Henry and Mrs. Thornton, and offspring Thorntons, all gathering this year with Mrs T's rellies in Sydney.

Christians and fellow travellors may enjoy the animated Christmas story, courtesy Peter Nicholson of the OZ.

Click on the link below, then follow the instructions.

http://nicholsoncartoons.com.au/christmas-news.html

Some clever person has suggested that we wait until the emergency action already legislated for raises taxes on January 1 and then the Republicans can vote to cut tax rates, though not to the unsustainable 2012 levels. Honour saved, fiscal disaster avoided, everyone happy.

Sort of like going over the cliff with a bungee rope around one ankle.

Still, going over the fiscal cliff may be about as scary as the end of the world Mayan-style.

Here is a reassuring perspective from late November, though the brace position is still recommended.

'If the arms of US governence remain locked in a wrestle that offers no solution, at least the long term debt problem of the USA would be less serious, and US businesses and households might understand their destiny is in their hands, not those of incompetent politicians'.

Rumination about Australia's wasted year in politics continue to fill the pages of the quality papers. Nice one in the Oz about Tony Abbott's time as a 'colonial gorilla', winning the Oxford-Cambridge boxing contest that was tied 4-4 before our wild colonial boy entered the ring to knock out the Cambridge heavyweight champ in 45 seconds.

Henry's meandering geologist, Louis Hissink, weighs in from a remote mining camp. 'Gadzooks – it’s 21st December and now I find out that the end is around 11pm tonight, so here’s a possible last post from HMG (I’m meandering, not wandering, at the moment) before all collapses around our ears.

'Of course as far as the Gillard Guvmint is concerned, it might as well be now as the PM is on leave and the Treasurer has taken leave of his senses, given the news these last few days, when Wayne’s World announced an absence of a budgetary surplus next year. That is one hell of a negative, fiscal and sentiment, I would say'.

Read on here.

From the archives comes a blast from the late Sir Wellington Boote, Henry's greatest iconoclast.

'The zeitgeist of the 70s was full of pixie dust nonsense about how easy it is to bring a Stone Age group into the modern world. When the intractability of progress was encountered by the public servants they quickly settled for enslaving these Australians with social welfare payments'.

Read on here and ask yourself what has changed in the past four and a half years of Rudd-Gillard rule.

Education downunder

Much hand-wringing about Australia's low international score in matters educational this week.

'Results prove education system favours girls, yet we do nothing', says Angela Shanahan.

'The collaborative classroom works well for girls. Their psychological development helps them fit into groups.

'Boys are simply not so responsive to this collaborative element, particularly when they reach adolescence, and they have to collaborate with the girls too. They are also up to two years behind the girls' emotional development. Add the fact that most teachers are women and the picture is a bit grim for young males'.

With women now filling all the leadership positions in Australia it is not surprising that boys are being discriminated against in education.

And when the Y-chromosome finally collapses (predicted by some scientists to be just a few short millions of years away), reproduction will be done by cloning, or perhaps splicing, and the victory of the wimmin will be complete.

Roll on progress.

The cricket

Henry salutes the Australian cricket team for its win over Sri Lanka in Hobart.

For a long while we thought that the scrapping Sri Lankans were going to do a South Efrica and hold out for a draw, but Siddle-n-Stark came through to crash through the defences.

Henry and Mrs T were close to the 'G' last night at about the time the Big Bash was ending. We saw only 4 boys leaving to catch a tram,and they were polite and apparently sober.

What is the world coming to?

Image of the week

 Courtesy The Australian

US housing markets continue to surprise on the upside and the latest US GDP data was relatively strong. Failure to fix the US budget - which would itself be a matter of strong surprise - will stop all the nonsense about 'economic recovery'.

Downunder, it is situation normal - the government breaking another frequently reiterated promise (to return the budget to surplus) - gaining the cheers of economists for failing to depress the economy any more than it already is.  Henry wishes it to be known that he deplores the promise breaking, that a more prudent fiscal policy during the time of severe global crisis would mean the budget would be in comfortable surplus now. ('My commitment to a surplus in 2012-13 was a promise made and it will be honoured'. Julia Gillard, April 13, 2011.)

The liason information about the true state of the economy remains mixed. Mrs Thornton is this family's shopper-in-chief, believing (correctly) as she does that Henry spends too freely when he is required to spend time in shops, and she believes 'the situation is dire'. Henry, however, has discerned some shreds of evidence of potential recovery. Most importantly, the man who frames Henry's paintings - available for viewing here - says business has picked up 'substantially' in the past three months, which he attributes to the rate cuts. Be aware that there is a picture-framing-led recovery underway in leafy Kew, gentle readers, another strange and unnatural fact.

