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Henry Thornton - Contributors: A discussion of economic, social and political issues Blogs
The Red zone; is Henry a Keynesian?
Date: Monday, September 26, 2011
Author: Henry Thornton

The world economy is 'in the red zone', 'navigating in dangerous waters' and a variety of other colourful and depressing descriptions.  As the opening sentence of my book Great Crises of Capitalism asserts, the world may still experience a depression as a result of the global crisis that exploded in 2007-08.  Indeed, the odds of this have risen appreciably since the book was completed in late 2010.

The descriptions of current risks are signs of deep frustration among world leaders.  If they are honest they will recognize that they, or their predecessors, are responsible for the current mess.  The sad fact is that it is far easier to wreck an economy than it is to fix it.

Here is a bold hypothesis.  An economy, even one as complicated and many-layered as the global economy, has its own tides and timetables.  Governments can steal (or borrow) from the future by spending more, but the future demands its payment which comes in the form of debt that needs to be serviced.  Indeed, if markets come to think debt is too large, the debt needs to be repaid or else borrowers need to default.  Governments can provide temporary stimulus, but this will be very unlikely to much change the overall level of activity, taking one decade with another.

A similar theorem applies to monetary policy. Stimulus now will increase economic activity now but the cost comes in the form of inflation and the tightening of future monetary policy, both responses that slow future activity.

When nations or banks become insolvent, a bailout now may alleviate the adverse effect on economic activity but, by adding to debt of the government (or a financial institution that acquires the failed institution), future activity will be slowed.  And bailouts create 'moral hazard', encouraging a repeat of the foolish behaviour that created the insolvency.

The case for ‘activist’ economic policy is the same as the case for fixing potholes in the road, removing a cause of accident that might end the journey, or at least cause sizeable damage to vehicles hitting the pothole.

The trouble is, economic potholes are frequently filled with wasteful spending that weakens incentives to work, to save and to innovate. Spending or tax relief that does not add to productivity, as is frequently the case when there is unexpected economic trouble, is like  filling potholes in the road with loose sand and gravel, likely to do more harm than good, if only by reinforcing the modern delusion that ‘the government will provide’.

The people I call 'bastard Keynesians' have been in charge.  Such people rush around looking for potholes to fill and (worse) to fund great projects they described as 'nation building' with no benefit cost or other rational test of value.  Keynes himself was concerned with the once in a century case of deep and intractable depression, when no compassionate leader can sit pat without offering policies with some chance of success.  But, even in the case of deep depression, if households and businesses reject the attempts to alleviate the situation, 'Keynesian' policies will fail.  This point was clearly recognised by my teachers at Melbourne University almost 50 years ago.

My bold ‘intertemporal policy impotence’ hypothesis has probably already been devised by some bright, mathematically inclined young economist at the University of Chicago, and if so I would welcome being sent a relevant reference.  But, if it is supported after careful thought, it disposes once and for all of the Keynesian approach to economic stabilisation.

Now we have leaders rushing about looking for ways to bail out Greece and other weak Eurozone countries without draconian fiscal restraint and indeed to soften the obvious approach of imposing tight fiscal policy now.  The trick is to tighten future fiscal policy without imposing very tight fiscal policy now (= austerity). One way to do this is to reform fiscal policy by removing tax breaks for the rich or, in the case of Greece, remove blatant and widespread tax avoidance and evasion.  The rich and the Greeks naturally resent this attack on their accustomed rorts and throw metaphorical or real rocks at their leaders.

I have no doubt that solving the problems of Europe must start with an orderly writedown of Greek debts, and those of other overly indebted nations. (This was the approach in the case of excess debt during the Latin American debt crisis of the late 1980s.  Note that people who brought heavily discounted debt made a lot of money, showing the inherent ability of capitalism to solve problems that seen intractable.) Debt write-downs must be accompanied by sufficient fiscal austerity, and a different set of tax and welfare arrangements.  The overall object of such policies must be to encourage a return to thrift, responsibility and innovation to get each nation's debt onto a sustainable path. In severe cases, weak nations should devalue their currencies, but only after the overall debt load has been dealt with or there would be a row of falling dominos that the Eurozone would be unable to prevent.

Mr Robert B Zoellick of the World Bank pointed out that, while the original shock in the current crisis was anticipated by few people, there is no such excuse now. He said over the weekend that the problems of the USA, Europe and Japan could spread to the developing nations.  Commodity prices (including even gold) have plunged and developing nations are ‘facing fresh headwinds’.  This means Australia is not immune and, like other nations, our fiscal position is far less attractive than it was when the original crisis hit.

We must hope that the world’s leaders finally get their act together and find a way through the road of many potholes we are all travelling.  Unless and until they do, investment should be conservative, at the very least accumulating cash rather than immediately plunging into the equity market.  Henry expects there will be better bargains by the time the current crisis of confidence is finally resolved.

