Saturday Sanity Break, 24 September 2011
Date: Saturday, September 24, 2011
Author: Henry Thornton
The week ended with a mild rally in US stock prices, after a less-that-it-could-have-been-fall in Australia on Friday.
The late rally is attributed to a 'pledge from global officials to maintain financial stability'. It is worth noting that the meeting of the G20 at which action could be agreed is six weeks away. And also that the form displayed by the G20 worthies so far is hardly conducive to overturning the current perceptions that the lunatics are in charge of the asylum.
Still, we live in hope. Today's lead story in the Oz begins thus: 'Fears of a possible Greek default and the US economy dipping back into recession pushed the Dow Jones Industrial Average to its worst week since the depths of the financial crisis.
'The US sharemarket edged slightly higher today, as a pledge from global officials to maintain financial stability alleviated some investor anxiety. The slim gains, however, failed to overshadow the Dow's 6.4 per cent weekly decline, its worst since the week ended October 10, 2008.
'The Dow, which plunged 674.83 points over Wednesday and Thursday, suffered the sixth-largest weekly point-drop in its 115-year history. The index has dropped in seven of the last nine weeks'.
Economists' talkfest - beware, reading may induce depression
Henry spent the previous two days at the conference of economists held in Sydney by the NSW branch.
There was much that is of interest. A session on happiness, which concluded that happiness is reasonably well correlated with economic factors, except that incomes over $100,000 do not add to happiness, a sentiment that Henry's Mother used try to convince him was true.
Sad to learn, however, that carers looking after a loved one on an inadequate income are the most unhappy group surveyed, even more so than people in goal or street kids. Yet another example of Galbraith's poverty in the midst of plenty.
Another session on crime and the economy, in which the lead presenter told us that global crime costs $50 billion (or was it trillion, my notes are lost). Sadly, no mention of the book called A Renegade History of the United States, recently reviewed here by David Jonson.
The biggest event of the conference was possibly the session on productivity, regulation and governance chaired by Janine Perrett, who confined her advertising for her program to a brief part of her introductory remarks.
Speakers were John Colvin, CEO of the Australian Institute of Company Directors, Gary 'Productivity' Banks and Saul Eslake.
All made wonderful contributions. Colvin showed a graph showing the 'unabated growth of regulations' in Australia and generally railed against regulations that risk 'strangling the goose'.
Banks pointed out that it is productivity improvement that creates wealth, and regulations need to be themselves regulated, with sunset clauses and systematic review by independent experts, such as his Productivity Commission.
Saul Eslake delved into the reasons for Australia's dismal recent productivity performance.
Part of the story is weak productivity performance by miners and utilities.
He did not say so, but utlities have fed on helpless consumers, and are a prime cases for review by the ACCC, if Henry's bills are any guide.
Miners have also had easy pickings, in their case because of the insatiable global demand for raw materials, with miners forced to meet demand by digging deeper into generally less productive deposits.
But non-miner, non-utility suppliers have also produced far lower productivity, and there are three (or is it four) causes that are responsible:
* The economy, which after 20 years of growth is experiencing bottlenecks, shortages of skilled labor, infrastructure, etc * Companies, who have never had it so good, and who have relaxed their productivity enhancing efforts. * Governments, who have lost enthusiasm for reforms that would increase productiviy. In addition, there has been a tsunami of productivity detracting regulations.
The fourth reason, perhaps on reflection the root of the problem, is that modern governments attempt to remove any possible risk. Eslake quoted research showing that the US government has spend $1 trillion trying to eliminate a risk that is less likely than drowing in the bath.
In Australia, fast population growth and high terms of trade masked the need to raise productiviy in the 1950s, 1960, and 1970s, and when these factors ended, Australia experienced its most dismal time ever. (The 1890s and 1930s were not mentions in this context, but we shall forgive this lapse as Saul is a relatively young man who is not greatly interested in times before his entry to the world.)
The end of the China boom (which Eslake said might be in 10 or even 25 years) would mean the vultures coming home to roost.
The international situation
Henry's contribution was to help discuss the current international situation, along with Paul Bloxham of HSBC and George Mathew of Infosys Australia, in a session chaired with his usual flair, by Tim Harcourt of Austrade and Airport Economist fame.
Bloxham gave an excellent overview of facts, leaving the distinct impression that the situation is dire.
Henry made the points that will be familiar to readers here, but which seemed new to most of those in the audience, who listened in what seemed like stunned silence to commentary on the idiocy of current and recent monetary, fiscal and bailout policy in the major countries of the west.
