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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, 10 January 2015
Date: Saturday, January 10, 2015
Author: Henry Thornton

The year has started with a barbaric act of terrorism by Islamists who object to people who are free to make fun of religious ideology. As we write, Australian law enforcement agencies are supposedly keeping tabs on likely would-be perpetrators of another act of terror.  Endless future diligent detective work seems likely to be required to minimise these atrocities, but there is no obvious alternative.


'Why not simply decline to accept any immigrants from the Middle East?' asked a visitor during the holiday break.  No short run relief from such a policy, and it may make things worse as existing people with imagined reasons to attack Australia's multicultural civilisation would presumably be given a fresh reason to feel aggrieved.


If such a draconian approach is not acceptable, surely we need a more rigorous filter for people from places with a generally hostile view of western values. Evaluation of applications for permanent residence or citizenship could be far more thorough, with interviews by pairs of people trained to detect latent hostility to our prevailing culture.


When interviewing job applicants, I have often found revealing the answer to a question like 'Why are you interested in working for XYZ corporation'. People with real expertise should be able to sort out likely trouble makers, especially if records of the interviews are kept and reasons for accepting people who later become terrorists are scrutinised carefully.


A cheaper solution would to be only to accept people from cultures known to be sympathetic to Australia's values, though one hopes even such people should be scrutinised more closely than current practice suggests is the norm.


Readers inclined to respond are invited to contact Henry here.


Economic prospects for 2015.


Martin Wolf of the FT presents the best overview of likely global economic developments this year Henry has read.  As Henry has often advised Australian astrologers, Wolf presents a base case but also major risks. He says global growth in 2015 is 'extremely likely' to be not too far short of 4 %.  Developing countries may grow faster (as they catch up to current high income economies) and developed nations slower than the average, perhaps at 2 % rate.


Risks to this benign scenario are various: financial meltdown in China; messy Eurozone dismemberment; dollar strength creating developed nation economic crisis; geopolitical  shock; and I would add global equity crash as US interest rates rise.


The Australian economy would normally be part of the high income group, but with our reliance on China's growth a crisis there would intensify the pain already being felt by plunging commodity prices.  While our budget problems are (or should be) well known the current state of political hostility and Senate gridlock is unusual.  As Henry has said, only a widened GST at a higher rate will fix the budget, and we must all hope this is achieved by some political alchemy currently hard to imagine.


In the short run, the greatest impediment to 'high income' growth is our cost disequilibrium.  This will be remediated if the Australian dollar keeps sinking and yet wage and price inflation stays low. Remediation would be faster if there were a productivity boost, but political gridlock is likely to be a blocker here too.


Readers are advised to save money, be unaggressive about remuneration claims and make it clear to government that they want the budget problem to be fixed and economic reform to encourage innovation and boost productivity. Passing these views to local members is likely to be effective, especially now when every one from John Howard down are expressing views on how to do better.


Martin Wolf wisely reminds us that economic forecasts exist to make astrology (or, we must add, alchemy) respectable.  Read on here.


Cricket'n'futball'n'tennis'n'stuff


Finally we saw some real form from the Indian cricket team under its young new captain Virat Kohli.  That said, the number of dropped catches during the Indian innings was unusual and Ravi Ashwin's brilliant dismissal of Dave Warner was another sign of growing Indian confidence. Henry will be watching the last day of the fourth test today and expects it to be a real contest.


Why the futball world cup begins at 10 pm on Friday is beyond Henry's ability to understand or explain.  Fine for unemployed couch potatoes, but what about people with jobs that require alertness by 8 AM Saturday? Henry nevertheless sat up last evening and was entranced by the ebbs and flows of a fascinating game in which the Aussies overcame a bad start to beat Kuwait 4-1.


Soon the tennis will be front and centre. A win for little Lleyton Hewitt and/or Slammin' Sam Stouser would bring great joy to the Thornton household, but must be regarded as less likely than a serious geopolitical accident.
 
Image of the week - Courtesy The Oz



Bull market - how long?
Date: Thursday, January 08, 2015
Author: Henry Thornton

The UK stock market is in its 70th month of a bull market, which began in March 2009. There are only two other occasions in history when the market has risen for longer. One is the period leading up to the great crash in 1929 and the other before the bursting of the dotcom bubble in the early 2000s.


The graph puts current performance into perspective.