Someone at one of the meetings I attended last week asked me what I would do. The obvious answer is that, like the skeptical Irishman, I would not be starting from where we are now, as the final chapters of Great Crises of Capitalism makes clear. The world needs stable, well understood policies rather than the massive knee-jerk policies applied during the past 3 years. While some fresh pothole-filling may well be justified - especially cleaning up the debt burdens of Greece and the other weak nations of the Eurozone, and the banks who have lent to these nations - the authorities need to rethink their approach.

Confidence of households and leaders will only gradually be improved, but credible plans to implement stable, well understood policies with major reliance on anti-inflationary global monetary policy and greater use of automatic stabilisers would provide a good start.

Henry's pal, James Guest, commented this morning: 'Greece has a very small economy and a small population that the rich EU countries could easily subsidise, like their own aged and unemployed.  Why then, apart from German voters’ distaste for indulging Greek budget extravagance and fraud, is the Greek insolvency allowed to drag on, threatening confidence all over the world?
'The missing key to this puzzle may lie in the person of the Greek Prime Minister.  The third generation liberal or social democrat Papandreou PM, George Papandreou has such a strong American background, where his father was a professor of economics and his mother born American, that he can fairly be exempted from the suspicion that he wishes to continue Greece’s hopeless populist and fraudulent record in public finance.  But how difficult it is for his government to force through the changes which remove entrenched privileges.  And it is made more difficult because it appears to be the result of pressure from foreigners.
'The point is that Greece needs the changes which increase the retiring age, reduce public sector employment and lower the wages it pays, whether it defaults on its debts now, later or never.  It won’t happen if Greece defaults now and it won’t happen if EU and IMF bail outs come without tension.  So Papandreou needs the drama of the EU’s Greek problem ever teetering on the edge however much harm it does to confidence in the global economy'.

Saturday Sanity Break, 5 July 2014
Date: Saturday, July 05, 2014
Author: Henry Thornton

What a week it has been for monetary policy.

First the Bank of England said it needed a new way to handle house price inflation, backing Henry's eighteen month campaign on the proper roles of monetary policy and what is now called 'macroprudential policy'.

Then the new head of the US Fed, Janet Yellan said something similar, although wider.

Both approaches are consistent with the view we have been running for 18 months now, with a special focus on the overvalued Aussie dollar.

Read all about it here and, please remember, you heard all this here for the first time, not in Australia's insular press.

Australia's unemployment problem

June Australian Unemployment was up 0.9 % to 10.6 %, reports Roy Morgan Research, and Under-employment up 1.4 % to a record 9.5 %. Now 2.51 million Australians are unemployed or under-employed. This is a terrible waste of resources. Readers may care to consider here how Australia became on of the world's richest nation - it was certainly NOT by wasting resources.

Gary Morgan said:

“In June Australian unemployment increased to 1.326 million Australians (10.6%, up 0.9%) and under-employment increased to1.188 million (9.5%, up 1.4%). Analysing longer-term trends shows Australian unemployment has now risen in June for the fourth successive year and has increased in June in five out of the last six years in June since the Global Financial Crisis. Now a total of 2.51 million (20.1%) Australians are unemployed or under-employed. This is only the fourth month more than 2.5 million Australians have been unemployed or under-employed – the first since February 2014.

“In recent months unemployment had fallen – although this was driven in part by a declining workforce as people who had been searching for employment ‘gave up’ – while this month saw an increase in both employment (up 142,000 to 11,182,000) and unemployment (up 140,000 to 1,326,000). Looking within the employment figures reveals that the rise in employment was driven by a strong increase in part-time employment – up 177,000 to 3,713,000 while full-time employment fell to 7,469,000 (down 35,000). Increases in part-time employment are strongly co-related with increases in under-employment.

“Clearly Australian unemployment and under-employment is far too high at present and if the Abbott Government wants to stand any chance of winning the 2016 Federal Election it must enact significant reforms to Australia’s industrial relations laws to ‘free up’ the Australian labour market and increase the productivity of the broader Australian labour force".

And do check out Paul Kelly's superb contribution, which we cover under the heading 'Political gridlock; economic

Terminal 5, Heathrow

A senior mining man wrote as follows: 'Henry Thornton's comment last Saturday on the Terminal 5 experience at Heathrow reminded me of this Terminal's opening in March 2008. For months, the PR apparatus had been working at fewer pitch, photographers and journalists had been brought from all over the world to promote this "most advanced in the world" facility.

'On opening day staff arrived late because of inadequate parking space, the sophisticated computer-operated baggage system failed disastrously, escalators and travelling walkways broke down, only one of 18 lifts was working, electronic messsage boards failed. There were two hour queues, 34 flights were cancelled, 7 flights left without pasengers' luggage.

'It appears that six years later nothing has changed'.