Mathew hails from India, and his comments provided a useful antidote to the gloom spread by the two former Reserve Bank officers.
While Henry missed the opening session, Mike Stutchbury reports today that another former RBA man, Don Stammer, had also spread some gloom of his own.
'Stammer says the risks from both inflation and China's economic cycle are bigger than most people realise. He is sitting in cash and inflation-linked bonds in anticipation of rising global inflation and a Chinese growth downturn in the next five years.
'That cyclical low will be the time to invest in the longer run China story. But it will also test Australia's political dysfunction and its economic management.
"So I am sitting on some cash, because if you think BHP and Rio are good long-term investments now, just wait 'til China has a period of 3 per cent growth," Stammer told an Economic Society forum in Sydney this week. "Think how cheap they will be."
'The former top Reserve Bank official, investment banker and now company director says he is not smart enough to know what would drive this cycle. But, at some point during the next five to seven years, Australian inflation will top 6 per cent, well above the Reserve Bank's 2-3 per cent target zone, he suggests. That would see the bank's cash rate rise to more than 7.5 per cent, compared with 4.75 per cent now. And the jobless rate would climb above 8 per cent, up from 5.3 per cent today.
'Australia needs to prepare for the inevitable volatility of our China boom by shoring up our defences. That means getting the budget back to surplus, maintaining a profitable banking system, keeping inflation low and removing impediments to business flexibility'.
Image of the week
Courtesy The Oz
Mr Abbott takes charge
Date: Wednesday, September 11, 2013
Author: Henry Thornton
The election is all over bar the counting, with the Coalition having around thirty seat majority in the House. Still unclear about the Senate, but some experts think the Labor-Green alliance will not have a blocking majority, which may allow long-suffering voters to avoid a double-dissolution election.
Business confidence has lifted from disasterous to simply awful, and household confidence has been rising slowly for some time now. So, for the time being, the economic slide may be arrested. But there is still unsustainable cost disequilibrium and out-of-control budget deficits to be dealt with. Mr Abbott is advocating slow and steady progress on all fronts, which will be a great and welcome change from the opportunism and haste of Mr Rudd's governments.
The business community has been advocating a strong and immediate attack on the fiscal disequilibrium. There is no public advocacy of policies to reduce the cost disequilibrium, although there is a lot of private sector 'cut, cut cutting' which will impact on household confidence in coming weeks.
Mr Abbott has already spoken by telephone to the Indonesian President, Susilo Bambang Yudhoyono, and is committed to elevating Indonesia to the status among Australia's most important national friends.
Tiresias of Canberra writes on the Syrian situation, including the wider issue of the state of American foreign policy and Australia's dependance on our great traditional ally.
'The election is over. Foreign affairs and defence scarcely figured in public debate. Neither side acknowledged the obvious: what is our ally and protector of the last 80 years really up to? Is America sincere in its aims for the war on terror, is it using the war as a means of spreading instability across Eurasia in order to impose strategic uncertainty on rivals like China and Russia or is it callously playing with the lives of hundreds of millions across Western Asia and beyond in pursuance of aims drawn from naïve, grad-school, fantasies of world-improvement? Until recently the first remained plausible. Now it is certain that the truth lies somewhere in the murky space between the second and third options'.
Within Australia, the once great Australian Labor Party is again tearing itself apart, Kevin Rudd, who was removed from office while still a first term Prime minister, then rubbished as a psycopath by members of his cabinet, then resurrected to 'save the furniture' three months ago, is now being advised to quit Parliament on the grounds he will be unable to avoid destabilising whomever is the (hapless) new leader. A hardened veteran was heard to mutter: 'Gor blimey, comrades, have we learned nothing?'
A note to our readers.
Henry is about to catch an aeroplane to L.A., and will be away for ten days or so. Please excuse intermittant transmission, gentle readers, although it will be interesting to soak up the economic and political news as perceived in the mighty USA, and internet cafes and hotel wi-fi systems will surely facilitate the occasional message.
(Mrs Thornton is trying to keep Henry's smart phone on the grounds it will outsmart Henry and create a monster phone bill like 'the partner from XYZ consultancy' and other worthies who took their smart phones to America.).
Australia`s economic challenges
Date: Monday, September 09, 2013
Author: Henry Thornton
A fine win for Tony Abbott and his highly disciplined team means Australia is again 'open for business' after the chaos and uncertainty of the past six years. Now comes the really hard part, fixing the economy.
