The Agincourt solution - how bad might it be?
Date: Friday, October 14, 2011
Author: Henry Thornton
Global economic conditions and prospects seem to be settling, although the haunting question remains 'how bad might it be?'.
A visiting American economic saleman, previously a US Fed official, Larry Meyer, has made the most sensible possible statement on the US economy.
"I don't think the US is going to have a double-dip but you have to recognise that there's a meaningful probability, maybe one in three".
Henry has long believed there is no sensible way to forecast except by stating possibilities and probabilities. Clearly Larry Meyer went to the same hard school and absorbed its messages.
Mr Meyer did say that the "recessionary risks are greater in the Euro area", showing that he also follows the economic news from non-American sources, a rare trait in an American in any field.
Australia, Mr Meyer asserted "remained in good shape" and the health of its financial system and budgets provided "unique opportunities".
China and other Asian nations have been overheating but "face a delicate task of slowing their economies down while western economies are struggling to find ways to stimulate their economies".
'Increasingly blunt warnings from central banks fail to prod bickering politicians into action' heads another press report.
Ben Bernanke: "Monetary policy can be a powerful tool, but it is not a panacea for the problems currently faced by the US economy ..."
Jean-Claude Trichet: "The crisis is systematic and must be tackled decisively: national governments and authorities, as well as European institutions, must rise to the challenge and act together swiftly. Further delays are only contributing to aggrevate the situation".
Mervyn King: "We're totally stuffed and I've given up". Correction, that was the Wikileaks version: "When the world changes, we change our policy response".
All this citing the authorities is as an early sanity check. It is always possible Henry might have gotten it wrong, sitting as he does in his office connected to the great and the good only by waves in cyberspace.
But no, these authorities seem to be on the same page, and that adds up to significent uncertainty.
What does it all mean for monetary policy here?
That will be decided by the result of Sunday's Rugby World cup game against New Zuland ... just joking folks, but there is little doubt that there will be a wave of hubris if the Wallabies manage to knock off the Kiwis to advance to the final.
That final will be against Wales or France and here Henry's probabilistic approach to forecasts will be of great value. Saturday's semi-final, and therefore Australia's (we hope) opponant on the weekend after this, is by no means certain.
We suspect France's great win over England in the quarter finals was their final revenge for their unexpected defeat at Agincourt and, having no equivalent enmity with Wales, they will surrender meekly. In any case, they have probably all been quaffing vin extraordinaire since belting le poms. And it must also be factored in that Wales has been playing well.
Imagine the catastrope if either Australia or NZ got belted by Wales in the final.
Assuming no catastrophic end to the Wallabies' campaign, the RBA's decision on Cup Day will depend on perceptions about the state of the local economy and the global situation.
If Mr Meyer's views still look broadly correct on November 1, there will be no rate cut.
Given the manifest uncertainties, however, and the fact that on the day that a horse race stops our nation the G20 will be about to agree (or not) on a Eurozone rescue plan, I suspect the board will give the governor approval to cut rates by up to 100 basis points in case 'or not' is the outcome and this provokes a Lehman moment for the eurozone.
But, wierd mistakes by foreigners aside, things here look not too shabby.
A massive investment boom is building strength, jobs growth has exceeded expectations (again) and retail sales have showed unexpected strength for the second month in a row.
Australia in the Asian century - the hard-edged reality
Date: Wednesday, October 31, 2012
Author: Henry Thornton
The Thornton family is well integrated with Asia, without support from the Rudd and Gillard governments I must report in the interests of full disclosure.
All three offspring studied Mandarin at school, and it was bloody hard yakka, especially for the parents.
All three have been to China with parents, seeing the usual sights and trying to use their language skills (?). Emily Rose successfully completed a university subject involving three weeks on the ground in China with classmates and teacher interviewing factory owners about their businesses. Fortesque hopes to do this subject next year.
Our oldest offspring, Bert, has a Chinese-Malaysian girlfriend, and the respective families have met here and in Malaysia. Mrs Thornton recently visited Malaysia to help with setting up there a course on corporate governance she presents in Australia. Earlier this year, Mrs T led a group of friends on a private tour down (or was it up?) the silk road.
Henry once led an Australian delegation (of two) to a large conference in Beijing on innovation and converting science and technology into businesses. The essence of his core idea idea has been adopted in Hong Kong, no doubt as a test for wider application. (The core idea failed to be understood by Australia's innovation bureaucrats, and has not been supported here.)
As a central banker, Henry was closely involved in various interactions with people from Asia's central banks. This reminds one that the RBA's first chief, 'Nugget' Coombs went to China about a decade before Henry Kissinger and Gough Whitlam. A later governor, Sir Harold Knight, also visited China before it was fashionable, and returned to tell a hair-raising story about landing in an old plane with a strong cross-wind, and other tall tales but true. No doubt these old traditions are maintained by the current gnomes of Martin Place.
Nowadays Henry mainly sits on company boards for a living. One such company is currently involved in showing movies in Singapore, making films in China and investigating building and operating theme parks there. A medical start-up Henry chairs is in conversations about fund-raising in Asia, which may involve finding a strategic partner to help in marketing the new drug that we hope will emerge from current Australian research.
