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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.

The barbarous beheading
Date: Friday, August 22, 2014
Author: Des Moore

US Response to Beheading

The best that Obama has so far been able to say following confirmation of the beheading of a US journalist by Islamic State  is that airstrikes will continue and “the US would do what it must to protect its citizens”. However, it now appears that earlier on Obama had approved an attempt by special forces to rescue Foley and, as previously announced, he had also contemplated the use of military to “rescue” the Yazidis on Mount Sinjar.

It is also reported that the Abbott government had considered involving an elite Special Air Services regiment if such a US rescue-mission had eventuated. It seems clear that Australia and some European countries would be prepared to send troops to Iraq if Obama were to decide to do so. That the beheader appears to have been British would likely confirm the implication that Cameron would join in.

With the continuation of US air strikes, it seems likely that the other US journalist held by IS will also be beheaded. But will the continuation of the now widely condemned barbarism, and the appeal from Iraqi Christians, lead Obama to reverse his decision not to put troops on the ground?

An article published in the Wall St Journal suggests a connection between what is being allowed to happen in Iraq and in Ferguson, US, where police forces have acquired military equipment to use in controlling the riots there. The author argues that, in both cases, the failure to prevent or control disorder has led to violence. He refers to the recognition in New York that “broken windows” sent a (successful) signal to the police force there that  neglecting disorder leads to crime. But he expresses no confidence that Obama will act to help restore order within Iraq.

Reactions in Australia and Indonesia

Abbott’s strong adverse reaction to the beheading has been widely reported, except in The Age which did not report his statements at all. Labor’s Tanya Pilbersek reportedly said it highlighted the brutality of the Islamic State and “the terrible risks faced more generally by foreign correspondents reporting in war zones”.

Abbott has also criticised the failure of some Muslim groups to attend the talks he held. With the heading “Evil threatens Australia” the Herald Sun editorial is also critical.

Encouragingly, in an interview with Greg Sheridan Indonesian President Yudhoyono has been very critical of IS and urged international leaders to work together to combat radicalism. He indicated that Indonesia is not an Islamic state (small s).

ED. Tiresias adds: 'What exactly is Team Australia? Who belongs to it and who doesn’t? Tony Abbott’s use of the expression suggests a sound-bite crafted by a ministerial staffer, possibly a graduate with a degree in media studies. It means nothing and stands for even less. Worst of all, it reveals the insecurities which we scarcely dare to acknowledge'.

If they chose to do so, Australian politicians can discriminate ruthlessly: Muslims who meet Western and Australian values half-way should be made welcome, Muslims who seek to reproduce the cankerous and bitter politics of Western or Southern Asia or North Africa should not. If Australia can cheerfully discipline political dissent from One Nation, it can do the same with supporters of even more rancid and inflammatory politics. Mainstream politicians can make it clear that illiberal, antiliberal and extremist politics have no place here, that those who support extremist causes (including jihad in any form or irredentist and revanchist Palestinian nationalism) cannot hope to exercise any influence on Australian policy. If Muslims wish to take up humanitarian causes overseas, by all means let them do so … but advocacy for violence against non-Muslims (such as we see at the so-called ‘peace protests’) should remain beyond the pale of mainstream politics.

 Read on here.


It's a bloodbath, comrades
Date: Wednesday, August 20, 2014
Author: Henry Thornton

'What fun, comrades.  Mr Palmer insults us and his running dog (Ahem, (correction inserted) ), suggests our mighty People's Army might be deflected by a few missiles, even supposing the cash-strapped Australian government could afford to buy them. 'Mongrels', 'bastards', these are terms of endearment in Australia, are they not? Palmer, Clyde's iron ore is not that good anyway, so let's just buy more from Brazil.  But cancel the FTA, it seems too complicated for the Ozzies anyway.'

Henry awoke with a jolt.  Was this just a dream, or a message from Beijing for all of us? Being uncertain, there is is, gentle readers, hot from Henry's fevered brain, stoked by fine single malt from the Highlands of Scotland.  More here, and do not miss Culloden.

