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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'.




We shall not forget
Date: Monday, April 27, 2015
Author: Henry Thornton

The one hundreth anniversary of ANZAC Day has been celebrated at Gallipoli, and  with record crowds around New Zealand and Australia. This is Australia's most widely supported holy day, and it is amazing how a bloody battle can become a religous ceremony. Tears were shed quietly and Henry and Mrs T applauded as our son Bert marched for the first time as a cadet officer in the Army Reserve.


Paul Kelly's moving tribute, delivered today, stood out for this scribe: 'At this time and place 100 years before the scene was whistling bullets, confusion, blood and brav­ado. This time, the visiting Australians, young and old, rugged up tight against the cold and fortified during a long night, were patient, happy, united and, above all, dedic­ated to honouring their ancestors of four generations earlier.


'These gullies, peaks, ridges and beaches in this beautiful part of Turkey have become, by mutual consent, Australia’s spiritual property.


'Tony Abbott’s speech hailed the transformation of Anzac at its centenary. Our task, the Prime Minister says, is not merely to remember Anzac but to emulate its spirit. This is now the essence of being an Australian'.


Read on here.


National superannuation


Many Australians have saved at the expense of their ability to practice the gross consumerism that is the prevailing ethos in this wide brown land.  Yes there were tax incentives to save but one foolishly believed these incentives were there to encourage people to save and thus to become self-sufficient in their twilight years.  Yes some foolish people people rorted the plan by spending their super nest egg and applying for a pension or part pension.


It has been asserted that 80 % of Australians past the nominal retirement age of 65 and 60 receive some financial assistance from government.  gor blimey comrade, can this be true?


Now superannuation balances have been noticed by the beady eyes of tax'n'spend politicians, especially the opposition Labor politicians and their supporters in the Federal Public Service.


A battle is coming, and we promise not to forget why (compulsory) superannuation was introduced and nurtured by tax concessions.


Henry has created a page to collect his thoughts and those of readers and influential opinion shapers.  A link is here, and you are encouraged to send contributions.


Saturday Sanity Break, 25 April 2015
Date: Saturday, April 25, 2015
Author: Henry Thornton

Today many Australians paused to remember our debt to those of our forefathers who left Australia to help the mother country fight off the Hun, whose reckless expansionism had plunged the world into war. The specific target of remembrance for many is the failed campaign to take Gallipoli.  In a wonderful speech this week, Professor Geoffrey Blainey outlined a new way to think about that campaign, as he so often does with any subject he addresses.


The invasion of Turkey, Blainey said, was designed to break the European deadlock, with vast armies facing each other in hellish trenches. The Gallipoli campaign is widely seen as a useless tragedy, but a very senior German General said at the time it was a brilliant idea badly executed.  The main problem of execution was the many ways in which the invasion was signalled, so that the Turkish defenders were in place and fully prepared when the ANZACS came ashore.


Blainey pointed out that the lesson of Gallipoli was learned.  The invasion at Normandy that marked the beginning of the end of the second war to end wars was conducted with the utmost secrecy, which meant the Allies went ashore at a place the Germans did not expect, leading to a fairly rapid end to hostilities.


So despite the awful, ultimately futile, struggle in 1915, its long shadow saved many lives in the 1940s.


We attended a moving dawn service at Melbourne U and then had an army breakfast that seems likely to linger longer than the usual porridge and raisons.


A champion for self-sufficient oldsters


'Hands off people's super: Morrison'.  Thank goodness, a pollie who understands that "if you want to try and restrict the eligibility for welfare payments, then you don't go and slug people simply for drawing down an income from an asset they themselves have saved to create".


"[Labor is] saying that $75,000, if you're earning more than that off your own super then you're rich", ... the threshold had to go "way north".


At last, a pollie who thinks well and tells it as it is.  Please consult the letters columns of our newspapers, dear readers.  People are waking up to the fact the pollies and public servants get large pensions without ever contributing, based on pension balances created out of money raised by taxing people working in the private sector.


In another offering in the Oz yesterday, Chris Joye points out that with people living longer, there is a strong possibility that some, perhaps many, will end up with their superannuation balances exhausted, forced to rely on government pensions.  In 30 or 40 years, pensions are likely to be impossible to live on, and people will reply on wealthier friends or grateful children, both unlikely sources of help.


Wake up Bill 'Tax'n'spend' Shorten or your slight chance of forming a government in 18 months or so will evaporate like a puddle in an outback summer.


Kulture


Fiona Prior attends Maina Gielgud's version of the classic ballet Giselle.



Politics of intergalactic warfare.


Education Minister Chistopher Pyne has starred in a Starwars video that has, or will, as they say 'go viral'.