I do not think for a moment that this experience is atypical. Surprising, perhaps, to Dr Ken Henry and his colleagues, and to government ministers who think nothing is real until they have issued a portentious paper on the subject.
'This document must not be forgotten in today's disposable politics. It is a test for the nation and a test for Labor. It needs to become a permanent measuring stick. In order to prove her commitment, Gillard should unveil a credible implementation strategy. It is her first test'.
And Henry's very own blind seer, Tiresias of Canberra, starts to fill the gap between vision and reality by presenting a realistic plan to promote skill in Asian languages and cultural awareness more widely defined.
Australia and the Asian century
Date: Tuesday, October 30, 2012
Author: Henry Thornton
Australia is a small, wealthy nation with highly civilised standards and a fierce desire to win only in sport (and most of us are better spectators than competitors) and a few traditional activities such as mining, agriculture and medicine.
The government's 'twenty-five national objectives' are all worthy, especially if Australia was far more competitive in a far wider proportion of industries with focussed support for activities in which we can readily achieve global best practice. Rather than report the views of others, I report what the document says and comment until exhaustion sets in.
'We aspire to be in the top ten on wealthy nations, which requires greatly increased productivity'. What is the plan for much higher productivity?
*** 'We aspire to better early childhood education, schools, universities and training systems', but what is the plan? Throwing money at these objectives is only part of the answer, and in any case in the middle of the biggest resource boom in our history we are struggling to produce a break-even budget. What is the plan to improve educational standards? Take a look at the selective high schools and the best of the private schools. and ask how do we build the traditions that drive that success across the board.
The government sees an increased role for the IR practices enshrined in its 'Fair Work' legislation, that give the whip hand in IR to the old IR club, even to the point of banning use of individual contracts. This is no way to build a workplace culture of excellence and high productivity.
'Articulate an ambitious industry and innovation policy agenda for Australian business to create new jobs and seize new market opportunities'. Excuse me, the whole thrust of government is to institute regulations to stifle bucaneering innovation, and a carefully crafted innovation statement will do nothing to help.
'Provide a framework for investment in Australia’s scientific capabilities'. Rubbish. Far better to double funds for industry-relevant research awarded on a tough competitive basis, provide meaningful tax breaks for innovators (at least equal to negative gearing for property development) and stand clear. The Australian Treasury has long opposed such an approach.
'Improve financing options for Australia’s innovation system'. How? See comments immediately above.
'Work with States and Territories to increase private sector involvement in new infrastructure projects, ... to 'Improve the productivity, amenity and liveability of Australia’s cities', ... and 'Sharpen rules governing infrastructure provision and use, including by promoting greater competition in retail energy markets, ensuring energy network investment is efficient and avoiding unnecessary costs ...'
You have to be joking. You cannot even work with States and Territories to improve the Murray-Darling Basin, electricity is a mess, and the National Broadbank project is way behind plan and way above cost.
'Australia’s communications infrastructure and markets will be world leading'. Please see previous comment.
'Australia’s tax and transfer system will be efficient and fair, ...' Great idea, worthy aim, but what is the record? How many pages have been added to the tax act since 1955? Or since since 1975? or since the current government's win in 2007?
'Continue the national conversation about tax reform with business and community groups, including through processes such as working groups and roundtables'. Like you did with the carbon tax? 'No, never, nyet'. Some conversation, nice working groups, wonderful roundtables.
'Australia will be among the most efficiently regulated places in the world, in the top five globally, reducing business costs by billions of dollars a year. This is a cute new idea, but exceeds desirable aspiration to reach the heights of the Big Rock Candy Mountain. How much have business regulations increased since the Rudd government was elected? Why should we believe there will be a change of trend?
'The Australian economy and our environmental assets will be managed sustainably ... we will be well on our way to securing a clean energy future in which emissions are 80 per cent below 2000 levels by 2050 ... Australia will be a world leader in implementing sustainable food production methods, in sustainable energy and water use, and in biodiversity conservation'.
How are we doing on each of these admirable objectives since Mr. Rudd was elected Prime minister in 2007? Leopards do not change their spots, and even leopards are an endangered species.
'Australia will have a strong and sustainable fiscal position and will continue to have a triple-A sovereign credit rating'. Please see comment *** above.
'Australia’s school system will be in the top five schooling systems in the world, delivering excellent outcomes for all students of all backgrounds, and systematically improving performance over time'.
Please see comment *** above.
'Every Australian student will have significant exposure to studies of Asia across the curriculum to increase their cultural knowledge and skills and enable them to be active in the region'.
Numbers of children studying Asian languages are less than the were years ago. These languages are hard, and most of the less than 6 % of children studying Asian languages in Australia are from Asian families. Far better to build respect for other cultures, which will happen anyway as more Australians travel to Asia and people from Asia travel here. Tourism is one of the things we do well and could do far better - let's encourage that.
Asian languages as a 'core requirement'? Utter rubbish. People must be free to chose what they study.
Did I see reference in the press to striving to get ten universities into the top one hundred in the world? Could not see this in the twenty-five aspirations, and in any case it is simply impossible. What is not impossible would be to achieve,say, five faculties each in the top twenty in the world, if our leading universities could agree on which universities would specialise in which areas of importance, with a bias to areas where Australia's already has a leadership position - eg mining, agriculture, medicine, and have a serious debate about the next few spots.