The article from which this graph is extracted is called 'Ten warning signs of a market crash in 2015'.


Read on here, and ponder.


We would welcome comments, prognostications or even wild guesses, if accompanied by some minimal logical support.


  Contact Henry here.


Work smarter to find work.
Date: Wednesday, January 07, 2015
Author: Henry Thornton

Every offspring of Henry's friends has had trouble finding a regular job in an area trained for at one of Australia's finest universities. The luckiest have found a spot thanks to the intervention of family friends. The most innovative have become unpaid 'interns', and in some cases this leads to paid employment.  The restless will find work in a remote outback town. The rest either take a job stacking shelves at a supermarket or return to university to try another profession. Teaching is currently one of the most popular options in the leafy Eastern suburbs of Melbourne.


We guessed this was a global problem, because if Australia - a 'miracle economy' - is having this trouble, what about less miraculous places? This week's Economist has filled in the story in a leader called: 'The on-demand economy' or 'Workers on tap', with accompanying graphic.


To be sure, the venerable mag's approach is from the view of the entrepreneur, rather that the struggling young would-be worker, but there is an implied message here. This was the theme of a movie, 'Nightcrawler', Henry watched with young Bert during the holiday season.  The chief character in this movie was a bloke who had turned to crime to create work for himself, dangerous and providing only a meagre income.  He happened upon a newsworthy event and when the newshounds arrived the lightbulb went off. He became a newshound, selling stories to any TV station that would pay for them.


Being a man of great entrepreneurial drive, he figures out how to do the newshound job better than any of the regulars.  Partly this involves making the news, his first instance being to move a corpse to create a more dramatic image.  Where this leads I shall not divulge, but the trailer, linked here, offers hints.


As the Economist says: 'Some of the forces behind the on-demand economy have been around for decades. Ever since the 1970s the economy that Henry Ford helped create, with big firms and big trade unions, has withered. Manufacturing jobs have been automated out of existence or outsourced abroad, while big companies have abandoned lifetime employment. Some 53m American workers already work as freelances.


'But two powerful forces are speeding this up and pushing it into ever more parts of the economy. The first is technology. Cheap computing power means a lone thespian with an Apple Mac can create videos that rival those of Hollywood studios. Complex tasks, such as programming a computer or writing a legal brief, can now be divided into their component parts—and subcontracted to specialists around the world. The on-demand economy allows society to tap into its under-used resources: thus Uber gets people to rent their own cars, and InnoCentive lets them rent their spare brain capacity'.


And in conclusion: 'But even if governments adjust their policies to a more individualistic age, the on-demand economy clearly imposes more risk on individuals. People will have to master multiple skills if they are to survive in such a world—and keep those skills up to date. Professional sorts in big service firms will have to take more responsibility for educating themselves. People will also have to learn how to sell themselves, through personal networking and social media or, if they are really ambitious, turning themselves into brands. In a more fluid world, everybody will need to learn how to manage You Inc'.


More information is available here.  If your offspring cannot find a decent job, show him this blog or tell her there is more than one way to create a future. If teaching fails, there is always setting up a baby-sitting business, or walking dogs for a living.


`Banana Republic` and politicising the public service
Date: Monday, January 05, 2015
Author: Henry Thornton

New years bring releases of cabinet papers and this allows former policy warriors relive their glory days.  The only real contemporary relevance is the lessons for the immediate future.  Geoff Kitney provided such an analysis in the weekend AFR and concluded that the economic mistakes of the Hawke-Keating government make 'ominous reading' for Tony Abbott.


Henry's memory goes back to the 'Banana Republic' event of 1986. This was sparked by sharply rising external debt.  After a serious s**tfight, Keating agreed that stern policy action recommendeded by the RBA's economists was required. In the event, the Treasurer persuaded the cabinet to cut government spending to the extent that a serious budget deficit was turned into a surplus. Prime minister Hawke persuaded the ACTU to cop a cut in real wages, accepting less than full compensation for the effects of the plunging dollar.  The falling dollar was possible only because of the earlier deregulation of the market for foreign exchange, the Hawke-Keating government's greatest policy move.


The advice of the Research Department (never 'official' RBA advice) was ultimately accepted by the government after a lot of Keating's global best practice invective focussed on the RBA's Chief Economist. Mr Keating's abuse was dished out at a meeting that included the entire senior Treasury team whose members with one honourable exception kept their head down while the verbal bullets were flying. Why Treasury was not leading that debate is a mystery.  Either Treasury read the economy differently, or they were far better careerists.  But in the crucial meeting alluded to Treasury officials (with that one honourable exception) sat quietly. 'Cigar store indians' Mark Twain would have said.


