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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.

Saturday Sanity Break, 7 December 2013
Date: Saturday, December 07, 2013
Author: Henry Thornton

We salute the life of Nelson Mandela, a man who changed global politics and relations between those with different skin colors more than just about everyone else.  What a hero, and how satisfying it is to hear reiterated Australia's leadership role in bringing down the south African regime that treated Mandela so harshly.

Australian economy

'Happy birthday, floating Aussie dollar' is the news for Monday, anticipated (of course) by the Oz yesterday and today.

After serving Australia so well for thirty years, it is ironical that now the Aussie is floating higher than we are all comfortable with.

My differences with John Stone are documented here, and his opposition to the float is widely documented in the Oz today, but there is one issue we agree upon - there are occasions in which markets call for intervention. The past year is one in which some sand in the gears of capital inflow might have served Australia well by getting the rampaging Aussie dollar to a lower, more sustainable level.

The death of the auto industry, the dire straits of Qantas, pressure on all Australian industries are made worse by a too high dollar.  But the underlying cause is the high cost base.  It is worth noting that the greatly excessive Australian cost base occurred while the RBA was focussing on keeping goods and services inflation low.  Now this high cost base is strangling our economy and there is no easy remedy.

Here is a suggestion for the newly confident Treasurer Hockey. 

First put the real issue on the agenda for public debate.  Then persuade the 50 most influential business leaders to take a 10 % wage cut, and to publicly ask the government to help them impose a similar cut on their workers.

Do not miss the Raff Report by veteran analyst, Nick Raffan. Here is a snippet:

'US coincident indicators have been looking pretty good. And so they should with durable goods orders starting to plateau. Industrial production lags new orders by six to nine months and longer for some items like large aircraft. In terms of manufacturing the US should remain robust through the first half of 2014. But then what? The next cycle will be a downturn and it is curious that the Federal Reserve is considering tapering its printing of money exercise near the peak of a cycle, rather than soon after take-off in 2010/2011'.

Final business embraces real diversity

 'Diversity in business is not just about having more women in management or on boards of directors.

'There is a wider diversity issue that is being taken seriously by many large and small companies. They are supporting programs to create inclusive workplaces for ­lesbian, gay, bisexual, transgender and intersex employees. [Ed: This para might have included something about skin color.]

'Senior executives of five major employees spoke about these important issues on Tuesday at the Pride in Diversity annual conference in Sydney called Pride in Practice.

'The speakers were Luke Sayers, chief executive of PwC, Matt Comyn, group executive, retail banking services at Commonwealth Bank of Australia, Andrew Stevens, managing director of IBM Australia and New Zealand, Jennifer Williams, CEO of Red Cross Blood Service and Jack Percy, managing director of Accenture'.

HenryThornton.com has long advocated such a policy, and one of our most read blogs of 2013 was based on promotion of the role of ladies in business - linked here.

However, an earlier article from a clearly misogynous reader (NOT Tony!) shows what great progress has yet to occur in the wider population.

For more in this vein, some of it acceptably PC, type 'Women' into the search box on Henry's home page.


Only the boring 'James Hird peptide' imbroglio to entertain us with footy this week, so let's just have a brief gloat about the state of the hapless Pommie cricket team, apparently still reeling from the powerful attack by Mitch Johnson at the Gabba.

Dropped catches, exhausted bowlers and a captain batting like he rather be home in England, yesterday's action had it all. Go Aussies, go.  Can't wait for the WACA.

Remember the cost, gentle readers.  A country's economic state is broadly inverse to its sporting prowess, and out sporting teams have improved substantially.

Image of the week.

Courtesy The Oz

Shrinking to greatness
Date: Wednesday, December 04, 2013
Author: Henry Thornton

The mighty miner that is RIO is shrinking its way to greatness according to the AFR's Matthew Stevens.  What about Australia?

'Last year Rio spent $US17 billion against its business and over the past three years the capital program has averaged out at $14 billion annually.

'Not only was that level of investment unsustainable, it was also indicative of an era when the miner “lost focus on what really matters”, [Sam] Walsh declared at Tuesday’s Rio investor day.

'But by 2015 Rio will have delivered on the demands of senior shareholders by trimming that spend to $8 billion and started returning excess capital to its battle-scarred owners. The net result of this plan will be a 20 per cent reduction in capex over each of the next three years.

'The journey to 2015 will also see Rio make a sustained assault on its debt. It plans to reduce it from $US22 billion to something in the mid-teens by the end of next year, paving the way for a serious step-up in dividends and the potential for more profound capital management'.

In the fish'n'chips version of the fin, right next to RIO's shrink'n'grow paen, is the sad story of 'Oxford Economics', apparently suffering its own problems with costs in Australia's high cost economy, especially the bits with a view of Sydney Harbour.