Australia's economic journalists are bleating almost in chorus that the exchange rate is too high, but have failed to notice or report Henry's masterplan, involving tax on capital inflow.

Recognition of another policy strike by Henry would itself be a strange and unnatural act, and there is still time for Terry McCrann or similar swashbuckling scribe to be the first to declare Henry a renegade, whose membership of the Economic Society of Australia (Victorian branch) should be stripped away and the unexpired annual subscription returned. Later, of course, one of the swashbuckling scribes would claim the idea for his own, or emanating from the RBA or (gasp!) Treasury.

We are told in today's Oz, on the basis of a leaked draft of the forthcoming defence White Paper, that China's military power is 'shifting the balance' of military power in the Pacific.  Where do they get such brilliant ideas?, one is forced to ask. We need a decent submarine fleet, comrades, and the sooner the better. (More here and here)

Why are we not surprised that members of Australia's customs service has been shown to be corrupt, aiding drug and gun smugglers and getting rich in the process. Like people in many modern capitalist nations, Australians have become infected with the idea that we all deserve to live in a McMansion and drive a flash car, and if we cannot get rich legally, we shall do so unlawfully. Corporations do their best to rip off their customers - think banks or electricity companies - and at the peak of the crisis the invisible hand delivered only a slap. Read the recent book Slapped by the Invisible Hand for an entertaining and informative account of the crisis and how we got there.

Low interest rates and the flood of hot money that is keeping the dollar high will fuel inflation here, and the high dollar is already destroying local industry.

This is an inevitable backwash from the so-called 'currency wars', whose existance Alan Kohler discovered on a recent visit to New York.

With cash rates effectively zero, the US, Japan, the UK and the Eurozone are all pumping out excess money with the aim of reducing other interest rates and thus stimulating economic activity.

Mr Kohler more recently discusses an interview conducted with RBA Chief Glenn Stevens in a recent edition of the AFR, which touches on the matter under review.

I also commend Glenn Stevens, for an even-handed discussion of many of these matters in a recent speech in Bangkok, but he needs to think harder, and with a fresher focus.

Many questions are raised by this vast monetary policy experiment, some of which are listed below. [Henry's short answers are in square brackets.]

Will the experience prove Keynes' assertion that there is a point at which monetary policy is like 'pushing on a string'? [Yes, arguably experience has mightily confirmed that point already.]

Will excess money fail to be reined in when economic recovery eventually begins and will this mean there is a burst of global inflation sufficient to end the post 1980s era of low (goods and services) inflation? [It will be mighty hard, as people (ie voters), will say the central bankers are stifling the recovery. Goodbye central banking independance, hello inflation.]

Is this the specific intent of the excess money generators, since (they think) inflation will erode the real value of their massive debts? [I do not buy this suggestion, for two reasons.  Central bankers are not sufficiently devious to consider such an outcome. And, if proven, such action would provoke massive retaliation from countries who held the debt being eroded. We may see retaliation anyway, eg China announcing its currency is backed by gold.]

Will 'intervention' in forex markets bring the Aussie dollar down?  [If this means the RBA buying and selling international currency the answer is 'Not in any meaningful way'.]

Is there any other policy innovation that could help achieve a better balance of interest rates and the exchange rate? [The RBA should recreate its exchange control department to impose tax on capital inflows. Such a tax would discourage the excess capital inflows, and could be varied according to need, the rate of tax rising if capital inflows were driving the dollar higher, initially forcing it down to a level at which vital industries are not grossly uncompetitive. The RBA should be left to decide the level of the tax, according to the charter in the RBA act plus the agreement on keeping inflation under control.]

John Howard famously said that we have the right to determine who comes here and on what terms, or words to that effect.

This approach should apply even more forcefully to capital flows.

At present, Australia is getting more capital inflow than we need, and the consequences are destroying our manufacturing industries and weakening inward tourism, exports of education and a whole raft of domestic industries, as well as leading Australians to sell assets to overseas buyers at prices that will eventually be seen as far too cheap.

We need to radically rethink this matter.  With current policies we shall end up with damaging inflation imported from the major nations undertaking massive 'quantitative easing' and an economy that is rapidly becoming a smoking ruin.