Footy


No time to watch today but Caaarlton! beat St Kilda in Wellington and Essendon and a 'gritty' Collingwood slogged to a fine victory over Essendon at a damp 'G'.


Next week, Caaarlton! will find out if its apparent improvement is real when we face collingwood, also at the 'G'.


Image of the week



Courtesy The Oz


The Raff Report – Late April 2015
Date: Friday, April 24, 2015
Author: Henry Thornton

In a recent note, David Stockman (of Contra Corner fame) cited the trend in US Industrial Production as further evidence that Keynesian money printing is not working. The March reading of IP fell 0.6% (Figure 1) but the reason touted from some pundits was the fall from February was because March was a much warmer month than February so the power utilities cut back on production. Demand for heating was lower and the Utilities IP Index plummeted 5.9%. Another notable fall in IP for March was mining (-4%), and it’s worth noting that production of coal was down 20% from a peak 3 years ago.



Of course what is actually happening is that IP is peaking following peak levels of new orders for durable goods. It’s not the weather stupid but the economy. The auto sector boomed with cheap credit ensuring a strong contribution from the household sector to orders and production (Figure 2). Although recent years have seen a massive printing of money there has not been a dramatic increase in US production, it’s just business as usual.



On Wednesday night there was good news for the realtors. Whoopee, low interest rates and job stability were cited as reasons for releasing pent-up demand in the housing sector. Existing homes sales rose at the strongest pace in a year rising 6.3%, whilst prices for existing homes rose 7.8%. The market loved this and the DJIA rose 88.68 pts (0.49%) to 18,038.27, largely reversing the loss of the previous night.


The good news on the housing front savaged precious metals. Gold fell $16.60 to $1,186.50/oz and silver fell $0.23 to $15.81/oz (ouch). Copper also took a hit falling 2.9% to $2.67/lb; somewhat surprising when housing data is strong but then the outlook in China is not rosy. The reason for the fall in precious metal prices was the spectre of rising interest rates induced by good housing numbers. Precious metals don’t provide an income, just a holding cost. The end result downward pressure on gold and silver. Some long range forecasts for these metals are downright gloomy with one prediction that silver will downtrend to $8 per ounce.


Just for the record, on the previous night the DJIA fell 0.5% or 85.34 pts to 17,949.59. Cause of this aberration was disappointing earnings from several leading companies, including Travelers Companies Inc. and DuPont Co. IBM reported a 12% slump in sales. The strong USD is having an adverse effect on revenues of US multinational companies. FactSet analysts are predicting 1Q EPS to fall on average by 4.2% on a year ago. The FactSet universe of stocks is presumably most of the S&P 500.


Homes are only part of the construction story. Factories and infrastructure are also important and taken as a whole; US construction leaves much to be desired. The current cycle is fizzling out short of the 1990s cycle. A previous Raff Report showed new orders for construction materials close to or at a cyclical high. Now IP for Construction Supplies is peaking, and like other IP indexes the 12 month moving average is rolling over. Also note that in all three figures the second derivative is negative and in the case of Figure 1, the first derivative is on a downward course. Upward momentum is decelerating apace.



Thank goodness for the services sectors of the US economy. New orders for durable goods, in constant dollars, show a downward trend with each cycle lower than the previous going back to January 1969, the start of the Raff’s database. New orders going back further are available from the US Census Bureau. With lower orders comes lower total industrial production. When industrial production is examined across a range of industries, those affected by import replacement show declining output or very little growth in output; footwear and clothing are two examples.


What do the trends mean? As stated in previous Raff Reports it would be very strange if the Federal Reserve hiked interest rates this year or next. A hike in rates is usually used to cool an economy and should they be implemented be soon after a cyclical low is reached and the economy recovering strongly again. This is clearly not the case in the US.


Investors or would be investors must understand that period 2002-2008 was an abnormality with strong industrial growth in China, when heavy industrial output recorded average compound growth of 37% (more than doubling every 2 years) sparked the biggest spike in demand for raw materials since invention of the steam engine. Worryingly, there were boards of public companies and individuals that thought such strong growth rates would continue. We are now witnessing the end result of this folly with closure in Australia of small iron ore miners with a bigger collapse should not the iron ore price exhibit a marked recovery. Prices of metals indicate that markets are adequately supplied. When this might change is unknown.


Even the oil market is oversupplied thanks to unconventional sources, principally oil from shale. The decline production rate for oil from shale is around 80% within two years. Some conventional oil wells also have fast decline rates from peak production but the tail is sometimes measured in decades or until the water cut makes the well uneconomic. Secondary oil recovery is beyond the scope of the Raff Report. Oil is expected to retrace towards past highs before iron ore does. In a global sense there is abundant iron ore for many a decade.