In a recent 'small briefing', reports Jonathan Shapiro, the Oxford group gave their views of the global economy, a somewhat 'mixed picture'.

'The most glaring chart showed hourly unit labour costs in manufacturing, measured in US dollars, which had Australia at about $US47 ($43), $US12 more than the $US35 in the US and the euro zone. Even in Germany, which Walker suggested was the most productive economy on the planet, unit labour costs were lower, at around $US40, leaving Australian industry without much of a hope.

'The rate of change of labour costs since 2000 has been exponential, almost doubling in US dollar terms, a rate only exceeded by China’s tripling and matched only by Brazil'. (Read on here.)

Precisely Henry's point, achieved without inspiration provided by a view of Sydney Harbour.

In fact, if one looks diligently through the pages of today's AFR, one can find many stories about Australia's cost blowout.

This is Australia's greatest economic problem, comrades, (as argued here), and what a pity the RBA fails to recognise this in its regular literary gems on the economy (eg here)

Henry was labelled 'deliberately pessimistic' in 1986 and, as we now know, despite Paul Keating's subsequent brave policy action Australia still suffered 'the recession we had to have'.

The question is this.  If one of the world's greatest mining companies, one with a strong Australian heritage, is cutting costs rigorously, and thereby shrinking itself to greatness, what is Australia's government doing about the macroeconomic version of the same mess?  Is Tony Abbott Australia's Sam Walsh?  Of course, a company's CEO has more freedom to act than a Prime Minister or President, but  the analogy is valid, and no-one else seems to be asking the right questions.

Readers who failed to see last night's Kerry O'Brian - Paul Keating love fest should do so to see the great man in action. 'We fixed up the joint' is the summary.

Sadly, Henry has missed the first three episodes in this fascinating Quadrology [Ed: is this a word Henry? Henry: it is now.] and must now await the ABC's boxed set, iview having apparently removed episodes 1 and 2, the second of which extends the love-in to include the RBA's RA (Bob)Johnston.

Stop press: Australia's GDP is still growing, thanks to mining, but slower than expected with manufacturing, electricity and gas, etc and wholesale trade actually shrinking.

Macrobusiness's Leith van Onselen provides an excellent coverage.

Australia`s dog days
Date: Tuesday, December 03, 2013
Author: Henry Thornton

The year is winding down with the nation in a sombre mood.  Glenn Stevens' 'glass half full' encouragement has been overtaken by Ross Garnaut's 'Dog Days'.  The Thornton family children, and their friends, are battling to find jobs in a weak labor market, and goodness knows how bad it must be for young people without degrees who have been priced out of the market by a ludicrously large hike in wages of apprentices, courtesy of the late lamented Labor government's 'Fair Work' Commission. Today's news includes young people seeing economic prospects as their biggest concern.

Australia's biggest economic problem is not the budget deficit, which is however a pretty big and intractable problem. Rather our biggest economic issue is a cost structure that is slowly choking various industries, even mining, where there is said to be a 30 % rate of unemployment among geologists. Qantas is losing vast sums of money on its overseas routes, the vehicle manufacturing industry is in the zone of the walking dead and Australian assets are being snapped up, except for Graincorp, which the government has bravely said is not for sale.  The NBN's budget is said to be growing every time it is reported on, and seems certain to create one of Australia's greatest fiscal fiascos.

The Labor opposition, largely responsible for the budgetary mess, due to its hugely wasteful spending during the global crisis but also for failing to nurture serious strategic thinking in Treasury, threatens to bring on a US-style Tea Party debt and deficit impasse. It also plans to fight to the end to refuse to allow the government to roll back the carbon tax, a policy that was  put to the people as explicitly as any policy in Australia's history. Announced intention to foster a more civilised discourse in the national parliament is looking certain to be ditched as the political infighting hots up.

The new government is determined to progress in a measured way but is grappling with largely intractable consequences of Australia's double-digit cost problem. This has been recognised by no official source, and its causes may not be fully obvious to the Prime minister and his cabinet. The RBA, whose history of first rate analysis makes it eminently suitable to ring the bell on this issue, continues to discuss the economy in terms of Keynesian sources of demand.  It's senior officers point out that a good burst of infrastructure spending would compensate for the precipitate decline in mining investment, but fails to ask why mining investment has dried up and why there is little investment in other sectors to compensate. 'It's the high dollar' says the RBA 'and we shall talk it down, and if the circumstances are suitable we may kick it along' - presumably with some of the $8 billion of fresh capital handed over by the Treasurer.

