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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.

Rate cut - Asset inflation or economic boost?
Date: Tuesday, February 10, 2015
Author: Henry Thornton

The RBA's latest excellent summary of the world and local economies, and the implications for monetary policy, was made available on Friday.  One could not assume that the timing was designed to distract us all from the political hi-jinks, but if it was it failed.  But now we are back to business as normal it is only fair to devote serious attention to the excellent work of the men and women of  the RBA's economic department.

Key questions remain. Resuming the policy easing may provide some boosts to non-mining activity and some assistance to a lower exchange rate.  But what if it fuels further housing inflation, as initial responses suggests is likely?  Will APRA's untested 'macroprudential policy' be able to prevent a housing boom turning into a bubble?

First we summarise the latest Monetary Statement. I shall use a staccato presentation of main facts.  In short:

* Growth slowed a bit in Asia - China, Japan, East Asia.

* Growth increased in USA.

* Price of oil fell further.

* Price of other commodities fell, but a bit slower rate.

* Net effect: 'Australia’s MTP growth is expected to continue at around its pace of recent years in 2015 as a number of effects offset each other'. [Sadly, 'MTP' is not something I have encountered before, which confession will strengthen the general view in Henry's household that the old boy is past it.]

* The oil price falls are putting downward pressure on global prices of goods and services. The dread word 'deflation' is being discussed in hushed tones in central banking land, especially in the ECB.

* Central banks have eased - 'QE' in Europe, rate cuts elsewhere, financial markets have pushed back expectations of rate hikes in the USA. 'Sovereign bond yields in the major markets have fallen significantly, particularly at longer maturities, although the size of the decline in yields is difficult to explain' [Ouch, if the RBA is puzzled, Henry is absolutely baffled.]

* Here is a zinger: 'The increasingly divergent paths of monetary policy among the major advanced economies have led to some sizeable movements in exchange rates'. The Swiss Franc moved dramatically after the Swiss abandoned policy of holding their currency down, and US dollar rising against most others, as next move in US rates is expected to be up.  The  so-called 'currency wars' are hotting up.

* And another: Australian financial conditions remain 'very accommodative'. The Aussie dollar has fallen relative to the US dollar, although not as far as commodity prices. We appear to still be a safe haven, though (ahem) the budget is in a right mess.

* 'Available data since the previous Statement suggest that the domestic economy continued to grow at a below-trend pace over the second half of 2014. Resource exports and dwelling investment have grown strongly. Consumption growth remains a bit below average. Growth of private non-mining business investment and public demand remain subdued, while mining investment has fallen further'.

* 'Housing price inflation has eased from the very rapid rates seen in late 2013, although it remains relatively high, particularly in Sydney and Melbourne'.

* Household consumption growth has picked up since early 2013, but is still below average, despite support from 'very low interest rates'.

* Various positive factors, increased wealth, etc, etc have been partially offset by 'weak growth in labour income, reflecting subdued conditions in the labour market'.

There we have it, dear readers. There is a lot of global uncertainty, with local political uncertainty to compound this,  but Henry must admit no strong case for the rate cut we received a week ago today.  This was well advertised in advance by a 'well connected' journo or two, and Henry reflects on how much things have changed since a few serior staff were authorised to take calls from the press when Bob Johnston took the reins. 

[As an aside, it is worth noting that properly trained economists believe that inside information makes a desirable contribution to creating a properly informed market. Why it is against the law is therefore one of those sweet mysteries of life, and presumably the current restrictive law will be changed as part of Josh Frydenberg's ongoing efforts to deregulate Australia's overregulated economy.]

But readers will be far more interested in why, with a weak rate cut case, and little warning, except via the trusties of the press, the deed was done.

There are three theories scudding about.

First, the economic outlook is worse than most people believe.  As I said in my pre-board briefing: 'Unless the RBA has joined the 'serious trouble' camp, its own stated position does not call for further rate cuts'.  But the degree of overt concern in the typically excellent RBA commentary summarised above does not support that theory.

Second, the fear might be, absent a rate cut (or two, or three), Australia will be a loser in the currency wars, the welcome fall in the Aussie dollar will stall and there will be no further improvement in competitiveness to pull the economy out of its current glide path. Again, while there are hints in this direction, it could be said that the near zero rate nations are in far worse shape that Australia, whose Treasurer keeps telling us the nation is in extremely good shape, and that the rate cuts will greatly improve the situation.

