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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.

BIS warns of bubbles
Date: Tuesday, July 01, 2014
Author: Henry Thornton

Happy new year, gentle readers.

'An organization representing the world’s main central banks warned on Sunday that dangerous new asset bubbles were forming even before the global economy has finished recovering from the last round of financial excess', reports Jack Ewing of the New York Times.

'Investors, desperate to earn returns when official interest rates are at or near record lows, have been driving up the prices of stocks and other assets with little regard for risk, the Bank for International Settlements [BIS] in Basel, Switzerland, said in its annual report published on Sunday.

'Recovery from the financial crisis that began in 2007 could take several more years, Jaime Caruana, the general manager of the B.I.S., said at the organization’s annual meeting in Basel on Sunday. The recovery could be especially slow in Europe, he said, because debt levels remain high.

“During the boom, resources were misallocated on a huge scale,” Mr. Caruana said, according to a text of his speech, “and it will take time to move them to new and more productive uses.”

The BIS has been ahead of the general curve in advising on how to moderate asset booms so thay don't turn into bubbles. 'Bubbles' do not slowly deflate, but rather pop.

The USA has experienced three major stock market booms in the twentieth century - in the 1920s, in the 1950s and in the 1990s. The first such boom turned into a bubble and burst, helping to produce the Great Depression. The booms in the 1990s burst and marked the end of the so-called 'Great Moderation. The US Fed's rapid easing of monetary policy helped stave off serious recession but re-ignited the stock boom and this led directly to the Global Financial Crisis (GFC). (Why the asset boom of the 1950s, extending into the 1960s did not turn into a bubble is worthy of careful analysis.)

As The BIS said in the quote above, the world economy is still struggling with the aftermath of the 2007 market crash.

This writer said in late 2010, in the opening paragraph of Great Crises of Capitalism: 'The Global Financial Crisis of 2007-08 might still produce a great depression. Massive monetary and fiscal stimulus has been thrown at the problem. Major financial institutions, with one exceptions, have been bailed out by taxpayers. The problems created by excessive debt and over-easy monetary policy have been 'solved' by more of the same'.

Now the BIS is warning of renewed bubble problems and it is time for investors to be especially cautious.

The summary of the BIS report is as follows: 'A new policy compass is needed to help the global economy step out of the shadow of the Great Financial Crisis. This will involve adjustments to the current policy mix and to policy frameworks with the aim of restoring sustainable and balanced economic growth.

'The global economy has shown encouraging signs over the past year but it has not shaken off its post-crisis malaise (Chapter III). Despite an aggressive and broad-based search for yield, with volatility and credit spreads sinking towards historical lows (Chapter II), and unusually accommodative monetary conditions (Chapter V), investment remains weak. Debt, both private and public, continues to rise while productivity growth has extended further its long-term downward trend (Chapters III and IV). There is even talk of secular stagnation. Some banks have rebuilt capital and adjusted their business models, while others have more work to do (Chapter VI).

'To return to sustainable and balanced growth, policies need to go beyond their traditional focus on the business cycle and take a longer-term perspective - one in which the financial cycle takes centre stage (Chapter I). They need to address head-on the structural deficiencies and resource misallocations masked by strong financial booms and revealed only in the subsequent busts. The only source of lasting prosperity is a stronger supply side. It is essential to move away from debt as the main engine of growth'.

Access to the full report is available here. It is worthy of careful reading and even more careful thought.

For later discussion of the BIS approach to asset bubbles, and related matters, see James Saft of Reuters.

Saturday Sanity Break, 28 June 2014
Date: Saturday, June 28, 2014
Author: Henry Thornton

Here we are, in the British Airways lounge in Heathrow after an hour long queue to dispose of the baggage. Twice in the past week, a fellow queuer (sic?) told us, there were major problems at Terminal 5, which is dedicated to BA. The problems involved luggage, and just as we joined a summer Saturday queue the system for sending luggage to be sorted and loaded stopped.