The morning news was equally baffling.  The 'budget emergency' is now just a little local issue, to be fixed with several months of negotiation (correction, 'vicious wrangling') with 'cross bench' Senators. Will keep Smokin' Joe off the streets for a bit, and it seems he's getting a bit of help from his colleagues, especially that nice Finance minister.  And, in any case, we are told that 98.7 % of the budget has been agreed by the Senate, and the budget emergency has been solved.

But the 'cost overhang emergency' has not been solved, and will become seen as the big challenge for the Australian people. Wages growth is already low and unemployment is rising, more sharply (Henry asserts) than allowed for in official forecasts.

The mighty BHP is going to shed its unstrategic assets, including unstrategic workers and perhaps even uncompetitive directors, improving the mother ship's productivity and giving investors a new plaything. Can Qantas take long to figure out the same strategy, shedding the highly unprofitable overseas routes in a last bold attempt to keep the domestic flight aloft. Or RIO? They must have made a few dud investments during the boom, surely. And perhaps the Finance minister will discover that some remote place, Tasmania or Northern Queensland, is not pulling its weight and propose a national spin-out.  Someone once said one cannot shrink oneself to greatness, but is Palmer, Clyde a counter example?

Henry apologises from the unserious approach to the economic news. But watching a slow motion train wreck, predicted two years ago, eg here, will do that to a bloke. One of Henry's fellow worriers said last night: 'Its a bloodbath in corporate Australia'. Do not be fooled by record profits, dear readers, this is a lull before the storm.

Saturday Sanity Break, 16 August 2014
Date: Saturday, August 16, 2014
Author: Henry Thornton

Joe Hockey shedding a tear for his own insensitivity on national television was the political high point of the week, and may represent a turning point for what was beginning to look like an economically inept government. The call now is for the government to recast the budget. However, the first task is to provide a believable narrative.

Once a believable and plausible narrative is in place, there are two things to get right.  Make the budget genuinely 'tough', and make it much fairer.  Henry's call for direct action to address the 20 % or so national cost overhang (and in the process create a plausible, because truthful, narrative is probably a bridge too far, but is linked here to remind readers about Australia's true 'economic emergency'. 

On the issue of welfare dependency, it is alleged by experts that 40 % of Australians contribute to helping the other 60 % who get assistance, and that Australia helps the bottom 25 % more than any other developed nation.  Surely 60 % of Australians are not 'battlers' and if they we have the balance wrong. But how to end the Age of Entitlement is far from obvious, but it must be done, dear readers, or we shall indeed achieve Banana Republic status, with all but a priviledged elite 'battlers'.

'Tony Abbott to step up budget sales job' is one relevant headline today, but there are others of equal importance.

Adam Creighton warns that 'If we're not careful, we'll have a full-blown jobs crisis on our hands'.

He points out that Australia's rate of unemployment is rising when in most countries it is falling. So much for the 'miracle economy', with even the tenured, highly remunerated men of the RBA pointing out that the jobs scene will be dismal for some time yet.

But the jobs crisis has been with us for years now, as pointed out here for an equally long time - and most recently in the blog immediately below this.

Mr Creighton nails the key point is a beautiful piece of economic prose: 'Economic theory says involuntary unemployment is impossible in a free market — if someone is out of work at the prevailing wage rate someone can simply offer to work for a $1 less and thereby become employed. But the reality could not be more different. Vast welfare states and bureaucracies, heavy taxation, transport and job search costs, and in some cases byzantine labour market regulations, dramatically dim prospects for full employment'.

Read on here and weep for official ignorance, gentle readers.

The political crystal ball

Henry's favourite journo, Grace Collier, has pointed out 'Labor's looming disasters'. First she summarises the government's recent blunders with enthusiasm, showing that Murdoch's minions understand 'balance' far more than do employees of the taxpayer-funded ABC.

'But speaking of Labor, here is the brutal truth: within the next year, three processes will be finalised and disaster is bound to strike. These processes are two police investigations and a royal commission into union malfeasance'.  More here, and google for more on the alleged police investigations.

Who owns the US Fed?

And does it matter?

The August Raff Report tackles these extraordinary questions. 


Caaaaaarlton! finally pleased its supercoach and gave til it really hurt.  Again narrowly beaten by a top side, Geelong, thanks to a dodgy free kick when the Blues were 8 points ahead with 3 minutes to go, Henry's heroes were gutted when the final bell sounded, having finished with three injured players and only one fit player on the interchange bench.

