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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.

Time for national belt-tighting
Date: Tuesday, November 25, 2014
Author: Henry Thornton

China's economy is slowing and demand for coal and iron ore is falling.  Both sources of Australia's extreme boost to national wealth in the past several decades are drying up. Yet our national cost structure remains at the exaggerated levels that occurred while we were riding in the ore truck's massive carrying space.  See the successive Raff Reports, or the prophecies of Louis Hissink.

Messrs Raff and Hissink were early to report the massive squeeze on small mining companies.  Now we are told that BHP Billiton and Rio (and presumably other global mining companies) are undergoing rigorous cost cutting and that the era of growth by acquisition is over.  Henry heard this on ABC radio this morning, along with frequent denunciation of the government's 'broken promise' not to cut the budget of the ABC and SBS.  Typically, SBS seems to have copped its share in restoring national prosperity far better than the mighty ABC. But I digress.

The most exciting point made by BHP's CEO, Andrew MacKenzie, was the plan to crank up output from the great Olympic Dam mine, first developed by Western Mining Corporation.  Henry recalls with great clarity WMC's Managing Director, Hugh Morgan, telling the board of the RBA just how much time and effort was needed to get permission to begin building that mine.  One assumes companies are still being strangled by red tape, despite Josh Frydenberg's valient afforts.

The Oz reports: 'BHP Billiton has outlined new plans to turn the Olympic Dam mine in South Australia into the world’s second-biggest copper mine and potentially the world’s biggest uranium mine, in a big-ticket expansion that could see extra production at the start of next decade'.

But the full interview, introduced by Radio National's Fran Kelly this morning, will repay careful attention. If Australia's global mining leader is cutting costs, and raising productivity, everyone else should do so also, or soon will be.

Is is way past time to tighten national and individual belts, gentle readers. But it is better late than never, so it is time to listen up and act.

Saturday Sanity Break, 22 November 2014
Date: Saturday, November 22, 2014
Author: Henry Thornton

'THE pivotal plays in Tony Abbott’s foreign policy' writes Paul Kelly, 'are with the big Asian powers — China, Japan and India — and not the US, despite Abbott’s pro-US disposition, commitment to Iraq and his effective working ties with President Barack Obama.

'This trend, apparent for some time, was unmistakable this week. Abbott is laying new foundations for our Asian future likely to last for decades. While Australia enjoys a fully developed relationship with the US, there is greater untapped potential in emerging arrangements with China and India and still fresh opportunity with Japan.

'Abbott grasps this and acts on an ancient law of politics — search for the big new breakthroughs. This is Abbott’s instinct and vision. He is not a leader for sophisticated strategic concepts. He is, instead, a man of action who believes in the power of personal relationships, picks the opportunities and has no truck for academic theorising about the contradictions in what he does'.

Read on here.

The waves from the G20 meeting, Andrew Robb's third Free Trade agreement, with the promise of another, and President Obama's shirtfront on climate policy continue to reverberate. Messrs Abbott and Hockey urgently need to  find a way to fix the budget without a whole series of unpopular policies that (even collectively) are unlikely to put the budget into surplus in the foreseeable future.

I remain of the view that the GST, as part of reform of the Federation - removing 'double dipping' administrations - is the best answer. Surely the states could be brought to agree, especially as the reforms would take us back toward the vision of the founding fathers.  In fact, a force of one Federal Minister and one senior minister from  each state government and a team of sherpas from all areas of government could be tasked to produce a White Paper on the savings from a proper federation, with Defence, International Trade and other obviously national matters run from the centre and all other matters run by the State and Territory governments.

It might turn out that thorough-going abolition of administrative 'double dipping' might do most of the budgetary heavy lifting, and the GST could stay more or less as it is at present.

Just a thought, Tony.


Very sad to read about the supposed 'Twilight of an art movement'.

Nicholas Rothwell writes: '“END of an Era,” proclaimed the staccato media statement sent out earlier this month by Melbourne’s Gallery Gabrielle Pizzi, long the starriest and best-known name on the commercial Aboriginal art scene — and for once the hype was right.

'The closure of the gallery after three decades serves as dramatic confirmation that the high-end market for traditional indigenous art has all but evaporated'.