Steady and predictable decision-making will be a hallmark of the new government. Abolishing the carbon and mining taxes, stopping the boats, putting the budget onto a sustainable path to surplus and investing in much needed infrastructure are all important first steps.
Despite the likely frustration by the current Senate on the first two objectives, one imagines the incoming Senate will contain sufficient conservative independents to allow passage after July 1 2014.
Stopping the boats is an almost bi-partisan desire and, if anyone can do it, it is the new government. It seems to Henry that regional action is required and that the previous government finally realised this in its dying days.
Putting the federal budget onto a sustainable and credible path to surplus, so Labor's debt can be repaid, is a large task. The electorate must be convinced to support sensible budget housekeeping and postponement or scaling back of programs that are currently unaffordable. Tax reform is also highly desirable, to align tax receipts with agreed spending priorities.
Henry is strongly in favour of cuts to effectively useless research programs. Focus by most of our universities on first rate teaching and specialisation by our leading research universities on disciplines in which they could reach top ten globally has the potential to greatly improve the performance and productivity of the contribution of Australia's tertiary education and research sector.
Vital new infrastructure must be paid for, and the only way to do this without postponing the attack on deficits and debt is to incentivise the private sector to lead the charge, with appropriate government oversight to see the tendering process is honest and promises by winning tenderers are adhered to.
Tax reform to improve incentives to save, to invest and to work could do much to produce the stronger economy the incoming government has promised.
So too will the promised attack on productivity-inhibiting red- and green-tape regulations. Industrial relations must return to the 'sensible middle' and this will do more than any other policy to create jobs and improve productivity.
The single biggest challenge facing the Australian economy is the current double-digit cost disequilibrium. Unless it is solved quickly real recession, with double-digit unemployment, will quickly become the reality facing us all. This matter is currently being attacked by corporate managements cutting costs but, as someone once put it 'you cannot shrink your way to greatness'. Tax and regulatory reform are the ways the new government can help companies deal with the cost disequilibrium.
The team at Henry Thornton wishes the government every success in helping deal with the challenges facing us all. Its success will be Austrlia's success.
Sunday Sanity Break, 8 September 2013
Date: Sunday, September 08, 2013
Author: Henry Thornton
It's over, and the polls were pretty well on the knocker.
Tony Abbott has had a fine win after what everyone realises was an astonishingly disciplined (three year) election campaign by a united and competent team.
Kevin 'It's all about me' Rudd seemed in his rambling concession speech to be claiming victory but at least gives his party a chance of one day again forming a government by standing down as its leader. Far better for his party if he left the parliament altogether. As one senior former pollie said at Henry's election party 'there'll be trouble'.
It will take a few days for the new parliament to be settled and sworn in, so we must enjoy a respite while we can.
Now we have the footy finals to focus on.
The AFL finals have so far produced two results that were surprising to most of us.
Freo travelled all the way to Geelong's skilled stadium and overcame the home town team. This earns Freo a home preliminary final in two week's time, and right now they are a better bet to play in the grand final even than Hawthorn, who blasted the Swans off the 'G' on Friday night.
The other surprise was the fine win by the Adelaide Magpies (as they once were) over the Collingwood Magpies. The Collingwood supporters at Henry's party were gobsmacked as their smart phones delivered the bad news, and fortunately so far as we could tell there were no persons present who were supporters of both Collingwood and Labor.
Today sees Caaaaarlton! play Richmond, also at the 'G', and we live in hope that the Blues can overcome a slick Richmond team who have played better footy this year. [Ed: An astonishing runaway win by the Blues after again looking down and out means it will be Caaaarlton! that travels to Sydney to face the Swans. This year's track record, plus home ground advantage means Sydney should win, but Mick the Merciless will have other ideas. If we beat Sydney, anything can happen.]
Caaarlton! goes to Sydney next week to what should be a good thrashing except for one thing. Sydney went into the game against Hawthorn on Friday evening with a number of star players out through injury. The mauling at the hands of Hawthorn left more of their best players sore and out of gas, and so there is just a chance one of today's combatants might sneak through.
When not discussing the election, Henry's pals were talking about the 'supplements' saga. While there were no supporters of the top three teams in the AFL present (such is the tribalism of Melbournians), all the rest of us continue to believe their players are stronger, faster and more focussed than those of the bottom 15 teams. Is this nature or nurture, gentle readers, and if the latter, what kind of nurture?