Henry is beginning to believe that better days are ahead for his beloved Caaaarlton!  And now supports the reappointment of Mick the Merciless and hopes that Juddie will stay on for years as a goalsneak and occasional midfielder.

Henry has heard, thanks to a taxi driver called 'Lucky', a Geelong supporter, that there is an international game of footy this weekend in a Northern suburb.

The game is between Pakistan and India.  The Pakistan team is made up by local lads of Pakistani origan, while the Indian team was said to have flown in from India. In what will clearly be a scoop, the result will be posted if 'Lucky' fulfills his promise to email them.

Tonight sees what should be a titanic struggle between the All Blacks and the Wallabies in the first game of the Bludisloe cup.  Henry will be glued to the screen, and asks readers not to feel sorry for Mrs T, who always has little mates to chat with by telephone, and books to read.

We commiserate with Henry's kultural advisor, Fiona Prior, who is having the cause of blinding headaches fixed in hospital. Fiona's many contributions are available here, and we look forward to her return soon, fit and well.

Image of the week

Courtesy The Oz

Creating jobs requires radical action
Date: Wednesday, August 13, 2014
Author: Henry Thornton

'The crisis the unemployment statistics don't reveal' is the headline for another expose of Australia's dismal labor market performance. The estimable John Black writes: 'Rather than join the ranks of those formally unemployed, these [middle class, middle aged] men and women, who had lost established jobs in industries such as wholesale, retail, hospitality, media, finance and recreation, joined the hidden unemployed while they worked out how to find a replacement job within a viable commuting distance for which they were qualified. But in May there were no jobs for them to find.

'The number of hidden unemployed has been steadily increasing, because the labour market in 2014 is generating only enough jobs for 100,000 persons every year, instead of the 210,000 needed to maintain employment levels. Most of the 110,000 persons not finding jobs have been joining the hidden unemployed'.

This revealing discussion strongly supports the alternative measure of unemployment developed by Roy Morgan Research with help from Henry Thornton.  Our results are summarised in the graph that is part of this Blog. The early part of Mr Black's article provides the best discussion I have seen on the reasons why the official (ABS) measure of the rate of unemployment greatly underestimates the real rate of unemployment.  It should be read by every senior bureaucrat and politician in Canberra, and interested academics.

As Mr Black concluded: 'At the heart of the problems for the labour market is the lack of any substantial industry drivers for jobs growth in an economy over-encumbered with regulation and on-costs and a lack of political leadership and meaningful vision'.  Read on here. 

Today Senator Day suggested that the young unemployed should be allowed to seek jobs and agree with an employer on the wage to be paid.  Immediately the cry of 'exploitation' want up, and 'remember Henry Bourne Higgins',but one must ask who are the exploited here. Currently it includes young people who cannot find jobs in a wealthy and supposedly dynamic country like Australia.

This Henry can report that all of his kids, and several of their friends, got jobs after gaining valuable but unpaid work experience, doing real jobs.  This is a common practice in Europe, while in America young people, and many adults, work for very low wages.  The philosophic question is whether it is better to get work experience for low wages or no wages and then a job that pays a living wage, or whether no job at a theoretical high wage is better. I have no doubts about the answer.

Of course, in a civilised nation, society needs to provide the basic elements of an income sufficient to live on for those who cannot earn a wage to do so without supplementation.  This must be provided after careful scrutiny to keep those who seek to bludge on society honest.  But the idea of forcing unemployed people to write 40 serious job applications a week is simply nuts.  It involves lots of wasted effort and much demeaning of the job seekers. I know how demeaned our kids felt, with 5 good degrees between them, useful parental 'contacts' and relevant work experience until they landed jobs with some chance of turning into careers.

I do not know how to solve all the problems inherent in the current system.  But I do think Senator Day's idea should be tried somewhere, perhaps in Tasmania where the plight of the homeless is particularly acute.

Come on Minister Abetz, stop peddling 1950s 'medical science' and try something radical in your area of actual responsibility.