Third, in the absence of action to fix the budget, and improve efficiency and competitiveness, the RBA must do its bit to help. This might be seen as insurance in case an unhappy Treasurer begins to talk openly about removing Treasurer Costello's reform that made the RBA so much more effective, giving it a clear focus on 'goods and services inflation' and the power to act independantly in pursuit of that objective.

And it may be inflation - asset inflation rather than goods and services inflation - that is the main result of this rate cut and others anticipated by 'well connected' members of the press.

Perhaps we shall never know, except in the unlikely case Glenn Stevens uses his well-deserved retirement to write a blisteringly honest biography.  Perhaps the truth is there was a bit of all three arguments at play, and also Barnaby's full moon.

But the good news is the rate cut comes at a good time to illustrate Henry's editor's latest post-modern painting.

Read the full RBA statement here.

The first painting in the style of this is available here.

Sunday Sanity Break, 8 February 2015
Date: Sunday, February 08, 2015
Author: Henry Thornton

'This dog will not run
'This boat will not float'
Ross Cameron, former Liberal backbencher, ahead of Party spill, now scheduled for 9 AM Monday.

'Tony has had absolute support from his senior colleagues. I will support him in any leadership spill'. Malcolm Turnbull, today.

As with the equivalent affirmation from Julie Bishop, 'this promise will not hold if a spill motion is passed'. The mob, to a man ... correction, person.

'Replace Joe Hockey as Treasurer by Malcolm Turnbull', Uncle Tom Cobley and many others in the past few days.  After all, it is the failed budget that is a main substantive weakness of Tony Abbott's performance in government.

'If Joe Hockey would agree to leave economic policy to Messrs Fraser and Stevens, at least until the current mess is sorted, I would vote for him to be given a second chance.  This is not a totally silly idea, dear readers. When a country gets so deep in the economic mire that it needs help from the International Monetary Fund, the tecnocrats get to call the shots.

'Far better to let our technocrats sort out the economy while there is still time to do so without advice from arrogant foreigners.  We've tried arrogant.  Let's have some genuine competence'. Henry Thornton, Friday 6 February.

So there you have it, dear readers. More political instability, following economic policy stasis amid assertion and counter assertion about which government is more responsible for the current mess. Greg Sheridan said among a blizzard of blame and analysis in the weekend press: ''... any government is now under constant attack from many of its own natural supporters, for not going far enough in the direction that alienates the majority of voters. There is a tremendous pincer movement of the extremes of your own base, louder than ever on social media, and the disgruntled in the centre and on the other side, louder than ever in their contradictory complaints'.

Paul Kelly, also yesterday, weighed in as follows. 'Rarely has the prime ministership seemed such a poisoned chalice. What is needed now, above all, is strong government. Yet resolute government is being put into grave jeopardy probably regardless of whether Abbott or Turnbull prevails.

'Two competing mantras echo across the partyroom. From Abbott: don’t surrender to chaos, weakness and Labor’s disease. And from the motley bunch of Turnbull travellers: seize this chance to save the government and invest it with new hope'.

More here, including a video.


This being a doldrum amongst the usual tempest of sporting news and views, the focus is on 'Leadership'. Leadership of Australia's world cup of cricket. Will Clarkie's hammy hold up? And if it does not, what about George Baily's form? And would Smithy lead the team if the hammy breaks again and George's form remains bad?

But there's more, dear readers. What about Watto's whatever? Is Johnno back to his scary best? Will Faulkner come up ok? If all the questions are answered in the affirmitive, Australia cannot lose.

In footy, the single biggest question is will Essendon be allowed to compete with all its players in 2015? Also: 'Will James Hird be leading them as coach? and 'Will Caaarlton! beat Essendon, even if the Dons are playing a hastily arranged team from Ascot Vale?

Great to see Timmy Cahill getting a fair suck of the sausage from the Shanghai dragons, and is also available to play for the Socceroos should the coach require him to do so. Go for it Ange.

Image of the week

Courtesy AFR

Political economy, Aussie style
Date: Friday, February 06, 2015
Author: Henry Thornton

What to say about politics, Aussie style, as it relates to economic policy? Four Prime ministers in four years would be clearly excessive, because how are holders of that high office meant to learn how to perform well in such a difficult job? Of course it can be remarked the Prime minister's job is not for someone on work experience, but that is too glib. Every Prime minister learns a lot in his or her first term, which I suspect is a main reason that most Australian governments have been given at least a second term. But no, this is no longer the case, if the examples of Rudd'n'Gillard'n'Rudd, or of the hapless Campbell Newman, are any guide.