'One-third of board members of Australia’s top 200 publicly listed companies and Commonwealth bodies (including companies, authorities, agencies and commissions), and one-third of the senior leadership of the Australian Public Service (APS 200) will have deep experience in and knowledge of Asia'.
Boards in the private sector will get the experience and expertise they need without silly quotas - 'deep knowledge' of business law and practices, accounting standards, the multiple regulations of various agencies, the tax system, and so on and so forth is now demanded by the lawmakers, and most potential boardmembers have natural limits. Public sector organisations should do what their leaders think is appropriate. There is more than a whiff of the soviet five-year plan in all this.
'Australian communities and regions will benefit from structural changes in the economy and seize the new opportunities emerging in the Asian century'.
Great idea, but do we penalise real or supposed supposed failure - eg ASIC's persistent and expensive attack on Andrew Forrest's allegedly premature announcement of a deal with an Asian entity, which, if he had not made it, might well have been an attack on his alleged failure to disclose a material event.
'Australia will be a higher skill, higher wage economy with a fair, multicultural and cohesive society and a growing population, and all Australians will be able to benefit from, and participate in, Australia’s growing prosperity and engagement in Asia'.
Great idea, but all these good things will only come from higher productivity economic activity, and one does not discern a plan to boost productivity. Handouts to consumers, pink batts in the ceilings of houses and new classrooms in schools during the global crisis (which is far from over, incidentally) did not encourage productivity. Why should the situation be different forthwith?
It is getting late and I must stop now, or risk being seen as a nay-sayer. In any case, the core ideas have a sameness that palls well before one has reached the end of the list.
A strong, vibrant society and economy will only be built by people who are prepared to challenge the ideas of people, like most of the Gillard government ministers and Dr Ken Henry, who have only ever worked in union or government jobs of one sort or another.
Dr Henry once reported that he had gotten his best ideas on tax reform from a bloke in a bar in North Queensland.
The ideas on how to make Australia an economic and social powerhouse seem to this writer to be long on modern business-school theory and good-natured aspiration and very short on practical issues of earning a good living in the real world of business.
And we haven't touched except very indirectly on the needs of our defence forces in such a rapidly changing and volatile world.
Saturday Sanity Break, 27 October 2012
Date: Saturday, October 27, 2012
Author: Henry Thornton
The U.S. gross domestic product grew at an annual rate of 2% in the third quarter as consumers spent more, federal-government spending accelerated and the housing industry improved. This last piece of economic data before Americans get the chanch to vote would seem to offer no fresh impetus to either candidate in the US presidential election.
The slightly bigger-than-expected increase in U.S. economic growth offset investors' concerns about a lackluster corporate outlook, and the US equity markets finished with a small gain.
The energy-led increase of inflation for the September quarter, released last week, has apparently (according to the ABC news, (which might be part of a socialist plot - just joking), claimed it meant the odds on a rate cut on Cup Day had greatly lengthened. Henry doubts the sense of that, and said so in the energy inflation blog.
Middle class welfare has been fulminated against by Adam Creighton.
I was especially taken by the thoughts of Helen Hughes quoted by Adam.
'Helen Hughes, emeritus professor of economics at the Australian National University and a mother, dismisses the idea children are a "social resource".
"People had children long before welfare came along and, in any case, children are only good for society if they work hard and don't drink too much," she says.
"It is outrageous that single people are forced to pay for the children of others."
The Tolpuddle Martyrs and the birth of the United Nations.
Geoffrey Robertson, Q.C., discusses in his INTRODUCTION TO TOLPUDDLE MARTYRS, October 2009, the role of Australia's Herbert Vere Evatt in analysis of the case of the Tolpuddle Martyrs and his later involvment in the creation of the United Nations.
On the martyrs, 'Doc' Evatt wrote in 1924:
"The Dorsetshire case illustrates the fact that oppression and cruelty do not always fail. Indeed, they sometimes succeed beyond the hopes of the oppressors. Unless trade unionists throughout the world are always ready to sacrifice their personal interests, their safety, or even their lives for the amelioration of the lot of the poor, their elaborate organisation may perish overnight either in a holocaust of terror and force or in the slower process of legal repression.”
After discussing the Tolpuddle case, Robertson goes on to discuss the role of the great jurist in the formation of the United Nations in 1945.
'Evatt made his – and Australia’s – first international mark in 1945 at the San Francisco Conference which founded the United Nations. My friend Michael Foot, then a young journalist, still remembers his sense of awe at this gravel-voiced Australian who emerged to dominate it. Evatt became the de facto leader of the small and medium sized nations who sought to build an institution that would assist their development as well as their security. He led the fight against the Soviets in an attempt to limit the “great power” veto, and the fight against the US to secure a pledge of full employment in the Charter, a document which benefitted in many ways from his drafting suggestions. At the end of the conference Ed Stettinius, the American Secretary of State, publicly declared that “no-one had contributed more to the conference than Mr Evatt” and the Peruvian delegation even moved a resolution by small powers to “pay homage to their great champion, Mr Evatt”. In the words of the New York Times, the conference had seen the exercise of two kinds of political power, the first packed with heavy national muscle and coercion and the other purveyed by force of ideas, argument and intellectual effort – and the paper hailed Herbert Vere Evatt as the epitomy of the latter'.