Read on here, gentle readers, and mourn.  But the great Aussie tradition of outback images will be back, dear readers.

In fact, help is at hand, in the form of Henry's hyper-realistic images from Central Australia, coming soon to a gallery near you.


Player trading has more or less finished in the AFL and Caaaarlton! seem to have flown under the radar. Read the SunHerald article at a coffee shop this week that claimed the Blues have quietly picked uo a number of grown-up players, some of whom may become good regular players, while there are stars in the making among the survivers of the culling by Mick the Merciless.  Time will tell.

The young guns have carried Australian one day cricket to a series win over South Efrica, and one more win will restore us to number one. When in doubt, or desperate, always go for yoof is Henry's views about international sport.  Curiously, however, he sees the wisdom of old age as the ideal for business or politics.

The futball (soccer) team had a great first half against Japan but relaxed slightly in the second half, with Tim Cahill's goal helping provide respectability to the 2:1 scoreline.  As the press has said, several other potential goal scorers have to become more confident and learn how to score like young Tim.

The Wallabies tackle the Irish in the wee hours tomorrow, and can expect a tough encounter.  With Mr Beale on the bench, we may be able to give the Irish a touch of the X-factor.  But I will not hold my breath, or get up to watch.  There have been too many disappointments.

Am coming to that view about the Outsiders, but will watch again tomorrow to see if the cartoon spot (easily the best part) uses the gem below.  Will anyone give me good odds?

Image of the week

Courtesy The Oz

Dire straits for miners; G20`s theoretical triumph
Date: Thursday, November 20, 2014
Author: Henry Thornton

'Without doubt this is the toughest market for the resource sector that the Raff can remember, since graduating from Macquarie University in 1975. Murdoch’s paper is too long to detail in a Raff Report but his key findings were as expected. Here are just a few points from Murdoch to ponder:

1. The Metals and Mining Index has hugely underperformed BHP (this reflects the dumping of junior metal miners and explorers and the relative safety of BHP which at least pays a dividend).

2. Only 28% of companies have the cash typically needed to mount a robust site programme that may result in a re-rating of the company’s share price (to give readers an idea of drilling cost, a ballpark figure for a drill rig with capability of 1,000 metres capacity is $6,000 per day; for this you might get 90-120 metres open hole or 30 metres of diamond core).

3. 22% of explorers do not have the cash to do any real work on site (the Raff looked at a bunch of Appendix 5Bs recently and one characteristic in common was cash outflow for administration dwarfing expenditures on exploration).

4. On average, energy explorers spent $740,000 on exploration, nearly three times the expenditure of companies exploring for precious and base metals (the Raff thinks the recent hike in the price for uranium will see a swing back to exploration for uranium in 2015, and energy explorers, on average, will outspend precious and base metals in 2015).

The latest Raff Report explains the dire straits our small mining companies find themselves in, a theme first predicted here by Louis Hissink at least 18 months ago.  And Louis weighs in with his own current thoughts on the dire straits of the mining industry.

Here is a BHP Billiton perspective. 'BHP Billiton, the world’s largest miner, is not concerned with the five-year-low iron ore price, saying its West Australian operations are still making a good margin, as it defends its expansion strategy in an oversupplied market'.

G20 triumph

We have, however, noted the new Free Trade Agreement and the visits of the G20 leaders and Finance ministers.  Both events are positive, but only the new FTA goes beyond nice theory.  Politics, as so often happens, is likely to block economic policy, as we observe so painfully here.

Overall, a triumph for Tony Abbott and Joe Hockey, and now we know how to boost global growth;  but we also know this will only happen if the policies listed by the G20 nations are implemented, and we can see just how many have got through Australia's Senate.  This may well be the usual response, leaving the G20 growth boost nice theory, disappointing practice.

How ironic that the Chinese president Xi Jinping spoke so graciously about China's new partner Australia in the parliament while Barak Obama seemed to undermine our policy on climate change at the University of Queensland.  Noone has explained yet how China's and America's climate change policies are different to ours, and how we achieved a better performance on CO2 emissions than the mighty USA.

Funny business politics.