A friend suggested this is the result of addiction to smart phones. This addiction means many people just have to have the latest version, so whenever a new model appears they just have to have it. A scarier possibility is that people will just refuse to cop some sacrifices so that they are not stealing from their children and their children's children. Or perhaps Tony Abbott's brilliant attacks on Labor's leaders in government have established new standards for opposition leaders and he is reaping what he sowed. Yet demolition derby is no way to run a counry, and I at least remain confident that a more generous and more patriotic approach by oppositions will eventually repair politics and allow a more rational discourse about economic policy.

Maybe the situation will only be tackled when there is a real economic crisis, so real and so immediate that we can all understand it?

The government has, almost by definition, failed to establish a coherent narrative. At the start there was supposedly a 'budget emergency', really a looming debt trap.  Why did the Treasurer not establish some sensible budget projections as a matter of priority - both 'best guess' and 'realistic worst case'? Such projections would include the 'realistic worst case' in which commodity prices continued to fall relentlessly and with US recovery global interest rates would begin to rise. The 'realistic worst case' projections could have included 'loss of confidence in Australia's economic policy leading to an abrupt fall in the Australian dollar'. And jobs growth too weak to prevent the rate of unemployment from rising relentlessly.  Even if such assumptions were sneered at by the Labor opposition at the time as scaremongering, about now the government's 'realistic worst case' scenario would have shown the government to have been prudent.  Assuming of course that it had responded with policies designed to tackle the realistic worse case if such a future arrived.

Yet the hard graft of constructing 'realistic worst case' scenarios and debating them with cabinet and then the 'punters' - aka the voters - was not done. Instead the first coalition budget included very mild assumptions about the economy and the deficit.  It was celebrated by scenes of Joe Hockey and Mathias Cormann smoking big cigars on a porch in the parliamentary building. Conveying the totally inappropriate message of 'job done, problem fixed'. 'Its the end of the age of entitlement' said Smokin' Joe, 'cop our reforms and all will be well'.

There was of course a further glaring inconsistency in the coalition's narrative. Budget emergency but a generous paid parental leave scheme, the 'captain's pick' in economic policy. Deregulating university fees was a good policy that failed to engage the punters. Ditto Medicare copayment hike, if that is the right description. (Henry can hardly understand the current system, and never knows when to claim from Medicare and when to claim from the private healh fund, and consequently often fails to claim from either.  And hopes to be considered for a gong in the new category of 'taxpayer of the year'.) With other budget savings, the overall budget was instantly declared 'unfair' and there was no serious attempt to refute this pub and BBQ allegation. There was a good reason for this - the budget wasn't fair, and Australians will not cop unfair.

It is also unclear if the Treasurer has the desirable technical understanding.  Earlier this week he received the cut to cash rates as 'good news'. I suppose if it is regarded as a sign that he now realises just how bad the economic mess is that would be fine.  But he was more accurate whilst in opposition when he asserted the rate cuts were a sign of an economy in trouble. As I said in my latest advice on the matter, linked here, "unless the RBA has joined the 'serious trouble' camp, its own stated position does not call for further rate cuts".

If sketchy reports are accurate RBA chief Glenn Stevens and new Treasury Secretary John Fraser have given cabinet a far more realistic account of the state of the world and Australian economies, presumably based on current best guesses but also I hope with at least a tinge of 'realistic worst case'.  But I doubt that the same team lead by Smokin' Joe has the credibility to oversee the response.  Tony Abbott has said he will leave gongs to relevant officials in future.  If Joe Hockey would agree to leave economic policy to Messrs Fraser and Stevens, at least until the current mess is sorted, I would vote for him to be given a second chance.  This is not a totally silly idea, dear readers. When a country gets so deep in the economic mire that it needs help from the International Monetary Fund, the tecnocrats get to call the shots.

Far better to let our technocrats sort out the economy while there is still time to do so without advice from arrogant foreigners.  We've tried arrogant.  Let's have some genuine competance.

Henry's collected writings on economic policy over the past decade are available here.