It is well past time to revive the suggestion made by Luke Griffiths at the start of the 2007 season, to test all players from both teams on grand final morning. Way back then, AFL chief Demetroiu saids in an angry letter: “To test every player in the grand final would be a logistical nightmare and under present arrangements would take up to 10-12 hours for testers to get through all 44 players which makes it neither an efficient nor a common sense approach in the continuing fight against drugs in sport.”
Experts have told us that the relevant tests now take far less time. If the AFL is fair dinkum about cleaning up the game, this policy should be adopted for this grand final.
The economy has held up fairly well under the strain of a hotly contested election campaign. Overseas news has been more positive than negative, with the USA, Japan and the Eurozone showing signs of recovery.
At home, the RBA's decision to keep interest rates on hold was probably a (weak) anti-recession vote. But with the housing market stirring and the possibility of the election improving business and household confidence, it was also perhaps the sign of prudent wait and see economics.
The rebound of the Aussie dollar will be worrying the RBA, and their boffins should be studying the idea of finding a new way to control capital inflow, just as the government has to find a better way to control (preferably stop) people from coming here on leaky boats without documemtation.
Over to you, Mr Abbott.
Image of the week
Courtesy Herald Sun
Election 2013 - the tide in men`s affairs
Date: Friday, September 06, 2013
Author: Henry Thornton
Annabel Crabbe burnished her reputation with another fine interview. Mr Rudd waved his arms and boasted about his Meile (?) kitchen while his daughter helped in the preparation of the 'Kevlova' and other sweet 'high tea' treats. Lots of the overblown rhetoric we have come to expect, naturally.
Today on ABC radio Tania Plibersek was wittering away about lack of detail on the coalition's costings. In the fin, Laura Tingle expresses amazement that the coalition's costings do not signal 'cut, cut, cut' or even mindless austerity. 'Coalition manages to pull a swifty on savings and spending' was her headline. The Labor gals are going to be gobsmacked when a mere male (the much derided T Abbott) becomes one of Australia's great Prime ministers.
The International Monetary Fund (IMF) 'reverses stance' of the global economy. Now it is going to be the USA and Japan, and to a lesser extent Europe, that will be the global growth engines. 'Emerging economies' are mostly in some trouble, and when the US Fed finally nerves itself to pull the plug on current super-easy monetary policy these problems will intensify.
Some experts are saying the commodity boom is catching its breath and Australia may be blessed with resurgent commodity prices.
That would, of course, put renewed pressure on the exchange rate, and there appears to be no debate about policies to mitigate renewed strength on the Aussie dollar.
What a hoot it would be if the Coalition inherited a renewed commodity boom, fixed the budget in its first term and went on to run the country efficiently without vainglorious spending and windy rhetoric for decades.
According to ABC radio, every newspaper in the country except the Melbourne Age has tipped the Coalition to win. The AFR reports the verdict of the punters, which has Labor in as much trouble as the punters said it was in just before Ms Gillard got the chop.
As the great bard had Brutas declaim:
There is a tide in the affairs of men. Which, taken at the flood, leads on to fortune; Omitted, all the voyage of their life Is bound in shallows and in miseries. On such a full sea are we now afloat, And we must take the current when it serves, Or lose our ventures.
Election 2013 - behind the arras
Date: Thursday, September 05, 2013
Author: Henry Thornton
What a brilliant interview by Annabel Crabbe, and Mr Abbott emerged about as warm and friendly, and as plausible, as it was possible to imagine. We await tomorrow night's revelations about Kevin Rudd with eager anticipation. Here is a report, focussing on the trivia, naturally. Do not miss the video.
Gary Morgan comments: 'Sorry, Mr Rudd. You lose!'
Mr Rudd’s ‘If he wins, you lose’ television commercial is a real loser according to Australian voters. It contrasts dramatically with the Liberal’s ‘New Hope’ commercial which is positive and uplifting and scores most highly with L-NP voters but didn’t do badly with ALP and Green voters'.
GDP numbers released yesterday showed sluggish growth held up by government spending and inventory rebuilding.
Previous day's news showed extremely soggy retail sales, and the retailers are crying out for further interest rate cuts when the real issue is prudent Australians improving their balance sheets in anticipation of tough times to come. When was thrift and propensity to save a problem, Gerry Harvey and consumerist mates?
Growth is sluggish and the Australian economy is already in a growth recession, with a real recession to come. some experts think a decisive election win to either side will restore confidence, but a new government (if that is the result) may have fresh news to dampen the post-election cheer.
