Yields on Spanish bonds had fallen from just under 7 % to just over 6 % but rose again to 6.45 %. All of these numbers represent unsustainable costs of borrowing by the Spanish government.

But some bond yields, including Australia's are reaching new lows.  The Economist says: 'When people are prepared to pay the German government for the privilege of holding its two-year paper, and are willing to lend America’s government funds for a decade for a nominal yield of less than 1.5%, they either expect years of stagnation and deflation or are terrified of imminent disaster. Whichever it is, something is very wrong with the world economy'.

What is the problem, it is fair to ask. 'That something is a combination of faltering growth and a rising risk of financial catastrophe'.

Growth is weakening in countries that have been apparently recovering, and is dreadful in the laggards. 'A global recovery that falters so soon after the previous recession points towards widespread Japan-style stagnation'.

But it is the risk of financial catastrophe that is worring some of us: 'The European Union, the world’s biggest economic area, could plunge into a spiral of bank busts, defaults and depression—a financial calamity to dwarf the mayhem unleashed by the bankruptcy of Lehman Brothers in 2008'.

With others, Henry has been warning of just this possibility, though it must be said with less compelling language.

For our pains, we have been labelled 'pessimists' by a chirpy central bank governor.

Despite Australia's steller economic performance, chirped Mr Stevens, 'the nature of public discussion is unrelentingly gloomy, and this has intensified over the past six months. Even before the recent turn of events in Europe and their effects on global markets, we were grimly determined to see our glass as half empty. Numerous foreign visitors to the Reserve Bank have remarked on the surprising extent of this pessimism'.

One might observe that a pessimist is an optimist with experience. Or that being steller in comparison with mediocre performers is hardly worthy of note, especially when the mediocre have the power to drag us all into an economic abyss.

It was the widespread bank closures that caused the depth of the depression in Melbourne in the 1890s, and the 10,000 or so American bank failures that turned a nasty market correction into a global Great Depression in the 1930s.

Optimism is foolish when a combination of squabbling, bickering politicians, officials paralyzed by irreconcilable demands, weak central bankers and deeply confused voters is risking everyone's well-being.

Yet realism has a habit of breaking in despite the appearence of folie à plusieurs (the 'madness of many') among Australia's current rulers.

Dow Jones late yesterday reported a story that will be big news today.

'AUSTRALIAN business conditions slumped to their weakest level in three years in May amid growing fears of a full scale meltdown of the eurozone, according to a survey by National Australia Bank (NAB).

'Its business conditions index, a key barometer of sentiment in the business sector, fell 6 points to minus 2 points in May from April, while business confidence fell 4 points to minus 4 points in the same period.

'The rapid deterioration in confidence and conditions comes despite data last week showing Australia's economy was the fastest-growing in the developed world in the first quarter and employment growth has also been solid since the start of the year.

'NAB expects the Reserve Bank of Australia (RBA) to continue cutting interest rates in coming months, adding to the 75 basis points of cuts delivered since May 1, while weaker industries will continue to shed jobs.

"Confidence has again been eroded by the uncertainty over the outlook for the eurozone. The latest bout of volatility on global financial markets is starting to impact on business planning with some of the latest surveys pointing to a softening in the outlook for Europe," said Alan Oster, chief economist at NAB'.

Even the miners are influenced by this new realism, it seems.

It seems the pessimists are the realists on this occasion at least.  Mr Swan's week in the sun has run its course, though he will be chirping in tune with Mr Stevens at the PM's love-in in Brisbane.

Henry has purchased some gold.  Not as an investment, though inflation will rear its ugly head once the current crisis is over.

Rather as insurance against the possibility of a serious global financial crisis, 'Lehman Brothers squared' as we put it recently.

Postscript

I have just posted the latest Raff Report. Investors will want to read this for its careful evidence-based analysis and bold conclusions.

That is wonderful advice for people with large salaries, secure tenure, sizeable 'defined benefit' pensions (ie not dependent on the vagaries of asset markets) and with glasses more than half filled with Grange or some equivalent tipple.

RBA Chief Glenn Stevens was not of course speaking from his own perspective, which would be insensitive and bone-headed, but on behalf of all of us in Australia's miracle economy, presumably including the odd people smuggler.

Those of us who see current weaknesses and future dangers and perceive complacency at the highest levels of official and political leadership are mostly not doing this from positions of personal peril but because of belief that complacency is the enemy of continued success.

This necessary point made, Glenn Stevens' latest speech is worth reading carefully.

