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Henry Thornton - Contributors: A discussion of economic, social and political issues Blogs
Europe stuffed, US stagnating; Asia growing
Date: Thursday, November 03, 2011
Author: Henry Thornton

One of Henry's most read blogs was posted on 1 November 2007.  Its heading told the story 'US recession inevitable; China unstoppable'.

The visiting guru, like Voldemort whose name cannot be spoken, has returned to Australia for his annual visit, slightly peeved that his visit coincided with the horse race that stops a nation, as this reduces his opportunity to practice his guruship.

Henry caught up with said guru thanks to the good offices of Shane NcNeice.  His headline on this occasion might be 'Europe absolutely stuffed; US to struggle for a decade or more; Asia to grow strongly'.

(Alert readers will see that Henry has no future as a writer of headlines.)

'Greece will default' was the opening salvo.'Its public service is overstuffed; it joined the EU with dodgy numbers simply to get German rates of interest and borrowed far too much; the New Drachma's are already printed so Greece can cut wages by devaluing, which is far more palatable than cutting wages by 50 %'.

'There is no way they can avoid default; the Germans are simply not gonna pay; Greek debt will be written off 100 %; Greek banks will be bankrupt, and the State owned German banks and French banks, who also hold a lot of Greek debt, will be in trouble'.

'Greek debt default and interbank loans will freeze the Eurozone banking system which will need to be recapitalised'.

The guru acknowledged that US banks will not be immune as they are heavily involved in the Eurozone interbank market and have like Lehman Brothers issued a lot of credit default swaps that will be triggered when Greece defaults.  Like Lehman Brothers, we know there are a lot of these instruments out there but the statistics are almost non-existant.

When questioned the guru agreed that, 'within a year', Portugal, Ireland, Spain and Italy would also default. While the guru implied that all this Eurozone mayhem would largely be contained within Europe, many in the audience, including Henry, wondered how this could be possible.

'Mrs Merkel has no interest in solving this problem', the guru added. 'She just kicks the can down the road.  The crisis is keeping the Euro low, and with low wage increases and subdued labor costs in Germany this is helping to make German industry incredibly competitive'.

'There are no jobs in Greece (or the other weak nations of Europe) for young people who are queuing up to emigrate'.

'The big central banks are printing money 24/7; banks are not lending but accumulating cash to cushion themselves when the defaults are triggered.  The latest statistics show US base money grew by 37 % in the year to September'. Henry observes that Milton Friedman must be spinning in his grave.

'The US budget deficit is 9 % of GDP, or $1.3 trillion. The Democrats want to raise taxes, and the Tea Party Republicans want to cut spending.  There is complete political gridlock. Bene Bernanke is printing money like crazy and using most of it to buy government securities - eg $855 billion of that $1.3 trillion deficit.

'Foreigners are reaching their limit for buying US Treasuries and China is selling down'.

Warming to his task, the guru noted (to Henry's delight) that there aret two sorts of inflation - goods and service inflation and asset inflation.

Goods and service inflation is dead in the USA, as it was for 40 years after 1929.  Young people who can't get jobs will be 'scarred for life' and except for food and energy there will be no goods and services inflation.

'But asset inflation is everwhere, even asset bubbles.  The Australian dollar is a bubble, US Treasuries, Gilts, JGBs, even London houses, which are being purchased by Arabs, Russians, Indians and Chinese, are bubbles'.

'Eventually there will be a Northern Europe Euro and brutal readjustment in the South. We're talking about social revolution'.

There will be stagnation or slow growth in most of Europe and the USA, 'at least a decade of austerity'.  Demographics will also hinder Europe, where indigenous Europeans are not replacing themselves, except in Sweden where there is two years paid maternity leave'.

'China is allowing wages to rise so that consumer spending can replace exports.  China knows what it is doing'.

'There will be no war in Europe.  The most likely war is between China and Russia over Siberia - a vast, resource rich area largely empty and unexploited'. (Henry kept his thoughts about a similar rich, lightly populated region to himself.)

'What about Australia?' a brave soul asked. 'Australians will feel very rich when the Australian dollar hits US$1.20, but there will be a lot of industrial unrest, like the UK in the 1970s'.

We thanked the guru in the traditional manner and Henry presented him with a copy of Great Crises of Capitalism. With appropriate modesty , it may be appropriate to say that some of this book's themes are similar to those of the guru, though stated in generally less colorful language.

The group then retreated to Vlados for a traditional (and consoling) dinner of lightly cooked meat, salad and red wine. The guru drank only coke.

GDP growth, labor market disaster
Date: Thursday, March 06, 2014
Author: Henry Thornton

'Growth spurt lifts hopes' says The Australian. Despite weak business investment, the predictable export surge and stronger household spending together created 0.8 % growth in the December quarter and 2.8 % over 2013.  This is the 22nd calendar year of continual economic growth — a brilliant result by the standards of other developed nations. The RBA clearly predicted an outcome close to this when it signalled that interest rates are on hold despite an exchange rate that is uncomfortably high.

There is a great conundrum, however, when one examines the state of the labor market. Full-time jobs and numbers of people seeking work have both declined substantially.  Although job ads seem to have reached some sort of low-level plateau, and the official (ABS) measure of unemployment is only 6 % (although rising), the latest Roy Morgan unemployment estimate of 12.3 % is more than double the official estimate.