The presumably Labor opposition leader will claim the coming recession is Tony Abbott's fault but no-one will believe him but Bill Shorten, who will be plotting behind the arras.
As the great bard wrote:
Hamlet.Come, come, and sit you down; you shall not budge. You go not, till I set you up a glass Where you may see the inmost part of you. Queen.What wilt thou do? thou wilt not murder me? Help, help, ho! Pol. [Behind.] What, ho! help! help! help! Hamlet. [Draws.] How now! a rat? Dead, for a ducat, dead! [Makes a pass through the arras. Pol. [Behind.] O! I am slain. QueenO me! what hast thou done? Hamlet. Nay, I know not: is it the king? Queen.O! what a rash and bloody deed is this! Hamlet. A bloody deed! almost as bad, good mother, As kill a king, and marry with his brother.
No more political advertising from midnight. What a relief. Roll on the election!
RBA trilemma, correction dilemma
Date: Tuesday, September 03, 2013
Author: Henry Thornton
Our friends at the Reserve Bank meet today with their buddies from what passes as the 'real world'.
Will they or won't they - cut rates further, today or before Christmas. Them is the questions, comrades.
Australia's economists, mostly well-briefed, say 'no way Jose' to a cut today and either 'yes' or 'probably' to a cut later in the year.
Roy Morgan's shocking news that 170,000 jobs were lost in August - see report below - should tip the balance in favour of a rate cut, but Gary Morgan is known as ... careful Henry ... different, and will be ignored.
In the RBA's 'minds' the stubborn refusal of the currency to fall further should support the case for a rate cut today, but signs of a renewal of the housing boom, especially in Sydney, will be a countervailing factor. An Archbishop's palace is reportedly going for $25 Million, probably to a 30-year-old entrepreneur, and good luck to her.
Henry's views about the need to find an alternative to monetary policy as a way of taming asset inflation have, like Gary Morgan's shocking unemployment figures, so far been ignored. Henry is ... careful Henry ... different, and it is practically an iron law that he is to be ignored with the full force of gov'ner Glenn's steely eye.
The good news is Henry is not alone. The latest edition of the Economist revives the good old 'Horns of a trilemma'.
'SINCE the beginning of May the Indian rupee has plunged by 23% against the dollar. The Turkish lira fell by 15% in that time, and the Indonesian rupiah by 16%. Headlines warn of a replay of the Asian crisis of the late 1990s. Complaints from emerging-market officials that rich-world monetary experiments are to blame for the trouble look like sour grapes. But new research presented to the world’s top central bankers at their recent gathering in Jackson Hole suggests they may have a point'.
The basic point is this: 'An economy open to free movement of capital can keep a fixed exchange rate, for example, only by subjugating monetary-policy goals to its defence—by raising interest rates sharply, say, when capital outflows put downward pressure on the currency'. [Ed: Or by cutting interest rates sharply when capital inflows are too strong to be useful.]
'Yet', continues the venerable mag, 'the trilemma also implies that an economy can enjoy both free capital flows and an independent monetary policy, so long as it gives up worrying about its exchange rate'.
The obvious answer, is to impose a tax on capital inflows when it is running too strong, a variable tax across the board, as advocated in this country by dear old Henry.
'Mainstream economics is increasingly sympathetic' continues the mag. 'In late 2012 the International Monetary Fund updated its institutional view on capital controls, noting that more financially open economies did worse in the crisis of 2007-09. The IMF suggested that limited, co-ordinated policies to temper flows could be warranted, especially in economies with relatively underdeveloped financial systems. In a 2012 lecture Maurice Obstfeld, an economist who helped develop the trilemma concept, mused that the world’s financial architecture looked ill-prepared for a world of outsized financial flows. On average, he notes, newly industrialised economies in Asia maintain foreign-investment positions equal to 200% of annual GDP.
'A new paper by Hélène Rey, of London Business School, goes further. Ms Rey reckons the trilemma itself has been rendered obsolete by financial globalisation. Governments instead face a dilemma, or an “irreconcilable duo”: free capital flows may inevitably mean a loss of monetary-policy independence'.
Ms Rey's “irreconcilable duo” is another manifestation of Milton Friedman's aphorism that 'monetary policy cannot serve two masters', a point Henry has been banging on about for nearly a year now.
As Henry concluded last January: 'Our floating exchange rate with an independent, inflation fighting central bank has generally served Australia well, supported by helpful international conditions. The policy now needs the support of a direct, non-discriminatory control over capital inflow. If not resolved, this problem with cause great damage to Australian industry, as it did in the late eighties, when the correct conclusions were not drawn. A similar problem helped lead America, and then the world, into a Great Depression.