Another friend wrote from London about our difficulties. 'Apparently on Saturday there was a shambles in Terminal 5 with luggage, so I'm pleased yours kept up with you. Some planes went out with 30 or 40 pieces only.


It is surprising, surely, that Aussie footy gets very little coverage on Italian TV, or in the international press.  But it is also sad that the AFL website is pretty ordinary, with 'live scores' posted only slowly with useless headlines that tell little about key points of the game.

Futball is also not much covered here, as Italy is out of the WORLD CUP. But, Costa Rica apart, it comes down to Europe (ex England) and South America. Any result but a win by Brazil will be a surprise, but Germany's highly disciplined outfit will give it a shake unless, like Phar Lap in America, they are nobbled.

At last, something to cheer about in international tennis.

Nineteen year old Aussie Nick Kyrgios topples no 1 Rafael Nadal at Wimbledon.

Gor Blimey, comrades, can this be true?

Henry today managed to complete the hardest walk - two hours up and down on the Chinque Terra in Southern Italy - without suffering a heart attack or stroke.  Even his knees are not hurting much, but tomorrow may be a different matter.

Took 4 trains and 4 hours to get back to our flat in Prato, where Mrs T is teaching for two weeks, but we arrived by 10.45 pm just in time for Henry to complete this brief report.

Image of the week  shows the steady fall in commodity prices received by Australia's exporters. Sad that the Aussie dollar holds up, but there is an answer, gentle readers.  Please ask your local member what is so wrong about a tax on capital inflow? Or ask Glenn Stevens if he appears in your local pub.

Image of the week

Financial stability-monetary policy breakthrough
Date: Friday, July 04, 2014
Author: PD Jonson

Regular readers will be aware of my attempts to persuade the RBA to sort out policies to control asset inflation, so far as this is possible, distinct from monetary policy, which involves keeping the overall economy on an even keel with low goods and services inflation. This week, Janet Yellen, US Fed Chairwomen, joined the crusade, which is all over save the shouting.

Glenda Korporaal yesterday reviewed the RBA's latest comment on monetary policy. She says 'yesterday’s glass-half-empty statement from Martin Place reveals a sense of frustration at the RBA with the stubbornly high dollar.

'A month ago, the bank was hopeful that some easing in the exchange rate could “assist in achieving balanced growth in the economy”, but now it’s not so sure.

“The exchange rate remains high by historical standards, particularly given the declines in key commodity prices” (which is what it said last month) “and hence is offering less assistance than it might in achieving balanced growth in the economy”. (Read: now we are really getting impatient that the dollar isn’t coming down). More here.

I must admit my own frustration. In my case it arises from having proposed a solution eighteen months ago to be met with  lofty silence from the RBA.

Here is a link

Since then I have done a lot of work on asset inflation and monetary policy, mostly reflected in the regular articles on monetary policy in 2013 and 2014 posted here.

The rule that 'monetary policy cannot serve two masters' (a much ignored dictum of Milton Friedman) is slowly being taken up in the search for policies to curb housing booms. The traditional approach - and I confess to supporting this until my Pauline insight reported in January 2013 - was to use monetary policy (ie, interest rate policy) to moderate asset inflation.  That is, to raise interest rates more than would be required to control the economy in efforts to contain goods and services inflation when assets such as housing are looking dangerously uppity, and prior to that to talk about the dangers of excessive house price increases and threaten to raise interest rates. Or cut rates by more than required for overall stability in an asset crash.  This is sometimes called 'leaning into the wind'.

Now good thinkers, including the new governor of the Bank of England, Ben Bernanke himself and (I believe) senior people in the RBA, are considering or (in the UK case implementing) what is called a 'macroprudential' policy to directly curb house price inflation by controlling bank lending for housing.

And, earlier this week, the Fed's new chief, Janet Yellen, changed the goalposts for US policy, supporting the UK, hints from Ben Bernanke and the RBA.

The FT reports: 'Federal Reserve Chair Janet Yellen speaks at the International Monetary Fund in Washington, Wednesday, July 2, 2014. Yellen said she doesn't see a need for the Fed to start raising interest rates to address the risk that extremely low rates could destabilize the financial system.
'Janet Yellen has mounted a forceful defence of the US Federal Reserve’s decision to keep monetary policy loose in the face of soaring asset prices, arguing there was no need to increase interest rates to tackle financial instability because the central bank has other tools at its disposal.

'In a clear signal of how the Fed intends to prevent a repeat of the 2008 crisis, its chairwoman suggested the central bank is more interested in having a resilient financial system that can cope when asset bubbles burst than it is in popping them through rate rises'

But here is the clincher.“I do not presently see a need for monetary policy to deviate from a primary focus on attaining price stability and maximum employment, in order to address financial stability concerns,” said Ms Yellen.