Some experts opine that the dollar at 90 cents to the US dollar is approaching a viable level.  I doubt this - with productivity about 70 % of USA levels, a 70 cent dollar would be nearer the mark.  But even if some crisis or other - perhaps the US Fed finally biting the bullet on beginning the 'taper' combined with more bad news in our economy - drove the Aussie dollar down toward that figure, what is the plan to encourage domestic costs to drop , or even to stop rising?  The Hawke government had its 'Accord' to provide a framework, but the more traditional approach, beloved of the Tea Party fanatics, is deep recession.  Preparing the nation for some austerity is vital, and was a key feature of the Hawke-Keating government at the time of its 'Banana Republic' crisis, but Mr Abbott's ministers are yet to overcome their strong silent Aussie male weaknesses of communication.  Of course, they need proper advice if they are to begin to think about these issues in any deep way, and I fear they are not getting it.

The global economy is showing only sluggish recovery, along with concern that the west may be facing a long period of Japanese-style deflation. China is seeking to rein in inflation and will find its pivot to consumerism very hard to handle. The imbroglio in the East China Sea may help stimulate the global economy, as rearmanent did in the 1940s, but there are evident dangers that some overreaction by one side or another may create some hot shooting. Snowdon's releases of more evidence of spying will add to complexity to all nations' security and diplomatic efforts.

In this vast, bubbling cauldron, there is not much more the RBA can do to help solve Australia's economic problems.  Interest rates may already be too low to prevent further cost disequilibrium. Getting real about economic analysis, and communicating this to the Treasurer and the Prime minister, is about the best contribution that Glenn Stevens and his team can make at this point.

Trouble is, their view may echo that of former RBA governor Bob Johnston, who told this writer (years after the event), that Treasurer Keating never fully forgave the RBA for its strong stand that led to his 'Banana Republic' action. A nutty response, of course, but officials in our system are supposed to show courage whatever the personal consequences.

But perhaps the 'bottle' is less than half full and if this is indeed the case we shall all pay the price.

Ed: The RBA left the cash rate unchanged.  Here is its Dog Day commentary.

Saturday Sanity Break, 30 November 2013
Date: Saturday, November 30, 2013
Author: Henry Thornton

GrainCorp saved for the Aussies; Qantas (likely) left for the wolves; Holden (likely) subsidised.  It's all happening, folks, and the ideal of a free market is being trashed as we sit and watch a new government find its way.

The brave lads and lassies at the IPA must be having conniptions, and who can blame them.  The trouble with democratic politics is that people have to get elected, and that is not so simple. 

Henry failed to get pre-selected when he challenged for Kooyong in 2009 (on the grounds that the Liberal Party lacked battle hardened economic warriors), but was told he was 'too old, too fat and too grumpy'.  He might have been told he was too much of an economist and too unused to consuming s**t sandwiches when announcing a decision that is sensible politics but rotton economics, but the good people of Kooyong were far to polite for that. (Here is a link to Henry's preselection speech.) 

Now let us address the big economic issues of the day.

Graincorp: the bid was great for shareholders, and probably on balance good for grain-growers in the short run (as the new owners would have far more money to build or rebuild infrastructure), but not so good for voters who hate to see Australian assets sold to the highest bidder.  Think Woolies or Coles, and their well-known brutality to Australian producers, and those retail behemoths are not (yet) owned by foreigners, but run by men who (almost be definition) care only for the corporate and personal bottom lines.

Qantas: Selling to foreigners would be great for shareholders and for senior management, but ordinary Aussies think the airline would be an unhappier entity if it were owned by foreigners. And less able to be comandeered by government in a national emergency. Trouble is, its cost base is far higher than that of competitor airlines, and Australians like flying on cheap airlines, even if foreign-owned. Ergo, Qantas is likely to go broke, or give up on foreign routes to shelter behind the national borders where it has a near monopoly. (Part) selling to government makes no sense, because what does your average minister know about running an airline?

Holden: More help for Holden makes little economic sense as overseas-built motor cars are cheaper and flasher, and consumers have abandoned the local product. If buyers are unwilling to subsidise Holden, what is the case for government to do so? But without help from government, many, many jobs will be lost in small and medium sized enterprises, and a whole set of expertise will be lost, probably forever. One suspects this will be the deciding factor. If the government got serious about defence procurament, however, this industry might be a substitute for vehicle manufacture in saving manufacturing SMEs, provided of course the current double-digit cost disequilibrium could be overcome.

The common thread in all these cases is that Australia's cost base is simply too high to sustain activities in which Australian enterprises have to compete with overseas activities, which is increasingly just about everything.

A second thread is the fact that Australian capital is not as high as it could be because Australians are pretty poor at saving, despite a recent, partial revival.