It admits to the unsustainability of the decade before the crash of 2007-08. Wealth was growing far too quickly to continue, household saving was for a time zero, debt levels were rocketing up, banks were making strong (indeed, excessive) returns, senior bankers were getting rich, and glasses were overflowing with expensive booze.

I searched in vain in Mr Stevens' speech for some acknowledgment that policies, including easy money, had greatly contributed to unsustainable borrowing and lending and unsustainable asset inflation.

Now there is a newly sober attitude to both corporate and household behaviour, and the RBA is cutting interest rates not in an attempt to restore the boom, with unsustainable growth of retail sales, or to boost asset inflation but rather ...

(I must say I missed that bit in Gov'nor Stevens' speech, but my guess remains 'to provide a buffer against really bad outcomes if something horrible happens in Europe and spreads to China and America, which is probably already happening'.)

Here is the link, for those inclined to join the debate on future economic policy.

Image of the week

Courtesy RBA

Politics

Wayne Swan has a spring in his step after a week in which economic growth and jobs have greatly exceeded expectations.

Nanny-in-chief, Julia Gillard, is looking frazzled but has announced some more plans to throw taxpayers' money at perceived problems - read on here.

(How entirely appropriate, subsidies for nannies in a Labor-built nanny state.)

Tony Abbott continues to outline his plans to reform Australia, largely unnoticed by the commentariat.

Quote of the month

I am reading Daniel Yergin's The Prize. The Epic Quest for Oil, Money and Power.  A wonderful achievement - the writing, not the reading!

After seven years of immense difficulty, the team of William D'Arcy and Burmah Oil had finally struck oil in Persia, days or weeks before the effort was to be abandoned. (D'Arcy's financial contribution came from a rich gold mine he had resurrected in Australia but money for the Persian adventure was running out.)

An English official wrote: 'I have spend a fortnight upon Oil Company business, mediating between Englishmen who cannot always say what they mean and Persians who do not always mean what they say. The English idea of an agreement is a document in English which will stand attack by lawyers in a Court of Justice: the Persian idea is a declaration of general intentions on both sides, with a substantial sum in cash, annually or in lump sum'. (P 132)

As a man who had to grapple with English shareholders for a number of years, this has special resonance.

Footy

Caaaarlton! was again beaten last night, but on this occasion not without a stern fight against a quality side in Geelong.  Indeed, after kicking five posters in the game, and inaccuracy including nine points in the final quarter, the game could have announced our team's return to the winners circle.

Next Thursday we meet West Coast at home.  The Eagles will be coming off a bye while the Blues will have had only 6 day's rest and a long flight in a crowded aeroplane.  Then we play Hawthorn followed by Collingwood, or perhaps it is the other way round.  If we are still in the contest a month from now, Henry will be very surprised but also very happy.

It is better than that because most of the new jobs were full-time jobs, although for the first time this year there was a fall in hours worked. Presumably most of the net jobs growth was in mining or mining related jobs.

This echoes the strong overall GDP data, where steller growth in WA, the NT and Queensland was dragged down somewhat by slow growth in NSW, Victoria, SA and Tasmania.  (Also Norfolk Island, where people are trying to decide whether to pay income tax in return for welfare payments, a solution no doubt good for their personal financial situations, if not their moral fibre.).

With increased 'participation' exceeding new jobs growth (go figure that!) the ABS rate of unemployment crept up to 5.1 % from a revised 5.0 % in April.

Another cause for celebration was China's 25 basis point rate cut, which has cheered global equity market investors despite the fact that it suggests China has overdone the slowing. This is a possible interpretation of Australia's recent rate cuts, incidentally, though not one I share.

Adam Creighton today presents a lovely Hayekian/Freidmanite analysis of interest rate movements.

For example: 'Milton Friedman observed, after decades of study, that changes in monetary policy have long and variable lag times, from six months to sometimes over two years. That remains the received wisdom. Friedman thought shifts in policy could aggravate rather than ameliorate the business cycle. ['Hear, hear' says Henry.]

'Discretionary monetary policy is meant to rein in nascent economic booms and dampen impending recessions. But without special powers of foresight that is very difficult. Economics professor Neville Norman of Melbourne University estimates that of the past 26 decisions of the Reserve Bank since 2006, only four have correctly anticipated the economic cycle'.

Professor Norman is a respected economist and his conclusion as reported is interesting.

The RBA, has a charter to do its best to maintain stability of the Australian financial system and keep 'underlying' goods and services inflation 'over the course of the cycle' between 2 and 3 per cent.