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

What a thrill, the leaders of G20 nations arriving in Brisbane, our new 'global city'. The Agenda for their meeting is largely economic, with the Australia-China free trade deal (Step 1) to be announced Monday to provide an exclamation mark. US-China climate change deal puts a big 'Stop Press' sign as a preamble, and it is also good to see the amount of press activity devoted to international tax avoidance.  Why discuss tax hikes here when Google, Amazon and IKEA, and other multinational are playing us for mugs?

The most interesting item in the weekend press, for this writer at least, is Stirling Larkin's 'Steps to avoid a banana republic'. Here are some quotes:
* The RBA's 'money zero maturity' (whatever this is) has 'placed us in the unenviable position of drifting away from the commodities super-cycle and towards the abyss of ... a banana republic'.
* '... real growth comes from technological developments, human ingenuity and the boosting of productivity through innovation, all of which are precepts of free markets and not the state'.
* Australian Industry group Chief Executive Innes Willox believes "the Australian economy is changing gears and big parts are in the slow lane with little prospect for a quick turnaround'.
* 'Willox highlights the need for the Australian economy to be retooled and rebooted to deal with the effects of a high-cost, high-wage economy saddled with a relatively high currency, struggling with the resources boom tapering off, construction struggling to gain traction, traditional manufacturing under pressure and slowing government hitting the services sector'.
* "Like any good business, Australia needs to focus on its competitive strengths, intellectual capital and skills base to value add in resources, agriculture and manufacturing to give us the balanced sustainable economy with a distinctive competitive edge" Willox added.

The whole article is well worth reading.  Mr Larkin's focus is one the investment practices of ultra-high-net-worth -families, who have for several years putting a lot of money offshore. The conclusion of the article links the economic reform program outlined by Innex Willox with a shift back toward investment in Australia.

'Hear, hear' Henry cheers.

A surpising headline today is 'Economist tips recession next year'. Finally this news is breaking through the Australian economic elite's complacency. This is like spotting the second blowfly at the barbeque.  Henry must admit to being the first such annoyance, with 'The recession we did not need to have', published in The Australian in august 2014.

Will our economy be saved by the G20?  Andrew Robb says says China free trade agreement could ‘set us up for years’, reports Paul Kelly.

If the 2 % hike in global growth really happens, and if the free trade agreement with China happens as advertised, these developments will undoubtedly help.  But to take maximum advantage the domestic reforms outlined by Innox Willox are needed. My fingers are crossed.


ASADA is said to have finally issued 'show cause' notices to 34 former and current Essendon players.  Stephen Dank is still smirking for the press, and looks like escaping from penalty for his alleged part in the supplements saga. This issue is becoming a bigger 'clusterf**k by the week, and can only end badly for the AFL. 

Meanwhile, Australian 'Futball' goes from strength to strength with its advantages if being a global game far friendlier to children, and therefore modern parents. Henry recalls at age 15 being given a shot of whisky before going out to play the hard men of Scorsby in an EDFL grand final.  Nunawading played an honorable but losing game, and the young Henry was delighted no-one was killed or crippled.

Mitch Johnson is cricketer of the year for the second time,  still scaring the cr*p out of batsmen and cheering local audiences.  Pakistan was a catastrophe, the One Day series against South Efrica has started well, and the test series against India looms.


Fiona Prior survived Java and now reports from, no, not from that comet but from a cinema showing the film called 'Interstellar'. Interstellar 'is a grandly enjoyable movie'.

Henry's sources reveal that a number of excellent movies will hit the screens this summer, so readers can find entertainment plus refuge from the heat if the cricket is boring.

Image of the week

  Courtesy The Oz

Saturday Sanity Break, 8 November 2014
Date: Saturday, November 08, 2014
Author: Henry Thornton

Big international companies evading tax.  Who'd have thunk it?  The BCA opposed to fixing this. Well, what a surprise!  Clearly there neeeds to be some international accord that companies will play fair on tax or be outed, or worse. What happens after outing remains to be seen, but individuals can make their views known in the most obvious of ways - stop buying their stuff.

Free trade agreement with China looking likely. Chalk this up as another bold move by the Abbott government, and will provide much opportunity to farmers and agriculturists. And it is a very welcome move strategically, which could be compared with pre-world war II decision by western powers to starve Japan of raw materials.