Economic reform, not rate cuts
Date: Tuesday, February 03, 2015
Author: Henry Thornton

Almost everyone involved in the debate about Australian economic policy is hyperventilating about what the RBA will do next. With every other country with zero or near zero cash rates, and all central banks of note but the US Fed buying bonds as part of the con job called 'quantitative easing', Glenn Stevens is being urged by some to cut local interest rates further.  The most defensible argument to this effect concerns alleged 'global deflation'.

Cutting rates here so far has been primarily because the economy was headed for bad times, a matter warned about here, for example.  There was also a belief that lower rates would help achieve a necessary faster fall in a clearly over-valued Aussie dollar.  But, as Glenn Stevens knows well, there are limits to what monetary policy can do.  In my view, Australia's economy is in deep trouble, but the RBA has been generally cheery about the immediate future. The Aussie dollar has fallen most of the way to US$0.75 and there are days when it seems likely to take a Swan dive.

Thus, unless the RBA has joined the 'serious trouble' camp, its own stated position does not call for further rate cuts.  Forecasts are for moderate income growth, gradually improving, Australia riding out the current 'income recession' caused by falling commodity prices as resources shift from mining to (for example) making coffees for hoardes of tourists.

Those economic commentators who are not totally focussed on monetary policy know what is needed:
* The budget needs to be fixed - and the knightood bestowed on Prince Philip is a negative item on that front as it givess recalcitrant Senators a fresh excuse not to support budget reform.
Australia's major cost disequilibrium needs to be overcome - and in the absence of Bob Hawke's gentle art of persuasion, this will only happen, and then gradually, by further falls in the Aussie dollar not compensated for by increases in wages and prices.  Further rate cuts will encourage wage and price hikes and work against the necessary correction.
* Economic reform, to boost Australia's productivity and international competitiveness, is required. Such action is also the major policy change required in the Eurozone, Japan, even the UK, where central banks are still using monetary policy in lieu of economic reform in futile attempts to restart the economic engines.

This 'Welcome to Country' for the new Secretary of Treasury provides a fair number of specific reforms for consideration, and the current discussion about reducing penalty rates for working on weekends and public holidays shows an appetite for reform in this vital area for creating new jobs. Yet internicene sniping evident within the government makes economic reform, always hard in any country, almost impossible.

Glenn Stevens has bravely told the government to get on with its job.  We endorse this carefully calculated advice and respectfully request the governor not to substitute unnecessay monetary easing for economic reform.

Saturday Sanity Break, 31 January 2015
Date: Saturday, January 31, 2015
Author: Henry Thornton

The latest 'Captain's Pick' has shaken Australian politics. Henry has been a corporate captain and knows how vital it is to take one's fellow officers and indeed the noncoms and grunts with one.  One hopes lessons will (finally) be learned and there is no need for a garotting in a dark room, which was the unhappy result of odd activites by the Captain(s) in the last government. Clearly, however, this government needs far better communication with the grunts (Henry's readers, aka 'voters') as well as the noncoms and sub-captain officers. 

Do not miss Grace Collier's 'Am I a tosser' quiz in the Oz today. It beats all the criticism thrown at the PM by a country mile, proving yet again that satire's rapier beats serious broadsword work most of the time.

Then there is the Queensland election, which looks like going down to the wire. What a catastrophe for the Premier if he loses his seat and his party loses the election or, even worse for the Premier, his party scrambles back and he does not. The week's conspiracy theory is interesting.  The Federal government knows that Australian politics works best when state and Territory governments are different 'colors' to the Federal government.  Hence the ham-fisted attemps to 'help' the Victorian and Queensland conservatives lose the latest state elections. Here is our most recent analysis of this matter.


Two big bits of recent economic news:
* The European Central Bank (ECB) announced a massive bond-buying program ('Quantitative Easing', or 'QE')
* The US Fed, which some time ago ended its QE policy and the Dow soared despite the Federal Reserve clearly indicating that interest rates would soon move up.

The latest Raff Report says that the current business cycle in the U.S. only has 12 to 18 months and perhaps far less to run. To reiterate the current situation, U.S. Industrial Production lags new orders by 6 to 9 months and longer for some aircraft and other large capital items. On this basis, U.S. manufacturing should remain robust at least up until the end of 2015. In 2016 all bets are off. Chucking money at problems is like some aspects of farming. You can lead a horse to water but you can’t make it drink. Ask the Japanese if this is not so.

Read the full Raff report here.