'Why don't they tag it and pile it up somewhere?' Henry asked a tall, courteous fellow traveller. Said traveller went to inquire from a BA staffer, only to return to report 'They heard you'. Tags were being added to bags and the owners were being sent to a muster point to dispose of them.  Presumably in many cases that would be the last time anyone saw them, but that is the case even when the mechanised system is operating. Our line inched forward.

Just as it was our turn to tag and dispose, the mechanical system cranked into action. We wished the bags a fond farewell and headed to the security check. As when we came into the country from mother Russia, the security and customs staff were far more numerous, with far better systems, than their Russian counterparts. Soon we were having porridge and kippers for breakfast in the BA lounge.

We have just spent two days and three nights with a dear friend in London.  Mrs T went to look at galleries while Henry and friend worked on their research project, aimed to test rigorously if current US monetary policy risks creating systematic instability in the US and therefore the world economy. It is likely to come down to how the monetary system interacts with the 'real' sector and how asset inflation influences both. Expect another report in a few months, gentle reader, because the research involves building, estimating and examining the dynamic properties of a model for the US similar to the RBII model of the Australian economy but with asset inflation added. (Here is a link to the non-rigorous version of the research so far completed.)

By amazing coincidence, the debate on how to handle asset inflation is raging in the UK. Today's FT includes a nice article by John Authers titled 'Rate rises pose biggest test for BoE bubble theory'.

The BoE has announced a 'macroprudential' policy (as recommended by Henry and colleagues in the aforementioned paper) to deal with asset inflation, specifically house price inflation, in the UK. No-one thinks there is a general housing bubble in the UK, but there is (it can be argued) in London. So the BoE has to tread carefully. The specific policy involves a 15 % cap on the proportion of mortgages that can cover more than 4.5 times the borrower's income.

Furthermore, lenders must carry out a new test of affordability in which they work out if borrowers could still service the loan should interest rates rise by 300 basis points. The BoE says 'this is not a stringent cap'.

Many other central banks will be watching this approach to controlling asset inflation with great interest. (Until now there has been  a non-policy of 'benign neglect', wait for the crash and clean up afterwards with very low/near zero interest rates. But the BoE, and one seems to remember the RBNZ, have discovered the stunning fact that 'monetary - interest rate - policy cannot serve two masters' and have decided a new policy - or an old policy  - of controls on the banks - is needed.)
Of course, as currently specified, this policy does not cover lending to fund share inflation, nor the sort of progressive tightening (preferably based on well understood rules with automatic tightening that Henry advocates), as an asset bubble develops. And the BoE governor says interest rate hikes are still a 'last resort'  to deal with asset inflation. But it is a good start, and one can be confident that this will be a large area for debate in coming years.

London is booming and, except in the poorest parts of the Scottish Highlands and western Isles, so is most of the rest of the UK economy.

David Cameron is involved in the S**tfight with other Eurozone leaders, and Henry's money is on the UK leaving the EU in due course.

Links to Henry's ramblings in St Petersburg and Scotland are available below. Thanks to Fiona Prior, most of the individual reports now have images.

Scotland the Brave, and sometimes foolish.

Mother Russia guards her borders. But why, comrades, that is the question.


Henry has been too busy to follow the footy, but assumes the season is over for his beloved Caaarlton! Tomorrows game with Collingwood may be the best realistic chance to stay in touch with the finals. Henry also assumes the Swan's millionaire forward line is wreaking havoc, and that Hawthorn is fighting on, along with Freo, Adelaide's Power and Mr Ablett's Suns.

The local (ie global) press is focussing on the WORLD CUP, where a star player has been kicked out of the game, even training for the game, for 4 months for biting an opponent, apparently his third such transgression.

A person of amazing insight in one of the hundreds of newspapers available in London argued that biting is a deep human instinct inherited from our carnivore ancestors and FIFA should go easy on the poor superstar. But his sponsors are abandoning him and his club has him on the market for 180 million Euros, so after a nice rest, and one hopes some serious psychotherapy, he'll come out snarling for another club.

Makes the AFL's 'supplements' scandal look pretty tame.