The next event of significance was the global share price crash of October 1987. Again there was frenzied debate, with Treasury (and several elderly advisors in the RBA's executive committee) arguing that the crash would create a global recession.  Once again the advice from the RBA's chief economist was that there would be no global recession and the risk of overheating was a larger risk than the deep freeze predicted by most journalists and policy advisors.  The RBA's board seemed to accept this advice and the related advice that monetary policy should be tightened. But while this advice was repeated at each meeting of the board, and seemingly accepted, interest rates fell rather than rose.


Geoff Kitney focusses on the major political event of the 1980s, the struggles for the top job between Messrs Hawke and Keating. 'Through 1989, Keating, the Treasury, and the Reserve Bank collectively misjudged the policy response of the boom, applying the monetary brakes too late and keeping interest rates too high for too long'.


By then, I had stood down as the RBA's Chief Economist and shortly after that accepted a job in the private sector. I will admit to have been seriously disillusioned about the dangers of giving fearless advice that the textbooks (and common sense) recommends for public officials. This disillusion was strengthed as those who kept silent during the big debate in 1987, and who were responsible for 'the recession we had to have', were promoted. To my mind, this is a major cause of the politisisation of the Australian public service that thoughtful people regret.


That is the real message of 'the recession we had to have', one that there is little evidence that the current government understands.


Saturday Sanity Break, 3 January 2015
Date: Saturday, January 03, 2015
Author: Henry Thornton

Greetings and best wishes for 2015, gentle readers.  It is hot and very windy on the Mornington Peninsular and in a large swatch of South-Eastern Australia.  Perfect bushfire weather, and doubtless there will be nutters abroad seeking to generate some excitement.  Anyhow, all we can do is keep the grass around the rural hideaway cut and hope for the best.


Henry's favourite journalistic stirrer, Grace Collier has returned to the Oz after what seems to be a long absence. 


Is this another economy measure from Rupert's minions or has Ms Collier been sprogging, travelling overseas or just taking a rest?  'Grace', if I may use such an intimate salutation, please keep up the good work, and if the Oz is reluctant to use your talents, HenryThornton.com stands ready to provide an internship.


Anyway, Ms Grace is onto something with her article today. 'Look after your friends, or at least stop slapping them in the face. Everyone needs friends. The Labor Party is great at looking after its friends; as a result, it has many. The Coalition is hopeless at looking after its friends; as a result, it has hardly any, a fact it constantly bemoans'.


Hopefully, one day the penny will drop. The Coalition should try to keep faith with its base; an obvious rule: never give the enemy of your supporters a job. Two key appointments (to protect the identities of the appointees, they shall be known only as “Natasha X” and “Greg X”) constituted unforgivable insults.


Those who know the real names of "Natasha X" and "Greg X" are invited to contact Henry here. 'Unforgivable insults' need to be recorded, but the general point is more relevant. 'Look after your friends, or at least stop slapping them in the face'.


Of the other suggestions for Tony Abbott and co, Henry most liked the following:
* 'Reverse the high-income earner debt levy and cut income taxes.'
* 'Do the job fearlessly or go home, and get with the times.'
* 'Make serious spending cuts but take from the poorest last.'


Cricket'n'footy'stuff


The third test ended in a hard fought draw, and Day 5 found Henry glued to the TV. Cap'n Smith again ran the show well, and is making a good start to his time at the top. Interesting to read today's story to the effect the Mitch Johnson has been bowling more than his preferred 3 overs in a spell, which is preventing him from being his fully aggressive best.  Shouldn't take more that a nanosecond for Cap'n Smith to resolve to do something about that.  Personally, Henry thinks Mitch is a bit like Samson, it is the lack of facial hair which is holding him back.  Let that hair grow Mitch, and see if that improves matters.


Still no action from ASADA about alleged drug taking at Essendon. This is a tabloid newspaper approach - trash their reputation, but never present the evidence in a forum in which it can be tested.  Surely there is a law firm willing to sue ASADA for defamation of character on a success fee basis?