Mr Robertson's full paper is well worth reading for deep insight into two vital aspects of modern history. Here is the link.
Stockmen of the North
In a rare good news story, the Oz today features a story about the return after a generation of two doing nothig much productive of indigenous stockmen.
Friday round-up - glass less than half full
Date: Friday, October 26, 2012
Author: Henry Thornton
Mining tax delivers a big fat zip.
Dollar defies gravity and senior banker Mike Smith says interest rates will have to be slashed, acknowledging the prospect of slower growth and rising bad debts in his own business of banking.
The analytic point is whether, even with a floating exchange rate and a vigilant central bank, a small country can keep inflation under control in a highly inflationary world. Henry's long and somewhat technical blog this week quoted the great Austrian economist, von Hayek, as follows: '
“There is no rational basis for the separate regulation of the quantity of money in a national area that remains part of a wider economic system;” arguing that independent national currencies cannot insulate a country from foreign shocks; and that fluctuating exchange rates would be bad.
Inflation exceeds expectations but economists (including Henry) say RBA can still cut rates. American research says energy costs - inflated in Australia by utility rorting, 'gold-plated infrastructure catch-up and the dreaded carbon tax - spread their tentacles right through an economy.
Treasurer Swan quacks (or is it honks?) about the underlying strength of an economy in considerable trouble.
Mid-term budget update seeks to collect a lot of extra taxes by making firms pay income tax monthly rather than quarterly. Spending cuts are trivial, and experts say there is 'no hope' of achieving the amazing shrinking budget surplus, nor should the gummint be trying to do so. Trouble is, a switch from a $44 billion deficit to near balance is just too great a burden on an already weak economy.
The US Fed again promises to keep interest rates near zero, but this time shares decline in value. After a while, some mildly positive manufacturing and jobs data cheers the market again - the screen jockeys sure are twitchy. Mit Romney seems to have crept into the lead in the US presidential election, and now it is going down to results in the swing states and whether or not women and hispanic youth turn out for Predident Obama.
The Eurozone crisis struggles on, with German industrial production the latest battlement to crumble.
'THE European debt crisis could weigh on the world economy for years', the World Bank's new chief economist, Kaushik Basu, says.
What fun for economists, what cause for concern for the rest of the people.
Inflation and energy useage - belting the battlers
Date: Thursday, October 25, 2012
Author: Henry Thornton
Australia's latest inflation outcome, for September quarter, has been boosted by electricity inflation (15 %), Other household fuels inflation (14 %), Fruit and vege inflation (10 %) and healthcare inflation (4.5 %).
Greg Combet on the 7.30 Report last night smiled his lovely smile, communicated in the tones of a sweet (non-misogynist) cabinet minister with a star and generally obfuscated, as good politicians do.
Even the promising polly-basher Leigh Sales could not penetrate his chummy 'we're all girls and boys together' persona.
By chance Henry this morning stumbled upon a highly relevant bit of analysis, courtesy the American Enterprise Institute (AEI).
The opening sentance might have been crafted to explain two of the greatest contributions to Australia's soon to be difficult inflation.
'Nearly half of what people pay for energy comes "embodied" in the various goods and services that they use, and about half of that comes down to two things: food and health care'.
Americans are probably world champion energy consumers, but the aggregate figures are scary.
'According to the last Residential Energy Consumption Survey, the average American household in 2005 spent about $1,800 on non transportation-related energy use, including electricity, natural gas, fuel oil, kerosene, and liquid petroleum gas. About $1,122 of that was spent on electricity, $471 was spent on natural gas, and $115 was spent on fuel oil. The amount spent on kerosene was relatively trivial. On top of that, the average American household in 2005 paid about $2,000 per year for gasoline. Considering that the average household income was about $46,000 in 2005, direct energy expenditures would have consumed a little over 8 percent of the household budget'.
But indirect energy use adds greatly to the direct energy useage numbers.
'The American Enterprise Institute calculated just how much energy is used indirectly as a component of the various goods and services that we consume in our daily lives. What we found surprised us. For example, it turns out that nearly half (46 percent) of what people pay for energy comes “embodied” in the various goods and services that they use, and about half of that comes down to two somewhat important things: food and health care. Transportation, another important part of our economy, comes in third'.
Minister Combet denied that the carbon tax had anything but a tiny affect on Australia's rocketing energy bills. Rather 'gold plating' of electricity infrastructure - poles and wires - is to blame. Supposedly, energy distributors lagged in their infrastructure building for several years (immediately after privatisation, one assumes) and now are playing catch up bigtime - nice time to do it, xxx-Energy, when your customers might blame Julia Gillard or, if she is lucky, Tony Abbott.
But everything is regulated to within an inch of its life under the current government, so why did the distributors get away with such foolish behaviour?
Henry has another suggestion to throw on the table. The energy 'suppliers' (do I mean 'distributors'? - there are more layers than a sponge-cake in the energy business) are rorting their customers. Henry still has not resolved his dispute with xxx-Energy reported here. I bet that a competent regulator will get to the bottom of the billing procedures quick smart, and in fact Henry is awaiting their ruling as we communicate.