'The lesson of history is clear; and we ignore it at our peril'.
170,000 jobs lost in August.
'In August 2013 an estimated 1.25 million Australians (10.1% of the workforce) were unemployed. This is down 16,000 (0.0%) from last month. The Australian workforce* was 12,377,000 (down 186,000) comprising 7,440,000 full-time workers (up 26,000), 3,686,000 part-time workers (down 196,000) and 1,251,000 looking for work (down 16,000) according to the Roy Morgan monthly employment estimates. These figures do not include people who have dropped out of the workforce and given up looking.
'Among those who were employed 1,006,000 Australians (8.1% of the workforce*) were under-employed, i.e. working part-time and looking for more work. This is 125,000 fewer than a month ago (down 0.9%).
'In August an estimated 2.257 million Australians (18.2% of the workforce) were unemployed or under-employed. This is down 0.9%, or 141,000 from July, but much higher than 12 months ago in August 2012 (up 126,000, 0.9% from 2.131 million).'
Anything is possible in the last week, of course, so its too soon to start celebrating, or greiving for that matter if you are a Ruddite.
The final nail in Labor's case, fiscal rectitude, seems to have been blown away by 'economic nationalist' Rudd's failure to accept the intervention of the heads of Treasury and Finance, who denied there was any sort of 'black hole' in the Coalition's costing.
Paul Kelly, who once was a fairly harsh critic of Tony Abbott, was moved to say: 'THE Labor government is now sinking before our eyes. Largely reduced to a negative attack on Tony Abbott's costings, Kevin Rudd has made the ritualistic blunder of leaders under pressure: he has over-reached and been humiliated.
'In a collegiate decision almost certainly without precedent in an election, the heads of the Australian public service repudiated the Prime Minister and his economic ministers this week in their assault on the Coalition's main election savings. This is the biggest story of the election'.
Read on here, and do not miss the video. 'Labor continuing to fade' is the judgment of the video twins. And Labor's 'campaign launch' is yet to come.
Overseas news has generally been better. The US economy is slowly but surely improving, China seems to have stabilised (though still facing large problems) and even the Eurozone seems to be pulling out of a deep recession.
The very success of US recoverey has powered debate about how the US Fed exits from current super-easy monetary policy. Gerry Harvey, however, wants the RBA to copy the US Fed and cut short-term interest rates to US levels, presumably not realising that this would give us the US exit problems squared, or even cubed.
Would of course help the standard advertising claims of 'no interest repayments for three years' rubbish. Almost as silly (and as untrue) as a Labor government's repeated promise of 'budget surplus by 20xx'
The Business Council of Australia (BCA) has cottoned on to the view that industry is facing a large 'double-digit cost disequilibrium' (to use Henry's description. This will be harder to fix than the debt and deficit problem, but at least the business mogols are on the case. Do not miss the photo (Image of the week, below) of business leaders pondering cost disequilibrium.
Caaaarlton! plays Port Adelaide today for Essendon's place in the finals. Two presumably uninhanced teams fight it out for the opportunity to be thrashed by teams whose bodies are stronger and faster and minds more focussed, just better team selection and smarter training, or so they say.
Stop press: Caaaarlton! came from 39 points down and looking dead in the water to win a thriller by a solitary point and thus ensure their place in the finals. Was this the turning point we have been looking for all season? Next week will show and if they can continue with the level of commitment and flair finally shown under Mick the merciless they can give the better teams a fright, and perhaps grab a scalp or two.
In New York, little Lleyton showed us its not necessarily over for him either. Older he may be, slower he may be but he's a fighter. Slamming Sam Stouser needs to take whatever it is Lleyton takes with his cornflakes.
Last night Henry and Mrs T attended the second night of Rupert. Great romp through NewsCorp's history as seen by David Williamson channelling Rupert Murdoch and a variety of Murdoch family members and associates. Lots of laughs but, like Essendon's peptide saga, it aint over yet.
Henry's essay on the fun to be had by accumulating debt has chimed with a reader who sent a poem, called CHRISTMAS CHEER, which seems to us to be a modern morality tale.
Image of the week.
Courtesy The Oz
Election week 4 - Acquiring debt can be fun ...
Date: Friday, August 30, 2013
Author: Henry Thornton
People or companies acquire debt for one of a number of purposes. Spending money can be fun and, if borrowed money is used productively, borrowing and spending can be glorious, as a Chinese philosopher once hinted.