A third thread is that a lot of infrastructure is missing or old and inadequate, and where is the money coming to fix this?

One might hope for a rational discussion about what, if anything, could be done about these economic imperatives.  The Liberals of Kooyong had little interest in these matters  in 2009 and it is not surprising that the Abbott government is not saying too much about the real problems that underly the headlines. Minister Pyne has added some diversionary fuel to a smoldering fire by interpreting the fine print of the Coalition's education policy, advertised as 'We support Gonski', as 'we cannot live with Gonski'. Splendid economics, perhaps, but lousy politics.  Light the match, Christopher, and watch your government burn, baby, burn.

One economic issue close to most Australian hearts is housing.  Henry is pleased to present an objective overview, available here.


Henry feels a bit (but only a bit) sorry for the pestiferous poms who are experiencing the sort of stuff dished out to the hapless Aussies earlier in the year.  It is a great mistake that the next test is in Adelaide rather than Perth, as another dose of fast bowling on Australia's fastest pitch would have helped build pommie backbone, correction, demolish whatever backbone was still operational after the massacre at the Gabba.

Not much footy news, but good to see that the futballers have finally won an international game, the Rugby lads have won three in a row, with Wales to come, and the hard men of Rugby Leage are in the final of the world cup. Against the men of the land of the long white put, as one wag once described New Zuland.

Tonight Henry's youngest offspring celebrates his 21 st birthday, at what he has called a 'couch on the court' party, his version of a Bunga Bunga party.  His siblings are planning payback for his speeches at their coming-of-age events, and Mrs T plans to even the balance.  Then we can begin the frightfully costly job of repainting the walls and pulling up the carpet, now liberally stained with red wine and other, less desirable, substances.

Image of the week

Courtesy AFR

Global economic worries and Australia
Date: Friday, November 29, 2013
Author: Henry Thornton

China's economy sneezes, Australian economy catches something nasty. This old saw originally applied to the UK (think the Baring crisis), then to the USA (think the 1930s, and the 2000s), but now it is probably best applied to China.

The Wall Street Journal reported earlier this week that 'yields on Chinese government debt have soared to their highest levels in nearly nine years amid Beijing's relentless drive to tighten the monetary spigots in the world's second-largest economy'.

'The higher yields on government debt have pushed up borrowing costs broadly, creating obstacles for companies and government agencies looking to tap bond markets. Several Chinese development banks, which have mandates to encourage growth through targeted investments, have had to either scale back borrowing plans or postpone bond sales.

'The slowing pace of bond sales from earlier in the year is reviving worries of reduced credit and soaring funding costs that were sparked in June, when China's debt markets were rattled by a cash crunch.

'The rise in borrowing costs and shrinking access to credit could undercut the recent uptick in China's economy that global investors in stock, commodity and currency markets have cheered. Wobbly growth in China could undermine economic recovery in the rest of the world'. (Read on here.)

This bad news comes just as investors have begun to notice the idea, expoused by Larry Summers, among others, that the US economy might be in the early stages of a long, sub-prime recession, as Japan did after its asset crash that began in late 1989.  And the Eurozone languishes with slow growth overall, and massive discrepency between Northern an southern regions.

And in distant Australia ...

Australia is already suffering a bout of the nasties. The Prime minister's pal, Maurice Newman, has unleashed another thunderbolt in the Oz. This time he gets right down to the core problem. 'Instead of being internationally competitive, we have slipped, on the kindest measure, from 15th globally in 2009-10 to 21st in 2012-13'.

Devaluation will help make us more competitive but brutal market forces will reduce our excessive wages: 'Our minimum wage is 50 % higher than in Europe, Canada, Britain and New Zealand, and more than double that in the United States'.

'Clearly something has to give.  But over time. That is inarguable. Australia's relative labor costs will fall, through increased labor substitution, unemployment, currency devaluation, wage growth elsewhere or a combination'.

There is a storm of disagreement and, indeed, abuse, if one searches for Maurice Newman on the google machine. But Mr Newman's proposition about excessive wages (and costs generally) is shared by Ross Garnaut - no ravening right wing loonie - and Henry himself (eg here).

Please read Mr Newman for yourself and ask if he is disconnected from reality, or is it his critics?

Today we bring an analysis of Australia's housing markets. Here is the conclusions of their analysis

'Overvalued – By how much?

'The Australian Housing market appears to be in the midst of a price bubble. Various data points frame a market that is stretched, vulnerable to exogenous shocks and likely to experience a significant correction. Various data points allude to an average correction of around 50%. Although the prediction of a substantial  housing decline appears to be obvious, the timing of such an event is difficult to predict. A continued slow-down in China and/or a sharp deterioration in the Australian labour market could bring on waves of forced deleveraging (asset sales) that could initiate a substantial downward trend in prices to more reasonable levels.