Gary Morgan says of his, in Henry's view more realistic, estimate: 'Australian unemployment has increased to a record high 1.561 million Australians (12.3%, up 1.0%) in February. This is the highest rate of unemployment in 20 years – since February 1994 (12.3%, 1,075,000). An additional 1.080 million Australians (8.5%, down 0.2%) are under-employed – a total of 2.641 million (20.8%) Australians unemployed or under-employed – a new record high.

'This month’s rise in unemployment was driven by a large fall in full-time employment – down 397,000 to 7,318,000, some of whom transferred to part-time employment – which was up 187,000 in February to 3,786,000 while an additional 121,000 Australians became unemployed.

'Analysing the results by age group also reveals unemployment to be heavily concentrated amongst the young: 18-24 year olds (28.0 %, up 6.8 % in February), have far higher unemployment than any other age group; ahead of 25-34 year olds (12.4 %, up 1.3 %), 50-64 year olds (9.3 %, up 0.1 %), 35-49 year olds (8.9 %, down 0.5 %) and those aged 65+ years old (5.2 %, up 2.7 %). An additional 16.1 % (up 1.4 %) of 18-24 year olds are under-employed – which is also far higher than any other age group. This implies a total of 44.1 % of 18-24 year olds unemployed or under-employed.

'The figures highlight a reality seen repeatedly during economic downturns – younger people are the first to lose their employment or have their hours reduced. The spike in youth unemployment is therefore often a leading indicator of higher unemployment for older age groups. However, it is also worth remembering that many younger people who have been searching for work over the Summer months will return to their studies in March as University recommences. This is an annual trend which decreases youth unemployment each year which we would expect to see next month.

'The continuing rise in unemployment – which has now increased in eight out of the last ten months since hitting a low of 9.3 % in April 2013 – is a huge concern for the Abbott Government as it gets set to deliver its first Federal Budget in two months’ time. In February alone Qantas announced plans to heavily slash costs (an expected 5,000 jobs lost), Toyota announced it was ceasing car manufacturing in Australia (A minimum of 2,500 jobs lost), Alcoa announced it was closing several smelters (1,000 jobs lost), Telstra announced plans to cut its directories division (800 jobs lost) and today IBM has announced it plans to cut a further 500 jobs'.

Qantas has joined the manufacturing industry in being in deep trouble.  The common factor is an unsustainable cost problem, which is a far harder problem to deal with that the massive budget black holes that is absorbing most of the government's economic policy thinking.  Taken literally, GDP growth and falling employment equals productivity increase.  Great news for those people who keep their jobs, bad news for those who lose jobs or, like many young people, have never had one.

The end of the age of entitlement, for both individuals and businesses, is the basic attitude of the Abbott government and is directionally correct.  Whether Australia needs a deep recession to underline the fact that the world offers us no easy road to prosperity, and to bust official complacency, is the big economic question we are facing now.

Henry Thornton's True Unemployment & Under-employment: February 2014

RBA `watching carefully`
Date: Tuesday, March 04, 2014
Author: Henry Thornton

Pity the Reserve Bank. Its staffers have interesting and highly paid jobs, cheap home loans and extraordinarily generous pension arrangements. They work in the CBD, with their own underground station outside the front door. The governor gets to sit next to the Treasurer at important events like the 'G20' meetings, and to schmooze with Janet Yellen and other central bank worthies.

Very occasionally their jobs become difficult.  Occasionally they face 'dilemmas' which create more heat than light. Back in the 1970s, a prime dilemma was whether to crunch the economy as a contribution to keeping greatly excessive wage deals from wrecking it, sort of like the American airforce in Vietnam. 

Then in the late 1980s, monetary policy was too easy for too long and then jerked, by jerks, to being far too tough.  This was accidental and apologised for, but the damage was done. The benefit was inflation slayed, sort of like the villages in Vietnam.

Now the RBA staffers are again facing a serious dilemma.  The value of the Australian dollar is too high and key companies are quitting or shedding jobs in an effort to stay afloat, correction, still flying.

The problem with the excessive dollar, of course, is that the RBA has no way to bring it down except by adopting a dangerously loose monetary policy.  Talking the dollar down seemed on some days to bring some response, but the net effect of open mouth policy is usually small, as it proved in this case. 

Domestic interest rates have been reduced to the point that inflation, both of goods and services and assets, house prices and shares, are rising. Sydney unit prices exceed Melbourne house prices for the first time and experts are quietly saying 'bubble' as they pocket the large commissions earned by selling both houses and flats in Australia's major cities.  How confident is the RBA about its in Henry's view overly optimistic forecasts - with inflation too low and activity too high?  This question will be on the RBA's boardroom table today. Here is a contribution its board members, including the Treasury Secretary, should ponder.

Higher than expected inflation is one worrying indicator. Lower than expected business fixed investment is another, where the latest survey points in the opposite direction, activity weaker than expected.  Jobs data has for some time also been pointing in a negative direction.  Jobs, especially full-time jobs, have been falling, and the widely publicised problems of the vehicle manufacturers, fruit canners, mining companies and the airlines, among others, has worsened the story.  At the same time, numbers of people looking for work have been falling.  In the official (ABS) data, people looking for work have been falling slightly slower than jobs have been falling, so the ABS rate of unemployment has been inching up. More accurate measures, by Roy Morgan Research, shows a far more alarming number, as explained here, in one of Henry's most read blogs.  What are the RBA's massive 'liason' efforts achieving, gentle readers?