Gearing - borrowing money at less than the 'risk adjusted' returns from investing the loan - can make people or companies rich.
When the cost of borrowing is tax deductable, when companies or investors borrow, and assets purchased with the borrowed money rise in value, the net benefit can be great.
If the value of assets falls greatly, of course, so that the assets must be sold at a loss, life gets uncomfortable, especially if the proceeds of the asset sale are well below the value of the loan. Many people and companies have gone broke playing this game. With luck and continued asset inflation, fortunes can be made.
In Australia, the cost of borrowing to purchase a house to live in is not tax deductable, but the value of the house is exempt from income or capital gains tax when the house is sold. With the long boom in house prices since the 1950s, many people have accumulated massive wealth, which can be released when they trade down or die.
Smart people borrow to buy successive houses to renovate and realise a tax free capital gain. Some smart people devote a lifetime to playing that gain. While house prices keep rising, they are laughing.
Borrowing to finance consumption, which happens when ones consumption spending exceeds ones income, is a mugs game, but often practiced.
At the national level, all the justifications except the last can be applied by governments going into debt. There is also the 'Keynesian' justification for stimulating an economy at risk of an economic downturn. Like spendthrift people, high-spending governments have fun planning, announcing and then spending on new projects.
'Keynesian' stimulus is of doubtful value except to a limited extend in a time of deep depression. Usually it is far better to allow the so-called 'automatic stabilisers' to work. As the economy weakens, taxes receipts fall, welfare payments rise and both effects offset the slowdown. If the tax and welfare system is designed well, the resulting budget deficit will be repaid when the economy returns to robust growth. Rather than expanding 'discretionary' spending, governments would be wise to explain to people and companies that they should work harder and smarter to offset the effects of the downturn.
In a very deep downturn, some increase in discretionary spending (financed with borrowing by government) may be justified, but only if the messages about cutting costs and working harder and smarter are delivered at the same time. Borrowing in an attempt to maintain economic activity, like any other borrowing, is borrowing from the future, and a wise government will think deeply about the short-term benefits of increased spending and borrowing, as the borrowing will create interest payments and eventually need to be repaid, and these future commitments will be a burden on future taxpayers, and tend to slow future economic activity.
Borrowing to invest for future returns often works for canny private investors, and may also work for wise governments that invest in high-return activities. Investing to improve education may boost future national productivity, but spending on high-priced and mostly unwanted schools halls will not. Putting pink batts in the ceilings of people's houses may reduce costs of heating and cooling by a small amount, but is hard to justify in terms of higher national productivity. The impact on national productivity will by definition be strongly negative if the batts later have to be taken out due to the negative effects of installation by dodgy builders. Massive spending on infrastructure may help national productivity, but governments are rarely sufficiently wise to spend in ways that boost national productivity. As a general rule, it may be far better to provide incentives for companies to build infrastructure, as they will get better value-for-money both in the building and running phases of infrastructure development.
While spending money is often fun, for individuals, companies or governments, the latter group are as a general rule is most inclined to spend money wastefully.
Please think hard about this matter in the coming week and a bit until polling day, gentle readers. Which party is more likely to spend money wisely and reform spending, taxes and welfare to stem the massive debt increases of the past six years. Fixing the fiscal mess is one vital matter. Another major challenge is to reduce the massive cost disequilibrium that has built up over the same time. The next government can help in this area by reducing red and green tape and by returning the industrial relations system to the sensible middle. But most of the heavy lifting to reduce costs will be done by companies in collaboration with their workers. The sooner that costs are reduced so that Australian companies can compete globally, and the excessive spending is checked, the sooner will Australia return to sustainable prosperity.
With the return to sensible fiscal policy, removing the cost disequilibrium is the major economic issue in this election. Sensible companies seem to be on the case, but IR laws need to support this endeavour, rather than frustrate it.
Election grinds on; Essendon given flick pass
Date: Wednesday, August 28, 2013
Author: Henry Thornton
Thank goodness. Too much longer and we'll be relocating the army to Darwin, except for the catering corps which will be sent to buy apples and other clean green food items in Tasmania.
Not that Henry's mind is as fertile as Mr Rudd's in the matter of shoring up marginal electorates. What about a weekend at the Lodge, or a week at Kirribilli House, for any voter who provides a stat dec that he or she voted successfully for a Labor candidate in a marginal electorate?
Or ... words fail me.