'If these assumptions are correct, and in fact, the Australian housing market has produced a bubble, what then can we expect on the decline? Recent housing crashes in other countries like the United States and Japan provide useful insight into the correction and deleveraging cycle, both in quantum and duration. Economist and author Steve Keen has presented a historical analysis of the Japanese and the United States corrections and an implied possible trajectory for Australia (Figure 9). On that analysis, the correction could take between six and eighteen years. Given the monetary and planning policy similarities, the United States appears the more probable case. Therefore, the downward trend could take up to six years to work through with declines of over 30%.

Figure 9: House prices in the United States, Japan and Australia following identified peaks (Peak = 100)

'Since Mr Keen completed his analysis, Australian house prices, especially in Sydney and Melbourne, have turned up again, encouraged by several interest rate cuts by the Reserve Bank. It may be that the downturn that began in 2010 becomes a minor (and temporary) downturn in the thirty-year housing boom that previously seemed to have peaked following the Global Financial Crisis.

'Whether or not this is the case, US, Japan, Ireland and the nations of southern Europe all show the potential for large falls in Australian house prices.

'Whatever the price action in the near future, a correction will eventually be felt as housing becomes increasingly less affordable, credit growth decelerates and oversupply weighs on the market. If these forces coincide with a more general downturn, the correction of Australian house prices could be both long-lasting and severe'.

Read on here.

Crisis in the China Sea
Date: Thursday, November 28, 2013
Author: Henry Thornton

'Asia is on the cusp of a full-blown arms race' writes Ambrose Evans-Pritchard. 'The escalating clash between China and almost all its neighbours in the Pacific has reached a threshold. All other economic issues at this point are becoming secondary'.

'Beijing's implicit threat to shoot down any aircraft that fails to adhere to its new air control zone in the East China Sea is a watershed moment for the world. The issue cannot easily be finessed. Other countries either comply, or they don't comply. Somebody has to back down.

'The gravity of the latest dispute should by now be obvious even to those who don't pay attention the Pacific Rim, the most dangerous geostrategic fault line in the world.
Japan’s foreign minister, Fumio Kishida, accused China of “profoundly dangerous acts that unilaterally change the status quo”.

'The US defence secretary Chuck Hagel called it “a destabilising attempt to alter the status quo in the region” and warned that the US would defy the order. The Pentagon has since stated that US pilots will not switch on their transponders to comply, and will defend themselves if attacked. Think about this for a moment.

'Mr Hagel asserted categorically that Washington will stand behind its alliance with Japan, the anchor of American security in Asia. “The United States reaffirms its long-standing policy that Article V of the US Japan Mutual Defense Treaty applies to the Senkaku Islands,” he said.

'Whether China fully believes this another matter, of course. The Senkaku islands offer a perfect opportunity for Beijing to test the resolve of the Obama Administration since it is far from clear to the war-weary American people why they should risk conflict in Asia over these uninhabited rocks near Taiwan, and since it also far from clear whether President Obama's Asian Pivot is much more than a rhetorical flourish.

'Besides, Beijing has just watched the US throw its long-time ally Saudi Arabia under a bus over Iran. It has watched Moscow score an alleged victory over Washington in Syria. You and I may think it is an error to infer too much US weakness from these incidents, but that is irrelevant. Beijing seems to be drawing its own conclusions.

'Even if the immediate crisis can be defused, we are clearly sliding into a new Cold War. While it is dangerous, it could have paradoxical and powerful side effects. Rearmament lifted the world economy out of slump in the late 1930s, working as a form of concerted Keynesian fiscal stimulus. It could do so again'.

There is, of course, a silver lining.  In fact two. The first is explained by Evans-Pritchard: 'The parallels are not exact. They never are. But an Asian arms race would almost certainly tackle some of the underlying causes of the long malaise in the Western economies. It would soak up much of the Asian "savings glut" and the excess industrial capacity in China, and would help to narrow the perennial East-West trade gap.

'This would be an answer of sorts to the West's "secular stagnation" – to use the term of former US treasury secretary Larry Summers – or the liquidity trap as others call it. But be careful what you wish for'.

More here on this subject. 

But we should not get too excited, or happy about the potential economic benefits. As the guru puts it: 'It could all go horribly wrong'.

Evans-Pritchard again: 'Today's escalating spat has echoes of the Agadir crisis in 1911, the stand-off between Wilhelmine Germany and the Franco-British Entente in the final years before the First World War.