The RBA is well aware of Friedman's 'long and variable lags'. It is required to peer into the uncertain future (and into the almost as uncertain rear view provided by necessarily lagging and imperfect data) and adjust monetary policy if it thinks the economy is likely to drive goods and services inflation out of the 'zone of stability'. General financial instability is fostered by stability at low rates of inflation and sensible regulations and specific financial instability is usually dealt with by lending freely at a penal rate to solvent financial institutions during a panic, to paraphrase Baghot's classic advice.  (And to arrange marriages or orderly closure of insolvent institutions.)

The unexpectedly strong March quarter GDP data are well in the past and are no perfect guide to interest rate policy, as has been widely observed.

There are several reasons to be cautious about any single month's employment data, and (as we have pointed out) the trend employment data is defective in several ways, as well as being yet another lagging indicator.

In any case, the RBA seems to me to be relying more on the parlous international data, including real time movements in markets and reports of national and bank insolvency or potential insolvency in making the most recent rate cuts.

Now we must get a bit technical.

Neville Norman's implied thought experiment is as follows - what would be the result if the cash rate was fixed at, say, 5 or 6 %, compared with the 'Taylor Rule fine tuning' actually undertaken?

Replacing the whole interest rate fine tuning in each country with a modern gold standard, with steady growth of a global 'base money' regime, is another thought experiment that has been imagined.

Economists lack any scientific or analytic ways to pronounce confidentally on these or other ways to run monetary policy, and history provides at best an uncertain guide, (as used in my book Great Crises of Capitalism).

I am confident, however, that no responsible central bank governor in the present state of knowledge would be prepared to fix official interest rates in a real economy.  Nor has the world rushed to introduce a modern gold standard, despite the damage done by USA monetary policy of near zero cash rates to the doctrine of 'Taylor Rule' interest rate fine tuning.

(More technical stuff here.) 

Adam Creighton makes one assertion that is of great interest, and which I agree is supported by plenty of historical evidence. It is that 'Economies are fluid, subject to sudden and sharp shifts of confidence'.

I suspect that is the main reason for the RBA's latest rate cuts, not some (impossible) attempt to 'fine tune' the economic outlook.

It might be noted that the Reserve Bank, which had cut rates in November and December of 2011, stayed its hand in the March quarter.

But then in May and June it has cut cash rates by a further 75 basis points.  The timing might be just good luck, but there is at least a fair chance that the RBA's 'liason' reports have been on the money.

Since the first quarter of 2012 global growth prospects have worsened.  The upward revision of IMF global forecasts sounded a warning. Then the BHP Chairman warned that the earlier floated $80 billion of new investment would not all be delivered.  Yesterday, CEO Marius Kloppers reminded us the he is a cautious man and that various projects are being reviewed and are on hold. (He also mused about the reluctance of Australians to move home to get good jobs, a matter raised by Henry earlier in the week.)

'Retrenchment' (in the general sense) is a theme that will continue to be heard until the Eurozone sorts out its sovereign debt/banking crisis and until we know that China's slowdown is to the targetted 8 % annual rate rather than some noticably lower number.

And although the Australian dollar has declined more or less in line with commodity prices, at approximate parity with the US dollar it is still uncomfortably high for manufacturers, tourism operators and universities, depressing three key non-mining sectors.

Red tape and Green tape entangles small business and the number of closing down sale signs in Melbourne are approaching levels last seen in the recession we were forced to have in 1991.

The Business Council today will release a report showing the extent to which Australian business undures costs far higher than competitor nations.

'Ahead of the Prime Minister's economic forum next week, the BCA will today publish a study showing Australian resources projects cost 40 per cent more than projects on the US Gulf Coast, mainly because of higher wages here. It also shows airports typically cost 90 per cent more to build in Australia than the US, while hospitals are 62 per cent more expensive.

'Massive resources projects are predicted to drive much of the economy's growth, with capital investment forecast to account for almost 30 per cent of gross domestic product in years ahead.

'But the BCA's president, Tony Shepherd, said the wave of investment was under threat from escalating costs, and he urged government to act through measures including faster project approvals and improved training.

'Following recent union uproar after the government approved an enterprise migration agreement for Gina Rinehart's Roy Hill mine, Mr Shepherd said the nation will also need more foreign workers.

"If we haven't got locally sufficient-skilled resources to build these projects then the only alternative is to import skilled labour," he said.

'Underlining the skills challenge, Mr Kloppers said US workers appeared more flexible than Australians. "Certainly, I think that if I compare it to the US or Canada, it feels to me that it's a bit more difficult to move people around here."