Please think afresh on this matter during the festive season, Mr Stevens.

The Hobbitt is back, and now we have the opportunity to learn about all the goings on that lead to The Fellowship of the Ring. (Prequel is probably the official description.)

This movie is in theatres from Boxing day, where it will compete with the Test Match for audiences. 'No contest' is Henry's judgment.

There are many epic battles, in which thirteen dwarves, Bilbo Baggins and Gandolf the wizard somehow emerge alive, though not always unscathed, while the bad guys (orcs, goblins and their vicious slathering giant wolf-like steeds) get killed in vast numbers.

For me the most memorable scene was near the start, when said thirteen dwarves descend on Bilbo Baggin's house in the hill (yes, that is not 'house on the hill') and eat everything on the shelves and in his carefully accumulated food stores.

This will remind you, as it reminded Henry, of Christmas lunches past and the reason why, like the dwarves, Australians are becoming obese at an accelerating rate.

Here is a link to the official site.

More to the point, here is a link to a trailor.

Watch it and tremble, gentle readers.

The many battles will remind you of Australian politics 2012, and you shall yearn for the good old days of Sir Robert Menzies and Arthur Calwell.

Henry's son Bert and his special loved one will be camping in the mountains, and may survive the promised deluge, but will sadly not be fully equipped to begin the regeneration of the human race.

The Economist magazine believes, with the rest of us, that the fiscal cliff will be somehow fixed: 'The shadow of the fiscal cliff has depressed corporate investment. American consumer confidence has started to wobble. Growth is slowing, perhaps to as little as 1% in the fourth quarter. Policymakers around the world are fretting: Australia’s central bank has just cut rates, citing the cliff as a worry'. ...

'If lawmakers do nothing, America faces fiscal tightening in 2013 worth up to 5% of GDP. That is a Greek-scale squeeze. It would not take many months for it to push the country into recession. A complete stand-off between Mr Obama and Congress would lead to disaster even sooner, for unless America’s lawmakers vote to increase the “debt ceiling” (the maximum amount of debt that the Treasury can issue) by around March, the federal government will be unable to pay its bills—including, potentially, its bondholders. The damage from a self-induced default would dwarf even that from the fiscal cliff.

'However, precisely because the consequences of prolonged stalemate would be so disastrous, there almost certainly will not be one'.

The image accompanying the article reveals a relaxed attitude that reinforces the 'she'll be right' message quoted above. More here. And here.

 Courtesy Economist

Higher ed: the opiate of the corporates

The conversation over last evening's BBQ naturally veered to the terrible mass killing in the USA, and the prospect of serious gun control in the land of the free (but frequently terrified).  Mrs Thornton wondered why people whose careers and lives are ruined by them being made redundant do not embark on mass killings of senior executives responsible. We got nowhere fast on this matter, which deserves further study.

This morning, however, the fertile brain of Mrs T came up with an hypothesis.

The background is a study Mrs T has carried out with colleagues at her university, on the relation between company results and the education of their CEOs, using Australia's top 200 companies as the sample.  Try as they might, there is no discernable relationship between CEO education and company results, even though Mrs T was secretly hoping to find a negative relationship when the MBA was used as an explanatory variable.  Henry's contribution is to observe that the best CEO he has worked with has no tertiary education at all, and neither did the master politician Paul Keating.

It was Marx who said that religion was the opiate of the masses.  Mrs T suggests that tertiary education is the opiate of corporate employees, which explains why there are no (or very few) massacres of corporate chiefs who ruin people's lives.  'Not even the boss of Enron was massacred' observed Mrs T.

Physics and economics - a breakthrough

Henry has noticed that Einstein's famous equation E=mc2 has a parallel in economics.

This is the monetarist equation Mv=Py.

Py is a measure of energy (E) and M (money supply) is a measure of the forcing factor equivalent to mass (m), running Einstein's equation in the usual direction as one does when a large nuclear explosion is being discussed.

Economics' 'v' is not a constant, like c2 is supposed to be, but Henry is confident that eventually 'c' will be found to vary in ways analogous to 'v's' variation, discussed most precisely in Friedman and Schwartz, A Monetary History of the United States. Hyperinflation is perhaps the economic equivalent to a nuclear explosion, but we need to bone up on tensor vectors before this can be confirmed.

Watch this space, gentle readers.