In case you have forgotten, Kaiser Wilhelm sent the warship Panther to Morocco in 1911 to prevent French annexation. The Kaiser picked his moment well. The French were violating earlier accords.
Yet his real purpose was to probe and weaken Britain's entente with France (not a formal alliance) by picking on an issue where London had little natural sympathy for French actions.

'The Agadir Crisis backfired against the Kaiser. The Entente did not break. But that is hardly a reassuring episode. The chain of events that followed were catastrophic.

'France felt emboldened by British backing, with ripple effects through the Franco-Russian alliance. Russia then felt more able to push its luck when the Serbian crisis hit in 1914. Agadir fed an overwhelming sense of fury in Germany, a feeling that Britain had become an enemy.

'America is now having to walk the same sort of tightrope that Britain had to walk – and walked badly – from Agadir to Sarajevo. One misjudgement by either side in the East China Sea could change our world entirely. If you are not concerned, perhaps you should be'.

The second silver lining, as a reader put it, is that it puts the spying spat with Indonesia into proper perspective - totally irrelevant to the main game of scary geopolitics.

In any case, Prime Minister Abbott seems to have soothed Indonesia's confected outrage.  We all know every country worth its place in the sun spies on the others, and for goodness sake shares the results with other nations' spies as well as whistleblowers.

Still, the diplomatic niceties have to be observed, and domestic politics is always in play.

Apologies for using Evans-Pritchard as a jumping off point twice this week, but he is covering great matters and Henry has three corporate AGMs and associated meetings of boards this week.  Normal iconoclastic transmission will be resumed next week, God willing.

The dangers of growing inequality and current global monetary policy
Date: Tuesday, November 26, 2013
Author: Henry Thornton

'Pre-revolutionary grievances are simmering in half the world, openly in France and Italy, less openly in Russia and China'. This is the opening of a very important article by Ambrose Evans-Pritchard.

'The Gini Coefficient measuring income inequality has been rising for 25 years almost everywhere, thanks to the deformed structure of globalisation.

'Companies can hold down wages in the West by threatening to decamp to the East. “Labour arbitrage” boosts the profit share of GDP and eats into the share of workers. ...

'The US Congressional Research Service says the income share of the richest 1pc of Americans reached a record 19.6pc last year.

'It never rose above 10pc for the whole post-War era until the mid-1980s. The 1pc Club has bagged 95pc of all gains since the Lehman crisis.

'Such extremes must ultimately threaten political consent for market capitalism. Yet quantitative easing as conducted in the rich countries risks making matters worse. The money is leaking into asset booms, without much economic trickle down'.

Keynes said excessive disparity of wealth and income was one of the greatest threats to capitalism, and perhaps also the continuation of democratic government.  Capitalism's alleged grinding the face of the poor was a key point in the arguments of Karl Marx.

Evans-Pritchard does not labor these points. Instead he contrasts sensible policy expansionism with mindless austerity being imposed on the nations of Southern Europe.

'Such extremes must ultimately threaten political consent for market capitalism. Yet quantitative easing as conducted in the rich countries risks making matters worse. The money is leaking into asset booms, without much economic trickle down.

'The Bank for International Settlements says the credit markets are becoming unstable again. A hunt for yield is creating a stampede into high-risk assets, “a phenomenon reminiscent of exuberance prior to the global financial crisis”.

'The 10-year Shiller price-to-earnings ratio for Wall Street’s S&P 500 is 50.3pc above its historic average, and higher than before the 1987 crash. Yes, it can go even higher. But should the US Federal Reserve try to push it there by purchasing the $85bn of bonds each month?

'Even as stocks soar, world trade is becalmed, and the West is still stuck in a contained depression.

'Manufacturing output is still down 3pc from its pre-Lehman peak in the US, 6pc in Germany and the UK, 7pc in Japan and France, and 12pc in Italy. Compare that to the 60pc surge in US factory output over the same time lapse in the 1990s. It is another world.

'The US workforce shrank by 755,000 in October. The labour participation rate for men dropped to 69.2pc, the lowest since data began in 1948. Discouraged workers are dropping off the rolls.

'Former US Treasury Secretary Larry Summers says the US is trapped in “secular stagnation”, a bad equilibrium where the interest rate needed to keep growth alive may be as low as minus 3pc.

'It takes fresh bubbles to keep the show on the road, and it threatens to become “chronic and systemic”. This is our brave new world. If Mr Summers is right, we need to go to the next stage of QE. Rather than relying on more bond purchases, the stimulus could be injected into the veins of the economy, or into the “income stream” in the words of the late Milton Friedman'.

This is a very important article. Please read on here, and talk to your local member of parliament or any cabinet minister you happen to encounter.