Poor old England, losing a test series to Sri Lanka after their belting by Mitch Johnston and his mates in Oz. Much heart searching after the self-congratulation of their own win over Australia on doctored pitches in England, was it earlier this year?

Image of the week

Iona, courtesy Google images and Fiona Prior

Henry in Scotland - land of the brave
Date: Wednesday, June 25, 2014
Author: Henry Thornton

After escaping Mother Russia only after thorough administrative survaillance - why were they being so careful about letting bog-standard tourists leave? - Henry and Mrs T arrive safely in Scotland.  Though St Petersburg had been fun, it was a relief again to be in a free nation, correction, apart of a free nation, where about 45 % of its people would like to be freer, but poorer, with their own nation.

As with reports from Russia, the latest will be at the top, making travel into the past relatively easy.

Farewell bonnie Scotland, home of the brave, and the foolish.

Harris and Lewis, siamese twins of islands.

Over the Sea to Skye, where Bonnie Prince left dressed in Fiona McDonalds dress.

And. so to Iona, the place where Christianity was introduced to the Picts and the Scoti.

Scotland, Bonnie Scotland - Arrival, inducing mild euphoria at again feeling free.

Monetary policy reflections
Date: Tuesday, June 24, 2014
Author: Henry Thornton

The Bank of England has signalled that the next change of interest rates is likely to be up, while the ECB has just made cash rates slightly negative. The US Fed is 'tapering' its bond buying project, and today we learn from the FT that central banks generally are planning to cut their bond holdings to minimise capital losses when interest rages generally begin to rise. Forecasts for global economic growth have been reduced, and world trade has started the year very slowly, indeed may have fallen slightly. 

Does the phrase 'dog's breakfast' leap to mind?

Economists had been hoping for stronger, not weaker growth of wotld trade but, if the sluggish start to the year continues, 2014 might be the third year in a row that world trade has grown less than, or no more than, growth of global GDP.

So far at least, the global economy is looking a lot like Japan in the 1990s - sluggish growth, slow recovery and low inflation, tending some think to actual deflation, of goods and service prices.  This is a natural consequence of large debt levels, with these levels still growing.

At the same time, differently to Japan in the 1990s, global asset inflation has shown unusual strength, plausibly reflecting unusually easy global monetary policy - near zero cash rates and 'quantitative easing', ie bond buying. Prices of shares, and house prices in many countries, have boomed despite sluggish global economic activity.

When and if the US Fed, and other important central banks, begin to raise global interest rates, there will be repurcussions beyond rising bond rates.  One must assume share prices will fall, possibly by large amounts, from record levels. House prices will lose bouyancy, and may also fall substantially. If all this is happening while economic activity is still sluggish, questions will be asked about the job being done by major central banks, and governments are likely to clip the wings of the central bankers.

That will be a pity, but one can make an argument that it will reflect the unwillingness of central bankers to work out how to deal with asset inflation. Trouble is, will politicians, advised by national Treasuries and Departments of Finance, do any better?

More here from the (later) pages of the Financial Times.

Does the phrase 'dog's breakfast' leap to mind?

Crashing the party

`Sharing`, self employment and the grey economy
Date: Tuesday, June 17, 2014
Author: Henry Thornton

There is a new way of doing business in the UK.  This is called 'sharing' - people my rent out a room, or their house, or call a non-cabbie car hire network, or rent a dress if they are a gorgeous young thing with a big date and a low budget.

Phillip Inman of the Guardian wrote yesterday about this development, and Henry cannot wait for it to get to Australia.  It could be called monopoly busting, whether the monopoly is the taxi companies, who are unreliable, or the golden legion of real estate agents, or the department stores who extract massive profits from selling nice dresses to poor but attractive young women.

Naturally, there new economy forces are being fought by the pld economy monopolists in the UK, and no doubt the monopolists in Australia are watching and readying themselves for battle.