At least one mid-tier Aussie iron ore producer is highly leveraged, and why not when interest rates are so low. Shale oil producers in the US also owe buckets of money to banks. Low interest rates are part of the problem. At the same time China’s economy was heading for the stratosphere, the Federal Reserve started the money printing process that roared away in 2009, continuing to this day. Other central banks followed suit. Despite these two great events, there seems to have been no significant lift in US industrial production. Money printing has been a failure, although we might all ponder what would have happened without it. Where has all the money gone? We know that money has gone into stocks as investors chase yield, companies have been active buying back their own shares using almost free money, and investment banks continue to pay large bonuses.


We live in crazy times. In Europe and Japan, real yields on 5 and 10-year paper are negative. In the US, the same government paper provides investors with a positive return in real terms. It’s no wonder that global money flows are flooding into the USD. However, a strong USD is distinctly negative for all commodities priced in USD. The headwinds faced by the resources sector are approaching gale force. The market has experienced falls in real terms for commodities for a 20-year period, most recently in the 1980s/1990s/early 2000s. History has a funny way of repeating so investors much take special care in these troubling times.


Four Corners expose
Date: Tuesday, April 21, 2015
Author: Henry Thornton

Members of the Thornton family rarely watch Four Corners.  But with three children between them with five degrees, and one undertaking her third, and their parents with 6 degrees between them, the subject was irristible. We began with a bias in favour of 'academic standards' as one parent is a practicing academic and the other mixes with a lot of fine university researchers in his extensive work with Cooperative Research Centres.


Henry has long believed that the marketplace is not the best model for all activities, especially not the most important activities. Paul Vonnegut wrote a scathingly vicious novel about a bunch of Japanese men incarcarated in an American jail run by a private firm.  The results were horrible, and one sighs when one hears of ructions at offshore (from Australia) detention of asylum seekers, also run by private firms.  He has long doubted the desirability of utilities, hospitals, schools, orphanages and homes for old people run by private companies, although high status public (ie private) schools do a job often just as good, if not better, than the best public (ie government run) schools.


Four Corners basically made a case that stiff competition among Australian universities to earn money puts pressures on entry standards, especially for overseas students, many of whom it was alleged have little English when they start. But entry levels are also amazingly low for some courses in some of the lower-ranked universities. Perhaps even more worrying, because one can make a case that foreign students or poorly educated Australian students deserve a fair go, standards of work demanded of all students are said by the many academic interviewed to be extraordinarily low.


Students who deserve to fail are given many opportunities to pass, and sometimes are passed by higher authority asking another academic to remark the paper.  Some of the academics interviewed were retired and thus had no obvious conflicts of interest - unless of course their fight to uphold standards was a prime factor in premature and enforced 'retirement'.  At least one other eminently sensible women asserted that by appearing on Four Corners she would not be hired next semester.


Plaigarism is also alleged to be endemic, despite sophisticated tools that enable markers to check the repetition of sentences, paragraphs and even whole arguments.  It was alleged that students caught out in this noxious activity are frequently given several opportunities to resubmit. And essays can be purchased for students unable to produce writing of appropriate standard. There was talk of overseas agencies who are paid to present qualified students. It was asserted that these agencies often fake the student's qualifications, and especially the English language requirement. One especially unhappy experience recorded a university teacher hinting that 'non academic favours' would be rewarded with a higher mark.


Now it would be easy enough to test the allegations in the TV presentation.  Henry has asked a senior administrator in a highly ranked Australian university whether there are data of patterns of pass rates over time and, where honours degrees are involved, percentages of students in various catagories, that might show that his university is immune from the matters asserted on Four Corners.  Henry is not holding his breath for a response.


For once, Henry thinks that Four Corners has uncovered an especially juicy scandal. Mrs Thornton agrees there is pressure on her and her colleagues to meet pre-specified patterns of results that include an implausibly low failure rate. One especially telling aspect of the Four Corners report was that none of three Vice-Chancellors, each at or approaching a million dollars a year salary, was prepared to comment on television. As noted above, a case could be made that foreign students or poorly educated Australian students deserve a fair go, the famous Aussie fair suck of the sauce bottle.  But ultimately Australian universities will be competing for ever more discriminating customers, and competing with the top 10 % of world teachers, who will increasingly be from universities in the top ten. Check out Corsera, or look at the myriad of excellent lectures provided under the banner of Great Courses.


Here is the bottom line, itself a cruel irony. A reputation for low standards of entry and in the quality of teaching and evaluation will at best give us a niche market that will mean very little in the overall hot competition in global markets for many goods and services, including top shelf education.