Saturday Sanity Break, 9 August 2014
Date: Saturday, August 09, 2014
Author: Henry Thornton

Economic news this weeks included a surprise (to most economists) leap in the rate of unemployment. The image of the week at the end of today's blog shows the latest jump in the 'official' (prepared by the ABS) rate of unemployment and the more realistic measure prepared by Roy Morgan Research. Draw your own conclusions, gentle people. We thank Des Moore for his incisive analysis immediately below this blog.

The state of the labor market is far worse than believed in official circles, and officials are generally maintaining a 'glass half full' posture, although the RBA this week somewhat reduced its economic forecasts. With the budget stranded in the Senate, and no plan B, Australia's 'miracle economy' is struggling and the government is also struggling. Paul Kelly continues his criticism of Tony Abbott's leadership, and Joe Hockey is doing the rounds trying to get a budget, any budget really, up. He has started to whinge that no-one, not even business, is providing support.

Smoking cigars with the Finance minister started the process of self-destruction and release of a 'semi-authorised' biography that restated his ambition to lead the nation, and revealed his secret wish for a tougher budget, would have been unwise if the budget had been applauded by all, but instead it is becalmed with almost no-one from among business leaders, the economists of Australia or drinkers in the front bars of Australia's pubs is prepared to back it.

Leaving Malcolm Turnbull out of the loop on the discussion of new anti-terror policies, leaving more favoured but severely less competent ministers to try to explain, was a catastrophe. Time for a shake up, Tony, or continued unpopularity? 

Meanwhile, we are being warned to prepare for a hundred year war with radical Islam. Tony, you have proved you have the right stuff to be a great war leader, and Julie Bishop has shown similar mettle.

For goodness sake get the team together that can win the economic war.

Footy'n'other stuff.

Caaarlton! belted the Gold Coast Suns (minus Gary) in the first half and coasted for most of the second half.  With nothing to play for but the good opinion of their fellows, and perhaps the chance to play for the blues next year, one might have expected a red hot go from all players for the full 100 minutes.

For the rest, Hawthorn and Sydney look like runaway favourites, with a young Geelong and a puzzling Freo maling up the final four, members of which all have some chance of winning a grand final in which luck and the net result of character on both finalists sometimes throws up an unexpected win.

Features of Henry's week included a fine seminar at Melbourne Uni with a superstar Spanish economist discussing asset bubbles and what to do about them.  Read on here folks, you will find support for some notions you may have seen in the hallowed pages of Henry's folly

The RBA brains trust seems not yet to have absorbed either the Fed's new approach of the visitor's clever theoretical thinking. Rather they sit like rabbits in the headlights, wondering whether to cut interest rates to help the currency to fall or raise them to head off a housing boom.  'Don't panic' shouts the resident Mr Jones, but one suspects there is no old soldier (like Aussie Holmes in Henry's time) to help their key people see the blooming obvious. Sigh!

And do not miss Henry's geopolitical writers - Gary Scarrabelotti on the Ukraine and Tiresias on Israel and the Garzans.

Image of the week

Labor market shock
Date: Friday, August 08, 2014
Author: Des Moore

The increase in July unemployment to 6.4% seasonally adjusted rate (from 5.6% in July last year), and the accompanying small fall in employment since last month, highlight the need for reduced regulation of workplace relations in circumstances where the economy is growing below trend.

Unless regulations are reduced the Abbott government’s budget forecast of a 1.5% increase in employment in 2014-15 will not be achieved and productivity growth will remain sluggish.

The regulatory problem is highlighted by the fact that the growth in the working age population (WAP) is twice as fast as the growth in employment over the past 12 months – employment up by only 0.9% while the WAP increased at double that rate (1.8%).

Before the Fair Work legislation employment was growing faster than the WAP and the participation rate was growing. Over the past three years that rate has fallen from 65.4% to 64.8%.

On top of the twelve months increase of about 15% in numbers unemployed, this indicates continued large increases in those who have given up actively looking for work – the so-called drop outs

Labour Force – Increases Since July 2013 (Original Data)

                                                   000s               Percent

Employment                                1,041                0.9

Working Age Population                 3,421                1.8

Unemployed                                   96                14.9 

WAP is civilian population aged 15 years and over     

It is now abundantly clear that urgent changes must be made to the existing regulatory legislation, and the administration of it, just to reach the “sensible centre” and remove the bias evident in the existing arrangements.