Soon we shall be in the Big Bash silly season and Henry can go back to work. Then it will be only 75 sleeps 'til the footy season when Henry and his co-religionists can watch Caaaarlton!'s desperate bid to finish in the top eight.  In between is the Asian Cup of futball, which may provide a distraction or two.


Image of the week



Courtesy The Oz


Economic crises: then and now
Date: Tuesday, December 30, 2014
Author: Henry Thornton

'The present crisis, fortunately, is in no way attributable to unsound banking practices or property speculation. It is a crisis precipitated by catastrophic collapse in the values of [iron ore and coal], but which had its origans in the unsound borrowing pursued by the Australian government from [2009 - 20xx]'.


'... Australia, having got itself into difficulties by inflating its internal prices, cannot get out of difficulties without deflating its prices, which means in this case reducing wages and accepting temporarily a lower standard of living'.


This is not the fulmination of a latter day prophet of doom. It is an edited version of a comment made by the Economist in February 1931. In terms of the editing, in the original the words in the first set of brackets were 'wheat and wool', and the dates in the second set of brackets were '1922 - 1928'.


Australia at the time showed great good sense.  Minimum wages were cut by 10 %  and the exchange rate was devalued by 30 %.  Now wages growth is slow - but without any dramatic cut - and the exchange rate is being devalued in fits and starts.  After the dramatic price cuts of 1931, Australia recovered relatively fast, but there was no avoiding deep depression. Slow wages growth and fits and starts currency depreciation will give us little international advantage, as the dramatic currency and wages cuts did in 1931.


With current policies, our economy will struggle for years.


But do enjoy the fireworks and general festivities. Mrs Thornton sends her best wishes with Henry's for 2015 and beyond.


Remember: forewarned is forearmed.


Sat Sanity Break , 27 December 2014
Date: Saturday, December 27, 2014
Author: Henry Thornton

Tony Abbott's reshuffle seems to have been a promising circuit breaker.  Next step is to get a sensible narrative going.  This will be harder, especially after more than a year of mixed messages and confusion, except of course for stop the boats, kill the carbon and mining taxes and sign three Free[r] Trade agreements. 


One would have to say say, 'not a bad year comrades', except for the budget deficit, now 40 billion and still rising, failure to get medical and university reform through the Senate, and failute to carry the people on what has been achieved and what has been blocked by economically illiterate micro-party Senators.


Clearly it was time to Reboot. That done, where is the Paul Keating, with his unparalled ability to charm even class enemies and his suprising ability to grasp essentials of economic reform and to persuade his cabinet colleagues?  Perhaps Mathias Cormann is the man, if he is given a serious chance to become the public face of the Abbott government's economic team.  This team has been strengthened by promotion of two promising young liberals from the so far largely ignored state of Robert Menzies' Victoria, Josh Frydenberg and Kelly O'Dwyer.


So it's on with the show, and we wish the Abbott government every success in 2015.  Vital this, as its success is our success, and its failure is our failure. 


Henry's son Bert, has just returned after three weeks in Tiger country (South-East Asia). Bert was very taken by the cheerful energy of Singapore, Malaysia, Laos, Cambodia and especially Vietnam.  'It's government is communist', Bert advised, 'but as effective capitalists they leave us for dead'.  That judgment, from a young man well educated in economics, history and the law, is worthy of pondering, gentle readers.


We wish all our fellow Australians a wonderful, gradually reforming capitalist success in 2015.


Footy'n'n'cricket'n'stuff.


Henry had the great pleasure of sitting through a day of absorbing test cricket yesterday, and will be listening on radio, with the TV screen turned on today, and, one hopes the next four days.  After a catastrophic duck by batting hero, Dave Warner, Chris Rogers and Shane Watson steadied the ship  with useful 50s, but with Mr Watson a chronic failure to go on and 'get a big hundred' he is copping some flack in the press today. 'Joe Burns for number three' is the cry today, after a well made 13 runs ended buy a silly shot. Henry is prepared to bet, smilin' Joe told himself 'This is pretty easy' just before the ever diligent - well almost always diligent Indian attack ended his first up camoe. the Australia's new super-star Captain and chief batter, Steve Smith, steading the boat again, finished the day on 72 not out, carrying the score to 5/259.


The boat was wobbling noticably at the end of the day, with midshipman Haddan ducking, weaving and taking hits for the team in the very cool breeze to offset the hot bowling.


'Lota work to be done yet, boys', Henry wishes to advise our tail-enders.