I have just read Cormac McCarthy's No Country for Old Men. If you have not read this modern classic, do so asap. America's problems are deeply engrained, with the drug lords conducting what can only be described as war on any one who gets in their way.

As a character says: 'It starts when you begin to overlook bad manners. ... It reaches into ever strata. ... You finally get into the sort of mercantile ethics that leaves people settin around in the desert dead in their vehicles and by then its just too late.' 

'Gillard faces MP backlash over surplus' screams the Fin's headline.

Paul Kelly provides the answer in The Weekend Oz. 'If the surplus is not delivered it will prove Labor's misjudgments and it will mean its substitute "return to surplus" plan B will provoke inevitable scepticism.

'Ultimately, it goes to character. Whether it is Rudd or Gillard as PM, Labor has an incurable addiction to over-promising. It makes, for reasons of short-term politics without proper assessment, pledges of long-run consequence. This is a bad way to run a country. Yet Labor has done this from day one to the present day. It cannot help itself'.

Kelly also comments on the 'Currency Wars' issue.  My view is that the analysis of the stubborn height of the Australian dollar is correct - capital inflow from investors (including other central banks) seeking positive rather than zero returns and also fearing inflation created by the massive monetary expansion in the core 'developed' economies.

But reducing Australian interest rates to zero is not the answer, not even if this monetary easing was accompanied by draconian fiscal tightening - though such policy would help lower the dollar at some point. Nor will Reserve Bank intervention help.

The thing to try is some sort of tax on capital inflow.  We do not allow free entry of people into this country, so why allow refuge capital free entry, with its attendant costs to our economy.

Since economic policy is in the news, here Henry's talk notes for a recent event may stimulate your thoughts on this matter.

Christmas reading.

If you, or a loved one, is interested in the world's geopolitical future, do acquire and read Ian Morris, Why the West Rules - for now. Henry's review is here.

Image of the week

 Courtesy International Wire Services

The group meets for dinner several times a year in Basel, Switzerland, Hilsenrath says, at the headquarters of the Bank for International Settlements:

Over Sunday dinners in Basel, which often stretch to three hours, they now talk of pressing, real-world problems with authority. The meals are part of two-day meetings held six times a year at the BIS. Dinner guests include leaders of the Fed, ECB, Bank of England and Bank of Japan, as well as central bankers from India, China, Mexico, Brazil and a few other countries.

This is the opening salvo of an expose's expose, by Jon Hilsenrath.

The full article is available here if you are a subscriber to the Wall Street Journal or on p 22 of today's Australian.

The bit that intrigued Henry concerns the innovative nature of so-called 'quantitative easing'.

'There are two conflicting viewsof the central bankers. One is that central banks have not done enough to attack economic malaise. The other is that easy-money policies lack sufficient power to help economies and risk triggering runaway inflation'. (Toward the end of what is a fine exposition, even an 'expose'.)

Regular readers will note that Henry is firmly in the latter camp. Monetary polciy cannot solve real problems and risks producing massive global inflation.

More here. 

And do not miss the final Raff report for 2012.

Alan Kohler has been to New York and has learned America's 'dirty little secret'.

His thinking is published today on the back page of The Australian's business section, and is indeed a little gem.

The US Fed's massive quantitative easing will create massive inflation in due course.

Here is the dilemma for Australia, quoting Alan Kohler.

'Because it is trying to reduce the world’s reserve currency, the Fed is effectively giving other countries two choices: either allow your currencies to appreciate against the US dollar and thus make your economies less competitive and crunch your export industries, or print money with us and risk (or perhaps guarantee) inflation.

'It is a Hobson’s Choice, and like most other countries’ central banks, the Reserve Bank of Australia doesn’t quite know what to do'. ...

'For Australia the problem is compounded by the very large flow of safe haven capital inflow now arriving, which is largely blind to interest rates. Money is pouring into Australian dollars, including from other central banks, seeking the security of our AAA rating. That’s making the exchange rate immune from domestic monetary policy'.

Kohler's answer is for Australia to undertake massive infrastructure building, which is part of a sensible response, and what a pity it is that this was not a major part of the response to the GFC, instead of the whole raft of wasteful and jerry-built schemes and handouts we actually got.

But a lot of infrastructure spending would create inflation, embracing the outcome that Kohler is seeking to avoid.

Henry has reached the conclusion that some form of market-based capital control is needed to restrain the massive capital inflows that are driving the dollar higher despite cuts to interest rates. Following the Swiss and Brazilian examples.

More on this in due course.