Saturday Sanity Break, 18 April 2015
Date: Saturday, April 18, 2015
Author: Henry Thornton

Western Australia has been treated shabbily in the latest recommended carve-up of the GST revenue. How can any state be expected to cop 30 cents in the dollar return, while others are gettting almost $2? One fiscal genius  said WA should respond by 'economic reform', when every other state maintains far less than ideal industrial relations rules and many other barriers to to maximal economic performance.  Neither is the Commonwealth government a great reforming machine.  Remove the pile of logs in your eyes, other jurisdictions, before you demand WA removes the dust of its wonderful deserts and debris from its tropical forests.


Who could blame the WA government if, stirred into action by the ridiculous criticism of its economic policies, it installed ticket machines at the best of its Kimberly Rock Art galleries and provided subsidised helicopter trips for rich tourists to visit? (See today's 'Kulture' story and image of the week below.)


Former Treasurer Peter Costello has been moved to enter the fray on the subject of 'Who is to blame for our parlous budgetary situation'. 'Everyone' is the only sensible answer, including, in order of importance:


(1) Australia's consumerist culture (note household debt to GDP ratio is around the second highest in the civilised world);


(2) China, for failing to keep iron ore and coal prices at world record levels by continuing to modernise like there was no tomorrow; and


(3) Australian governments who returned too much  'excess' tax during the boom (Howard'n'Costello)', spent like drunken sailors (Rudd'n'Gillard'n'Swan) or failed to implement a sensible dialogue with Australian 'punters' (ie voters) as a prelude to the horrendous clean-up they have inherited (Abbott'n'Hockey). 


Cutting spending would undoubtedly be the best solution, but with a deeply embedded culture of entitlement - see point 1 above - our best bet is to reform the tax system to discourage consumerism, remove bracket creep to maintain some discipline over future government spending, cut corporate tax to make Oz business more competitive, and force global companies to pay fair company tax on their profits earned in Australia. Phew! (Shut eyes and imagine you are Joe Hockey.)


 And, but only if all else fails, seek a larger contribution from retirees. But if this 'reform' is to be pursued seriously, and get Henry's vote - we old folk are after all entitled to our saved retirement balances - it will be provided pensions of politicians and senior public servants are clipped on a pro-rota basis. See the argument here, gentle readers.


The PM has promised no adverse changes will be made to Superannuation rules in this parliament, and one assumes this is one promise that would be broken only by a government with a real death wish.  Reform here will be difficult and divisive even with several years notice, but will get Henry's vote only if other reforms, as outlined above, have failed to balance the books.


National growth Centres


Despite budgetary constraints, the Abbott government has crafted a worthy attempt to energise Australia's innovative industries. These are in sectors with great prospects for fostering industries of the future and/or great potential for growth.


These sectors are Advanced Manufacturing, Food and Agribusiness, Medical Technologies and Pharmaceutical, Mining Equipment, Technology and Services and Oil, Gas and Energy Resources.  In each case, a distinguished Australian has, or will be, appointed to Chair a relevant board, and there is an overall board made up of the sector chairs plus several distinguished independant members.


More here.  www.business.gov.au/industrygrowthcentres.


The government solicits comment and Henry urges all people with an interest to respond.


Kulture


Fiona Prior sees Sydney Theatre Company’s Jumpy and then turns up the passion with Le Grand Tango http://www.henrythornton.com/article.asp?article_id=6783


And don't miss the wonderful front page story in the Oz today (image below) about the Kimberly rock art and its cultural significence.


'The eye of the sea is imprinted on the solid rock face of Kimberley land. It is a place that Robyn Mungulu cherishes, part of her oral history.


'Cyclone Cave is tucked behind Freshwater Cove camp in the remote and tranquil Buccaneer Archipelago, 360km northeast of Broome.


“When I see the art, I see ­stories and the people who made them,” says Mungulu, who tells visitors about the mother who went looking for her lost son, “poked the eye of the sea with a spear, and it sucked her in”.  Read on here.


Footy'n'cricket'n'stuff


Last night, lowly St Kilda confirmed its cellar dweller status by being belted by Collingwood.


Today, Henry will find it hard to ignore the game that he expects to produce another spanking, this time by the mighty Hawthorn-slayers, the substance enhanced Essendon.  The good news about Caaaarlton!'s cellar dwelling aspiration - why did we ditch Jacobs, Kennedy, Eddie Betts, Waite, Garlett, I could go on but it's just too sad - is that there will be more time to work at weekends, dear readers.


In Perth, the fiery young fast bowler,Henry Thornton continued his dramatic break through in international cricket.


'Australia Under-19s' new-ball pair of Jhye Richardson and Henry Thornton shared three wickets apiece to set up a crushing win against England Under-19s in the second ODI - the 1000th Youth ODI - in Bunbury. The win helped Australia level the five-match series 1-1'. More here.