“That said, I do see pockets of increased risk-taking across the financial system, and an acceleration or broadening of these concerns could necessitate a more robust macroprudential approach.”

'A macroprudential approach would involve using non-monetary policy tools designed to manage the safety of the financial system as a whole'.  Full report here.

With appropriate modesty, I feel I have been fishing in the right stream. Now, dear RBA, let's discuss the overvalued exchange rate. While the overvalued Australian dollar is not a 'bubble', it is creating general economic instability by distorting asset allocation across the economy.

'Macroprudential policy' will create a lot of debate in coming years, but I feel that policies like those discussed above, distinct from 'monetary policy' are going to be essential. 'Monetary policy cannot serve two masters', in this case control the overall economy sensibly and also 'influence' house prices, share prices or the exchange rate (or other asset prices), in an appropriate way except for short periods when the needs of asset inflation are in accord with the overall need for economic stability with low inflation.

The FT has already added to the debate with its editorial headed 'Caution on rates is wise but Fed could do more on bubbles', a proposition I agree with.

My simple point is this. If respectable central bankers see the necessity of curbing house prices, or excessive financial system risk, with 'macroprudential policy', why not do something about a stubbornly excessive exchange rate? Something other than cutting interest rates, which has been the unstated (in my view) approach in recent times in Australia.


Janet Yellen's speech is linked below, as well as a more recent speech by Vice Chairman, Stanley Fisher.

Janet Yellen, Chair, US Fed, 2 July 2014, including 'Watch live'option.


Stanley Fischer, Vice Chairman, US Fed, 10 July 2014


The conclusion of Janet Yellen's speech is quoted here.

In closing, the policy approach to promoting financial stability has changed dramatically in the wake of the global financial crisis. We have made considerable progress in implementing a macroprudential approach in the United States, and these changes have also had a significant effect on our monetary policy discussions. An important contributor to the progress made in the United States has been the lessons we learned from the experience gained by central banks and regulatory authorities all around the world. The IMF plays an important role in this evolving process as a forum for representatives from the world's economies and as an institution charged with promoting financial and economic stability globally. I expect to both contribute to and learn from ongoing discussions on these issues'.

Political gridlock, economic decline.
Date: Thursday, July 03, 2014
Author: PD Jonson

'THE trajectory of Australia’s relative decline now seems set with the nation in denial of its economic challenges and suffering a malaise in its political decision-making — signalling that a country that cannot recognise its problems is far from finding their solution.

'Australia’s political system is in malfunction. The evidence has been plentiful for some years and continues to mount. The origins of the crisis are deep-seated. This is the reason it is unlikely to be easily reversed. The nation’s economic advantages are extensive but unless buttressed by effective public policy they will erode relentlessly'.

This is the opening to Paul Kelly's latest commentary about Australia's grid-locked politics and near-certain relative economic decline.  Every voter should read this article and contact their local member to give him or her a wake-up call.  It is available here or in the printed edition of the Australian yesterday.

One example, close to Henry's heart, concerns monetary policy.  Since the RBA is formally independent of  Australia's grid-locked politics, the problem comes from deficient understanding, or reluctance to innovate to solve a problem that has been obvious now for over a year-and-a half.

Glenda Korporaal yersterday reviewed the RBA's latest comment on monetary policy. She says 'yesterday’s glass-half-empty statement from Martin Place reveals a sense of frustration at the RBA with the stubbornly high dollar.

'A month ago, the bank was hopeful that some easing in the exchange rate could “assist in achieving balanced growth in the economy”, but now it’s not so sure.

“The exchange rate remains high by historical standards, particularly given the declines in key commodity prices” (which is what it said last month) “and hence is offering less assistance than it might in achieving balanced growth in the economy”. (Read: now we are really getting impatient that the dollar isn’t coming down).

More here.

Henry must admit his own frustration. In his case it arises from having proposed a solution eighteen months ago to be met with a lofty silence from the RBA.

Here is a link

Since then I have done a lot of work on asset inflation and monetary policy, mostly reflected in the regular articles on monetary policy in 2013 and 2014 posted here.

The rule that 'monetary policy cannot serve two masters' (a much ignored dictum of Milton Friedman) is slowly being taken up in the search for policies to curb housing booms. The traditional approach - and I confess to supporting this until my Pauline insight reported in January 2013 - was to use monetary policy (ie, interest rate policy) to moderate asset inflation.  That is, to raise interest rates more than would be required to control the economy in efforts to contain goods and services inflation when assets such as housing are looking dangerously uppity, and prior to that to talk about the dangers of excessive house price increases and threaten to raise interest rates.

Now good thinkers, including the new governor of the Bank of England, Ben Bernanke himself and (I believe) senior people in the RBA, are considering or (in the UK case implementing) what is called a 'macroprudential' policy to directly curb house price inflation by controlling bank lending for housing.