Jobs growth about half growth of the workforce, leading to inexorable increase in unemployment, loss of productive workers (dropping out of the workforce) and further upward pressure on welfare payments. Who cares? The government must and anyone else concerned at growing inequality should.

Imposing a modest real wage hike on the defence forces and others on the national payroll. In reality, if Australians all took a 20 % cut in money wages, our economy would be competitive again and our jobs growth would surge. Who cares? The government does and anyone else concerned at growing inequality should. 

The exchange rate sinking, not yet quite like a stone, but that could be the next issue people worry about, or take advantage of by moving assets offshore and generally tightening their belts. Provided wage costs are contained - see previous comment - a lower exchange rate will help restore competitiveness. A lower exchange rate is a graphic signal of our nation giving up the fruits of the mining boom, reality bites.  Ergo, we are poorer and can afford less welfare and lower incomes generally.

Points like these should be part of the Australian 'hymnbook'. Henry has been working to see that a 'hymnbook' is agreed by all participants in two significent industrial ventures.  That is difficult enough for one enterprise, imagine the challenge for the Prime minister? Even the cabinet is said to be in need of more solidarity.

Hope these notes might be useful at festive season bbqs.  Spread the news, folks. Global economic competition is ruthless, and Australia's current lack of competitiveness will impose costs on us all.  As dear old Frank Cream said way back when: 'One man's wage rise is another man's job loss'.

We wish the Prime minister, his ministers and every one battling to improve Australia's competitiveness, thereby allowing more compassion, all their best with their endeavours, so look out boys and lady, disunity is death. This is why we need a compelling national 'narrative'.

Here is the latest RBA prognosis - their glasses now well below half full - indeed 'grim' as one newspaper summarised. 

Do not panic, gentle readers - the G20 (sans shirtfronts) will sort it all out. Is it 2 % of GDP or 2 % pa Growth of GDP that is being added?  Henry suspects we are all equally confused about this but either outcome will be welcome.


Our recently victorious cricket team has been given a salutory lesson in the duust of the Middle East.  Overnight it drew level in a T20 contest, whatever that is.  Bring back the five day tests meandering to a meaningless draw is Henry's views. 'G20' is apparently the economy's version od T20, Henry has been told. Helter skelter for a short time, then its on to the next talkfest.  One assumes it is better than fighting.

Rugby team started well under its new coach but faces severe tests in Europe.

No news of footy, except the non-news that ASADA has again failed to pounce.  Obviously Asada feels its case is not sufficiently backed by evidence, and surely someone should insist there be an end to this farce.  And it was good to read this week that Caaaaaarlton! believes is has recruited wisely. Time will tell.

So sad to see two horse died after the running of the Melbourne Cup. Not much to be done about it except, perhaps, to enforce rules apparently in place about use of the whip.

Terry Maher has again presented all the news that's worth reading in his views of the Spring Carnival.

Image of the week - from the archives


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

Inequality in Australia is rising, but only gradually from not-too-obscene levels.  This is one of the conclusions as Adam Creighton continues to fan the blaze after his boss Rupert Murdoch lit the flames in a major presentation to G20 finance ministers.  Henry has been trying to get a copy of the presentation so he can check it for himself, but so far, no luck. Anyway, inequality has risen far faster elsewhere and it is plausibly due in part to the massive monetary expansionary that is 'Quanitative Easing' (QE). Do not miss the nice video featuring Alan Kohler.

Another economist has joined the discussion. Henry Ergas sees QE as dangerous and must be welcomed to the 'old ratbag club' (orc) otherwise known as the 'economic elite'. As clear evidence of his status, Mr Ergas quotes Keynes and Milton Friedman: 'While very sparingly used until then, that approach had a long pedigree. Before he turned to government spending as his instrument of choice, John Maynard Keynes had proposed QE as a key element in responding to the ­Depression.  Mr Ergas speaks here. (Apologies if the link is not working, gentle readers, The Oz has done something different.)

“We cannot hope,” Keynes wrote in 1930, “for a complete or lasting recovery until there has been a very great fall in the long-term rate of interest throughout the world.” The problem, however, was that left to its own devices, achieving that fall was likely to prove “a long and a tedious process”. The answer was for central banks to “reduce the rate of interest to a very low figure”, while buying “long-dated securities either against an expansion of central bank money or against the sale of short-dated securities until the short-term market is saturated”.