Image of the week



Courtesy The Australian. For more, google Kimberly Rock Art


Global deflation - Mystery or common sense?
Date: Friday, April 17, 2015
Author: Henry Thornton

Last evening was spent at a banquet involving a large number of serious medical researchers. We were celebrating the triumph of an octogenarian friend who has just earned a PhD and so needs to be addressed as Dr, Dr, though he is (of course) far too sensible to insist on that germanic salutation. The food was traditional with the menu built around rare beef and sticky date puddin'.


Our octogenarian friend some time ago had an inspiration while reading about the life of Charles Darwin. His eureka moment was about the mystery illness suffered by the father of modern biology. A medical man commented that this was a PhD based on a conjecture, which is itself a breakthrough.  Apparently, only analysis of Darwin's genome will prove or disprove our friend's hypothesis. This will presumably be provided in due course, the medical profession having an excellent history of grave robbing.


The diners were almost all distinguished researchers, including a former Vice Chancellor still working age 85, no shrinking violets to be seen. The wine flowed freely and several short speeches were made, one in particular regretting the current government's apparent disinterest in medical research.  Not for the first time, as the only economist present, I was asked why the government could possibly fail to see the virtues of medical research.


My reply was in three parts. The first, and most important, was that distinguished scientists need to stoop to conquer.  They must learn to speak in language that economists, and especially economists in the Federal Treasury, can understand. Second, they must explain the benefits of medical research in respectable benefit-cost terms, with hard data, not airy assertions. Third, they might also spend some time understanding the vagaries of politics and getting to know how politics works.  Right now, I asserted, they might send powerful messages to their Labor mates about the importance of fixing Australia's budgetary mess and supporting sensible economic reform.


These messages are not always welcome, but need to be passed on in as persuasive ways as clever medical women and men can devise. But after the fire caused by this subject retreated to glowing embers, a recently retired medical researcher asked why jobs were hard to get, wages growth was slow and global leaders were concerned about 'deflation' while asset prices were rocketing up.  This person has been reading Mr Picketty's book and has built up quite a nice theory that it is essentially a matter of the rich grinding the faces of the poor, with central bankers and government officials part of a giant conspiracy of the ruling classes everywhere.


I did my best to explain that, as in so many other cases, a cock-up was a far more likely hypothesis than a conspiracy. I asserted that economics has not yet solved the problem of why monetary stimulus - introduced to save the world from depression - is currently mainly pushing up asset prices. I could tell that the distinguished medical man remained skeptical but we parted as friends, the medical man having been given Henry's web address so that he could access independant non-ruling class commentary on the great debates of economics.


As Mrs T and I wandered slowly to Lygon Street in quest of an empty taxi, I opined that there is really no great mystery about the subject of the divergent behaviour of labor and goods markets, on the one hand, and asset markets on the other hand. My mind seemed to have been clarified by more red wine than my personal medical advisor would endorse. 'It is all about demand and supply', I opined. 'There are too many people chasing to few jobs. There is too large a supply of mass produced goods, like motor cars and television sets, and prices of these items and others like them are forced down, or at best do not rise. Assets, on the other hand, are in shorter supply.  As central banks throw money into the system, it does little to raise the demands for labor, or cheap mass produced consumer goods, but does a lot to boost demand for relatively scarce assets.  Think houses in Sydney or Melbourne, New York or London, shares of Australian banks, blue chip shares everywhere, except for the present shares of mining companies like Rio and BHP, Vale or Shell.'


We found our taxi, despite some trouble with a work crew that was repairing Lygon Street in the dead of night - another sign of the times. As we were driven to our home in Melbourne's leafy Eastern suburbs by a nice man from India, we discussed the present overproduction of engineers in Australia, hard on the heels of a massive oversupply of young lawyers and indeed just about the output of any university discipline one can imagine.  We had heard earlier that, in China, young people are being encouraged to train for trades, there already being too many young people trained in the professions by universities.


In the cold light of day this morning, as Henry headed to the Epworth hospital for a scheduled MRI of his right knee, he reflected this is what he had been trying to explain for some time now. The best attempt so far is available here, with a nice picture. But the conjecture in both the article and the nice picture has yet to be proved.  That is the challenge still before us.


Saturday Sanity Break, 11 April 2015
Date: Saturday, April 11, 2015
Author: Henry Thornton

Henry's favourite journo, Grace Collier is at it again.  (Ms Collier seems only to write when she actually has something important to say. How good it would be if all journos acted that way.  But I digress.) She says: 'I hate to bring down the national vibe of the moment and interrupt this “let’s find some rich bastards who should pay more tax” hunting collective, but this country does not have a revenue problem, it has a spending problem. And by the way, those rich people we think we can chase down rabbit holes and fleece, they are already paying most of the tax.


'Too many of we perfectly capable types supplement our household budgets with taxes taken off the rich. We have done so for many years. Well, times are tough and the gravy train has screeched to a halt. But instead of getting off with dignity and walking on our own two feet, we are staying on board and demanding someone else be found to get it going again.