Sufficient evidence of the monopoly position of unions has already been given to the Heydon Royal Commission to warrant immediate reforms and allow employers much greater freedom to determine employment conditions. It is anomalous, for example, that the MUA has to be taken to the Federal Court in an attempt to reduce its monopoly powers.

The proposals to reform the ABBC and other minor reforms are welcome but have yet to be implemented and will not themselves change the behaviour of militant unions.

Henry comments: We agree with Des moore, and the HR Nicholls Society, that Australia needs serious labor market reform.

We have long argued that the labor market is in far more trouble than generally recognised (EG here).

We have also warned of 'The recession we did not need to have'.  With the budget jammed in the Senate, and a worsening labor market, the 'miracle economy' is headed for real trouble.

The latest RBA Quarterly Report on Monetary Policy is linked here, and presents a significently happier picture. Time will tell whether my relatively gloomy view or the RBA's far happier view is closer to the mark.

The main difference between us is my concern for Australia's competitiveness, which I believe we cannot overcome with current policies.

Asset/credit bubbles - advice to the RBA
Date: Thursday, August 07, 2014
Author: PD Jonson

There is justified credit and 'bubble credit'. The former is fine, indeed it is how the capitalist world makes progress, but bubble credit is not so fine and can, and often does, lead to asset bubbles that inevitably lead to asset busts.  As in the world learned at great cost in the 1930s, a sufficiently bad asset bust can influence the world and may lead to global depression.

That is the message of Professor Jaume Ventura, a visitor to Melbourne University. Last night Professor Jaume delivered the twelth Corden lecture, introduced by Professor Max Corden, who is still working and is a rolled gold superstar of economics.  He described Jaume as his best student and a brilliant academic. I agree, and would add that Jaume is a genuine macro-economist who admits this part of the profession has learned it knows less than it thought it knew about how economies work and about appropriate policies to control 'bubble credit'. As Mark Twain is alleged to have said: 'It's not the things you don't know that get you into trouble, but the things you think you know that ain't so'.

Jaume Ventura started with a graph depicting the global ratio of credit to GDP since 1970. This ratio fell below trend in the 1970s, rose sharply in the late 1980s, fell again and then set new records in the late 1990s. If 1970 is 100, after the fall associated with the Global Financial Crisis, the ratio is now 160. That is, since 1970, credit has on average grown faster than GDP. Worse, the growth has been variable, and associated with increasing ups and down.  Asset prices have followed a similar pattern.

We were shown similar graphs for a number of countries.  The booms and busts of credit were not unifom, but all showed a strong upward trend and decided volatility.  'Worst' were Spain, Italy, Island and Greece. These countries were the worst hit during the GFC, unsurprising given the size of their preceeding credit binges.

Then we saw data on gross and net credit flows by country.  The stunning fact is that all OECD countries both import and export credit. It is import and export of credit that dries up when something goes wrong for a country. 'In crises everyone goes home' said Professor Ventura. 'During crises, countries go back to the closed economy model'. Already we learned a reason not to rely too heavily on overseas credit and I recalled James Tobin's call for 'sand in the gears of global finance', or indeed the logic of taxing capital inflow to protect local industry.

Professor Ventura was careful to point out that lots of good things happen when credit grows quickly. Booms are good for countries. Indeed, he has drawn a distinction of 'collateralised credit' (backed by real assets) and 'bubble credit' (resulting from chaims of credit ultimately backed only by hype and overoptimism).  It is bubble capital that we should try to contain.  But there is no consensus among macroeconomists about this matter, and Professor Ventura is trying to clarify this vital matter.

In short, Professor Ventura has discovered by sheer logic and some mathematical analysis that there is an optimal mix of the two sorts of credit. So the problem for central banks is to find that optimal mix for a given nation and devise policy or policies to drive their economy toward that optimal mix, 'leaning into the wind' of asset credit.  This is because there is no way for the economy unaided to find this happy outcome.

As the lender of last resort, a central bank should be able to do this.  The basic idea is if a boom is based on 'real things', let it rip. If it is based on irrational exuberance, lean into it.  My own view is that as asset prices, or credit (as a ratio to GDP), get too far from their long run trends, action to 'lean into' the growth are needed, but this should be in the form of macroprudential policies, not (except perhaps in extreme cases) using interest rates.  This is because normal development - take GDP itself - suggests that fundamental forces of productivity and population are always close to a reasonable steady trend, so as asset values or credit depart greatly from trend, this is surely a sign of an asset/credit bubble.