Saturday Sanity Break, 23 November 2013
Date: Saturday, November 23, 2013
Author: Henry Thornton

Australia is experiencing 'dog days'.  Worse, 'Australia is in deep shit' ... We're on a sticky wicket here'. It doesn't get much worse than batting on a sticky wicket whilst in deep shit, comrades, and its mostly the fault of the Rudd'n'Gillard'n'Rudd Labor government(s). We agree with Professor Garnaut (whose comments are quoted above) about the deep problems of the Australian economy, and one can only hope that the real decision makers in Canberra, Messrs Abbott, Hockey, Rudd and Cormann, and Ms Bishop realise just how hard it is going to be to sort out the mess.

Henry's views about what is needed were set out here earlier this year, under the heading of 'Coping with the coming global crunch'. So far we have seen no crunch, as the US Fed keeps putting off the nasty moment when it judges monetary policy needs to be made ... not tight, but slightly less easy. But forecasts of economic growth have already been reduced, while asset prices continue to boom. Pundits are already suggesting that 'developed' western nations may be in for a long period of sluggish growth. One can suggest that a big crunch might involve less pain (by creating the conditions for economic reform), but no official policy advisor is going to admit to holding such a view, or even to suggest it to the pollies because such advice would be deeply unacceptable to people who need to be reelected.

Last Saturday, Henry was reeling from being spoken to rudely by a modern women but, thankfully, not actually vomited on. Today two of the best economic comments come from feisty ladies. Grace Collier, like Mrs Thornton, hates bailing out the vehicle-makers without something tangible in return.  Ms Collier proposes that Holden makes a 'simple two-page form to the Fair Work Commission, asking the Commission to terminate Holden's work place agreement.  Provided the Commission agreed, this would 'put all the Holdens workers back on the terms and conditions of the Vehicle Industry Modern Award.' She claims labour costs at holden would drop by somewhere between 50 and75 per cent' and 'productivity would would skyrocket'.  Assuming the arithmetic is correct, this sounds like a no brainer.  Ian Macfarlane should tell Holden - if any sufficiently senior man will meet him - that any future hand-out depends on Holden acting as indicated by Ms Collier.

Henry's favourite lady-economist, Judith Sloan today addresses the adverse consequences of the present system of 'demand-driven university enrollments'.  Excess university graduates come at a time when there has been 'a precipitous drop in the number of young people starting apprenticeships and traineeships'.   Dog days indeed, with even Henry's highly credentialled offspring (and their friends) struggling to find jobs, apart from stacking shelves at Woolies or Coles.

Long term mini-depression or short sharp crunch, gentle readers, seems to be the choice we are facing.


The Indonesian spy-scandal is receiving lots of coverage. Gary Scarrabelotti called it as follows before the latest turn of the screw. 'For Indonesia’s sake, let’s hope its government does not make the same mistake that the Australian Labor Party, the Greens, the ABC, SBS and the Fairfax press have made about the man who is now Prime Minister of Australia'.

Australia is a lonely outpost of western civilisation a long way from the centres of such culture in the UK and the USA. We are widely disliked in Asia because we are rich and our young males are often loud and overconfident. But we have a pround record of assisting the smaller Asian nations both in regular ways - such as the  Colombo Plan - and generously in the wake of natural or man-mande disasters.  We need to lift our game in the area of cultural sensitivity, but surely we will do better in the long run by avoiding senseless grovelling and firmly defending our national interests.


Today, for obvious reasons, cricket is Henry's preferred sporting event.  It is possible to read newspapers, even board papers, and look up only when some dramatic moment is being replayed.  The hapless, pestiferous poms are finally on the end of a huge belting. Provided the rain gods do not destroy the rest of the game, the second test will begin with Australia one-zip and Mitchel Johnson and Ryan Harris bowling viciously on a fast and bouncy Perth wicket. Then Messrs Lyon and Clarke may out-thinking them in Adelaide, allowing the boxing day test to see the quicks again tormenting the bruised and humiliated (Pommie) Lions.

Not much footy, with only minimal coverage of the AFL recruiting and transfer season.  But the national Futball team has won a 'friendly' and even the Rugger buggers seem to be doing better.

There is an old theory that there is a negative correlation between a nation's sporting and economic success.  So Henry watches the better sporting results with mixed feelings - unrelieved joy at the first of these factors, deep foreboding about the latter. (See 'From the Archives')

Image of the week

 Courtesy Herald Sun

Economic policy - confusion rules
Date: Thursday, November 21, 2013
Author: Henry Thornton

Will the post-GFC go on for a decade or more?  That is the question and finally some answers are beginning to be offered.  Unfortunately, the world's best economists, having had half a decade to ponder, still have not agreed on an answer.