Speaking of boats, the SydneytoHobart got off to a fast start as some of that decidedly cool Southerly breeze made it to Sydney. Soon we'll be singing auld Lang Syne and hoping our footy team does a bit better, actually a lot better, if you require total honesty, in the 2015 season.  Henry has got to the point that he now hopes for only one more premiership before he goes to a better place, and even that looks like wild hope at this time.  We may be forced to begin to ask the great Architect for a Second Term for the Abbott government instead.  Perhaps more likely than another premiership for Caaaaarlton! anytime soon, but also a more worthy wish as it willl provide more joy for the masses of well-to-do than a mere footy wish.


Image of the week.


Today we break with years of tradition and present an image from Henry's own brush.



The meaning onf this image will be obvious to any thoughtful reader - here is the link.


Saturday Sanity Break, 20 December 2014
Date: Saturday, December 20, 2014
Author: Henry Thornton

It is time for most of us to down tools and have a break from what are becoming increasingly tough times.  I'd be delighted to present cheerier news, but it is hard to do so when Australia is suffering from three big challenges:
* Double digit cost overhang, encouraging imports and discouraging exports;
* Budget deficit out-of-control, adding $40 billion this year to a rapidly growing international debt;
* Nasty political gridlock, frustrating the government's attempts to grapple with budget catastrophe.


The first point to note is that every boom of the sort we experienced in the 2000s is followed by a bust. We shall be very lucky to escape severe recession, or a long period of below potential growth, following the national party that was our good luck during the late, much lamented, China boom.


With the onset of the global crisis in 2007-08, Australia's government panicked and the head of Treasury, Dr Ken Henry, advised a crude Keynesian remedy - 'Go early, go hard and go households'. This may have saved some jobs, but it fostered all the wrong cultural messages. Spend, not save.  At the first sign of trouble, your government will provide. There is no need to cut consumption and raise productivity in the face of a severe global shock. Item 1 below provides a more appropriate summary of current national imperitives.


So much for how we got here.  A massive battle to restore budgetary balance is ahead of us all. Henry would prefer to balance the books with spending cuts, but a well developed sense of entitlement has Australians in its grip. Like the OECD and other expert groups, I believe a GST without exceptions and a top rate of 15 % will eventually be required, as it was in New Zealand.  If Labor was fair dinkum it'd do a deal with the government on spending cuts and the suggested GST reform.


That is the least pain solution, and should include compensation for the most needy Australians for the associated increases in the cost of living.


The double-digit cost overhang is a harder nut to crack. Fortunately Australian people are sensible, as shown by the low recent rate of cost increases, especially wage cost increases. If this discipline can be maintained as the dollar falls the cost overhang will be gradually eroded.  But there is a lot that a government could do to help reduce costs by structural reform. Here are Henry's suggestions.


This year has seen Australia's monetary policy stuck 'easy'. Henry cheered when Rupert Murdoch noted the link between easy money and asset inflation, and the adverse effect of asset inflation on equality of income and wealth.  The article linked here provides the start of an explanation, one that I hope to fill out with serious econometric testing during 2015.


(A reader said 'This would be easier to understand with diagrams.  The painting contains the diagrams, three in fact, and anyone who renews his or her goldmembership will receive an explanation.)


Australia is lucky that its central bank, the RBA, has expanded less aggressively than the major central banks.  During 2014 the US Fed abandoned a long-held policy of allowing asset booms to go on without any response than to clean up after the bust. New Fed Chief Janet Yellen announced use of 'mactoprudential policy' to curb asset booms, leaving monetary policy to provide overall economic control with low goods and services inflation.  This finally helped people to understand the wise saying of Milton Friedman: 'Monetary policy cannot serve two masters'.


I plan to be back in 2015 with updates on  matters economic and also providing a vehicle for our impressive bank of political, investment and lifestyle writers. Our 'SMERSH' section provides the most challenging offerings and we commend it to people who welcome a challenge.  The article by Roger Underwood, with thanks to Quadrant, about the threat of bushfires and Australia's bone-headed failure to apply the right remedies, is a highly relevant example.


We wish all our readers a merry festive season and a safe and happy 2015.


Footy'n'cricket'n'stuff


The first test against India was a rip-snorther and the second is shaping to be just as exciting. With Australia on the ropes at 6 for not very much, the Indians abandoned their usually gentlemanly virtue to slede Mitchell Johnston. Mitch responded with one of the best number 8 batting Henry has seen. Day 4 awaits, gentle readers, do not tarry in the shopping marts.