This I am sure will create a lot of debate in coming years, but I feel that policies like that are going to be essential. 'Monetary policy cannot serve two masters', in this case control the overall economy sensibly and also 'influence' house prices in an appropriate way.

My simple point is this. If respectable central bankers see the necessity of curbing house prices, why not do something about a stubbornly excessive exchange rate? Something other than cutting interest rates, which has been the unstated (in my view) approach in recent times in Australia.

For more views on the BIS approach to asset bubbles, and related matters, discussed on Tuesday, see James Saft of Reuters.

BIS warns of bubbles
Date: Tuesday, July 01, 2014
Author: Henry Thornton

Happy new year, gentle readers.

'An organization representing the world’s main central banks warned on Sunday that dangerous new asset bubbles were forming even before the global economy has finished recovering from the last round of financial excess', reports Jack Ewing of the New York Times.

'Investors, desperate to earn returns when official interest rates are at or near record lows, have been driving up the prices of stocks and other assets with little regard for risk, the Bank for International Settlements [BIS] in Basel, Switzerland, said in its annual report published on Sunday.

'Recovery from the financial crisis that began in 2007 could take several more years, Jaime Caruana, the general manager of the B.I.S., said at the organization’s annual meeting in Basel on Sunday. The recovery could be especially slow in Europe, he said, because debt levels remain high.

“During the boom, resources were misallocated on a huge scale,” Mr. Caruana said, according to a text of his speech, “and it will take time to move them to new and more productive uses.”

The BIS has been ahead of the general curve in advising on how to moderate asset booms so thay don't turn into bubbles. 'Bubbles' do not slowly deflate, but rather pop.

The USA has experienced three major stock market booms in the twentieth century - in the 1920s, in the 1950s and in the 1990s. The first such boom turned into a bubble and burst, helping to produce the Great Depression. The booms in the 1990s burst and marked the end of the so-called 'Great Moderation. The US Fed's rapid easing of monetary policy helped stave off serious recession but re-ignited the stock boom and this led directly to the Global Financial Crisis (GFC). (Why the asset boom of the 1950s, extending into the 1960s did not turn into a bubble is worthy of careful analysis.)

As The BIS said in the quote above, the world economy is still struggling with the aftermath of the 2007 market crash.

This writer said in late 2010, in the opening paragraph of Great Crises of Capitalism: 'The Global Financial Crisis of 2007-08 might still produce a great depression. Massive monetary and fiscal stimulus has been thrown at the problem. Major financial institutions, with one exceptions, have been bailed out by taxpayers. The problems created by excessive debt and over-easy monetary policy have been 'solved' by more of the same'.

Now the BIS is warning of renewed bubble problems and it is time for investors to be especially cautious.

The summary of the BIS report is as follows: 'A new policy compass is needed to help the global economy step out of the shadow of the Great Financial Crisis. This will involve adjustments to the current policy mix and to policy frameworks with the aim of restoring sustainable and balanced economic growth.

'The global economy has shown encouraging signs over the past year but it has not shaken off its post-crisis malaise (Chapter III). Despite an aggressive and broad-based search for yield, with volatility and credit spreads sinking towards historical lows (Chapter II), and unusually accommodative monetary conditions (Chapter V), investment remains weak. Debt, both private and public, continues to rise while productivity growth has extended further its long-term downward trend (Chapters III and IV). There is even talk of secular stagnation. Some banks have rebuilt capital and adjusted their business models, while others have more work to do (Chapter VI).

'To return to sustainable and balanced growth, policies need to go beyond their traditional focus on the business cycle and take a longer-term perspective - one in which the financial cycle takes centre stage (Chapter I). They need to address head-on the structural deficiencies and resource misallocations masked by strong financial booms and revealed only in the subsequent busts. The only source of lasting prosperity is a stronger supply side. It is essential to move away from debt as the main engine of growth'.

Access to the full report is available here. It is worthy of careful reading and even more careful thought.

For later discussion of the BIS approach to asset bubbles, and related matters, see James Saft of Reuters.

Saturday Sanity Break, 28 June 2014
Date: Saturday, June 28, 2014
Author: Henry Thornton

Here we are, in the British Airways lounge in Heathrow after an hour long queue to dispose of the baggage. Twice in the past week, a fellow queuer (sic?) told us, there were major problems at Terminal 5, which is dedicated to BA. The problems involved luggage, and just as we joined a summer Saturday queue the system for sending luggage to be sorted and loaded stopped.

'Why don't they tag it and pile it up somewhere?' Henry asked a tall, courteous fellow traveller. Said traveller went to inquire from a BA staffer, only to return to report 'They heard you'. Tags were being added to bags and the owners were being sent to a muster point to dispose of them.  Presumably in many cases that would be the last time anyone saw them, but that is the case even when the mechanised system is operating. Our line inched forward.