Another key indicator is commodity prices, its index a vital statistic for any economy watcher. The RBA, in its latest release, says: 'Preliminary estimates for February indicate that the index declined by 1.3 per cent (on a monthly average basis) in SDR terms, after declining by 1.6 per cent in January (revised). The largest contributors to the fall in February were declines in the prices of iron ore and coking coal, which was partially offset by an increase in the price of gold. The prices of many rural commodities rose, while the base metals subindex fell in the month. In Australian dollar terms, the index declined by 2.2 per cent in February'.

Over the past year, the index has declined by around 12 per cent in SDR terms. The prices of most commodities in the index have fallen over this period. The index has risen by 1.8 per cent in Australian dollar terms over the past year. The graph below puts the longer term picture starkly.

Recent economic news from abroad is more than a bit worrying, though gov'nor Glenn will be sanguine having been assured by the brighest and best international experts that all is well. We learned from 'G20' reports that the US Fed is watching closely the weakness in US economic data, and 'will listen' to international complaints about US monetary policy', presumably as the US airforce listened to complaints from Vietnam in the sixties.  China is watching closely the state of its banking system, both those parts in the sun and those in the shade. The Eurozone is struggling along with catastrophic levels of unemployment in most Eurozone countries and the Ukraine to the East looking like a bomb about to go off.  Japan is doing its thing, battling deflation with a population rapidly growing old. (Memo Scott Morrison: here is a nation that needs brave young people.)

The general gloomy international news will of course be 'watched carefully' by the relevant analysts in the RBA, and the liason team may be told to dig harder. But it is, or should be, an uneasy time at the Reserve. Their last big snafu was in the late eighties, leading to 'the recession we had to have', despite Henry's editor's efforts to help, which are available here. Ignoring such advice from outsiders is the practice in a sheltered workshop, and we all have to hope today's RBA is telling the Treasurer that current official forecasts may be wrong.

Courtesy RBA

Saturday Sanity Break, 1 March 2014
Date: Saturday, March 01, 2014
Author: Henry Thornton

The likely demise of Qantas as an aussie icon has dominated the local news.  Coming on top of Holden, Toyota, SPC Ardmona, Forge, who can doubt that Australia is entering a recession?  Certainly a growth recession, but perhaps a real, awful recession where there are massive numbers of lost jobs. Business fixed investment is the latest major economic statistic to 'surprise on the downside' but blind Freddy has been noticing and commenting on the weakness of the local economy when the rest of the world seems to be picking up.

Or is it? US Fed chief, Janet Yellen says US weakness is due to the especially severe winter weather, but perhaps it is worse than that. China is enduring another bout of the colliwobbles, this time with concern about the so-called 'shadow banking system'. Forget that , comrades, the real banking system is in trouble because of its loans to State Owned Enterprises focussed more on job creation than on profitability.  The Eurozone is still struggling to regain growth momentum, though some of the real basket cases are showing signs of life despite the powerful austerity imposed upon them.

Australia's Treasurer, Joe Hockey, is supposedly pondering just how tough to be in the forthcoming budget.  Fix it fast, Joe, and you can get on with the job of restoring a truly dynamic economy.  In the Qantas case, thouhtful commentators are pointing to a long history of working constructively with the unions, but with growing international competition this game is over, as it is over for all companies in Australia. 

As we have said for more than a year now, Australia's budget problem is severe, but a grossly excessive cost base is a bigger problem. Tony Abbott and his government seem to recognise this, and Mr Abbott himself is emphasising  the responsibility of boards of directors and chief executives to fix up their companies.  If we get both a tough budget and continued advice to 'fix your own problems' it will add up to the biggest cold bath since the 1990-91 recession. 

Households seem to have recognised the looming problems, and household saving is again positive after decades of being near zero.  Companies that act decisively to cut costs will emerge first from the downturn, and the number of half-year 'surprises on the upside' with company profits bodes well for corporate Australia.

Structural reforms should include setting the pension age asap to at least 70. But someone should work out the average number of years between becoming an age pensioner and death the nation can afford, and determine the age of 'retirement' in that way.  There is a lot of evidence that physical and mental health are promoted by people keeping active during an effective 'retirement' from full-time, full-on jobs.  There is a lot that older Australian's can do to promote society welfare as volunteers, or as members of local councils, superannuation boards and even, for suitably trained oldsters, teaching or child-minding. 

Perhaps the pension should only be provided if people apply for it including their plan to 'give back' to the general community.

The global warming debate

An interesting report has crossed Henry's desk this week. In short it says:
* The main source of heat on planet earth comes from the sun - and the strength of energy reaching earth depends on varying activity of the sun.  This varying energy source accounts for the long term changes in the average temperature on planet earth.
* The oceans are vast energy resevoirs.  In colder times the oceans absorb CO2 and in warmer times they give it up, hence the positive correlation between average temperature and atmospheric CO2.  Persumably, there are 'long and variable lags' in this process.  No doubt also that industrial activity is adding to the atmospheric CO2, and if not checked this process might make the swings in atmospheric CO2 larger and faster, making smooth 'accomodation' to a hotter planet harder.
* CO2 promotes plant growth, so its levels are not a disaster (if accomodation is smooth) but a help.  Currently it seems some seaside cities will have to be abandoned, and the sooner we begin planning for this, the easier will be the transition.  However;
* Recently sunspot activity has been very low, which accounts for the flattening in the warming trend that is so embarrassing to the more zealous warmists, and which may signal a cooling period such as those clearly visible in the historical data.