'The Fed did just that two years later, with Milton Friedman, in the monumental monetary history of the US he co-authored with Anna Schwartz, crediting the policy with an important role in stabilising the American economy'. And, in conclusion, governments, and presumably, central banks, should be cautious, 'all too often, however, they have failed to heed Friedman’s admonition against “assigning to monetary policy a larger role than it can ­perform, asking it to achieve tasks it cannot achieve, and, as a result, preventing it from making the contribution it is capable of ­making”.  Or, as Friedman used say more pithily: 'Monetary policy cannot serve two masters'.

To return to Mr Ergas; 'the “unconventional” measures the Fed is bringing to an end may become an object lesson in the costs ignoring that warning can impose'.  More here. 

Henry's collected recent advice on  Monetary policy is available here.


Henry's Kultural Komissar, Fiona Prior, has travelled to Java.

I have not been to Indonesia for almost a decade ... definitely not since the Bali bombings and I was looking forward to discovering Java, an island I knew very little about except that it housed an ancient Buddhist temple of which my school art teacher had enthusiastically spoken.

Transporter God Garuda

A whiff of a clove cigarette at Denpasar airport accompanied the transition to my Yogyakarta flight. On arrival I sadly noted the rituals of post-terrorism Indonesia, as each time my driver pulled up at our hotel or any major public/tourist destination a long stick with a mirror attached to its end was walked round the car to detect attached explosives.

Read on here.

Footy'n'cricket'n stuff

What a catastrophe.  On a dead pitch, even Mitch Johnson can't put a batter, or preferable two, out of the game.  The formerly hapless Pakistani team is putting Australia to the sword. After scoring almost 600 for 6, the Pakistanis declared and snared the wicket of nightwatchman Nathan Lyon.  Personally, I blame australia's mothers. Don (Bradman), Jeff (Thompson), Dennis (Lillee), Ricky (Ponting), the list of good old aussie scrappers goes on. 'Nathan, move a few inches to the left, if you don't mind', is unlikely to scare the batter as much as 'Rip into the bas**rd, your b**tard', once would have unsettled the nice lads from Karachi.

Shane (Warne) set the new trend of Superstars with, in his case, only slightly sus first name. But 'Nathan'?  Mrs Lyon has a lot to answer for, as do Mothers who call their kids Trent, Jeremy, Fortesque, ... and other 'modern' names. Fill in your favourite first name.

In Footy, ASADA is still poised to pounce, but seem to lack the guts, or evidence, to do so.  Here is a modest suggestion. The Napthine government should pass a law, or promulgate a regulation, that asserts if ASADA fails to pounce by November 1 its all over.  Oooops, I meant November 4, by which time every one will be focussed on the Cup.  While they are at it, Mr Nahthine might ban foreign horses from The Cup. Either new policy would put the state Libs back in the election race.  Both would make an election win a dead cert.

Image of the week

Courtesy The Oz


Easy money and inequality
Date: Wednesday, October 29, 2014
Author: Henry Thornton

Rupert Murdoch has greatly contributed to the debate on the world's currently uncontrollable asset inflation. In a recent speech to the G20 finance ministers, he blamed asset inflation on money printing in the guise of 'quantitative easing'. He noted, according to Paul Kelly's report in The Australian, that this was the cause of widespread asset inflation. Most importantly, he noted that the net effect of this was to make rich people much richer, and therefore made income disparity far greater.

This is a consequence of overly easy money that is vital for the stability of modern capitalism. Zero interest rates and massive 'quantitative easing' has greatly inflated asset prices. This has made rich people richer, and has little benefit for ordinary people. The great thinkers, including Keynes and Marx, have seen excessive inequality as likely to damage, even destroy, capitalism. So, even without factoring in the likely (serious) economic consequences of withdrawing excessive monetary stimulus, there is a serious issue awaiting resolution.

This is an issue that should provoke widespread interest in the question about the causes and consequences of asset inflation that is not generally even debated in academic circles.(Macoeconomics is a largely overlooked subject in academic circles, being too hard for most economists.)  However, Mr Murdoch's speech is likely to have wide ramifications in the real world.