The nice man at the AEI points out that 'It has long been known that the poor spend a greater share of their income on energy than do the better off. It is not simply that the poor have less income — an aggravating factor is that the poor often live in older, less energy-efficient houses and apartments, drive older, less energy-efficient cars, and often have to drive them longer distances to work'. ...
'The implication of this finding is that government policies that raise the cost of energy have the greatest impact on the poor, not only directly as they gas up their cars or flip on their lights, but also as they consume goods and services across the economy.
'We should remember, too, that affordable energy isn’t only important to us as consumers of both direct and indirect energy. As a prime input to economic productivity, energy costs affect the entire economy. From the time we awake to the time we go to sleep, we’re consuming energy both directly and indirectly. If energy costs go up, so do all other costs. When that happens, consumption declines and unemployment rises. As with many things, the poor are the most harmed by actions that undermine energy affordability in the United States, and still more are harmed in the most poverty-stricken reaches of the world'.
I do not think that the impact of higher energy prices should cause the RBA to hold back from cuts to interest rates it otherwise think are warrented. When the GST came onstream, the RBA 'looked through' its immediate effects, and one expects consistency in such matters. But, allowing for both direct and indirect effects of rising electricity prices, everyone, but especially Australia's battlers, are already taking a beating.
Kenneth P. Green is a resident scholar at the American Enterprise Institute. This essay is derived from the introduction of Abundant Energy: The Fuel of Human Flourishing, a supplementary text for college students, published by AEI Press.
FURTHER READING: Green also writes “Homo Sapiens or Homo Igniferens?” and “Energy Abundance vs. the Poverty of Energy Literacy” and coauthors “Presidential Power: Obama vs. Romney on Energy” with Elizabeth DeMeo. Pierre Desrochers and Hiroko Shimizu ask “Locavores or Loco-vores?” Mark J. Perry adds “President Obama's Some-of-the-Above Energy Policy” and “Unleash Private Sector to Produce Energy, Create Jobs.”
Alan Kohler today says an early election is on the cards. If you are in Tony Abbott's inner circle you may wish to ponder Niki Savva's column in the Australian today.
Options for sound money and healthy economies
Date: Wednesday, October 24, 2012
Author: Henry Thornton
'So there is a magic wand after all. A revolutionary paper by the International Monetary Fund claims that one could eliminate the net public debt of the US at a stroke, and by implication do the same for Britain, Germany, Italy, or Japan'.
This is the tickler for the latest report in the UK Telegraph by Ambrose Evans-Pritchard. This blog is longer and more technical than usual, but Henry urges readers to persist, as sound money is a vital basis for free societies and prosperous economies.
'The conjuring trick', says Evans-Pritchard, 'is to replace our system of private bank-created money -- roughly 97pc of the money supply -- with state-created money. We return to the historical norm, before Charles II placed control of the money supply in private hands with the English Free Coinage Act of 1666.
'Specifically, it means an assault on "fractional reserve banking". If lenders are forced to put up 100pc reserve backing for deposits, they lose the exorbitant privilege of creating money out of thin air.
'The nation regains sovereign control over the money supply. There are no more banks runs, and fewer boom-bust credit cycles. Accounting legerdemain will do the rest. That at least is the argument'.
Zarlanga describes the plan, and the problems it was designed to handle, chiefly the recurrent tendency for privalety owned banks to overlend, creating asset booms followed by inevitable busts, in severe cases including bank failures and deep depression. In this sense, those of us like Martin Wolf and this writer are seeking in different ways to control more effectively the private banks' ability to derail modern capitalism.
Evans-Pritchard continues: 'The key of the Chicago Plan was to separate the "monetary and credit functions" of the banking system. "The quantity of money and the quantity of credit would become completely independent of each other."
'Private lenders would no longer be able to create new deposits "ex nihilo". New bank credit would have to be financed by retained earnings.
"The control of credit growth would become much more straightforward because banks would no longer be able, as they are today, to generate their own funding, deposits, in the act of lending, an extraordinary privilege that is not enjoyed by any other type of business," says the IMF paper.
"Rather, banks would become what many erroneously believe them to be today, pure intermediaries that depend on obtaining outside funding before being able to lend."
'The US Federal Reserve would take real control over the money supply for the first time, making it easier to manage inflation. It was precisely for this reason that Milton Friedman called for 100pc reserve backing in 1967. Even the great free marketeer implicitly favoured a clamp-down on private money'. (Emphasis added)
Zarlanga also delves into the views of other former great economists.
'Can we learn from what John Maynard Keynes was doing during all this? He was squarely behind the bankers and against such real reform. Yet he knew that he had to break out of orthodox economics or the whole system was in danger of being overturned. Keynesianism was a way to allow banks not government to keep control over the money-creation process, and while the more narrow minded economists fought Roosevelt’s attempts to create money and jobs as inflationary, during the nations worst deflation, Keynes knew better.
'KEYNES APPROACH WAS DIRECT TO THE PUBLIC: The New York Times in December 1933, working with Felix Frankfurter, (who wrote a rather poor book called Other Peoples Money, and later became a Supreme Court Justice), got Keynes to write an open letter to Roosevelt, which they published. Keynes wisely advised Roosevelt that “Only the expenditures of public authority” could turn the tide of depression. Well, that was obvious enough!