'Many of us must learn how to give back the benefits we have been taking for granted. While we are at it, we should probably mind our manners — this country needs people who know how, and are willing, to create wealth. Instead of holding them up as examples of evil, we should thank them for living here and ask them if they can think of ways we can attract some of their clever and wealthy friends. Blasphemy, I know. I expect to be hunted down and burned at the stake'.


Read on here.


The rest of the economic news is so depressing.  Iron ore prices keep falling, Sydney and Melbourne house prices keep rising and youth unemployment remains a national disgrace.  But most of the excitement this week concerned the RBA's failure to meet near universal expectations of another rate cut. The smarter commentators are nearly all agreed that the only lasting cure for Australia's economic ills involves thorough economic reform. 


It is often asserted that true reform will only come when there is an indisputable catastrophe. We are headed to economic catastrophe, dear readers, so keep telling your favourite pollie to get off his/her derriere and start reforming all aspects of our economic framework. While you are at it, ask said Pollie if he/she knows the capital sum required to support his/her superannuation payout and those of senior public servants.


Here is a blueprint.


Kulture


Henry's parents ended their lives as struggling pensioners.  Their view was typical of their generation.  They would almost prefer to die than accept any help from the state, or for that matter from their children.  Sometime in between that generation and now almost all of society has embraced the culture of entitlement, an issue Joe Hockey tried but failed to get on the national agenda. Henry respectfully asks the Treasurer to try, try and try again, another cultural characteristic that seems to be lost in the haze of sugar hits from handouts, interest rate cuts and reform backflips.


This week Smokin' Joe got onto the more promising  subject of clawing more tax out of bloated multinational firms that (gasp!) legally avoid paying tax in Australia by clever use of so-called 'marketing hubs' and even more devious constructs. Henry's take on this is here.


If you missed last week's expose on superannuation for pollies and senior public servants, click here. Why has no respectable jouro covered this vital point?


Memo journos: Mrs T believes the pollies have quietly dropped taxing 'rich people's' super so the can of worms pionted out here last week does not get opened.


On a lighter note, Fiona Prior has been to the movies and reports on Cinderella here. 'If you are the parent or grandparent of little ones sure as climate change, Justin Bieber ending up in rehab and Kym Kardashian’s buttock’s exploding (OK, this one is more wish than certainty:) you will see Kenneth Branagh’s Cinderella'


Cricket'n'footy'n'stuff


Caaaarlton! travelled to Perth to play the Weagles on their home ground last night.  The Weagles were said to lack a backline for this game but, as one wag put, it Caaaarlton! lack a forward line, so it should have been a fair contest.  As it happened, Caaaarlton! was spanked with Josh Kennedy, the man we swapped for Juddie, kicking 10 goals.  Judd himself was brilliant in the first quarter but like the whole team faied to do much after that. Judd's excuse was being shadowed by a young Weagle who may just have found his role in the process.


Henry is reflecting bitterly on Caaaarlton's leadership blunders.  For example, we sent our then no 3 ruckman, Sam Jacobs, to Adelaide, where he has become one of the best in the land and we now have no effective ruckman.  We sent Eddie Betts in the same direction, where he is playing brilliantly. Our only power forward, Levi Casboult can take pack marks as good as anyone in the game, but cannot kick straight. It's just an art to be learned like anything else Levi.  Or get Tuohy to stand behind you and handball to him as he goes past.


Also from Perth, we learned last week that: 'Henry Thornton's remarkable spell on the opening day in Perth gave Australia an immediate advantage in the first youth Test.


'Thornton, the 18-year-old from Sydney, took 4 for 17 in 13 ... dismantling England's top order and leaving the tourists with work to do to get back into the match.


At one stage England were reduced to 11 for 4, with Thornton rampant after three wickets in an opening spell'.could this lad be a distant relative, or the accidental offspring of an illicit encounter in the home state of Australia's fast bowlers?


Vale Richie Benaud


It is geatly sad to learn that the great Australian cricketer, Richie Benaud has gone to a better place. Tony Abbott has offered Richie Benaud’s family a state funeral, saying his death is the “greatest loss for cricket” since Don Bradman died in 2001, Rosie Lewis reports.


'The beloved former Australian Test cricket captain, selector and commentator, has passed away at 84 after a battle with skin cancer.


'Mr Abbott said Benaud had been “the voice of cricket” since the 1960s and that today Australia had lost “an icon”.


“There would be very few Australians who have not passed a summer in the company of Richie Benaud,” the Prime Minister said.


“He was the accompaniment of an Australian summer. His voice was even more present than the chirping of the cicadas in our suburbs and towns and that voice, tragically, is now still.”