The Aussies have been belted in the second test just as thoroughly as in we belted the South Efricans in the first test.  Brave (but foolish) Mr Warner has been fined for alleging that the South Efrican bowlers engaged in ball tampering to allow 'reverse swing' which allegedly makes the sort of balls bowled by Mr Styen literally impossible to see.  Australia's Cap'n Clarke says Australia must join the 'reverse swing' movement, implying fielders will be trying to keep one side of the ball smooth and the other side roughed up, which is the illegal approach Mr Warner alleges the South Efricans did in the second test.

What an irony if the Aussies got pinged by the umpires for crude attempts to emulate the South Efrican's apparently subtle afforts to groom the ball. (I say 'subtle' because no South Efrican fielder was pinged by an umpire for ball tampering, which is illegal, as surely would have happened if South Efrican efforts to groom the ball were obvious.)

Anyway, the bowl-off at Cape Town begins tonight, and we have to hope the pitch (and their recovery from the monster bowl-off in the Second test) allows Mitch and his mates again to terrorise the South Efrican batters, or that Mr Steyn and his pals fail to get reverse swing into their repertoire, or that our batters out-bat their batters. Then we can focus on the footy, with the nab cup over for another year and the real stuff underway.


We learn shortly how the film industry has voted for the plethora of Academy awards.  We hear from an insider: that 'best film' is between 'Twelve Years a Slave' and  'Gravity'; that 'best actor' is likely to feature Christian Bale (American Hustle) or Leonardo DiCaprio (The Wolf of Wall Street); and 'best actress is a toss-up between Cate Blanchett (Blue Jasmine) and Henry's favourite Judi Dench (Philomena).  Sandra Bullock (Gravity) must have a shot also, for sustained single actor performance in outer space after the Russians destroyed an aging satellite/space station, thereby infesting Bullock's orbit with space junk.  How do they film this stuff?

Fiona Prior has ignored all the blockbusters mentioned above, and recently viewed 'The Great Beauty', which, she says, mysteriously, is 'even better if you are a catholic'.

The Pope has made a wonderful appointment of George Pell as the Vatican's CFO. Cardinal Pell is sure to fix up the finances and to be a general force for good in the Catholic high command. We wish him well.

Image of the week

Courtesy AFR

Academic hanky panky
Date: Thursday, February 27, 2014
Author: Henry Thornton

Fakery is an issue rarely in polite academic company. Surely modern academics would not think of such a thing, or if they did the so-called 'peer review' would capture the occasional fakery well before publication.  On the other hand, as economists like to say, with promotion based on numbers of articles published, with only minimal checking of quality, the rewards from fakery can be large.  Simple economic theory says high rewards from any activity will attract people willing to fake it, especially if the chances of getting caught are low.

Even in science, where fakery might be thought to be harder than in the social sciences to get away with, there are some infamous examples.  There is even a website dedicated to retractions, which are quite frequent, if the existance of this site is any guide.

Mrs Thornton came home yesterday with a deliciously sad story about some bigshots in the analysis of management styles who has been caught. Said bigshot had supposedly found evidence that what is variously called 'servant leadership', 'authentic leadership', 'spiritual leadership or indeed 'ethical leadership' works better than traditional authoritarian leadership, the sort that Henry used to practice.

Henry had never believed that modern touchy-feely, 'how's the wife/husband/kids, aunt?' style of leadership could possibly be better than 'just get the job done, quickly' leadership, but the weight of research had sowed seeds of doubt in Henry's aging brain.

Here is an extract from the editor of an interesting website called 'Retraction Watch'.

'In a letter to board members of the journal obtained by Retraction Watch, Leanne Atwater, senior editor of the LQ, tiptoed around the reason for the pending retractions:

Dear LQ board members

'It is with great distress on many levels that I must report that a decision has been made to retract 5 published papers from The Leadership Quarterly.  This decision comes after a thorough investigation of complaints, responses from the authors  to the concerns and thorough follow up on the authors’ responses.  A formal retraction will be published in an upcoming issue.


'There is no editor oath of office to preserve, protect, and defend the academic integrity of The Leadership Quarterly(LQ), or of any other scientific journal of which I am aware.  However, the advancement of scientific leadership knowledge requires exactly such stewardship.  The health of our collective endeavor does likewise, as two of the hallmarks of a profession are that it engages in self-monitoring to insure the integrity of its contributions and that it places societal service and the public good above personal or institutional benefit.

'In recent weeks serious allegations have been raised about the scientific value and contribution of a number of papers published in recent years in our discipline, five of which were articles published in LQ.  As a result of these a lengthy investigation was launched into the veracity of the allegations.   This inquiry process has been intensive and exceptionally time-consuming for me and many others looking into these issues.  It has also been incredibly stressful and unpleasant to conduct such an inquiry into the work of authors who are colleagues, acquaintances, and, in some cases, friends.

'However, despite all the negatives associated with conducting such an inquiry, safeguarding the academic integrity ofLQ and of the knowledge published within its pages has required that it an inquiry be undertaken.

'The inquiry process was lengthy and thorough and included a request from authors to demonstrate the accuracy and authenticity of their results and reporting.

'As a result of the inquiry, myself and the two previous senior LQ editors, along with three independent statistical and methodological consultants, have concluded that, while intentional wrong doing should not be inferred, assertions of seriously compromised scientific value and contribution are supported with respect to five LQ articles'.