Elderly British survey fillers are against the new economy development already described, but younger Britains are more likely to embrace the idea. Phillip Inman explains the economics behind this movement: 'This rising tide of self-employment accounts for two out of five jobs created in the past year, pushing the number of people who work for themselves to one in seven of the workforce. While many will be self-employed out of necessity and earning, on average, about 40% less than their employed counterparts, a sizeable proportion consider themselves entrepreneurs and are excited about being their own boss.

'Analysis by the Royal Society of Arts shows that for every worker who loses out there are three who say they benefit. It is an entrepreneurialism that the RSA argued is indicative of an unstoppable shift.

'Respondents [to a major survey] cited factors such as being able to live where they want and work around caring for older relatives or children. The rising cost of childcare was a key consideration, as was the escalating cost of commuting.

'Largely unspoken was the lack of pay, wage rises and decent pensions on offer in mainstream jobs culture.

'The tax system also encourages workers to look beyond the workplace for extra income. A combination of income tax and national insurance places a 32% marginal tax rate on standard rate taxpayers. Capital gains tax by contrast charges the basic rate taxpayer a rate of 18%, and a higher-rate taxpayer 28%. As such, gains on wealth are more lightly taxed  than earned income'.

Henry notes that an effective tax rate on conventional paid employment of 32 % perfectly explains why people will accept 40 % lower incomes in the self-employed sector - most of the 'Self-employed income is from the black/gray economy and therefore effectively untaxed.

Henry knows of many young Australians with fine education, positive attitudes and no jobs in the standard economy or poorly paid jobs with little prospect of advancement. Crime is one solution for these kids, but being self-employed is the logical alternative.

In the UK, a peer of the realm, Lord Young, is reporting on this phenomonon and pressuring the government to relax rules that support the monolply positions of entrenched enterprises like the London cabbies. One hopes that Maurice Newman can find the courage to address these issues as they affect Australia's struggling manufacturing economy.

Read more from Phillip Inman here. 

Saturday Sanity Break, 14 June 2014
Date: Saturday, June 14, 2014
Author: Henry Thornton

"A government big enough to give you everything you want, is strong enough to take everything you have".

This quote from Thomas Jefferson might serve as daily support for Joe Hockey as he tries to make Australians give up the entitlement mentality. Henry is overseas, but did hear on BBC news (the only English language news channel available in our modest hotel) that New Zealand has raised interest rates.

What is New Zealand up to?  Is it possible that the difference from Australa is more realistic government and people – quickly fixed the budget (GST hike, low top rate of income tax) and then got on with making a living.

More here on the tax policy that seems to have done wonders for our cousin over the ditch. Source: Tom Hazledine and The Conversation.


A canny friend said overnight: 'The Australian housing situation is becoming serious. Before the budget it was carrying consumption with it although that is now cooling. No sign of life in tradables investment including new resources.

'Our share market boom is now just banks ... monopoly plus the Fed'.

He later reported that we are getting a new bout of currency appreciation after the Euro relaxations last week ... 'even as resources prices fall in a heap'.

This makes the case for Henry's tax on capital inflow, iniatially proposed here (and in The Australian) 18 months ago.


The alternative is further cuts in interest rates, which would repeat the mistakes of America and the Eurozone.

It is only lack of national confidence that prevents taxing capital inflow: enter, stage left, senior official (wringing hands) 'we are a capital importing nation and cannot choke off that source of national prosperity'.


Henry and Mrs T spend the best part of two days exploring the Hermitage Museum in St Petersburg this week and will provide a seperate report in due course. But getting in was a nightmare, despite booking on line and thereby supposedly 'avoiding queues', and finding ones way around was almost as bad.

Amazing collection, many Rembrants, a lot of Titians, one Georgioni (a rare example) and not an Australian impressionist to be seem. What do these Ruskies think thay are doing, ignoring Streeten, Roberts, Condor and the rest of our boys. Come to think of it, this creates an opportunity, especially if Australia does well enough in the World Cup to hit the news here.

Visit the Hermitage here, where a virtual tour is on offer.  www.hermitagemuseum.org

We took in a performance of Magic Flute at the new Marinsky Theatre last evening. Of course it was in Russian, and a shouted 'Nyet' and other gutteral noises does not fit naturally with Motzart's music, but small matters like that were ignored as the performance had style, humour and great singing.