Today The Australian has continued the debate, courtesy Adam Creighton, who asserts that 'Economic elite back Rupert Murdoch’s inequality fears'. Henry acknowledges his editor's appearance in Adam's list of local economic gurus but believes concern at growing inequality within the rich nations is, or should be, a concern to economic thinkers everywhere. For the academic end of this debate, you need go no further than the much discussed work of Thomas Piketty.

But now for Adam's contribution: 'VETERAN Reserve Bank economist Peter Jonson cheered yesterday when he read Rupert Murdoch had warned G20 ¬finance ministers that money printing by central banks had exacerbated inequality and fanned discontent with the global economic system.

'Mr Jonson, a Reserve Bank economist for 16 years and the former Henry Thornton columnist for The Australian, said he had been worried for years that so-called quantitative easing (QE) had benefited the rich by artificially boosting share and property prices. {NB - two typos corrected.}

' “Mr Murdoch has made the absolutely valid point that QE has done really nothing or very little for ordinary people,” said Mr Jonson, the bank’s head of research for seven years in the 1980s'.  ...

'Bob Gregory, professor of economics at ANU and a former Reserve Bank board member, said Mr Murdoch was “completely right: QE is causing rising asset prices and growing inequality, but the harder question is what should central banks do now, and what should they have done then after the financial crisis”.

' “The intellectual underpinning of QE is a kind of ‘trickle down’ economics whereby the rich feel richer and spend more,” he said, suggesting the policies would eventually stoke inflation in consumer prices as well as asset prices'.

The answer to Bob Gregory’s question – what to do about it – is that we never should have gotten into the situation we are in.

Having got there, we must take our medicine.  Ending QE will presumably remove some of the excess asset fiz, and raising interest rates will remove some more.

If the beneficiaries of the great asset boom are lucky, they will end up net net better than they would have been but not nearly so rich as they are now.  (If the smart, or merely lucky, ones bail out at the right time, they will remain rich.)

This will be what it will be.  The real lesson to not let it happen again. That's where macroprudential policies fit in.

But I am reminded of a comment John Howard once made: ‘No-one complains to me that the price of his house has gone up’.

Continuing with Adam Creighton: 'A new study by the US-based National Bureau of Economic Research written by eminent tax economist Emmanuel Saez, released on Monday, found the rise in wealth inequality in the US is “almost entirely due to the rise of the top 0.1 per cent wealth share”, noting that share had grown from 7 per cent in 1979 to 22 per cent in 2012 — a level almost as high as in 1929. “The bottom 90 per cent wealth share first increased up to the mid-1980s and then steadily declined.

' “The increase in wealth concentration is due to the surge of top incomes,” the authors said' .  ...

'Joe Hockey agreed that “loose monetary policy has helped people who own a lot of assets to become richer, and that is why loose monetary policy needs to be reversed over time and will get back to normal levels of monetary policy.”

'Labor Treasury spokesman Chris Bowen welcomed Mr Murdoch’s remarks, especially for their contribution to a growing debate about rising global inequality'.

Alan Kohler has also weighed in with some analysis of the  history of inequality. His headline is 'Roots of imbalance sown in the Reagan era', and he asks 'Are we seeing a return to the time when middle classes didn't exist?'

Henry is keen to foster debate on this vital issue. If you wish to contribute, contact Henry here.


Economic progress and risks
Date: Tuesday, October 28, 2014
Author: Henry Thornton

There are some welcome developments in economic management. The Prime minister has put Commonwealth-State relations on the agenda, which has widely been interpreted as implying a broadening and/or widening of the GST. As Mr Abbott said, the real issue is deciding which level of government does what and cutting out the overlaps, double guessing and double regulating.

This will save money but, if done thoroughly, there would be wider benefits.  Shared responsibility is no responsibility, and allowing states to have sole control over specified functions would make for far clearer lines of responsibility. There would also be opportunity for states to offer competition. For example, a particular state might opt for more technical training and less production of excess lawyers, economists and experts in gender studies.