The Australian economy rumbles along despite the political gridlock and without the benefit of the new Treasury Secretary revealing his thoughts about the steaming pot he has inherited. Relatively high 'underlying' consumer inflation produced an upward twitch of the (still overvalued) currency and then with a majority of market denizens deciding the RBA will cut rates next week fell again.

Soon the Aussie will be in a danger zone in which a major slide will be likely.  While this might improve competitiveness, at least for a while, it would be far preferable if that could be achieved by economic reform.  But with the government in some strife this is about as likely as  peace in the Middle East, so we must grit our teeth and soldier on.

My regular advice to the board of the RBA is posted earlier than usual. Henry started the fashion of giving advice, or guessing outcomes, over a decade ago.  Now those who play this game start earlier and earlier, so we must comply, but with the RBA Board date on the relevant Blog.  Confused? You are not alone.

This edition starts with the proposition that our economic problems are not due to inappropriate monetary policy and that we need no further rate cuts.  But the people who think we do need further rate cuts earn far more than Henry, and readers should feel free to follow the money.

And, in the interests of 'balance', the very well connected Terry McCrann argues in the Oz today that the RBA's supposedly new plan for further rate cuts is because the world has changed, with deflation of goods and labor markets and new monetary expansion plans by the big guys, the US Fed apart, it is worth noting.


The courts have turned down James Hird's technical plea for redemption for the second time. But other expert opinion says that in the absence of ASADA's key witnesses their case against Essendon players has to fail.  If this occurs, all that will be left is a very nasty smell and a discredited football competition.

So far as Henry understands, there is no hard evidence, of the sort that is produced by regular drug testing.  Perhaps the issue is like racing on bikes in the Lance Franklin era.  We all suspect the presence of 'enhanced' players, even teams, but it may take death-bed confessions in 50 years to be sure.

Meanwhile, footy's main rival for hearts and minds, 'Futball', or 'Soccer', has produced a magnificant Asian Cup and the Socceroos are set to play South Korea in the final tonight.  After the brilliant wins over China and the UAE, including four brilliant goals Henry is warming to 'futball' as never before.

The tennis has been exciting and it all comes to an end this weekend. Nrws that Lleyton is finally retiring in a year or so is comforting and his continuing involvement in the Davis cup is further good news.  It's time we got competitive in that competition, Lleyton, and the promising crop of brilliant young players will make it possible.  Do not overlook that former Vermont football player, as he has the spirit and physical strength to become an intimidating force if he works hard enough.

'Stuff' this week is focussed on government, as is today's Image of the Week, courtesy AFR and the brilliant David Rowe.

Image of the Week

Saturday Sanity Break, 24 January 2015
Date: Saturday, January 24, 2015
Author: Henry Thornton

Happy Oz Day weekend, gentle readers. we hope it all goes swimmingly, and those who deserve Oz Day honours get their just desserts.

Mario Draghi has finally found the courage to buy bonds with printed Euros, introducing 'Quantitative Easing' (QE) to the Eurozone.  The USA, the UK and Japan are all ahead in that game, and all for the same reason, that conventional easy money has failed to stimulate goods and labor markets. Curiously, no-one seems to acknowledge that 'QE' has massively stimulated asset markets, making owners of assets richer, while doing very little to help battlers.

The real issue for economists is to explain why very easy monetary policy has failed to stimulate goods and labor markets. In seeking to understand this issue, economists would be wise to delve into the history of English monetary policy.  In 1871, The Economist reported, fairly offhand, as follows: ‘On several occasions like the present, the Bank of England has borrowed largely on Consols – and in this way circumvented lack of market rate response to the lower discount rate'.  To me this is a description of 'QE', attributed to the grand Old Lady of global monetary policy.

Anyway, with the partial exception of the mighty USA, zero discount rates and QE seem utterly impotant.  To a simple bloke like Henry, this suggests that easy money, even very easy money, is not the core reason for sluggish goods and labor markets. Governments are like the drunk looking for his wallet under the lamp post, not because that's where he lost it, but because that's where the light is best.

The Oz reports that Tony Abbott has had his 'Banana Republic' moment, warning that Australia risks becoming a 'second rate' nation. That's a good start, but the Treasurer earlier in the new year was spreading optimism about the state of the nation.  The only way to square the circle here is that Mr Hockey is confident he can successfully fix the budget mess, and the large-scale cost disequilibrium and restore Australia's productive growth and global competitiveness. 