Professor Ventura said there are three ways to contain asset/credit bubbles.
1. Improve law enforcement and contract design,
2. Improve corporate governance, and
3.  Macroprudential policy.

Macroprudential policy includes reserve requirements of lending institutions and capital controls.  These should be 'owned' by the central banks and be seperate from monetary policy.  Given the key role of overseas credit - both inward and outward - there is a potential role for taxes on capital inflow, or if the economy is on the nose with international investors, subsidies.

As we walked out of the lecture, I said to one old friend 'I rest my case'. He observed that Professor Ventura had brilliantly made my case.

Further reading, from Jaume Ventura

Economic Growth with Bubbles (with A. Martin)
American Economic Review, 102 (6), 2012, 3033-3058

 Bubbles and Capital Flows
Journal of Economic Theory, 147 (2), 2012, 738-758

 Understanding Bubbly Episodes (with V. Carvalho and A. Martin)
American Economic Review: Papers & Proceedings, 102 (3), 2012, 95-100 

 Theoretical Notes on Bubbles and the Current Crisis (with A. Martin)
Read a non-technical summary on VOXEU
IMF Economic Review
, 59 (1), 2011, 6-40

By PD Jonson

Monetary policy and asset inflation, July 2014

Asset inflation and monetary policy (with Elizabeth Prior Jonson and Ka Mun Ho), June 2013

Great Crises of Capitalism, January 2011

Saturday Sanity Break, 2 August 2014
Date: Saturday, August 02, 2014
Author: Henry Thornton

Innovation is (probably briefly) in the news, thanks to new BCA Chair, and former CSIRO Chair, Catherine Livingstone. Her comments came about the same time that Henry heard the news that 800 scientists from CSIRO's Brisbane offices have been or are to be, made redundant.  This was (allegedly) the entire coal division, meaning a dispersal of the group responsible for research into this vital exportable resource.

Ms Livingstone and the BCA suggested that research and other support should go to 'proven winners'. Rod Sims of the ACCC immediately leapt into the debate with critical comments about 'picking winners', missing the point almost entirely. The Hon Minister Andrew Robb said the government had been spruiking the BCA view for years.

The relevant policies of The Industry Group for 'Growing the Trade Exposed Industries' are as follows.

In a study called The Mystery of Economic Growth, Israeli economist Elhanan Helpman reviewed all the available research on the sources of above average economic growth, especially growth of productivity. He found that the only single clear reason for higher productivity growth was corporate and Government spending on Research and Development (R&D) as a share of GDP. Singapore and Israel feature near the top of any list of nations that have commercialised inventions.

Australia’s total spending on R&D is not especially high on lists of international spenders and as the budgetary situation allows needs to be increased. The long established Cooperative Research Centre (CRC)  Association conducted a review by Allen Consulting Group in 2014. This review reported that, relative to the funds committed to the CRC program by the Australian Government, the CRC program has generated a net economic benefit to the community, which has exceeded its costs by a factor of 3 to 1.

We must stress, however, that it is not just R&D that matters. ‘Innovation’ requires successful commercialisation of R&D. By contrast to our average performance with R&D in the international league tables, Australia often ranks lowest in tables comparing successful implementation of the results of R&D. (See John Bell, ‘Innovation policy linked to productivity boost’, ATSE Focus, April 2014.)

Australian Venture Capital Association Ltd (AVCAL) has pointed out that the flaw in Australia's current policy prioritisation is that it does not invest enough in bringing its innovation to market.

AVCAL quoted a recent PricewaterhouseCoopers study that flagged venture capital as being one of the potential ‘game changers’ in contributing to Australia's innovation system: a position that has been echoed in many forums in recent years. It also highlighted the fact that the US spends over four times (per capita) what Australia spends through venture capital investment.

The 300 page Strategic Review of Health and Medical Research report referred to what it called the“valley of death” being the hiatus between discovery and successful commercialisation.

The evidence suggests that there are two key factors involved, firstly the availability of risk capital for commercialisation, and secondly the transfer of development to staff sufficiently trained and with the business skills required.