Another good sign is that labor costs are now growing more slowly than for a long time.  Provided this can be maintained as the currency devalues, it might make a useful contribution to making Australian industry more internationally competitive. There is also the project of killing unnecessary regulation, and if we can get really serious about this, it will also be helpful. I worry that our international competitiveness is so compromised that best realistic endeavours shall not be enough, but I hope I am wrong.  Failure to boost competitiveness strongly is the biggest risk facing our economic well being.

The second biggest risk is failure to fix the budget.  I think Labor would be sensible to stop playing doggie in the manger and say they oppose various budgetary measures but they will wave them through so that the budget can be fixed.  If the side effects are excessively horrific, or if the budget is not fixed, one would expect the government's popularity to plunge. Ergo, Labor reelected with a reputation for allowing the voters to have their say.

A third risk, far harder to deal with, is rising inequality. This has been greatly exacerbated by the super-easy monetary policy since the GFC. Many great thinkers, including Keynes and Marx, have seen excessive inequality as putting capitalism at risk. Rupert Murdoch has put this issue squarely on the global agenda with a speech at a meeting of G20 Finance ministers. How leaders respond will be vital, but even removing excessive monetary policy ease will be a major challenge to the stability of the global economy.

The next biggest risk to Australia's prosperity concerns the state of the world economy. As Larry Summers has concluded, high growth, especially in authoritarian nations, can and usually does end badly with a return to global average growth.  A dramatic slowdown in China and/or India would hit hard a world economy that is already struggling to recover from the severe recession induced by the GFC.  There is another iron law of economics, which is that nations with large debts, private plus public, take a long time to recover.  Think Japan after its asset bust in 1989/90. And this was the first 'miracle economy' of the modern era.

Some will say Australia was also a 'miracle economy', and so it seemed at the time.  With current policies, Australia is adding a mountain of government to debt to everests of household debt and company debt. This comes at a time when our cost structures are out of whack and there are growing doubts about the likely strength of global growth, and some chance that the Chindia boom will slow severely, even if there is no bust to follow the boom.

What would you do if your household had built a debt mountain and priced itself out of the market, gentle readers?

Sunday Sanity Break, 26 October 2014
Date: Sunday, October 26, 2014
Author: Henry Thornton

The most reliable measure of above average growth is spending on research and development (R&D.) Spending on 'commercialisation' or, more generally 'innovation' is also vital, as shown by the experience of Israel and Singapore.  And will be further evidence as China embraces innovation. Henry's pleas about this matter are available here. But high level help is at hand. 

To its credit, The Oz is running a series called Innovation Challenge.  As well as case studies, the Oz is providing opinion. This weekend's opinion piece is by master entrepreneur, Alan Finkel, 'Why closer ties with industry is needed'.

We have ridden on the sheep's back, profited greatly from the activities of gold prospectors and hitched a ride in the cabin of iron ore trucks. But collaboration between Australian industry and research institutes like CSIRO and our great research universities is the weakest in the OECD area.

And there is less government funding of business-relevant research in Australia than in any OECD nation than Mexico.

Alan Finkel predicts us slipping to last now that Commercialisation Australia funding has been junked and the Cooperative Research Centre (CRC) program is under threat. He notes the new Industry Innovation and Competitiveness Agenda (including the new Growth Centres program) is expected to redress the situation, at least to some degree.

More on prospects for growth here.

Dealing with fundamentalist terror

A constant theme is summed up as follows: 'SECURITY agencies fear Australian jihadists may have used the ­recent Hajj pilgrimage as a cover to leave the country to fight for ­Islamic State and other terror groups in Syria'.

And: 'Tony Abbott yesterday defended the policy of cancelling the passports of would-be fighters, despite claims that this might increase the likelihood of those people launching attacks in Australia. “What we don’t want is people coming back more capable of doing us harm than they were before they left. Going overseas brutalises them, it militarises them, it gives them far more capacity to do us harm then they had before they left,” the Prime Minister said'.

My question is this.  Why would it not be better to let suspected terrorists leave and, 24 or 48 hours later, cancel their passports?  If such people wanted to return, they could provide an explanation of where they went and why. If this failed to satisfy immigration authorities, they would become stateless and would have to remain with their fundamentalist mates in Iraq and Styria.