Henry has advised the incoming Treasury Secretary on the questions he, (and the Treasurer), should be asking. Just as 'Disunity is Death', failure to 'Ask the right questions' is a second certain way to fail, in economic management as much as anything. In effect, Australia has a mild version of the Eurozone disease, sluggish growth of goods and labor markets, and Treasury and the RBA will be (or should be) delving into history and current experience of other nations to find the answers.

In case you missed them, Mr Hockey, here are the questions and a set of implied answers.


Very sad to see the exit of Lleyton Hewitt and Sam Stouser from the Oz Open, but great performances by the younguns, lead by Bernard Tomic and Nick Kyrgios, made for a cheery start to the weekend.

We think we heard that the ugly Oz cricketers beat the Poms with the second last ball of their innings, which is about as good as beating Collingwood by one point kicked after the siren due to an umpiring error.

But the highlight of the sporting week was undoubtedly the wonderful win by the Socceroos over the brave Chinese team in the quarter final of the Asian Cup of Futball.  And the goals scored by Tim Cahill were a joy to behold - here is a replay.


Henry was awakened at 7 AM today by a discussion on Radio National with the author of what sounds like a very nice book about the state of play in Australian culture. Will try to find a link, but this bloke  - a BBC correspondant - sounded like he is onto something.  Some overlap with the fin's interview of Anna Funder, linked here. We used to cut down the tall poppies, but 'now we are cutting the cultural cringe'. (AFR P 18, no link I can find.)

Also in the fin, nice discussion of the need to take science mosr seriously, with the views of Australia's four living Nobel laureates.

American Sniper is a must see movie in what is a summer of movie excellence.  Here is a link to the trailor and additional critical comment by Grace Randolph.

Also nice review in the Fin (P 51).

Image of the week

Energy crisis; what crisis?
Date: Wednesday, January 21, 2015
Author: Henry Thornton

The press is full of 'energy crisis' stories - energy workers who will lose jobs, companies that will go broke, energy exporting nations that will suffer cuts to real incomes, the list goes on. But this reader can remember the 1970s when oil crises - limited supply, soaring prices - caused 'stagflation' - that ugly mix of inflation and severe recession.

Logically, current events, with plunging enery prices, should produce deflation, or at least restrained inflation, and economic growth stronger than if energy costs remained high.

'Seize the day', says The Economist. 'The fall in the price of oil and gas provides a once-in-a-generation opportunity to fix bad energy policies'.

Economic policy is mostly about tinkering at the edges. Sometimes there is opportunity to do something useful. 'From Deng Xiaoping’s market opening in 1978 to Poland’s adoption of “shock therapy” in 1990, bold politicians have seized propitious circumstances to push through reforms that transformed their countries. Such a once-in-a-generation opportunity exists today'.

It's relatively simple.  'With energy prices falling, and set to fall further, it would be possible to abolish billions of dollars of distorting subsidies, especially for dirty fuels, whilst shifting taxes towards carbon use. A cheaper, greener and more reliable energy future could be within reach'.

The venerable mag's latest edition includes several reports on aspects of the state of modern energy production, conservation and pollution. One learns about matters like:

* Why the oil price is falling.

* Energy efficiency - 'using less'

* The oldish five-story house at Notting Hill that on average exports energy to the grid.

Renewables are no longer a fad but a fact of life, supercharged by advances in power storage

The theme is that the cost of renewables is falling very fast and that there are innovations galore.

The graphic is not dynamic, but even current relative costs will suprise many readers.

If you are a subscriber, do not miss the latest edition.

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Courtesy The Economist

Welcome John Fraser
Date: Monday, January 19, 2015
Author: Henry Thornton

We are delighted to welcome someone from the real world to the Australian Treasury.  John Fraser has the bonus of being a former high Treasury official. Mr Fraser peaked at Treasury after my time as a senior RBA man, so there is no personal bond between us. But I do wish him every success, as his success with be success for all Australians.

There are three big issues that should be in Mr Fraser's file marked 'urgent and important'.

1. The budget mess
2. Australia's major cost disequilibrium
3. Low productivity and poor competitiveness.

Some Treasury Secretaries I have known would have ticked all three items on this list based on plans to have a really good recession, created or made worse by a 'horror budget'.  This is the fallback solution, and will be imposed by international market participants if we do not get it done by our own efforts. Shock treatment of that kind is, of course, no longer part of the Treasury playbook, and unlikely to appeal to a government struggling in the polls that has not developed the narrative to explain why rapid action would be better than gradually nibbling away at what are major problems.