Another generic issue concerns the early sale of successful new Australian ventures to large foreign companies. The causes of this perhaps includes cultural obstacles and also lack of explicit tax benefits for investors, to compensate for the higher risk attaching to early stage innovation and development.

There is a further uncertainty with foreign owned companies as to the question of retaining the benefits of Government supported innovations and commercialisation within the Australian economy.

It may be necessary to focus assistance to smaller Australian companies. Larger global companies in the main have their own resources. For example, the German company Bosch, has 38,000 staff worldwide working in innovation and development and on average registers 14 patents each day.

Business regulation and taxation arrangements can be unhelpful for commercialisation of ventures. For example, entrepreneurial people granted shares in cash strapped start-up companies immediately pay the full amount of income tax based on the theoretical value of the shares - value that may never be realised.

No comment on innovation is complete without recognition of staff in the workplace being able to recognise the opportunity for innovation with improvements to processes and products. Smith referred to the value of workers contributing to innovation. He said: “A great part of the machines made use of in those manufacturers in which labour is most subdivided, were originally the inventions of common workmen, who, being each of them employed in some simple operation, naturally turned their thoughts to finding out easier and readier methods of performing it.”

Today his comments would apply to a wider range of employees.

Such innovations can support the management philosophy of continual improvement known in Japan as Kaizen management. Toyota benefits from a sophisticated system whereby employee ideas are given consideration and where adopted the employee gets a benefit reflecting the value of the innovation.


1. It is recommended policies be put in place to raise the overall spend (Government and corporate) on R&D as a percentage of GDP, to global best practice levels.

The program would need to ensure that relevant business and administrative skills and experience are available to use any Government support effectively.

2. To attract capital to this high risk area, tax concessions would be appropriate. For example, for  approved projects foundation shares could be capital gains tax free and further calls up to set limits tax deductible. This could reduce the requirement for payments by Government to support innovation and commercialisation.

3. Remove the tax penalty applying to shares issued in start up companies commercialising innovations.

4. It is recommended a task force be constituted to review best practice arrangements in countries which lead the table of performance with innovation and commercialisation. The outcome be a basis to review and implement policies which would be relevant for Australia.

The internal process, if available, of successful companies in this field such as Bosch, would also be relevant.

5. The Government consider claw-back of grants and/or tax concessions within, say, five years as a way to discourage too early sale to overseas interests.

6. Ensuring tax certainty and consistent long term policy settings for innovation and commercial development.

Read the full report, including policies in related areas, here.

Geopolitical tragedies

The events in Gaza make one weep. We have a natural sympathy with the Israeli side, but the terrible price they are exacting from the inhabitents of Gaza seems dispropionate. That said, no country cam allow regular rocket attacks on its territory.

The failed attempts to rescue the bodies remaining on the crash zone of the downed Malaysian airplane get more farcial by the day. Horrible for everyone involved, except perhaps for whoever gave the order to destroy the plane and its almost 300 passengers and crew.  President Putin has a lot to apologize for, and one hopes that severe trade and financial sanctions will eventually bring him to heel.

The various other global atrocities in Syria, Iraq, Africa, the list goes on, show the need for an effective global policing group.  That seems at least as far away as good sense in Australian economic and welfare policies.


Caaaarlton! cheered Henry with its brave attempt to beat Freo on its home turf, but left him almost weeping with frustration at yet another loss by a tiny margin.

Coach Merciless Mick Malthouse said he did not know why this was the case, but it seems clear the team has just forgotten how to win. Partly, perhaps, due to morale sapping coaching.

Like 'Innovation' it is a difficult subject, but Henry is certain in footy it requires occasional shafts of kindness to the players, not constant criticism, which is what Mick the Merciless seems to dish out. Henry learnt this lesson by changing his coaching style for an under-age footy team a decade ago, and is available for psychological councelling at Caaaarlton! if needed.

Meanwhile, in Scotland, the Aussie women and men are acquitting themselves with honour.  The swimmers seem to have rediscovered their mojo, the marathoners have exceeded expectations, ditto the shooters, and Sally Pearson looked terrifyingly focussed when she won a heat or semi-final by a second or two. From the other side of the world, this seems like a happy team, and the sacking of the apparantly merciless head(?) coach will have lifted team morale further. Go Sally!