Image of the week


Courtesy Herald Sun


Work hard, innovate and save.
Date: Tuesday, December 16, 2014
Author: Henry Thornton

The Treasurer and Finance minister have provided the current 'best guess' about Australia's budget, and it is an ugly picture.  We are all hostage to the budget mess just as surely as were the unfortunate people held hostage in the coffee shop in Sydney's Martin Place. Fixing the budget will require stern action by the authorities, as in the Martin Place siege, and there will be casualties.


Some people will find this description macabre, even offensive.  But it is a macro statement of the horrible micro-events of yesterday in Sydney.  After living high on the hog - too high it turns out - Australia is facing a difficult and painful readjustment to a new reality.  Never before has Australia (or any other country, it must be noted) enjoyed a massive boom (not of its own making, it should be noted) without an equally tough bust. The development boom of the 1880s was followed by deep depression in the 1890s. The share boom of the 1920s was followed by the deep depression in the 1930s. The resource boom of the early 1970s was exaggerated by the over-spending boom of the Whitlam government and followed by a jobs bust and then the long, dreary government of Malcolm Fraser.


Famously, the Global Financial Crisis (GFC) followed a massive real estate and share boom but the bust, though severe, lead to a long recession but not a great depression, except in the poor and heavily indebted nations of the Eurozone and the hard working nations of Asia.  Southern Europe was forced to adopt savage deflationary policies, and prevented from currency devaluation to restore competitiveness, and these nations are still wallowing in deep depression whose ultimate consequences cannot confidently be predicted.


Australia was a polar opposite to Greece, Italy, Portugal and the other poor nations of Southern Europe. The China boom was hardly touched by the GFC and our resource boom rolled on.  Australia's government panicked and the head of Treasury, Dr Ken Henry, advised a crude Keynesian remedy - 'Go early, go hard and go households'. This may have saved some jobs, but it fostered all the wrong cultural messages. Spend, not save.  At the first sign of trouble, your government will provide. There is no need to cut consumption and raise productivity in the face of a severe global shock.


This writer much preferred the Icelandic solution when its three banks failed and could not be saved. 'You will have to learn to go fishing again' said the Prime minister.


Many nations are still wallowing in prolonged recession, Japan and Europe in particular.  America is showing signs of recovery, but asset prices are roaring and recovery is likely to be compromised when the US Fed begins to raise interest rates. China's miracle economy is slowing and global commodity prices are being decimated.  Australia's mini-miracle economy is suffering from the end of the investment phase of the mining boom while many other industries have been damaged by the greatly overvalued currency which, thank goodness, is finally and belatedly now sinking.


Australia's governments have since the onset of the GFC suffered a string of surprises that manifests most clearly in Treasurers constantly overestimating receipts and underestimating budget deficits. While the falling exchange rate is mainly due to falling commodity prices, international investors are noticing our inability to control these deficits.


Australia's government debt was negative when Peter Costello handed the keys of the Treasury to Wayne Swan. Now it is rising with successively higher budget deficits and if this is not stopped far sooner than currently predicted Paul Keating's 'Banana Republic' cry will again be heard. It should not be forgotten that household debt and business debt also has to be serviced, and with current trends Australia's total debt will be become a serious limitation on individual economic freedom, even if it does not currently look that way.


Jobs are growing more slowly than population and therefore the rate of unemployment is rising even though many older Australians are dropping out of the workforce. Furthermore, part time jobs are providing most of the jobs growth, and many of the available jobs are low paid and do not use the skills current young people have acquired in universities. There is a glut of graduates in law, for example, but law firms are the latest to send work offshore where, a senior lawyer said at a recent social event, work can be done at 10 % of the Australian rate. Accountancy will follow this trend shortly, while Fly-in, Fly-out work practives sould an ominous warning.


Australia needs policies to fix the budget.  The quality press is beginning to point out that Labor must help fix the mess it did so much to create. Cross-bench Senators have a lot to answer for also, as they have so far blocked several of the more important budget repair efforts and seem to think like Labor 'the budget crisis not belonga me'.  Overall cost levels are far too high and will be even harder to fix than the bloated budget.