Just as it was our turn to tag and dispose, the mechanical system cranked into action. We wished the bags a fond farewell and headed to the security check. As when we came into the country from mother Russia, the security and customs staff were far more numerous, with far better systems, than their Russian counterparts. Soon we were having porridge and kippers for breakfast in the BA lounge.

We have just spent two days and three nights with a dear friend in London.  Mrs T went to look at galleries while Henry and friend worked on their research project, aimed to test rigorously if current US monetary policy risks creating systematic instability in the US and therefore the world economy. It is likely to come down to how the monetary system interacts with the 'real' sector and how asset inflation influences both. Expect another report in a few months, gentle reader, because the research involves building, estimating and examining the dynamic properties of a model for the US similar to the RBII model of the Australian economy but with asset inflation added. (Here is a link to the non-rigorous version of the research so far completed.)

By amazing coincidence, the debate on how to handle asset inflation is raging in the UK. Today's FT includes a nice article by John Authers titled 'Rate rises pose biggest test for BoE bubble theory'.

The BoE has announced a 'macroprudential' policy (as recommended by Henry and colleagues in the aforementioned paper) to deal with asset inflation, specifically house price inflation, in the UK. No-one thinks there is a general housing bubble in the UK, but there is (it can be argued) in London. So the BoE has to tread carefully. The specific policy involves a 15 % cap on the proportion of mortgages that can cover more than 4.5 times the borrower's income.

Furthermore, lenders must carry out a new test of affordability in which they work out if borrowers could still service the loan should interest rates rise by 300 basis points. The BoE says 'this is not a stringent cap'.

Many other central banks will be watching this approach to controlling asset inflation with great interest. (Until now there has been  a non-policy of 'benign neglect', wait for the crash and clean up afterwards with very low/near zero interest rates. But the BoE, and one seems to remember the RBNZ, have discovered the stunning fact that 'monetary - interest rate - policy cannot serve two masters' and have decided a new policy - or an old policy  - of controls on the banks - is needed.)
Of course, as currently specified, this policy does not cover lending to fund share inflation, nor the sort of progressive tightening (preferably based on well understood rules with automatic tightening that Henry advocates), as an asset bubble develops. And the BoE governor says interest rate hikes are still a 'last resort'  to deal with asset inflation. But it is a good start, and one can be confident that this will be a large area for debate in coming years.

London is booming and, except in the poorest parts of the Scottish Highlands and western Isles, so is most of the rest of the UK economy.

David Cameron is involved in the S**tfight with other Eurozone leaders, and Henry's money is on the UK leaving the EU in due course.

Links to Henry's ramblings in St Petersburg and Scotland are available below. Thanks to Fiona Prior, most of the individual reports now have images.

Scotland the Brave, and sometimes foolish.

Mother Russia guards her borders. But why, comrades, that is the question.


Henry has been too busy to follow the footy, but assumes the season is over for his beloved Caaarlton! Tomorrows game with Collingwood may be the best realistic chance to stay in touch with the finals. Henry also assumes the Swan's millionaire forward line is wreaking havoc, and that Hawthorn is fighting on, along with Freo, Adelaide's Power and Mr Ablett's Suns.

The local (ie global) press is focussing on the WORLD CUP, where a star player has been kicked out of the game, even training for the game, for 4 months for biting an opponent, apparently his third such transgression.

A person of amazing insight in one of the hundreds of newspapers available in London argued that biting is a deep human instinct inherited from our carnivore ancestors and FIFA should go easy on the poor superstar. But his sponsors are abandoning him and his club has him on the market for 180 million Euros, so after a nice rest, and one hopes some serious psychotherapy, he'll come out snarling for another club.

Makes the AFL's 'supplements' scandal look pretty tame.

Poor old England, losing a test series to Sri Lanka after their belting by Mitch Johnston and his mates in Oz. Much heart searching after the self-congratulation of their own win over Australia on doctored pitches in England, was it earlier this year?

Image of the week

Iona, courtesy Google images and Fiona Prior

Henry in Scotland - land of the brave
Date: Wednesday, June 25, 2014
Author: Henry Thornton

After escaping Mother Russia only after thorough administrative survaillance - why were they being so careful about letting bog-standard tourists leave? - Henry and Mrs T arrive safely in Scotland.  Though St Petersburg had been fun, it was a relief again to be in a free nation, correction, apart of a free nation, where about 45 % of its people would like to be freer, but poorer, with their own nation.

As with reports from Russia, the latest will be at the top, making travel into the past relatively easy.

Farewell bonnie Scotland, home of the brave, and the foolish.

Harris and Lewis, siamese twins of islands.

Over the Sea to Skye, where Bonnie Prince left dressed in Fiona McDonalds dress.

And. so to Iona, the place where Christianity was introduced to the Picts and the Scoti.