Writing in late 2010, this economist ('elderly, feeble, out-of-date' according to the critics, including Mrs Thornton) concluded: 'The biggest threat to modern capitalism in my view is the possibility of instability caused by policy swings: expansion; recovery; asset inflation; goods inflation; policy tightens; economy falls back; recession starting the whole process anew. Such outcomes would destabilise the beliefs of the econocrats in major countries, as well as their political masters. It would also present a severe blow to the confidence of households and firms, and confidence is a vital part of the capitalist way'.

I failed to warn of a long, Japanese-style mild depression, but that is now how things are beginning to look for the wider global economy.

The global experts are certainly showing signs of reduced confidence about what should be done.  When economists wrote and spoke about the so-called 'Great Moderation' in the late 1990s, macroeconomics seemed easy, entirely cut and dried. The powers failed to take systematic account of the fact that, while the standard economic indicators were all flashing (moderate) green, asset inflation was producing one of the great bubbles of history. US Fed Chairman Alan Greenspan believed there was nothing to be done about asset booms/bubbles except mop up afterwards.  He did this in the wake of the so-called 'Tech Wreck' with cash rates at an historically low level of 1 %.

Asset markets boomed again and economies recovered, though the 'moderation' of the 1990s was maintained for most parts of most economies. In the USA and UK, and other western economies, housing markets boomed, as did share markets. Again the Fed's response was passive, and when the asset booms ended with a crash, monetary stimulus was thrown at the economy along with large-scale bail-outs of financial institutions 'too big to fail' and extraordinary fiscal stimulus.  By 2010, officials and market participents were worrying about growth of government debt and efforts to rein in fiscal stimuli were underway.

All this is the opposite of the steady policy with largely automatic stabilising offsets recommended by masters such as Milton Friedman. the twentieth century's greatest monetary economist.

Today we read that Larry Summers has 'set the world of economics abuzz'. David Uren continues: 'In the USA, as in Australia, employment as a share of the adult population is no higher now than it wasat the worst of the crisis, despite huge injections of public spending and massive monetary support'.  David Uren might also have noted that America's rate of unemployment is falling, while Australia's is still rising, and in both cases the structural problems are compounded by heavy retirements, or by people simply giving up the search for work.

A few days ago, Henry seems to recall, the OECD was warning us not to cut fiscal deficits too quickly, while today the IMF is urging what the AFR calls 'urgent spending cuts'. The RBA is saying it can do little or nothing to reduce what it (and Henry) sees as an overvalued exchange rate, and 'prominant economist', Professor Ross Garnaut wants a mix of tighter fiscal policy and easier monetary policy.

Whether Australia can resume normal growth with a clearly overvalued currency is a moot point, and the RBA says 'wait for it to fall, people, as it will when commodity prices fall and/or when the US Fed finally begins to withdraw extraordinary monetary stimulus'.   What happens if neither of those pigs fly in the next year or so?

Will the Senate allow the Australian government to ditch the carbon tax and mining tax, and reduce other impediments to sustained growth?  No-one knows.

Clearly the alphabet soup men, and economists and politicians generally, are in deep confusion.

Perhaps all this confusion is helping to produce cautious businesses and people and contributing to slower growth, indeed, entrenched mild depression?

The Gettysburg Addess
Date: Tuesday, November 19, 2013
Author: Henry Thornton

Serious people everywhere have been celebrating the 150th anniversary of President Lincoln's Gettysburg Addess.

President Lincoln delivered the 272 word Gettysburg Address on November 19, 1863 on the battlefield near Gettysburg, Pennsylvania.

"Fourscore and seven years ago our fathers brought forth, on this continent, a new nation, conceived in liberty, and dedicated to the proposition that all men are created equal. Now we are engaged in a great civil war, testing whether that nation, or any nation so conceived, and so dedicated, can long endure. We are met on a great battle-field of that war. We have come to dedicate a portion of that field, as a final resting-place for those who here gave their lives, that that nation might live. It is altogether fitting and proper that we should do this. But, in a larger sense, we cannot dedicate, we cannot consecrate—we cannot hallow—this ground. The brave men, living and dead, who struggled here, have consecrated it far above our poor power to add or detract. The world will little note, nor long remember what we say here, but it can never forget what they did here. It is for us the living, rather, to be dedicated here to the unfinished work which they who fought here have thus far so nobly advanced. It is rather for us to be here dedicated to the great task remaining before us—that from these honored dead we take increased devotion to that cause for which they here gave the last full measure of devotion—that we here highly resolve that these dead shall not have died in vain—that this nation, under God, shall have a new birth of freedom, and that government of the people, by the people, for the people, shall not perish from the earth."

More information here.

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