Treasurer Wayne Swan should enjoy his week in the sun.  Dark clouds are clearly evident to virtually every experienced commentator.  Even the IMF is probably busy preparing fresh forecasts.

One respected RBA 'outside insider' (one of the Trusties) even said a 50 basis point cut would have suggested panic at the highest levels.  When the parlous state of the world was realised in 2008 'panic' was a word used only by Henry, but clearly more people are now attuned to the dangers being flirted with around the world.

Wayne Swan, of course, claimed credit for the rate cut, asserting that his surplus had 'made room' for the RBA to act.  I do not recall him saying his budget blowout - correction, necessary stimulus - had required the RBA to raise rates.

Joe Hockey, of course, pointed out that the RBA chief, Glenn Stevens, had not mentioned the budget in his remarks about the economy, merely some rather gentle words about the unfolding global crisis. One assumes that the calming drug is administered in the Governor's water each day; wouldn't look good if the boss was agitated about anything so trivial as the state of the global economy.

But surely noone was fooled by the 'making room' hypothesis.  The global economy is in bigger trouble than it was in 2008 when the Lehman Brothers crisis exploded. A bankrupt Greece is like Northern Rock squared. A bankrupt Spain will make Lehman Brothers' failure look like some tidy housekeeping.

Gary Morgan, whose more realistic jobs data was yet again ignored by chemically calmed officials, was miffed, to put it mildly. 

Under the heading 'RBA Governor Glenn Stevens is a disgrace - he cost Howard the 2008 Federal Election and everyone is suffering - a lot'  Morgan said:
 
'To all,

'Glenn Stevens, RBA Governor, said today “Overall labour market conditions firmed a little, notwithstanding job shedding in some industries, and the rate of unemployment remains low”.
 
'Complete 'rubbish' and indeed very harmful with 2+ million Australians looking for a job or more work -  interest rates should have been cut by 1%.

'I said today in our Morgan Poll release:

"If the Government is to have a real chance of winning the next Federal Election they must recognise the real level of unemployment throughout the Australian economy and stop referring to the artificially low estimate provided by the ABS (4.9%) that a clear majority of Australians do not believe is accurate — only 30% of Australians believe the ABS estimate is closer to Australia’s true level of unemployment than the Roy Morgan estimate (8.2% in May).”
 
'Unfortunately Australian business is having a hard time because of poor Government and the RBA - both as bad as each other - unfortunately the Opposition keep letting them both 'off the hook'.

Henry was miffed also because nobody took up his call for bold economic reform, but the time for this will come immediately after the next election so it is probably wise to relax and enjoy the end-game for this Labor government.

Rudd's poisoned chalice

Paul Kelly today presents the reasons why Kevin Rudd should or would reject the opportunity to return to the Lodge.

'If Rudd's recall is mired in blood and thunder, then its downward spiral is foretold from its inception. And what chance a united Labor election campaign under Rudd if the party remains a house divided against itself?

'Rudd's recall might be in Labor's interest by delivering a higher vote. But how does it satisfy Rudd's interest? He would become the PM who was played for a mug twice -- the first time deposed by the party and the second time rejected by the people. What an ignominious record before history. No matter what you think of Rudd, he's better than this.

'Am I expecting Rudd, therefore, to decline the leadership? On the contrary, he is likely to accept because he will think he can defeat Abbott. It is the way leaders think.

'The real point lies elsewhere. If Labor wants any Rudd recall to work it must grasp the unique conditions that are required -- the party must surrender itself to Rudd and allow him to project as an agent of sweeping change in contrast to the failed Gillard era. And for Labor that is just a bridge too far'.

Henry salutes the wonderful illustration by Lobbecke.

 Courtesy The Australian

'Financial market sentiment has deteriorated over the past month. The Board has noted previously that Europe would remain a potential source of adverse shocks. Europe's economic and financial prospects have again been clouded by weakening growth, heightened political uncertainty and concerns about fiscal sustainability and the strength of some banks. Capital markets remain open to corporations and well-rated banks, but spreads have increased. Long-term interest rates faced by highly rated sovereigns, including Australia, have fallen to exceptionally low levels. Share markets have declined.

'In Australia, available indicators suggest modest growth continued in the first part of 2012, with significant variation across sectors. Overall labour market conditions firmed a little, notwithstanding job shedding in some industries, and the rate of unemployment remains low. Nonetheless, both households and businesses continue to exhibit a degree of precautionary behaviour, which may continue in the near term'.