So any attempt to fix these problems needs to be gradual.  One can imagine a gradual solution to Australia's three vital economic challenges but, writing frankly, this will at best spread the necessary adjustment over several years, even a decade.  One notices newspapers pointing out that slow growth will mean employment will not grow fast enough to prevent the rate of unemployment keeping on rising.  Last week's alleged 'good news' on jobs must largely be due to poor statistics from a cash strapped ABS, as it is not supported by feedback from the real world of people anxiously job-hunting.

Now to the arguments that one hopes are in the folder marked 'urgent and important'.

1. The budget. The Treasurer has said that there will be no more spending cuts to match falling revenues. The idea is to avoid imposing fiscal pain on households and businesses already struggling to make ends meet. This means no further attempts to balance the Federal government's books and delays the time when Australia will again deserve an AAA rating. It also shows the iron grip of Keynesian economics in Canberra.

The question to ask, Mr Fraser, is this.  Would decisive action to fix the budget, despite Keynesian fiscal tightening, help or hinder the confidence of Australian businesses and households? (Compared to the status quo of no forseeable budget repair.)

2. Cost disequilibrium. The basic Keynesian analysis still practiced in Canberra means that 'major cost disequlibrium' is not a concept readily embraced. So far as I can figure out,  cost imbalance is a concept at most recognised as a subsidiary factor when attempting to forecast the various componants of 'aggregate demand'. Yet in the real world of highly competitive markets, it is probably more relevant than hours, even days or weeks, attempting to predict the economic future by torturing the numbers of each componant of 'aggregate demand'.

Now it is true that a falling exchange rate will help restore competitiveness provided local costs do not simply increase to wipe out the benefits.

Here is the second question to ask, Mr Fraser. Can Australia, with existing wage fixing tribunals, industrial relations arrangements and monopoly price setting across the board (think Coles and Woolies) be competitive enough to restore full employment within a year or two?  If the answer is 'sadly, no', what is the implication for policy?

3. Low productivity and poor competitiveness. If you fix the first two challenges you will be well on the way to fixing the third. But it would be wise to consider what additional policy changes might help improve overall competitiveness directly.  Here is a selection of ideas from a recent review, with the full analysis available here.

* Immediate action needs to be taken to reverse cabotage rules introduced since 2009, and phase out as rapidly as possible the entire cabotage system and its unique work practices regime. This would allow costal shipments of products and raw materials to be transported at internationally competitive rates.

* High efficiency super-critical coal fired power generation must become again the major base for a return to Australia’s power and energy cost advantage. [Nuclear alternatives need consideration, but a mere mention of that would be political, ahem, dynamite.]

* Company tax reform needs to provide for the write-off of new manufacturing equipment to match overseas competitors.

* Government should urgently remove regulatory impediments to management and labour flexibility, to allow work practices and conditions of employment to be tailored to the specific needs of each individual business.

* Policies need to 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.

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

* A persistently overvalued exchange rate is a form of asset pricing imbalance that involves instability of industry structure and which requires fresh thinking by the Reserve Bank of Australia.

* Priority be given to mergers which favour the formation of a strong group which can compete in international markets rather than having weak fragmented entities. The ACCC brief needs appropriate revision.

This is a powerful list, and the full list contains arguments in support of these suggestions. You might well say 'This list is very challenging, minister', in true Yes Minister style.  There would be cries of outrage from the vested interests that would be disturbed. 

But please consider this point.  If radical reform is needed to restore Australia's economic strength, as I believe, the necessary pain should be spread widely and fairly.  My earlier advice that the government take a temporary (and voluntary) 20 % cut in wages remains. This would certainly get people's attention, and almost certainly indicate a government that is fair dinkum.

Saturday Sanity Break, 17 January 2015
Date: Saturday, January 17, 2015
Author: Henry Thornton

The global economy has been dealt another blow as Switzerland abandons its policy of capping the Swiss Franc, and associated support for the clock and choclate industries. 

Currency capping was initiated in 2011 to protect Swiss industry.  But the cost of keeping the Franc low required massive buying of foreign exchange - mainly US dollars and Euro - financed by printing Swiss Francs to pay for it. When the cap was removed, the Swiss Franc exploded up against the Euro, initially by 40 %, with correction back to a 'mere' 18 %. The reason seems to be that the Euro is expected to depreciate against every other currency when the Eurozone starts 'quantitative easing' (QE) to combate deflation and depression.