Coming home as the sun was threatening to set at 11.30 pm was a strange experience, but the streets were busy and cars and busses were battling it out as if it was peak hour. Thursday was Russia's national day and both it and Friday are holidays, so there was a festive air about the place. We were helped to find the appropriate bus stop at 11.15 pm by two American gals, from Texas and Ohio respectively, working here and learning Russian as they go. Two Japanese girls got on the bus at the next stop, waved off by a young Japanese couple from the front door of their home. Its all happening in St Petersburg, folks.

Here is the Mariinsky's website.  www.mariinsky.ru

And here is Henry's collected trip reports. http://www.henrythornton.com/blog.asp?blog_id=2785

Henry in Russia - never to be the same
Date: Friday, June 13, 2014
Author: Henry Thornton

St Petersburg is a place Mrs Thornton has long wished to visit. Naturally this led eventually to the idea of Henry and his sweet lady flying to the former Russian capital city, captured by Peter the Great from Sweden, a once serious player in Northern Europe's wars and in European politics generally.

As usual, Henry feels constrained to provide reports for his faithful readers, who no doubt are missing the usual trenchent commentary on matters economic and political. And travel broadens the mind, so it is to be hoped that Henry returns to Australia - that miracle economy - freshly reinvigorated andwith a mind broadened if not deepened.

Time will tell but, in the meantime, here is an index of Henry's reports from St Petersburg.  It will be updated each time a new report is posted, with the latest on top so no-one can feel she is being tricked into reading any report twice.

(If coming new to this e-journal, consider starting from the bottom and moving up.)

Military might and reflections on departing.

Is the Russian Empire experiencing a slow, ultimately false, sunset or is it toward the end of  a long decline that is destined to turn Russia into a poor, undeveloped nation whose great days are steadily fading further into history? That question is beyond my current pay grade, gentle readers but, as previously noted, there is a lot of room for improvement in matters economic.

We leave Morther Russia with great memories, but with this question seriously on our minds. Very likely, we shall not pass this way again

The Hermitage

The Hermitage will blow you mind, and even the digital tour may cause you to buy a ticket to St Petersburg

Gilded palaces, forests and public transport.

Henry masters (!) St Petersburg's public transport and visits more gilded palaces and their grounds.

White nights in St Petersburgh - Peterhof

Henry makes only his second visit to Russia. In 1973, he briefly visited Tashkent, on route to the socialist finishing school known as the London School of Economics. Sadly for the socialist cause, almost all the teachers at the LSE proclaimed the power of capitalism. Much to Henry's father's delight, Henry returned with a totally different outlook on life.

US jobs data boosts share prices - que?
Date: Monday, June 09, 2014
Author: Henry Thornton

Finally, after six long years, US jobs have surpassed the previous peak in January 2006. In previous post-war recessions, the previous peak has been exceeded in just a few years, often only one or two years.  The latest result came after four months of over 200 K new jobs created in a row, the best result for 14 years.The rate of unemployment held steady at 6.2 %.  The US share market hit a new record.

There is a catch, of course. During the Great Recession, as the post-GFC downturn has been labelled, a lot of American workers dropped out of the workforce, and the data suggests that many will not be back.  This is the outcome in many countries, and suggests that future economic capacity will be limited compared with pre-GFC estimates. This is an issue that has been discussed by Gavyn Davies of FT fame, in an article just posted,

Davies says that central bankers, especially in the USA and UK, strongly believe that the damage of the GFC can be repaired, in the sense that pre-GFC trendlines for GDP can eventually be recovered. After all, 'none of the growth fundamentals in the system – the state of technological knowledge, the available labour force, and the amount of fixed investment that is profitable to deploy – has been permanently destroyed by the Great Recession', although the loss of skilled and experienced workers might take a long time to replace.