'Mr Abbott said the nation would remember him with “tremendous affection” and also recalled his “extraordinarily successful” time as Australian cricket captain'.


Image of the week


To be provided


Tax and currency reform
Date: Friday, April 10, 2015
Author: Henry Thornton

Loyal Australian taxpayers have always felt aggrieved as the ATO chases the home team rather than the giant multi-national companies that clearly are failing to pay a fair amount of tax on sales made in and to Australians on our home turf.  We commend Treasurer Joe Hockey for his brave attempts to overcome diversion of profits to overseas 'marketing hubs' and other even more devious schemes to minimise tax. 


This debate has also unexpectedly thrown light in the issue of the damagingly high Australian exchange rate, a point to which we shall return.


Tax avoidance.


No-one asserts that the multinational companies are doing things illegally.  The are just using legal but antiquated tax laws to avoid paying amounts of tax that we feel are appropriate and which we should be equally smart about collecting.


The way 'marketing hubs' work is explained simply in today's Australian/Business Spectator by Leo Shanahan.  'A product made for perhaps $200 in China is sold for $600 to an international subsidiary, which then sells the device in Australia, netting [the company] a taxable profit of just $20'. Simple? Undoubtedly. Legal? According to the letter. Fair? Not on your nelly, gentle taxpayer, who may well be forced to send half of the theoretical cost of shares in a cash strapped start-up paid liu of cash to the ATO. (Yes I know there is a move to reftify this obstacle to new business ventures in Australia, but why did the ATO encourage the previous government to implement this stupid requirement?)


But to go back to the main point, there is no doubt there are more complicated anti-Aussie-tax schemes, some invented by Australians. My main point is that multinational companies are probably milking the ATO of billions of taxes that should logically be helping to pay the costs of good government in Australia, and it is well past time to do whatever can be done about it.


Another story in today's Australian is headed 'Joe Hockey seeking to reap ‘billions’ from tech taxes'. Good on you, Joe. This will help your government's standing in the polls as well as your thankless, frequently frustrated, attempts to balance our national budget.


The currency debate.


Australia's industrial structure has been greatly distorted by the stubborn overvaluation of the Australian dollar, a fact frequently endorsed by senior officials of the RBA. In particular, our manufacturing base has been smashed, while other industries sensitive to an over-valued dollar have struggled to survive.


In its attempt to reduce the overvalued currency, the RBA has relied on the ancient and discredited 'jawbone' technique, supported by cuts to interest rates more than strictly needed to achieve a sensible monetary policy in the face of so-called 'currency wars'.


In early 2013, this writer recommended the introduction of a tax on capital inflow.  This suggestion has been treated with lofty silence by the team at the top end of Martin Place, although Henry has been advised through back channels that 'Australia relies on capital inflow, and to discourage capital inflow would be a strategic mistake'. That is a matter for debate, and in the context of the debate on tax avoidance, senior ATO man, Chris Jordan, has made a major, if unintentional, contribution to this debate, also reported by Leo Shanahan.


'These companies are not going to exit the Australianmarket because they have to pay tax. Even if they pay the full 30, they can still keep 70 per cent. These are profitable businesses. They are here because they need to sell to customers.


'They are not going to leave if they have to pay tax. This notion us trying to tax foreign companies will harm foreign investment is rediculous'.


Bravo Mr Jordan!


As a further contribution to debate, I must point out that the idea of making foreign house or unit buyers pay fees to be allowed to do so is a partial, ham-fisted tax on a tiny piece of capital inflow.  Time to do it properly and I am confident  that Mr Jordan would say something like: 'These companies are not going to exit the Australian market because they have to pay tax. Even if they pay the full 10 per cent, (say), they can still keep 90 per cent. These are profitable businesses. They are here because they need to invest in the miracle economy that is Australia.


'They are not going to leave us alone if they have to pay tax. This notion us trying to tax foreign companies on their way in to Australia will harm foreign investment is rediculous'.


Ukraine`s economic crisis
Date: Thursday, April 09, 2015
Author: Gary Scarrabelotti with comments by Henry Thornton

'The Ukrainian general staff should be sacked and its generals replaced by Ukraine’s bankers', advises Gary Scarrabelotti.


'Whereas the generals have proved out of their depth in dealing with the Russian-backed separatists of the Donbas, and perhaps feel kindly toward them, Ukraine’s bankers have shown themselves completely unsympathetic to Ukrainians in general, no matter what their loyalties, and utterly ruthless in setting up the country’s middle class for extinction. They really should be running the war.


'Since the “Maidan” revolution of November 2013 – February 2014, Ukraine has entered a steep economic crisis.  The economic bust has triggered a banking crash. Above 30 Ukrainian banks have had their banking licenses withdrawn by the National Bank of Ukraine (NBU: the equivalent of our Reserve Bank) and are being liquidated.  Another 15 or so have been put into “temporary administration”.