The coalition's $70 billion budget black hole, Mr Abbott's alleged unfitness to hold the office of Prime minister, the constant harping on coalition negativity from the man who promised a nicer political discourse. Has no-one told Mr. Rudd that he damages himself with wild and patently untrue allegations of this type? Or does he shoot those with messages such as this as well as abusing cabin stewards and other worker bees?
More at Rooty Hill tonight.
The coalition is releasing PBO costings, and will produce a set of plausible budget estimates next week. Those criticising the coalition for the lack of point estimates of the budget in four years have presumably never run a business or been a successful politician. Never make promises you cannot keep is one of Mr Abbott's ethical principles, and these principles stand in marked contrast to Labor's 'no carbon tax', promotion of the insulating value of pink batts and unneeded school halls at wildly inflated prices and delivery of a succession of 'budget surplus by 20xx' promises that have had to be progressively wound back.
If its character we want in a political party and its leader this election would be like the Martian beauty parade - we've seen the first candidate in action, and immediately award the title to the second.
Sorry folks, its all got too much for me, gotta zip.
Finally, a settlement. 'Essendon has got off pretty lightly' is the opinion of those of Henry's readers (apart from Essendon supporters) who have commented.
The AFL can justify its willingness to settle for the 'good of the game'.
But there is another possible motive. James Hird in court might have said a whole lot more about use of 'supplements' at other clubs. 'Bigger, fitter, faster' is the clear view about players in other top clubs, and we have to hope this is just the results of better recruiting and smarter training. Astute readers will be aware of the analysis of The Economist (reported here) as well as Henry's 2006 campaign against drugs in the AFL, where even facts about the frequency of drug testing had to be extracted from the AFL with pliers. On this logic, Doc Reid will be allowed to go home with his record unblemished. After all, he did share his concerns with the Essendon administration.
In response to a suggestion that the AFL test every player in the grand final in the day of the game, Mr Demetriou said: “To test every player in the grand final would be a logistical nightmare and under present arrangements would take up to 10-12 hours for testers to get through all 44 players which makes it neither an efficient nor a common sense approach in the continuing fight against drugs in sport.”
Do it this year, Mr D, not too costly or intrusive, and if everyone is clean we shall join the cheering.
See the work of Luke Griffiths, who led the charge in 2006, had an answer to that one also. Read on here.
Coalition launch, RBA talkfest
Date: Monday, August 26, 2013
Author: Henry Thornton
Tony Abbott has presented a blueprint for the restoration of Australia to its natural position as a stronger, fairer and more dynamic country.
This graphic from The Australian sets out the promised actions as 'immediate' (day one); within 100 days; within the first term; and within ten years.
An original approach, with believable actions and a sensible, conservative approach.
The promise to restore fiscal rectitude within ten years is far more sensible than presenting a set of budget projections based on unforcastable assumptions. Spending 2 per cent of GDP on defence within a decade is also a vital change from the ambivalence and inconsistency of Labor's approach to this vital aspect of national security.
And the various immediate and other near term promises are all as already advertised.
The standard plaintive journalistic cry 'but what about the details' just displays youth and inexperience, and should be forgiven.
Reforming a nation requires strong character, a sensible time frame and steady purpose, and above all realism.
Great to see that the boffins at the RBA have held another of their annual talk-fests, as reported today by Alan Mitchell, economics editor of the AFR.
Three one sentance paragraphs naturally caught my eye.
'Pennsylvania University’s Franklin Allen and the European University Institute’s Elena Carletti warn that academic researchers have only started to consider the different kinds of interventions that central banks should use when funding markets break down.
"The other aspect of central bank policy that has not fully been analysed is the effect of low interest rates and quantitative easing on asset prices,” they say.
“The effect of withdrawing these measures and returning to a normal interest rate regime is also not well understood.”
What an admission.
Readers are invited to put 'Henry Thornton Asset inflation and monetary policy' into Google's search engine and you will find some speculation from as long ago as 2004, plus leads to research-based answers.
'Closest match' is from a recent talk, and the relevant paragraph is as follows:
The final chapters of my book Great Crises of Capitalism outlined policies to combat ‘moral hazard’ as well as more conventional policies to better regulate the financial system. More recently I have been researching how monetary policy influences asset inflation - paper available here to SSRN members. This research emphasises that monetary policy indeed influences asset inflation but in a different, and somewhat surprising way than it influences goods and services inflation. This means that asset inflation must be regulated differently to goods and services inflation, a point to which I shall return.