'A more pessimistic view is that the Great Recession has resulted in a permanent (or at least very long lasting) loss of economic capacity, in which case it would be inflationary to attempt to re-attain previous trendlines. On this view, the global economy has now locked on to a different path, with its effective capacity being much lower than previous trends might imply. The latest estimates of capacity published by the IMF and OECD, who should be able to do this sort of work better than most, clearly imply this'.

A reason, apart from loss of skilled labor, is the debt overhang that helps to explain the very slow recovery of US jobs already noted. Japan is the example that people who worry about debt fuelled economic bubbles point to, perhaps an extreme example due to the size if its asset bust and the extreme aging of its declining population.

The Economist, like the FT another venerable newspaper, has a proud record of warning that the debt-driven  market bubble of the 1990s, which crashed and was revived twice by near zero interest rates, would eventually create serious economic mayhem. Henry is with the pessimists on this issue, and has asked his asset management to begin reducing his risk profile.

Despite the causes for caution - possible permanant loss of economic capacity, new share price records and the clear challenge of returning US monetary policy to a sensible neutral position - Wall Street's “fear gauge” has fallen to a seven-year low. This is a clear warning sign, suggesting a new take on the old adge about the time to sell being when the lift drivers are at their most enthusiastic.

Saturday Sanity Break, 7 June 2014
Date: Saturday, June 07, 2014
Author: Henry Thornton

Greetings, gentle readers, from Dubai airport, en route to St Petersburg. The airport at Dubai is growing before one's eyes and is full of Airbus 380s. As we sit in the lounge we hear announcements of flights to just about every destination one could imagine, New York, London, Sydney, Toronto, Seattle, Entebbe, Venice, Muscat, Houston, Colombo, Dusseldorf, Kabul, Algeirs, ...

Australia is (almost) at the end of the road, although we were on a flight that started in New Zealand. This is the mini-state that already has a freer trade deal with China and no budgetary problems despite being derided with sheep jokes.  When we checked in at Melbourne we found the Qantas first class lounge was closing for the night, although we were on a joint Qantas-Emirates flight.  The Emirates first class lounge in Melbourne is far more modest that the Qantas equivalent, but we were welcomed and Henry was, gasp, upgraded, due presumably to his long and dedicated work as a Qantas travellor.

In Dubai the equivalent lounge reaches Qantas standards but is built on an industrial scale. More evidence that Qantas international is doomed, and one reads in the Weekend Australian that we are still debating the easier visa regulations for brikkies and chefs, fruit picking is almost all done by kids from overseas and unions are fighting hard for 200 % loadings for work on Sunday.

One is everyday reminded there is a lot of ruin in a nation, and that successive governments just do not get what is needed for Australia to reach its potential.  We shall travel on to Mother Russia, and look forward to young Henry's take on the issues of the week. We already know that Russia has even more onerous regulations than Oz, given the amount of paperwork that is required to get a visa so we can inject somw vital dollars (little dollars, but still hardish currency) into the Russian economy.


Caaaarlton! went down to Geelong by 5 points overnight, but Henry has still not found a balanced discussion of the game. Did they fight the game out or throw it away by f**kwit brain snaps as they did last week?

Clearly it was a great game. But seems it was umpire brainsnaps, as suggested here.

Delicious to learn that ASADA's star witness has been pinched by the plod for allegedly dealing in drugs, and that Mr Dank is on their list also. The supplements saga gets more farcical every week, and it is surely time for ASADA to apologise to those whose reputations have been trashed and get its act  together .

We wish the lads well who are about to take on the might of world futball.  Just one win and two draws/small losses would be likely to see us all watching the games in the wee hours. Great pity about renewed allegatons about briberygate.

Image of the week

Courtesy The Australian


Australian monetary policy and where does it come from?
Date: Thursday, June 05, 2014
Author: Henry Thornton

A response from reader Paul Schefe to Henry's blog on Tuesday June 3, 2014.

Thanks Henry for comments on the interaction between Monetary Policy, goods and services inflation and asset booms. I like your work.

In my view these are all related.