'This is a disaster not only for the Ukrainian middle class but also for Ukraine itself. It is middle class savers — professionals, small business people, medium-sized farmers — who will be central to any revival of the Ukraine economy.  However, their savings and capacity to borrow are being eliminated and, consequently, their trust in Ukraine’s political and financial institutions is being destroyed.


'This is the second (for some, the third) time since 1991 that Ukrainians have had to endure a savings wipe out.  The first was the result of the hyperinflation that accompanied the collapse of the Soviet Union.  In between then and now there was the GFC that hit Ukraine during 2008 – 2009 more severely than any other large country. Now in 2014 – 2015 the Ukraine middle class is having its savings wiped out again. It’s a shattering experience to see all you have worked for go up in smoke for the second (or third) time in 24 years'.


Read on here. 


Inflation - and other ways to cancel debts.


Economists say there are three ways to wipe out excessive debts: inflation, debt repudiation; or sales of debt at international auctions at heavily discounted prices.


The graph suggests the power of inflation in the case of The Ukraine.



In fact, more recent figures suggest hyper-inflation is not far away: 'New figures show that inflation in Ukraine during the first quarter of this year increased 20.3 percent compared to the January-March period in 2014, and that last month alone it rose by 45.8 percent.


'The State Statistics Service released information on April 6 that showed the dramatic downturn for the economy last month.


The leaders of the Ukraine seem to have invented a new way, or perhaps it is just an illustration of debt repudiation - let the banks go broke and wipe out the savings of the middle class and while they are at it, repudiate the vast sums of debt owing by the banks.


The Russians and indigenous Soviet sympathisers are attacking militarily while the oligarchs are attacking their own economy.


RBA meets ...
Date: Tuesday, April 07, 2015
Author: Henry Thornton

...with serious matters to discuss.


Did you see Glenn Stevens on TV last night, dear readers?  He is half a generation younger than Henry but looks a generation older. Clearly central banking is stressful, and we wish our former colleagues well as they grapple with near insoluble problems.



1. The economy is rapidly approaching real recession, with rising unemployment and an absolutely disgraceful  level youth unemployment. A modest further rate cut, or even several cuts in cash rates, cannot prevent this slide.  Yet the Reserve cannot look uncaring, so must cut rates to avoid looking uncaring.


2. The Aussie dollar keep looking buoyant, despite the inexorable falls in commodity prices. Further rate cuts will encourage falls in the currency, but dramatic 'banana republic' falls will not occur unless and until international investors lose confidence in Australia's ability to restore growth. While parliament remains gridlocked and budgetary reform seems impossible, risks will grow of a major loss of confidence by investors.  A fall to 50 or even 60 cents in the US dollar would, or should, send shivers down our national spine, while a renewed fall in the US dollar would drive the Aussie dollar higher.


3. Further rate cuts will fuel house prices in Sydney and Melbourne and further damage young peoples' faith in Australia's future. In theory APRA will deal with the housing boom with so-called 'macroprudential policy' - imposing higher reserve ratios on banks to discourage excess lending for housing.  But APRA, until it becomes as open as the RBA, will act too little too late, and the board of the RBA should recognise this and either send APRA a very precise instruction or rethink the rate cut policy.


This is the set of serious dilemmas facing Glenn Stevens and his colleagues. We read over the weekend the touching story of a relatively young RBA director.  With great respect we doubt this person, and the other representatives of the good and the great amateurs who are there to keep the RBA honest, are capable of providing useful advice at this dire time in Australia's history.


The key points are these:


*  Australia's growth depends on rapid and thoroughgoing economic reform.  Any brave economist will provide a list.  Until such reform is implemented, cuts in interest rates will have little effect except providing the RBA will the excuse that it did the best it could.
* Australia's budget problems will drive us into a very nasty dry gully of excess debt if they are not fixed in the next few years. Interest rate cuts will do little to help.
* A lower dollar, provided not the result of a massive vote of no confidence in Australia's economic management, will help at the margin, and this may be the decisive point made at the RBA meeting today. But cutting rates will also fuel asset prices and Australia has already joined the global soft money crusade that will eventually create a massive, damaging, global recession or depression.


What you should do today, gentle RBA board members, is direct Gov'nor Glenn to write a serious letter to the government, copied to the opposition and especially the so called 'independent' Senators.  The three points laid out above need to make up the essence of the letter.  Glenn Stevens has said he plans not to seek another term as head of the RBA, so he has the chance to be a truly independent leader of that august institution.


Please Glenn Stevens, show us what you really are capable of.  I have great confidence you are the most likely person in Australia to get the attention of the politicians and start a process that may even stop their bickering, which is in fact worse than useless.


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