Read on here if you are so inclined, to see the list of authors and articles whose 'scholarship' has been retracted.  Shows just how off-course some social scientists have gotten.

Australia gets it
Date: Tuesday, February 25, 2014
Author: Henry Thornton

Australia is getting it, if the daily newsfeeds are accurate.  The budget, and its spending and tax assumptions, is unsustainable.  Our cost base is too high.  In quick succession Holden, Toyota, Alcoa's smelter, one of our last oil refineries and a multitude of smaller businesses have shut down or are shutting down. Qantas will soon be gone, or changed so that only the logo is recognisable.  Our infrastructure is old and outdated, and bringing it into the twenty-first century will require vast sums of money or tax breaks that governments cannot afford.

The world has embraced (partial) free trade and our domestic markets can support only industries and companies that are globally competitive.  The big miners are safe but can hardly be labelled 'Australian' nowadays. The big banks are supercompetitive as a group of four oligarchs but gouge domestic customers unmercifully, as do the utilities.  Owners of toll roads do not face international competition, but soon their rich pickings will be taken by a foreign buyer and their taxes will pass to overseas owners. This is just one of the many issues limiting Australia's ability to levy taxes on the businesses that make a living off Australian consumers and other businesses.

Increasingly our children are unemployed, or employed in jobs for which they are overqualified.  The best of them will find better jobs elsewhere and visit their elderly relatives in Australia only occasionally. Small businesses are burdened by penalty rates that limit their ability to employ people. To add insult to injury.  they also suffer the effects of onerous over-regulation.

I could go on, but I might become depressed. Someone once said that Crisis equals Opportunity.  What an opportunity for reform is faced by the Abbott government. Rather than running around like headless chooks, Messrs Abbott, Hockey and their team of non-wimps are battling on many fronts to achieve viable plans to reform Australia's outdated economic infrastructure, and this includes industrial relations policies, tax policies and spending priorities as well as train lines, roads, ports and other more conventional infrastructure.

The key to success in any reform program is effective communication.  It is of course vital to convince 52 % of the people (to be on the safe side) that what you are proposing is (a) necessary; and (b) as fair as possible given all the circumstances.  The endorsement by the G20 of Mr Hockey's Go4Growth policy was a good start but we all need to be reminded daily of the interrelated weaknesses in all existing Australian economic policies. And the plan to fix things.

Saturday Sanity break, 22 February 2014
Date: Saturday, February 22, 2014
Author: Henry Thornton

'Big growth the answer' says business chief. 'THE head of one of the nation's largest employers has declared Australia needs to go for growth to spur "real job creation", instead of lifting taxes or creating big government.

'Backing Joe Hockey's call for the world's 20 biggest economies to set a global growth target, Wesfarmers chief executive and B20 Australia chairman Richard Goyder said Australia needed growth above 2.5 per cent.

"To get real job creation we are going to have to grow faster than that . . . There's no doubt (that growth should be higher)," Mr Goyder said in an exclusive interview with The Australian.

"Business is the key part of that. You don't get GDP growth through high taxes. You don't get GDP growth in the long run through growth in governments. You get it through letting the private sector take risks and invest. That's how you get jobs."  More here.

And in another surprise, it seems the Productivity Commission is to help with IR reform.

In one of the most exciting bits of economic news since, ... Moses was a boy (just joking): 'THE Productivity Commission will be given wide-ranging powers to recommend sweeping workplace changes, including giving employers greater rights to try to remove conditions from enterprise agreements, under the terms of reference that cabinet is finalising for its inquiry.

'Employment Minister Eric Abetz will announce the terms of reference next week when he introduces a bill into parliament to allow workers to trade off more easily key entitlements, including penalty rates, for more flexible working hours.

'The bill will also impose fresh restrictions on unions entering workplaces and limit their ability to get pay deals on new resource projects'.

Read on here and wonder, you Pharoahs of Australia's union movement. Your glory days are over and the royal commission will bust your monopolies open just as surely as police action is putting the bikie gangs into their proper place as harmless groups of petrol heads enjoying a ride in the sun.


The South Efricans had apparently prepared a greentop to suit previous beliefs that their side had the best fast bowling attack in the world.  This was until Mitch Johnson and friends tore the heart out of the South Efrican batting not once but twice, and accounted for Cap'n Smith both times in quick order.

Late orders from the high command made the hapless curator shave the pitch so it turned into a slow, non-turning dried mudpatch. Brown with no bounce, slow as Henry in his largely inglorious athletic career, so did Mitch and his mates give up?  Certainly not, instead used their noggins to construct swinging and cutting near sandshoe crushers that quickly accounted for Cap'n Smith and Henry's favoured bearded man, the imperturbable Amla.  Cap'n Clarke made smart field changes, while Mr Harris got into the act and even Messr Lyon and Smith, tempting the wily South Efrican batters into twice hitting one six too many, and Mr Doolan took another fine catch at silly square leg to help Mr Lyon's rapidly growing reputation.

Sadly, Day 2 was a different story.  Our bowlers labored on the unhelpful pitch, with AB de Villiers and JP Duminy making centuries. The increasingly confident  Nathan Lyon captured 5 wickets after bowling Shane Watson's overs as well as his own, and then late  in the day was required to come in a night watchman after four of Australia's recognised batters fell quickly.

