring a fierce desire to compete in an increasing global marketplace, either, I suspect.

In Henry's view - fostered by memories of his own schooling in the distant 1950s, plus close attention to his children's schooling in the 1990s and 2000s - there are three reasons for Australian children's suboptimal learning.

The first concerns quality of teachers. When Henry was a lad, most teachers, especially in primary schools, were women.  In those distant days, opportunities for women of talent were far fewer that they are now, so Australia had very high quality teachers and nurses, the two professions women were encouraged to join.

Sadly, as a perhaps unexpected implication of women becoming corporate and government leaders, and climbing heirarchies previously denied them, the pool of talented women available to teach others is limited. How to remedy this problem is hard to see, although Henry would if asked suggest that older workers of either gender retrenched in their middle fifties be retrained as teachers should they show appropriate aptitude and willingness.  The union might be a problem of course, but where there is a will there would be a way.  Worth a try in one state, Mr Naphthine?

A second factor is culture within the schools.  After a good performance in year five, Henry's first spelling test in year six was a disaster, with twelve mistakes.  Henry was given the strap and sent into his previous classroom to tell his year five teacher, who dismissed his by saying 'get back to your hutch, rabbit'. Henry's performance at the next spelling test was much improved.

A second act of what now would be called brutality came in year twelve.  'Hands up those who want to apply for a Commonwealth scholarship' said the class teacher. Henry's hand went up, even though he had no great knowledge of what said scholarship might involve. "You, Henry!' exclaimed the teacher, 'don't waste our time'. Naturally, a challenge like that could not be resisted, so the young Thornton insisted on applying, and surprised everyone by winning one, which he declined as by then he had a job.

Nowdays, of course, kids cannot be given the strap, nor one assumes can they be ridiculed in front of their class, although in the case of Henry's eldest child, he was given a pretty vigerous serve in the presence of his parents by one feisty teacher at his private school. Again, Henry does not propose turning back the clock to again allow beatings or ridicule to enter the curriculum, but it is undeniable that the classroom is a far softer and gentler place than it once was, perhaps past the optimal line for gentleness.

Third is the culture of parents. Now many parents strive to be 'friends' of their children, allowing a lot of time playing computer games, texting friends and generally promoting 'sensible work-life balance', rather than insisting on home-work (and supervising this at the kitchen table) and limiting the amount of happy relaxed leisure time.  Schooling, like work, is an important part of a person's life, and should be treated as such from the get-go.

Henry has not studied this matter closely, but has somehow absorbed from friends, including recent immigrants from Asia, and from exchange students from China living with the family, some important impressions. In summary, in all three catagories discussed above, those Asian nations that lead Australia in numeracy and literacy, and in will to win, schools and parents take an altogether more serious approach. Despite larger classes, supposed more rote learning and generally tougher regimes at home and schools, Asian kids outperform their Australian counterparts.  This of course shows up here too.  Simply look at the names on the lists of the highest-achieving students in each state's year twelve exams.

I rest my case, but welcome comments.

Contact Henry here.

The follow-up, from the Oz.