Since about 2000 when interest rates started to decline, house prices started to rise, (we then witnessed a large number of TV shows promoting DIY renos and the corresponding jump in house prices).

At this time there was a wholesale push on behalf of banks etc. to make use of this new found wealth. A massive number of overseas holidays, new cars, shares and more property were all financed by rising levels of home equity.

Mortgage interest rates are by far cheaper than personal loans or credit cards.

There are even bank products out there that encourage people to cost every purchase on the credit card and at the end of the month clear the card with house finance.

As time has moved on house prices have continued to increase mostly due to lower interest rates (ratios of income to house price increased from abt 3 times to 5 times, partially offset by interest rates decreasing from about 12% to about 6%), whereas banks required equity levels have stayed almost constant. (About 10%) give or take. Therefore most people that have a $40k deposit will purchase a $400,000 house before they purchase a $200,000 house as they aspire to a better house.

As the standard house-owner is now carrying much larger amounts of personal and mortgage debt. A say 10% correction in house prices downwards will wipe the equity of a large number of people. I believe that this will wipe the spending power in more luxury goods of a great many people. (say a 10% correction on a $400k house results in $40k of spendable equity disappearing).

I believe that it’s the ability of consumers to access house equity finance that has led to this correlation between monetary policy and goods and services inflation.

Secondly I believe that the share price boom is a domestic version of the “Carry Trade” Borrow from the house or the super fund at relatively cheap finance to invest in higher returning assets.

In conclusion I believe that this positive correlation between house equity, purchase of goods and services and share price booms works best when interest rates are low and house prices are increasing.

However I believe that when house prices decline (dependent on a number of factors, employment, interest rates etc.) the whole shebang might be in trouble.

Anyway these are my own thoughts on this matter.


Paul Schefe


Thanks for your note Paul,

you make some very salient points in regards to the greater access to finance for the prime purpose of purchasing a house - and the fact lower interest rates encourage greater speculation into property, and in turn larger and larger mortgages - and higher and higher house prices. Which allows greater financing on the spending of goods to fill up these houses.

A consumer boom. There is little doubt Australia has been living in an unprecdented boom in household consumption and consumer spending for the better part of 15 years now. It is almost as if Australia has been following the playbook we've observed from across the Pacific in the United States about how to inflate a property bubble and create this spending power....

There is no doubt that the United States went down the path of ultra low interest rates more than a decade ago - in response to the bursting of the so-called 'Dotcom Bubble Boom' of the late 1990s. US interest rates dipped below 3% for the first time in many decades in October 2001, and below 2% for the first time only two months later in December 2001.

Except for a brief period in 2006-07, when former Federal Reserve Chairman Alan Greenspan (who retired from the post in January 2006) and his successor Ben Shalom Bernanke raised interest rates in an effort to deflate the US housing bubble, US interest rates have spent most of the last 12 years below 4%, and indeed a majority of that period below 2%.

Analysing the recent history of US interest rates on a monthly basis shows that since first dipping below 2% in December 2001 US interest rates have averaged only 1.6%. Of the 150 months since then there have been 106 months with US interest rates below 2% (106/150 = 70.7%) and only 44 months with US interest rates at 2% or above (44/150 = 29.3%).

It should be abundantly clear that the low interest rates that have existed in the US for a dozen years have done little to create a 'sustainable' US housing bubble - which indeed heavily deflated half-a-decade ago and remains well below its 2006-07 highs.

It appears Australian policymakers have learnt little from the lesson provided by the US and the Australian experiment with low interest rates which began just over a year ago (Australian interest rates dipped below 3% for the first time since the independence of the Reserve Bank in May 2013), may well have many more years to run to try and keep the Australian housing market properly 'inflated'.

Is it sustainable? One would have to expect at some point it will prove unsustainable, but the other lesson from across the Pacific, and indeed from our neighbour to the North, Japan, is that policies that appear unsustainable can persist for a significant amount of time due to the great deal of inherent 'buy-in' to the system by an assortment of varied and vested interests - most significantly - the humble Aussie mortgagee and the politicians he elects to protect his nest egg.


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