Net result is a modest 25 basis point rate cut.

Clearly the Reserve has complete confidence in the official (ABS) measurement of unemployment and is not so worried as Henry about the parlous state of the global economy.

Time will tell who is closer to the mark.

US jobs growth disappointed on Friday and US share prices fell by 2.6 %. Similar falls can be expected globally in the next 24 hours, on top of May's sizable drops.

German bond yields were briefly negative, meaning investors were paying the German government to borrow from them.  US and Japanese bond yields plumbed new depths, and even Australian bonds joined the group seen as a 'safe haven' for investors. Spanish bond yields reached an unsustainable 6.7 %, and the Eurodominoes are wobbling.

China's slowdown looks worse by the week, India has recorded its slowest growth for a decade, even Brazil (another 'miracle economy') has recorded growth almost zero.

Commodity prices have fallen substantially, though the price of gold  had a sharp weekend rally as part of the global rush into defensive assets.  The twenty day change in various commodities reported by Henry's favourite brokers are: oil, -15 %; copper -10 %; tin - 9.6 %; nickel -8.4 %; iron ore - 6.3 %; platinum - 5.6 %; aluminium - 4.5 %.

Australian property prices have continued falling, and earlier predictions that our property prices are 25 to 40 % overvalued are no longer looking implausible.

Australian non-mining activity is weak and even major mining projects are being reevaluated and postponed or cancelled.

The global economy is in a parlous state, and Australia is poorly placed to resist the renewed sense of global economic crisis.  (Please refer to Great Crises of Capitalism.)

Apologies for adding to the gloom, gentle readers, but this is no time to be gilding the lily.  One hopes the RBA is nerving itself for another 50 basis point cut.

******************

The best commentary Henry has seen today is by Walter Russell Mead from The American Interest courtesy The Australian.

'THE European monetary crisis is like a botched root canal: painful, expensive, interminable. Years go by and the world helplessly sits in the chair as the incompetent dentists poke, scrape, bicker and endlessly drill.

'From time to time there are shots of novocaine - usually in the form of liquidity from the European Central Bank -. that reduce the pain to a dull throb, but there are no signs of improvement, no signs that the long and futile European process is coming to any kind of successful conclusion

'We are frightened and bored; we can't look away but we can't bear to master the details of this most tedious of world crises'.

And in conclusion: 'The next great game of chicken where irresponsible and selfish politicians will gamble with the world's economic future is now scheduled to be held in the US after November. As the Bush tax cuts move towards expiration and automatic budget cuts are set to go into effect, the lame duck US congress will see Republicans and Democrats engage in their own form of brinkmanship. If European brinkmanship and American brinkmanship come together, Katy bar the door. The mother of all meltdowns could be upon us much sooner than we think.

The benchmark ASX200 share index ended about 7.3 per cent lower for May - the worst monthly return since Europe's debt crisis erupted in May 2010.

The economics team at NAB say that a rate cut next week is a line ball decision but another 25 basis points is more likely than not.

'On the domestic economy it is not obvious that the economy has overall weakened further – as witnessed by the fall in the unemployment rate to 4.9 %.  Equally the Government's near term fiscal spending measures (school kid’s bonus and the pre-payment of the carbon tax compensation) could well help retail spending during June.  Clearly mining investment remains very strong – with engineering construction up 13.3 % in real terms in the March quarter.  And medium term total capital (mining) spending plans continue to imply massive increases in mining investment.

'Against that, there are signs that some of the soft sectors of the economy are weakening further.  Here the list includes the slowing in on line retail sales growth – and negative readings for on line spending in household goods and electronics. That also showed up in the fall in total retail spending in April.  Manufacturing is also struggling with increasing reports of labour shedding and insolvencies. Indeed capacity utilization in manufacturing hit a record low of 73.1 % in April.   The NAB Business survey for April also showed a significant slowing in business conditions (with the index falling from 3 to zero). Another sector showing increasing stress is residential construction where again capacity utilization has fallen sharply recently – with building approvals also deteriorating at a rapid rate (as witnessed for example by today’s 11.1 % fall in private housing approvals in April)'.

There is a great and brooding conundrum, however.  The official (ABS) employment data says the rate of unemployment is 4.9 %.

Unofficial umemployment as measured (more accurately) by Roy Morgan Research puts the rate of unemployment at 8.2 %, 3.3 % above the 4.9 % currently quoted by the ABS for April 2012.

'In May 2012 according to Roy Morgan the rate of unemployment was 8.2 % (down 1.1 % since April 2012) — an estimated 997,000 Australians were unemployed and looking for work.