'However, Keynes inappropriately warned Roosevelt not to create the money for this, but only to borrow it, and wrongly advised him that there was already enough money in circulation, and that: “increasing the quantity of money…is like trying to get fat by buying a larger belt”.'
'What were the Austrian economists up to? Frederich Hayek was arguing against national currencies – arguing for in effect an international control over all economies through the gold system incredibly writing:
“There is no rational basis for the separate regulation of the quantity of money in a national area that remains part of a wider economic system;” arguing that independent national currencies cannot insulate a country from foreign shocks; and that fluctuating exchange rates would be bad.
'Hayek tried to twist hundred % reserves to covering them 100% with gold. A deflationist. This is the position supporting the creditors and usury and plutocracy; the normal outcome of Austrian Economics. They talk a freedom game, but promote serfdom. Psychologically they remind me of those middle ages cults that used to whip their own backs with chains'.
Why did this approach fail? Zarlenga suggests three points: no widespread support among the voting public; mishandling of the politics; and the premature death (in a plane crash) of Senator Bronson Cutting, its strongest advocate within the administration.
Reformers should ponder these issues afresh. The choice is between the radical 'Chicage Plan' or widespread use of flexible reserve ratios for banks (rising in booms, falling in recessions) plus responsible control of global money, most certainly by introduction of a modern version of the gold standard, or perhaps widespread use of a paper currency, backed by gold, which may be the evolving Chinese plan.
Fiscal policy on the run, or a far better way
Date: Tuesday, October 23, 2012
Author: Henry Thornton
We have just seen another example of fiscal policy on the run. Deteriorating fiscal receipts have been offset by tax increases and token cuts to programs Australia cannot afford. Worse, the overall budget is being tightened too late, and at a time when global economic activity is sliding and Australia’s resource boom may be ending due to slower global growth and sharply rising costs.
This is budgetary policy on the run, and there is a far better way to do things.
Fiscal policy should be set as follows. First take a long-term view of what is most needed and can be afforded, allowing for contingencies.
For a Federal government, what is most needed and must be funded includes: national defence and national security; basic foreign policy; a Federal contribution to law and order and national policing; any Federal contribution to health and education deemed necessary, and indeed to projects like nationally important infrastructure, plus ... [Readers interested in entering politics or lobbying politicians fill in as you see fit.]
Then a prudent government would choose the efficient taxes to fund necessary spending – taxes that are hardest to avoid and do least damage to important national objectives like saving for a rainy day, hard and productive work by citizens, or even encourage such activities. There should be a premium for taxes that flex automatically – rising in good time and falling in bad times. Crucial point, the set of taxes should be designed to cover costs of the Federal government (including all items on the spending list) on average during the foreseeable ups and downs of business, with a modest allowance for contingencies.
This approach is similar to that of a prudent household, with ‘earnings’ replacing ‘taxes’ on the positive side of the ledger. As Charles Dickens said of such households, an annual budget surplus spells delight, a modest deficit spells doom, or words to that effect. The Federal government’s borrowing power is such that it does not need to balance the books year by year, but should do so on average over the decades. This writer would have taxes that are modestly progressive – taxes that are higher for those with higher incomes, or whose spending is greater than the average. ‘Modestly’ because too ‘progressive’ blunts incentives. Tea Party conservatives may have a different view on this matter.
Extreme situations aside, maintaining spending in the lean years and, the tendency for taxes to fall, will produce budget deficits. Not expanding spending in the fat years, plus the tendency for tax receipts to rise, will produce surpluses in fat years. Both aspects of our reformed fiscal policy provide what economists call ‘automatic stabilisers’ for the economy.
In a sufficiently serious downturn, it would be both possible and wise for a prudent government to do more, in what Professor Max Corden calls ‘Ambulance economics’. Knowing when to unleash ‘discretionary’ stimulus is a matter for judgment. A cool government with faith in its people’s ability to manage their own finances prudently, would be slow to provide discretionary stimulus in hard times, and would avoid adding stimulus stimulus during good times. A more ‘active’ government might seek quickly to add (discretionary) stimulus in a downturn and be equally quick to remove stimulus (above the ‘automatic stabilisation’ provided by the structure of spending and taxation) during good times. If running for office, one should have a view on how ‘active’, or how ‘cool’ you plan to be.
But the crucial point is that both types of government should aim to produce balanced budgets on average of good times and hard times so that government debt is zero on average. A modest amount of government debt might be acceptable, allowing perhaps for the funding of unavoidable wars or major infrastructure projects judged necessary for national development and too great to pay for out of the annual budget. Conversely, in a time of unexpected plenty, a prudent government should be expected to save the excess tax receipts in a ‘Future Fund’, or Sovereign Wealth Fund of some sort.
The Howard-Costello government passes the test of balancing its books over its life, as demonstrated by the graph on page 5 of today’s Australian. It clearly felt that the times were better than average as it repaid the debt accumulated by earlier governments and established a ‘Future Fund’ to offset the liabilities represented by unfunded pensions for public officials and politicians provided in lieu of appropriate salaries by a succession of governments, including its own. Its surpluses were modest and, especially toward the end of its tenure, it played the game of throwing goodies to the voters. Throwing goodies to voters is a fairly standard ploy for modern governments, despite long-standing laws against bribery in respect to elections. (Recipients of goodies provided by governments rarely go to the law in an attempt to stop the goodie handouts.)