Image of the week


Inflationary expectations and monetary policy
Date: Tuesday, July 29, 2014
Author: PD Jonson

Inflationary expectations have also risen, as reported by Roy Morgan Research. Here is the graph.

We are not yet embrioled in an inflationary fiasco but there is a dilemma, that last week we tried to set out in slightly satiric terms. (See Blog two down.)

I have for some time also been worrying like a dog with a bone how to define the stance of monetary policy, and I have now solved this, to my satisfaction at least.

I have also made progress in showing with Economics 101 supply and demand graphs - albeit drawn in the air - how monetary policy might transmit itself to goods inflation but also to asset inflation.

Here is the link, and I am keen to receive feedback.

Is there any competent macro-economists out there?  If there is, am I on the right train? Was this all said in an unpublished note 50 years ago? It is trivially obvious, or wrong, or both at the same time?

Saturday Sanity Break, 26 July 2014
Date: Saturday, July 26, 2014
Author: Henry Thornton

'Need more policy reform' say both RBA Chief, Glenn Stevens, and Treasury Head, Martin Parkinson. 'The budget should have been tougher' says someone who is allegedly quoting Smokin' Joe Hockey. 'Hear, Hear' squark the pet shop galahs (just joking, galahs) but it is a refreshing development that these three important Australians now feel they can edge toward saying what they really think, and what the galahs think. (See Parkinson and Stevens.)

Tony Abbott's chief economic advisor, Maurice Newman, no galah, more like a robust emu on the run, says 'We're heading fast for a one-way trip on the escalator of decline'. This echoes Paul Kelly's message of some weeks ago, and that of senior galahs like Ross Garnaut and Henry Thornton himself.

Henry is mighty pleased to see 'Asset inflation' recognised as: (a) heavily influenced by super-easy monetary policy; (b) presenting a distinct risk to financial stability (and therefore to economic stability - think 1930s); and (c) requiring so-called 'macroprudential policy', rather than monetary policy alone, to deal with.

There is a further feature of asset inflation, which is to exacerbate inequalities of wealth and incomes. Like financial instability, stretching the gap between rich and poor is a sure road to ruin, as the world's elite thinkers (eg Keynes and Marx) have frequently asserted. (Here is a recent example. 'Asset inflation makes richer; unemployment makes us poorer'.)

Geopolitical matters.

It is cheering to see gradual (though sadly overdue) progress in recovering bodies for respectful identification and return to family members. We salute Tony Abbott for his strong global leadership in this sad matter, and Julie Bishop for success in achieving a unanimous decision by the Security Council.

Mr Putin will probably still annex Eastern Ukraine  and terrorists will still run amuck in hellholes without the law, and surely it is time for a fast response policing unit overseen by whichever country is chairing the Security Council?

'Mind you own business, Henry' is no doubt the view of those currently in office, but surely this latest atrocity will make those currently in office think outside the existing boxes.

Here is what the experts say - Paul Kelly and Greg Sheridan.

Kelly: 'THE nation is seeing a new Tony Abbott — the Prime Minister as crisis manager. It is a time when more people than usual focus on their leader and the leader, in turn, operates as principal mourner, chief diplomat and security guardian'.

Sheridan: 'AS every day the news from eastern Ukraine grows worse, Australia has found itself in the middle of one of the greatest geostrategic crises of our day.

'Irony has come here to attend tragedy. For decades, our strategic debate has been transfixed by the rise of China. But it is Russia, the old enemy from the Cold War, which has drawn us intimately into first-order global power plays'.

Footy'n'cricket'n'Commonwealth Games'n'stuff

Today is the second part of another 'split round', an innovation Henry does not like as he requires a weekly diet of footy during the winter chills. And what a winter it is proving to be. The wags say this is due to the presence of Al Gore, because everywhere he goes the weather turns cold.  And there are reports of cooling in the world's deep oceans. But I digress.

The Indians have again beaten the pestiferous Poms in the fine old game of five day cricket.  Soon it will be summer and we can have our own crack at the curry munchers.

At least we can enjoy news of gold medals and world records, mostly due to the efforts of Aussie shielas in Glasgow. ...

Image of the week

Courtesy The Australian

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