A further 9 % of the workforce (up 0.8 %) were working part-time looking for more work (underemployed) — 1,107,000 Australians.

In total 17.2 % (down 0.3 %) of the workforce, or 2.1 million Australians, were unemployed or underemployed.

The Australian workforce in May was at 12,213,000, (down from 12,307,000 in April, 2012 but up 331,000 since May 2011) — comprising 7,801,000 full-time workers (down 150,000 since May 2011); 4,412,000 part-time workers (up 481,000 since May 2011) and 997,000 looking for work (up 179,000 since May 2011).

As NAB's economists say, 'Manufacturing is ... struggling with increasing reports of labour shedding and insolvencies'. Yet mining companies and mining-related businesses are struggling to find workers, and are pressuring the government to allow than to bring more workers from abroad.

In Henry's humble opinion, the missing piece of this jigsaw is Australia's relatively generous welfare arrangements.

Australia's various forms of welfare are sufficiently generous that most unemployed East coast Australians just will not consider moving West or North to do jobs in hot, relatively uncivilised conditions - relative to life in Brisbane, Sydney or Melbourne, or in glorious coastal towns.

Australia's structural problems require welfare, tax and IR reform, and further rate cuts are putting the monetary policy cart before the structural reform horse.  One notices reports that Treasury now see monetary policy as a first line response to economic problems, which is one of the great responsibility avoidance ploys of Australian history.

(Reports of Treasury Secretary of Treasury Martin 'Climate Change' Parkinson's views about how to run monetary and fiscal policy are many and varied, with no clear exposition as spoke by the man himself so far as Henry can see. Henry, and presumably others, would welcome a clear account, Mr Secretary.)

Eurozone crisis

Meanwhile, the Eurozone crisis grinds on with a happy ending looking increasingly unlikely.

Imports on the same basis have grown from 12 % to 19 %.  Equally important, export prices have surged and the cost of Chinese manufactures have been subdued, producing record terms of trade. Massively increased net exports with high terms of trade has made most australians far richer.

China's investments in Australia have surged from a low base and would be higher if governments had not been playing a blocking role.

Yet in the debate on mining and its workforce 'racist innuendo' is overt or covert.

Here is a fact that may be difficult for many Australians to grasp.

Australia's various forms of welfare are sufficiently generous that most unemployed East coast Australians just will not consider moving West or North to do jobs in hot, relatively uncivilised conditions - relative to life in Brisbane, Sydney or Melbourne, or in glorious coastal towns.

So our mining magnates need to import tough, hard-working, workers from China and other foreign climes.

The front page story of 'godsend' Chinese boilermaker Yong Jun Li and his family deserves careful thought.

China's own economy has been overheating also, and one can find opinion but not much hard fact in today's press.

The Economist provides the coolest and most rational commentary.

'CHINA’S weight in the global economy means that it commands the world’s attention. When its industrial production, house building and electricity output slow sharply, as they did in the year to April, the news weighs on global stockmarkets and commodity prices. When its central bank eases monetary policy, as it did this month, it creates almost as big a stir as a decision by America’s Federal Reserve. And when China’s prime minister, Wen Jiabao, stresses the need to maintain growth, as he did last weekend, his words carry more weight with the markets than similar homages to growth from Europe’s leaders. No previous industrial revolution has been so widely watched.

'But rapid development can look messy close up, as our special report this week explains; and there is much that is going wrong with China’s economy. It is surprisingly inefficient, and it is not as fair as it should be. But outsiders’ principal concern—that its growth will collapse if it suffers a serious blow, such as the collapse of the euro—is not justified. For the moment, it is likely to prove more resilient than its detractors fear. Its difficulties, and they are considerable, will emerge later on'.

Defence of the realm

Greg Sheridan, chanelling Mark Thomson of the Australian Strategic Policy Institute, adds to his already powerful critique of Australia's ability to defend our borders.

In summary: 'Labor has decided to make defence a zero priority. This is all part of Gillard taking Australia down the disastrous European road. Every form of social expenditure is increased radically, especially through entitlements programs that are nearly impossible to pull back once they are implemented, but spending on defence and national security is savagely reduced'.

If this was the only black mark against the Rudd-gillard government it would warrent a sound thrashing at the next election.

But think of the wasteful spending - handouts, pink batts, unnecessay and costly school refurbishment and the NBN, to nale only the most prominant cases.

Think of the waste, and the trashing of our defence capability, think of these matters and weep, gentle readers.