Looks like the second test is all but over, and there will be changes for the third test.  Possibly a faster pitch, though Cap'n Smith may order another sun dried mud wicket in an attempt to replicate test two dominence.

Henry is beginning the difficult task of evaluating Caaaarlton's! chances of a successful season. He turned on the nab Cup game against North Melbourne, previously known as the Kangaroos and before that the shinboners (til other teams learned to fight back), and saw, much against the pundits' predictions, that the Blues were comfortably ahead.  There was a highly skilled man from the Swans, a promising ruckman from Collingwood and, gor blimey, many of the Blue boys have become stronger and more assured over the summer, with Cachia, Buckley and Bell standing out.

There has been little competition in the Thornton household for the TV as only the youngest ankle-biter is interested in the Sochi snow-games, as it seems our competitors were well off the pace in most events. Very sad, really, but unsurprising for a small country, mainly hot and dry except in the North where is is sometimes hot and VERY wet, with no snow. (Snow in Kakadu would make Lord Monckton's already bulging eyes pop right out, one imagines.)

Image of the week

Courtesy The Australian

G20 and US interest rates
Date: Friday, February 21, 2014
Author: Henry Thornton and Nick Raffan

Economic headlines today are mostly about the G20 meeting in (gasp!) Sydney and Australia's opportunity again to lead the world. Last time this was tried it was the brainchild of K Rudd, and he left us with the world's most extreme policy to fight global climate change.

This approach included a damaging carbon tax and a high required use of 'renewable energy', both policies that have helped to make Australian industry deeply uncompetitive.  The current Treasurer plans to lead the way on a growth target when we have no official idea about how best to boost Australian growth from currently predicted sub-3 % performance. Is it to be 'fixing the budget emergency', slashing business regulation or reforming industrial relations by stealth?  Or some of all three reforms?

The US Fed is supposedly beginning to consider (gasp!) raising interest rates.  The complaints of Turkey and similar inflationist nations will, of course, be brushed aside, along with advice from deflationist Eurozone nations.  Like previous hyper-powers, the mighty USA has no need to run its policies to help out lesser nations whether mad developers or ossified bureaucratic hellholes.

Just how strong is the US recovery is a subject tackled today by Henry's favourite analyst, Nick Raffan. The remainder of this blog presents the relevant part of the Raff Report for February.

'Any analyst who bothers to review the trends of US Installed Production Capacity and Utilization will see the effect on US industry caused by the emergence of China as a manufacturing powerhouse. In itself, just printing money cannot make US manufacturers competitive with China or any other emerging economy.

Now for some charts: Figure 1 shows US New Orders for Manufacturing Excluding Defense. This picture shows the dilemma facing the Federal Reserve. Growth in manufacturing keeps disappointing many mainstream commentators, seemingly these are people whom have probably never heard of, or whom do not have access to, Thomson Financial Datastream.

Figure 2 depicts new orders for computers and electronic products that are gapping down and surely reflect import replacement; this just but one example.

There seems to be a fixation on housing starts but these are only one facet of US construction. Figure 3 shows new orders for construction supplies and so covers residential and commercial construction. Note that the 12 month moving average looks set to top-out. The recovery has been slow relative to the last up cycle and we might ponder what would happen if the Fed pulled the rug from under its money printing programme.

Over recent years the US auto industry has done well as was shown in Figure 4. Henry’s readers will notice that the recovery from the depths of 2009 was very sharp and this same trend is obviously reflected in new orders for consumer goods. The pace of recovery has slowed a tad but when looked at from a historical perspective it seems likely that auto sales are set to peak, probably this year.

The fact that the Federal Reserve and the Bank of England have foreshadowed record low interest rates for the foreseeable future is relished by stock markets. The reality is of course different. It’s bad news; business is terrible and does not want the cash. We have seen this many times when bad news is good news and to hell with what is really happening in the world.

The story goes like this: low interest rates keep the discount rate low on future cash flows. The value of cashflows increases and this allows the expansion of price earnings multiples because the value of the business rises. But one day the King rides by in all his finery until someone points out he is wearing no clothes.

 Remember October 1987, the Raff does.'

The full Raff Report for February is available here.

G20 cracks gather in Sydney
Date: Thursday, February 20, 2014
Author: Henry Thornton

What fun.  The cracks have gathered for the (G20) fray.  The brumbies are galloping into the distance. The dark and weedy (well, relative to his past physique) Australian rider is urging his fellow riders to set a target for global growth, even though such a target has not been proposed for the home paddock and Joe's horse (aka Australia's Treasury) is groaning at the very idea as it has failed even to estimate the budget deficit to a couple of significent figures.  Soon the great G20 gallop will begin and presumably a global growth target will be set as 'aspirational' and the riders can all go off to the pub for a well earned drink.

Will any of this manic activity help stem the losses in Australian manufacturing industries or in small businesses generally?  Not bloody likely, comrades, but the discussion might just help shape attitudes.  In his dialogue with Australia, Joe Hockey has started to hint that he will avoid what some have called 'mindless austerity' in framing the forthcoming budget.  With every day it seems another manufacturing domino falls, most recently the Alcoa alumininium smelter, and yesterday the Sensis domino, and a very tough budget  would seem overkill.  A six percent rate of unemployment will soon look like a wonderful state of affairs, and it is good to see the good sense of workers and companies keeping wages growth well below inflation.  This is lower than in the depths of the GFC, meaning falling real wages which is just what the Australian labor market requires.