'Enough, Henry', Mrs T has cried. 'Dinner is on the table'.  Henry and his family are blessed, but like all Australians subject to the iron laws of economics. Instead of Ken Henry's crude Keynesian dogma, the alternative should be: 'Work hard; innovate; and save. Not so snappy, or populist, but far more likely to produce a real mini-miracle economy.


Saturday Sanity Break, 13 December 2014
Date: Saturday, December 13, 2014
Author: Henry Thornton

'Get real' says RBA Chief Glenn Stevens to the pollies.  Guv'nor Glenn deserves a gold medel in public policy for telling it as it is.  Retiring Treasury Chief, Martin Parkinson, gets the silver medal for his advice in deficits as far as the mind can imagine. Treasurer Joe Hockey is also in the medal-winning frame (as the argot allows) with his forthcoming mini-budget, and for admitting his first budget lacked the careful 'narrative' used by previous governments seeking to inflict tough management on an hedonistic nation.


(Memo Dr Parkinson. Contact Henry here if you wish to become one of Henry's special correspondants.)


So wonderful to read today of 'Coalition axing 175 agencies'. Buy the Oz and ponder the list of bodies, each of whose chairperson was in line for an AM or better, and whose meetings involved overnight stays at good hotels, aeroplane flights in business class and often luxurious hire cars to transport the eminent agency board members to and fro.


The government has reached accomodation with the Senate micro-parties on one or two of its more controversial savings and there is more effective politicking to be done on this front yet.


So the nation is, or should be, ready for some serious budget clipping and patriotic constraint.


History wars.


Hal Colebatch's Australia's Secret War: How Unionists Sabotaged Our Troops in World War II was a co-winner of the Prime minister's Literary Award for History.  This is marked by a nice article by Mr Colebatch in the Weekend Oz today, link to come, but on P 17 in the fish'n'chips version.


The introduction to this fine contribution was posted on this site in October 2013, with permission of Quadrant and the author, and currently has a 'member's rating' of 4.8/5.  The story deserves to be told to all Australians. As the Oz says 'Militant unions held the country to ranson and helped end [Prime minister] Curtin's life'.


Best blogs of 2014.


Gor blimy comrades, 20 May 2014


'Who'd of guessed it?  Tony Abbott has taken the axe to every program he can find, even adding to the taxes paid by his rich Liberal mates. He's hit us battlers harder, of course, and the brothers at the local pub have all agreed to vote for Bill Shorten or Clive Palmer.  Gary Morgan says the Libs are buggered, and even the Oz says Abbott and his mates are in their own world of pain.  Dunno why, as all they're sufferin' is a wage freeze plus less free plane trips when they quit politics. Which looks like commin' sooner than they thought.  Even the useless bloody State Premiers are whinging, and most of them are Liberals'.


Henry's roving reporter filed this missive from a battleground of the class war, the front bar of Balmain's most traditional pub.


Cricket'n'footy'n'stuff


What a blinder of a test match, with wonderful batting from Warner, Captain Courageous and future Captain Smith. Great bowling by Lyon, who looked more like Warnie than ever before as he showed the Indians that they are not necessarily the world's best players of spin.  Day five looks like being just as much fun so stay tuned to the ABC if travelling or to Channel Nine if enjoying a nice couch potato day at home.


STOP PRESS: A glorious end to a great test match. India looking like winners until Lyon produced a day for the ages as he bowled them put with not many runs to spare. On to the Gabba, where the pitch should be green, the temperature will be hot and the beer will be cold, but there will be no Captain Courageous.


ASADA has lost a battle to have a court insist that the guys who really know the truth give evidence.  Henry is no lawyer, but this seems likely to cruel the chances of cleaning up the great sport of footy. With 4 tests to come, Henry will now focus footy talk on the 2015 season, which in his always optimistic brain flits the ideas of Caaarlton! finishing ... in the top eight.


Meanwhile the hockey players seem to have done well, with the girls' teams in all sports doing exceptionally well. Regular readers will agree this is evidence for Henry's theory that women in Australia are given a better 'go' than just about anywhere else, but try telling that to Julia or Peta if you want a bop on your noggin.


Henry is exhausted after six months in which at any one time two out of the three start-up entities he chairs have been in crisis.  Fortunately - touch wood - all three entities have emerged into sunlit uplands as the year draws to a close. Aplogies at sparsity of blogging during recent times, but regular transmission should resume in the new year.


Image of the week


 Courtesy Herald Sun


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