Goodie handouts also encourage people to adopt what has been called an ‘entitlement mentality’, a mindset unlikely to encourage hard work and self sufficiency in the populace. Such a mindset is a vital ingredient in any nation that plans to do better than average, or to aspire to gold medal economic performance.
Perhaps Messrs Howard and Costello deserve seven out of ten for their budgetary performance.
Readers are invited to rank the Rudd-Gillard-Swan governments by the standards of this analysis. Specific questions to ponder are as follows: • Were they sufficiently cool under pressure when the Global Financial Crisis (GFC) hit? • Did they repay debt and build a nest egg during the ongoing boom in commodity prices that hardly flagged despite the GFC? • Did their actions in providing goodies encourage hard work and a culture of self-sufficiency in all Australians, or the opposite? • Is this government likely to balance its budget over its life?
Henry welcomes comment and will post all but the abusive or potentially defamatory.
Black Monday revisited
Date: Monday, October 22, 2012
Author: Henry Thornton
Friday/Saturday was the 25th anniversary of Black Monday. While Friday's trading was soggy, it was far from the 23/25 % crash from that distant day.
The Economist says: 'At the time analysts rushed to look backwards. Parallels with the 1929 crash, which preceded the Great Depression, were immediately made. In fact they should have been looking forward. Three of the main reasons why the crunch happened in 2007 date back to 1987'.
'The biggest mistake was to do with monetary policy. Central banks around the world responded quickly to the crash, some cutting interest rates, others pumping money into the system'. This was a mistake made in Australia also. As I said in my recent paper on 'floating the dollar': 'I should add that the interest rate cuts in 1987 and 1988, which were attributed to me as ‘principal architect’ by Paul Keating, were in fact against my advice at the time. I was one of few on the official team who did not see the 1987 share market crash as likely to cause an economic slump, and I was actively concerned at the inflationary pressures. At each meeting of the board I recommended rate hikes, messages apparently agreed to by the board, before stepping down as Head of Research in early 1988. Given that the easing of monetary policy at that time, against my advice, is now seen as a major mistake, this is yet another mystery surrounding the floating of the dollar, in this case concerning the delayed achievement of low inflation'.
The Economist continues: 'This [mistake] was compounded by Mr Greenspan taking the opposite position when it came to asset bubbles: that even when prices were sky-high, it was not the job of central banks to outguess markets by trying to bring them back to earth. The one-day price fall of 23% in 1987, seemingly unconnected to economic fundamentals, gave a hint that markets are not always efficient. But Mr Greenspan declined this newspaper’s advice to intervene both when dotcom stocks surged in the late 1990s and when house prices rocketed in the early 2000s'.
'The second mistake' says the Economist, ' \was to enlarge the protected part of finance. Before 1987 the focus was on the big deposit-taking banks: stockbrokers and investment banks were relatively unimportant players in the system. But after Black Monday, with equity markets dominating the headlines, policymakers expanded the concept of systemic risk to other forms of finance—which encouraged banks and others to sprawl. By 2007 banks like Citigroup and insurance companies like American International Group had grown “too big to fail”.'
'The third mistake was to do with trading. In the mid-1980s many institutional investors adopted “portfolio insurance”, a way of hedging against market declines. It involved selling stockmarket futures so that investors’ gains in the derivatives market offset their losses on their equity portfolios. But the technique exacerbated the market’s decline, as waves of futures-selling alarmed equity investors. The lesson that should have been learned was that the market cannot insure itself: if most investors want to sell assets, there will be no one on the other side of the trade with a big enough wallet to buy them. Twenty years later, the same problem was demonstrated when investors stampeded for the exits in the securitised mortgage market. With no willing buyers, prices collapsed'.
And the venerable mag concludes, with a message I strongly agree with: 'Perhaps the biggest conclusion of all is that any extended period of rapidly rising prices is an indication of a bubble—and that sadly there is no painless way to clean up the mess after the bubble pops'.
This takes us back to Mr Greenspan's decision not to lean into bubbles, but rather to clean up afterwards. As the Economist says, there is no painless way to clean up afterwards.
So the sensible approach is to lean into the bubble, putting equal weight on curbing asset inflation as to curbing goods and services inflation.
A small economy like Australia, however, cannot offset with its monetary policy failure of the big economies to do so. This is why I have concluded the world needs a modern version of the gold standard, to provide for steady growth of global base money, which would itself act to offset inflation of all types.
More discussion of this matter is provided here and here.
Saturday Sanity Break, 20 Oct 2012
Date: Saturday, October 20, 2012
Author: Henry Thornton
'US stocks closed the week with their biggest single-day decline in four months, after a slew of weak corporate earnings reports'.
October 19 & 20; memories flood back, most authoritively from Robert Gottleibsen who remembers the market crashes of both 1960 and 1987.
And 'Gotters' has a message for us all. 'Black Monday occurred on October 19, 1987. That month the Australian market fell 45 per cent, and the US 22 per cent. The conditions were very similar to a crash in 1960 and they could happen just as quickly today'.
Henry tried a similar argument out on his favourite fund managers early last week. 'No way', was the answer. 'People are so pessimistic that now is the time to buy!'