Scotland, Bonnie Scotland - Arrival, inducing mild euphoria at again feeling free.

Monetary policy reflections
Date: Tuesday, June 24, 2014
Author: Henry Thornton

The Bank of England has signalled that the next change of interest rates is likely to be up, while the ECB has just made cash rates slightly negative. The US Fed is 'tapering' its bond buying project, and today we learn from the FT that central banks generally are planning to cut their bond holdings to minimise capital losses when interest rages generally begin to rise. Forecasts for global economic growth have been reduced, and world trade has started the year very slowly, indeed may have fallen slightly. 

Does the phrase 'dog's breakfast' leap to mind?

Economists had been hoping for stronger, not weaker growth of wotld trade but, if the sluggish start to the year continues, 2014 might be the third year in a row that world trade has grown less than, or no more than, growth of global GDP.

So far at least, the global economy is looking a lot like Japan in the 1990s - sluggish growth, slow recovery and low inflation, tending some think to actual deflation, of goods and service prices.  This is a natural consequence of large debt levels, with these levels still growing.

At the same time, differently to Japan in the 1990s, global asset inflation has shown unusual strength, plausibly reflecting unusually easy global monetary policy - near zero cash rates and 'quantitative easing', ie bond buying. Prices of shares, and house prices in many countries, have boomed despite sluggish global economic activity.

When and if the US Fed, and other important central banks, begin to raise global interest rates, there will be repurcussions beyond rising bond rates.  One must assume share prices will fall, possibly by large amounts, from record levels. House prices will lose bouyancy, and may also fall substantially. If all this is happening while economic activity is still sluggish, questions will be asked about the job being done by major central banks, and governments are likely to clip the wings of the central bankers.

That will be a pity, but one can make an argument that it will reflect the unwillingness of central bankers to work out how to deal with asset inflation. Trouble is, will politicians, advised by national Treasuries and Departments of Finance, do any better?

More here from the (later) pages of the Financial Times.

Does the phrase 'dog's breakfast' leap to mind?

Crashing the party

`Sharing`, self employment and the grey economy
Date: Tuesday, June 17, 2014
Author: Henry Thornton

There is a new way of doing business in the UK.  This is called 'sharing' - people my rent out a room, or their house, or call a non-cabbie car hire network, or rent a dress if they are a gorgeous young thing with a big date and a low budget.

Phillip Inman of the Guardian wrote yesterday about this development, and Henry cannot wait for it to get to Australia.  It could be called monopoly busting, whether the monopoly is the taxi companies, who are unreliable, or the golden legion of real estate agents, or the department stores who extract massive profits from selling nice dresses to poor but attractive young women.

Naturally, there new economy forces are being fought by the pld economy monopolists in the UK, and no doubt the monopolists in Australia are watching and readying themselves for battle.

Elderly British survey fillers are against the new economy development already described, but younger Britains are more likely to embrace the idea. Phillip Inman explains the economics behind this movement: 'This rising tide of self-employment accounts for two out of five jobs created in the past year, pushing the number of people who work for themselves to one in seven of the workforce. While many will be self-employed out of necessity and earning, on average, about 40% less than their employed counterparts, a sizeable proportion consider themselves entrepreneurs and are excited about being their own boss.

'Analysis by the Royal Society of Arts shows that for every worker who loses out there are three who say they benefit. It is an entrepreneurialism that the RSA argued is indicative of an unstoppable shift.

'Respondents [to a major survey] cited factors such as being able to live where they want and work around caring for older relatives or children. The rising cost of childcare was a key consideration, as was the escalating cost of commuting.

'Largely unspoken was the lack of pay, wage rises and decent pensions on offer in mainstream jobs culture.

'The tax system also encourages workers to look beyond the workplace for extra income. A combination of income tax and national insurance places a 32% marginal tax rate on standard rate taxpayers. Capital gains tax by contrast charges the basic rate taxpayer a rate of 18%, and a higher-rate taxpayer 28%. As such, gains on wealth are more lightly taxed  than earned income'.

Henry notes that an effective tax rate on conventional paid employment of 32 % perfectly explains why people will accept 40 % lower incomes in the self-employed sector - most of the 'Self-employed income is from the black/gray economy and therefore effectively untaxed.

Henry knows of many young Australians with fine education, positive attitudes and no jobs in the standard economy or poorly paid jobs with little prospect of advancement. Crime is one solution for these kids, but being self-employed is the logical alternative.

In the UK, a peer of the realm, Lord Young, is reporting on this phenomonon and pressuring the government to relax rules that support the monolply positions of entrenched enterprises like the London cabbies. One hopes that Maurice Newman can find the courage to address these issues as they affect Australia's struggling manufacturing economy.

Read more from Phillip Inman here. 

Saturday Sanity Break, 14 June 2014
Date: Saturday, June 14, 2014
Author: Henry Thornton

"A government big enough to give you everything you want, is strong enough to take everything you have".