Helped by wage restraint, but also cost cutting generally, Australia's companies are delivering stronger than expected (by analysts) profits and maintaining dividends when profits are not fully up to scratch.  Good for confidence and stronger confidence will lift spending generally, and eventually stem the job losses.

What can the G20 bring to the party? Janet Yellen, if she arrives, will tell us all that she works for the USA and cannot shape US monetary policy to suit the rest of the world.  Just as well, really, as 'emerging economies' would require continued inflation and that would soon mean a global outbreak of inflation.  Note that 'inflation' here means 'goods and services inflation'. The world already has asset inflation in the form of recovering house prices and record share prices.  In fact, a key question is whether the US Fed's 'taper' will produce consistent asset deflation, but Henry doubts if Ms Yellen will have much to say on this matter.

There is, of course, a generally awkward situation at meetings like those of the G20.  Bringing together the most important heads of national administrations, finance ministers and central bankers sounds like a good idea, but each national representative is dedicated to his or her country's welfare, or when this conflicts with economic goods sense, his or her electoral popularity, in cases when democracy applies.The US Fed will not be pandering to 'developing nations' and the Germans will not be endorsing a global target for growth. As one wise owl, Jacob Frenkel, once of Chicage University, put it: 'It would be better to have a target for things governments can control'.  Sadly he held back his opinion on what a national government can control.  Budget deficit anyone?

So its on with the fun.  By the end of the meeting our most senior pollies and bankers will be dazzled, but also confused at a higher level.

The 20:80 society, tittytainment and defence industries
Date: Tuesday, February 18, 2014
Author: Tiresias of Canberra

Henry, your passing reference to the 1% and the 99% in connection to the future world of work makes me feel ancient. Almost two decades ago, in late September 1995, the global elite, in the form of 500 leading politicians, businessmen and academics, gathered at the Fairmont Hotel which stands on San Francisco’s famous Nob Hill. The venue was the birthplace of the United Nations, so the enduring odour of corruption and the best of intentions perhaps worked like a pheromone to attract the ultra-rich. Amongst the 500 were Mikhail Gorbachev (the world’s greatest ever failure at economic reform), Margaret Thatcher (another failed economic reformer), George Bush Sr. and George Schultz.

Much of the discussion centred on the so-called “20:80 society”. This was this group's paradigm for the emerging socio-economic system:
“In the next century, 20 per cent of the population will suffice to keep the world economy going … A fifth of all job-seekers will be enough to produce all the commodities and to furnish the high-value services that world society will be able to afford. The 20 per cent, in whichever country, will actively participate in life, earnings and consumption – to which another 1 per cent or so of people who, for example, have inherited a lot of money … A new social order is being sketched out at The Fairmont – one of rich countries with no middle class worth mentioning – and nobody there disagrees.”[*]

Such were (and remain) the expectations of the great and the good. The de-industrialisation of Australia fits easily enough into this agenda. The recent public whining about ‘Australian’ jobs lost on account of the decision of multinationals to pull out of Victoria and the moronic blame game which followed missed the point. There is a world-wide glut of manufacturing capacity of all kinds and there is no need for any multinational to locate any part of the auto-manufacturing supply-chain in this country. No matter how low Australian wages, those jobs are gone.  This cannot be admitted without unsettling the electorate, which imagines that the right policy fix will assure them or their children of a place in the global workforce.

The obvious flaw with the 20:80-system into which we are now surely falling is what to do with those who are not part of the magic circle, those whose labour is not in demand and who are economically surplus? The answer on offer at the Fairmont was put forward by Zbigniew Brzezinski, Jimmy Carter’s national security adviser. Brzezinski’s solution was simple: “‘tittytainment’ [‘tits’ plus ‘entertainment’] … not so much … sex as … the milk flowing from a nursing mother’s breast.  Perhaps a mix of deadening entertainment and adequate nourishment will keep the world’s frustrated population in relatively good spirits.”
This sort of thing thrills the American plutocracy, but why should we settle for this? Why would we want to? Unfortunately, “tittytainment” sums up our existing national culture. It is undeniable that our education system is already geared for turning out a population unfitted to compete with the rest of the world. The revelation over the weekend in THE AUSTRALIAN about the incorporation of Aboriginal arithmetic into the national curriculum says it all.

Henry’s preferred alternative, maintaining a strategic core of industry under the aegis of national self-reliance in defence procurement, is worth exploring as a partial contribution towards a solution, but I will not be holding my breath. Defence procurement is both a murky and an exceptionally sensitive area. It remains to be seen if our politicians and senior bureaucrats have the ability to independently manage even a miniscule military-industrial complex. Judging by the Collins submarine fiasco, the answer would be an emphatic “no”.

The best way around this obstacle is very simple. Australia must follow my old-suggestion and form a consortium of defence related industries with key friends and allies who lack our greatest strategic asset: vast open spaces with plenty of remote locations that are ideal for road-testing new products in avionics and military hardware. Our friends and allies who are rich in human capital and technology are also overcrowded and poor in space: I refer to the UK, Japan, Israel, Singapore, Taiwan and South Korea. These countries have the capital, the managerial capacity and the technology to achieve great things. We do not. So we host the party on our shores and contribute whatever we can.