Caaaarlton! seems still in limbo on the trading market.  ASADA 'refuses to be rushed' in issuing 'show cause' notices to Essendon or ex-Essendon players. Henry resolutely believes Essendon and other clubs using banned or unknown drugs or supplements should suffer harsh penalties. But Gor Blimey, Comrades, how long can this be allowed to be dragged out? ASADA failed to require Steven Dank to give evidence. Now they fiddle while the reputations of Essendon and its players are trashed. How long can they be allowed to dither? Act or get off the pot, supposed guardians of a fair go in sport.

Meanwhile, Australia's world standard cricket team is being belted by Pakistan. 'Just what we needed to get rid of the cobwebs' someone in authority will presumably say. Sigh!

Henry's epic crossing the Nullarbor is over.  Here are links to his three trip reports.


Crossing the Nullarbor  

The Barossa  

Image of the week

Vale Gough Whitlam; and issues for economic growth
Date: Tuesday, October 21, 2014
Author: Henry Thornton

We salute the life of Gough Whitlam, 98 good years for a great Australian. Flawed, like the rest of us, but a visionary leader who gave hope to the battlers and helped to create a better deal for women, indigenous Australians, bright kids from battler families, ill Australians and improved Australia's international image with his early recognition of China.

Economics was Mr Whitlam's great flaw. 'His weakness was inability to tell a million from a billion' said one of his loyal supporters. Trouble with social reform is that it costs real money, and more generous welfare or premature wage increases can blunt incentives and cost jobs..

It was Time, as the slogan (and the song) said, but we got too much too fast.

Greetings from Port Lincoln, gentle readers. From Port Lincoln, after crossing the Nullarbor, Henry reported in the  style of Jack Kerouac. Available here.

Brilliant landscape, with lots of painting ideas.

Totally missed the weekend papers, but got a free Monday Australian at hotel here to catch up. Plus a special newspaper at Port Lincoln tourist info specially for Seniors. 'Leave our pensions alone' was the headline.

Heard of new Growth Centre ideas before leaving. Sounds like an innovative new way to get university researchers to work with businesses, focussing on areas where Australia has already achieved global high standard, or needs to do so.

This is sometimes derided as 'picking winners' but Henry's view it should more sensibly be described as 'supporting winners'. The world economy is more competitive than ever, and we need to focus on things we already do well.

The examples provided by the government include:

* The food and agribusiness Centre may assist food manufacturers to work with packaging companies and researchers to consider packaging solutions to extend the shelf life of products, especially into regional export markets where the lack of refrigeration is a problem.

* The mining equipment, technology and services (METS) Centre may identify global market opportunities to enable establishment of METS consortiums to target opportunities with product and service export packages and access to information on global supply chains.

* Through the medical technologies and pharmaceuticals Centre, businesses may be assisted to identify new opportunities through linking with medical device and materials researchers to develop new biomedical devices and platform technologies to improve health outcomes and business profitability.

* The advanced manufacturing Centre may bring together researchers and small chemical manufacturers to enable them to adopt new chemical flow and carbon fibre technology, in turn allowing them to develop new, low cost chemical products which are competitive with those produced overseas.

* The oil, gas and energy resources Centre may assist businesses to lower costs through greater collaboration, better sharing of infrastructure and logistics support (especially on remote projects), greater development and uptake of new technology and innovation, and improved planning across all areas of the resources value chain.

More information here.

Economic growth.

David Uren delivered a very interesting discussion in Monday's Oz. He reports on a study led by Larry Summers, former US Treasury Secretary, now practicing economics at Harvard.  In summary: 'The history of countries enjoying rapid growth is that they return to the global average, usually very rapidly'.

It is always possible to assert 'this time its different', but in my view the sort of historical experience like that investigated by Summers et al is the best guide to future economic developments.

If this universal law - 'regression to the mean' - applies to China and India, the future will be far rougher than the past decade has been for Australia.

This possibility should give us added impetus to fix the budget and get on with some serious economic reform.  Please, political heirs of the visionary Gough Whitlam, buckle down and let the government do their best. In my view, this will give you the best chance to again govern, and it will be a far stronger country when your turn comes again.

The bipartisan tributes to Gough and Margaret Whitlam today show parliament  at its best.  Being constructive about economic policy would lift the tone and outcomes greatly.

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