This quote from Thomas Jefferson might serve as daily support for Joe Hockey as he tries to make Australians give up the entitlement mentality. Henry is overseas, but did hear on BBC news (the only English language news channel available in our modest hotel) that New Zealand has raised interest rates.

What is New Zealand up to?  Is it possible that the difference from Australa is more realistic government and people – quickly fixed the budget (GST hike, low top rate of income tax) and then got on with making a living.

More here on the tax policy that seems to have done wonders for our cousin over the ditch. Source: Tom Hazledine and The Conversation.


A canny friend said overnight: 'The Australian housing situation is becoming serious. Before the budget it was carrying consumption with it although that is now cooling. No sign of life in tradables investment including new resources.

'Our share market boom is now just banks ... monopoly plus the Fed'.

He later reported that we are getting a new bout of currency appreciation after the Euro relaxations last week ... 'even as resources prices fall in a heap'.

This makes the case for Henry's tax on capital inflow, iniatially proposed here (and in The Australian) 18 months ago.


The alternative is further cuts in interest rates, which would repeat the mistakes of America and the Eurozone.

It is only lack of national confidence that prevents taxing capital inflow: enter, stage left, senior official (wringing hands) 'we are a capital importing nation and cannot choke off that source of national prosperity'.


Henry and Mrs T spend the best part of two days exploring the Hermitage Museum in St Petersburg this week and will provide a seperate report in due course. But getting in was a nightmare, despite booking on line and thereby supposedly 'avoiding queues', and finding ones way around was almost as bad.

Amazing collection, many Rembrants, a lot of Titians, one Georgioni (a rare example) and not an Australian impressionist to be seem. What do these Ruskies think thay are doing, ignoring Streeten, Roberts, Condor and the rest of our boys. Come to think of it, this creates an opportunity, especially if Australia does well enough in the World Cup to hit the news here.

Visit the Hermitage here, where a virtual tour is on offer.  www.hermitagemuseum.org

We took in a performance of Magic Flute at the new Marinsky Theatre last evening. Of course it was in Russian, and a shouted 'Nyet' and other gutteral noises does not fit naturally with Motzart's music, but small matters like that were ignored as the performance had style, humour and great singing.

Coming home as the sun was threatening to set at 11.30 pm was a strange experience, but the streets were busy and cars and busses were battling it out as if it was peak hour. Thursday was Russia's national day and both it and Friday are holidays, so there was a festive air about the place. We were helped to find the appropriate bus stop at 11.15 pm by two American gals, from Texas and Ohio respectively, working here and learning Russian as they go. Two Japanese girls got on the bus at the next stop, waved off by a young Japanese couple from the front door of their home. Its all happening in St Petersburg, folks.

Here is the Mariinsky's website.  www.mariinsky.ru

And here is Henry's collected trip reports. http://www.henrythornton.com/blog.asp?blog_id=2785

Henry in Russia - never to be the same
Date: Friday, June 13, 2014
Author: Henry Thornton

St Petersburg is a place Mrs Thornton has long wished to visit. Naturally this led eventually to the idea of Henry and his sweet lady flying to the former Russian capital city, captured by Peter the Great from Sweden, a once serious player in Northern Europe's wars and in European politics generally.

As usual, Henry feels constrained to provide reports for his faithful readers, who no doubt are missing the usual trenchent commentary on matters economic and political. And travel broadens the mind, so it is to be hoped that Henry returns to Australia - that miracle economy - freshly reinvigorated andwith a mind broadened if not deepened.

Time will tell but, in the meantime, here is an index of Henry's reports from St Petersburg.  It will be updated each time a new report is posted, with the latest on top so no-one can feel she is being tricked into reading any report twice.

(If coming new to this e-journal, consider starting from the bottom and moving up.)

Military might and reflections on departing.

Is the Russian Empire experiencing a slow, ultimately false, sunset or is it toward the end of  a long decline that is destined to turn Russia into a poor, undeveloped nation whose great days are steadily fading further into history? That question is beyond my current pay grade, gentle readers but, as previously noted, there is a lot of room for improvement in matters economic.

We leave Morther Russia with great memories, but with this question seriously on our minds. Very likely, we shall not pass this way again

The Hermitage

The Hermitage will blow you mind, and even the digital tour may cause you to buy a ticket to St Petersburg

Gilded palaces, forests and public transport.

Henry masters (!) St Petersburg's public transport and visits more gilded palaces and their grounds.

White nights in St Petersburgh - Peterhof

Henry makes only his second visit to Russia. In 1973, he briefly visited Tashkent, on route to the socialist finishing school known as the London School of Economics. Sadly for the socialist cause, almost all the teachers at the LSE proclaimed the power of capitalism. Much to Henry's father's delight, Henry returned with a totally different outlook on life.

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