If we can get the more advanced nations to locate a fraction of their defence related production on our shores, we might just have a chance. Australia would have to swallow its pride and play a junior role in the consortium, but beggars have no right to any pride in the first place. Who knows, perhaps Australian managers might learn a thing or two from their peers from more advanced nations? Stranger things have happened.

Footnote: * T Hans-Peter Martin and Harald Schumann, The Global Trap: Globalization and the Assault on Democracy and Prosperity, translated by Patrick Camiller, Pluto Press Australia and others, 1997, pp. 3-4.

Saturday Sanity Break, 15 February 2014
Date: Saturday, February 15, 2014
Author: Henry Thornton

How to replace vehicle manufacture and retain a useful and productive manufacturing infrastructure?  This is the question of the year and there is little but rhetoric on offer. Here is a modest suggestion.  It is that we systematically develop the capacity to build and maintain Australia's defence kit in Australia, fuelled by state-of-the-art, even ahead of other people's art, research and development.  Modern Australia has laughed at this idea, with government policy providing what is effectively anti-protection.

The linked article, 'Defending Australia's manufacturing capacity', published in September 2011, made the case against anti-protection in defence procurement.

'While free trade is the modern economists’ mantra, the USA, Europe and Japan all protect their agricultural industries.  Furthermore, in other strategic areas, including defence, their rules of engagement clearly favour local industry, and why not, one is forced to ask?  While-ever the possibility of serious global conflict exists, no sensible nation should rely entirely on global free trade, trade that will immediately be disrupted in any serious conflict.

'I present three examples of what I regard as inappropriate treatment of Australia’s strategic manufacturing sector. The first concerns the Joint Strike Fighter (JSF) project. ...

'A second example concerns the Australian-made Bushmaster. ...

'A third example is the breakthrough defence technology developed by Queensland company Metal Storm Ltd.  The company has proved its technology for American military clients but remains zealously ignored by the ADF.  As in the solar energy space, Australia Inc has managed to turn its back on a fine Australian invention'.

This item from the archives is recalled  due to an article on P2 of The Australian today - 'Defence system could earn billions'. Sadly, this warrior for home-grown defence procurement must conclude that the breakthrough technology is far more likely to be simply given to the Americans.  Should a start-up company  raise a few millions in an attempt to develop and sell this technology, it will be ignored by Australia's defence procurement agencies and will eventually go broke.  Then it will be gobbled up by an American company with strong positive links to the American defence establishment.  That was the fate of Metal Storm Ltd, and I hope the Abbott government does vastly better than its predecessors in utilising Australian R&D.

Make no mistake, this is a bell-weather example.
There are two further, closely related, issues. The first concerns industrial relations, where calls for reform will simply not go away.  While WorkChoices is 'dead, buried and cremated', high labor costs and whole libraries of regulations are strangling Australia's businesses. Dennis Shanahan says 'If Shorten wants a plan [as he keeps demanding], Abbott certainly has one'.

'It means stopping the boats. It means fixing the budget. It means building the future. It means building an Australia where everyone can expect a fair go and everyone is encouraged to have a go'.  So far at least, the Abbott government has not provided businesses faced by unsustainable IR rules with a fair go, although its decision not to bail out Holden, Toyota or SPC Adrmona has sent a powerful indirect message.

And, as Henry's favourite journalistic hound from hell, Grace Collier, also in the Oz, says of the coming  royal commission: 'We are set to see ALP-affiliated gangsters for what they are, and all won't be apples'.

The second additional reason for the decline of Australian manufacturing, and the weakness of many other non-mining businesses, is an exchange rate that has been too high for too long.  While our currency has been talked down, helped along by rate cuts that have gone too far, as witnessed by powerful house price inflation and rising goods and services inflation, it is still well above levels that will give a fair go to the relevant businesses. The RBA has tried its damnedest (spell check here), it simply lacks the necessary policy to give Australian business a fair go.  More here on this puzzling lack of understanding.


Mitch, you are a marvel. You have reminded Cap'n Smith of the number one cricket team in the world of just how damaging a well-directed bouncer at 150 km per hour can be, and the six other wickets you garnered in destroying the Sth Efrican's first innings of this series just underlined you message.  Then Messrs Warner and Doolan put the South Efrican bowlers - rated the best unit in the world -  to the sword, and destroyed Henry's normal sleep patterns in the process.

The footy has started, and the Hawks looked invincible in disposing of a hapless young Lions outfit.  But the big news so far is the effect of Supercoach Paul Roos on Melbourne, a joke team in recent years, who beat Richmond in a thrilling game. Caaaarlton's main new hiring Daisy Thomas is out with a chest infection, while Juddy is having his nerves cut so he can no longer feel the pain of his achilles tendon.  Scary stuff!

The skiing and snowboarding has battled for watchers against the cricket in the Thornton household, with the second TV too far away (down the hall) for easy relocation. The Aussie females, as in the real Olympics, are doing us proud.  And the woman who beat Sally Pearson and set a new record in the 100 metres is another example of wimmin power in Australian sport. Henry's daughter Emily Rose, was the only member of Henry's brood who received umpires votes in the underage gender-free footy though this is not a popular point with the young males when raised at the dinner table.

Henry and brood are going to attend the first showing in Australia of the Lego Movie, whose trailer is here.  Seats are selling like hotcakes in the mighty USA, and it is being said this is one of the best movies of the year.  Cheap but very cute actors also, helping the bottom line.

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Henry Thornton's True Unemployment & Under-employment (22.5%)

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