China suffers tough choice on growth, say two WSJ writers.
'BEIJING—China's latest evidence of sputtering growth underlines a dilemma for its incoming leaders: They can shore up the economy by doubling down on an exhausted growth model, or take a risky political bet on reforms that could worsen the slowdown in the short term.
'The challenge—an unusual one for a Communist government—is to put more money in the pockets of its consumers by tackling the burgeoning inequality in income, which has contributed to pushing China's growth off kilter'. More here.
'It's too close to call' or 'Its all over for Obama'.
These are the choices offered today on the US predential election.
Gary Morgan's view of the presidential debate, using his famous 'worm', suggests that Obama won the debate.
John Mauldin on the singularity
'When the bubble collapses in upon itself, it creates its own black hole with an event horizon beyond which all traditional economic modeling breaks down.
'Any economic theory that does not attempt to transcend the event horizon associated with excessive debt will be incapable of offering a viable solution to an economic crisis. Even worse, it is likely that any proposed solution will make the crisis more severe'.
As a bagpiper, I play many gigs. Recently I was asked by a funeral director to play at a graveside service for a homeless man. He had no family or friends, so the service was to be at a pauper's cemetery in the back country. As I was not familiar with the backwoods, I got lost and, being a typical man, I didn't stop for directions.
I finally arrived an hour late and saw the funeral guy had evidently gone and the hearse was nowhere in sight. There were only the diggers and crew left and they were eating lunch.
I felt badly and apologized to the men for being late. I went to the side of the grave and looked down and the vault lid was already in place. I didn't know what else to do, so I started to play.
The workers put down their lunches and began to gather around. I played out my heart and soul for this man with no family and friends. I played like I've never played before for this homeless man.
And as I played 'Amazing Grace,' the workers began to weep. They wept, I wept, we all wept together. When I finished I packed up my bagpipes and started for my car. Though my head hung low, my heart was full.
As I opened the door to my car, I heard one of the workers say, "I never seen nothin' like that before and I've been putting in septic tanks for twenty years."
Apparently, I'm still lost... It's a man thing.
Flickers of good news
Date: Friday, October 19, 2012
Author: Henry Thornton
China's gross domestic product growth eased in the third quarter to the slowest pace since the first quarter of 2009, although there were some hopeful signs the economy is stabilising. If accurate, this is the first flicker of good economic news for some time.
"It can be confirmed from the economic data that the economy has hit the bottom, and the rebound is stronger than we expected," said Societe Generale economist Wei Yao.
China's GDP grew by 7.4 % from a year earlier in the third quarter, slower than the second quarter's 7.6 % rise, data from the National Bureau of Statistics showed today. The reading was in line with the median forecast of economists polled earlier and Australian shares and the local currency rallied.
There's more. China's economy will be boosted further as Village Roadshow expands its theme park business into China through a deal with Guangzhou R&F Properties to build a $550 million version of Gold Coast theme park Sea World on Hainan Island. 'We need Chinese people to learn to have fun', said an official on condition of anonymity. 'The strategy is to switch growth to domestic sources, and theme parks are a vital part of that strategy'.
'THE boom time for commodities is over and the drive to improve productivity must begin', Marius Kloppers, chief executive of BHP Billiton, the world's biggest miner, has warned.
It is Henry's hypothesis, sadly hard to validate with standard economic data, that companies only focus on productivity when times are tough. This is likely to have applied with special force to mining companies during the strongest mining boom in history - companies were so busy showelling ore and coal onto boats, there was little time or energy left to increase productivity.
RIO Tinto's vast and highly profitable iron ore operations in Western Australia continue to beat production expectations as they expand amid growing uncertainty about the sustainability of Chinese steel demand growth and iron ore prices.
For the September quarter, the mining giant yesterday reported record quarterly production of 62.9 million tonnes from its mines in WA's Pilbara region, up 8 per cent from the previous quarter and 5 per cent from a year earlier. More here on the mighty Pilbara.
The price of iron ore has rebounded to the $110 - $120 per tonne band, and Twiggy Forrest, fresh from his wonderful win over ASIC, is dusting off his expansion plans.
WOOLWORTHS chief executive Grant O'Brien says 'the worst may be over for the retail sector' after the company reported a 3.4 % surge in supermarket sales for the first quarter of the financial year.
House prices have edged up, home loans have risen and spring sales so far have exceeded expectations. Interest rate cuts already made, and more expected, have boosted consumer confidence, especially relevant for home buyers.
Nevertheless, during the week research from JP Morgan and Digital Finance Analytics (DFA) is showing large numbers of aspiring Australian homeowners are being locked out of the market, subduing demand and weighing on an already “soggy” property market.
'It will take years for complete recovery' said one real estate guru, who is struggling to make ends meet on a $200,000 salary and bonus package.
The Reserve Bank is struggling to come to terms with the sad state of the Australian labor market. Perhaps one or two RBAers need to face the chill winds of redundancy, only to be brought back on one half of their former packages as contractors. At least they'd have some inhouse knowledge of the fate of ordinary Australians in these difficult times.
Treasury Deputy Secretary, Dr David Gruen, is quoted today as saying his forecasts do not have to change much. He did not say 'Producing the sliver of surplus will be easy', but its what he was thinking.