The Swiss central bank also cut its 'discount rate' from -0.25 % to -0.75 %, though this is unlikely to deter people seeking protection againt further cuts in the Euro. No need to blink, gentle readers, these bizarre numbers are not typos, just indicative of the fragile, hairtrigger state of international finance, instability that will foster further volatility and policy experimentation.

The AFR has reported 'veiled wrath' of IMF Chief Christine Lagarde, which suggests 'private fury among the European elite'.  Also that the gnomes of Switzerland have set up a 'blockbuster European central Bank meeting next Thursday'. The US Fed, meanwhile has ended its QE as US jobs growth strengthens. US economic recovery means that now market participants are betting on the first increase, from near zero, in the US discount rate.

The Australian dollar was, of course, tossed about in the wake of the global financial chaos. Smart punters now put potential downside for the Aussie dollar at US$0.70, which for some time has been Henry's best guess at a stopping point of Australia's currency weakness. Memo to self: consult the blind seer about whether 60 cents might be the new low.

Of course, we now have a new boss of the Australian Treasury, John Fraser. His brief tenure has included the surprise report of jobs strength in official (ABS) statistics. Also continued failure in the initial attempts of the Abbott government to achieve a convincing budget outlook, with backflips and hints of further backflips to come.  The news from the mining sector is for massive jobs loss, and it is highly unlikely that jobs growth will be anywhere strong enouth to give the government a real chance of its promise - or was that just an 'aspiration' - to create a million new jobs in its first 5 years in office.

Recent chatter among the elderly members of Henry's social circle focusses on whether Mr Abbott's government has any real chance of being re-elected in a bit over 18 month's time. Even the Labor members of friends in their twilight years add the caveat that Bill Shorten does not have what it takes to run the country, and the second most favourite topic is whether it's too late to put hard-earned savings offshore.

Henry's favourite journo, Grace Collier of the Oz, commends the government, and Josh Frydenberg, for its latest really good idea about a new tax. 'It is obvious more taxation is urgently required and the timing of the Assistant Treasurer’s proposal is perfect. This kamikaze government needs to restore its standing in the eyes of the populace. If starting the new year by talking loudly about a new plan to increase the cost of living doesn’t work, then I cannot imagine what will.'

Read on here, and ponder where the Australian dollar will go as the degree of Australia's fiscal deadlock is fully revealed.

Welcome to Country, Mr Fraser.


Having triumphed in the long form of the game, Steve Smith's all conquering heros have put away their white gear for their green jammies and taken on the Poms and Indians in a one day (actually, afternoon'n'evening 'tri-series') under George Baily's leadership and with the real captain doing stretches in the grandsstand.  Young Mitch Stark struck again in the first over  and it took an Irishman to make England's score respectable enough to ensure a full evening's fun'n'games under the lights.

Henry will take a rest from cricket in order to be properly fit for the tennis.  Roger Federer is Henry's choice for the men's trophy and Slammin' Sam Stouser for the lady's, on the grounds that she needs to come good on home courts sometime soon.

I am aware that readers, if any, are thinking: 'Stick to your day job, Henry, if you have one'.  In fact, Henry has just had printed and bound 530 pages of historical analysis of the state of  Optimism and Pessimism in the USA and England.  Sources are magazines and books from 1843 and the plan is to turn this literary material into an index that may help explain share prices.  Will report back in a month or so, and then again when the formal statistical analysis is completed.

Image of the week

Courtesy HeraldSun

Old economics-new economics
Date: Monday, January 12, 2015
Author: Henry Thornton

The US economy added  252,000 jobs in December, confirming 2014 as the best year for job creation since 1999. The good news for the US economy's competitiveness is that growth in wages and US government bond yields remained subdued.

The strong job growth reinforces other evidence that the US is outperforming other large hi-income economies. In particular, the Eurozone, is reentering deflation for the first time in more than five years, and the Japanese economy is still struggling.

While investors are betting that the US Federal Reserve will raise interest rates this (Northern) summer, expectations are growing for the European Central Bank to embark on a full-blown programme of bond-buying to stimulate its economy.

The FT reports that the US Fed officials 'are in broad agreement that US interest rates are unlikely to rise until at least April, according to minutes from their policy meeting in December.

'Most people on the 10-strong Federal Open Market Committee agreed with Fed chairwoman Janet Yellen that the move to drop the central bank’s forecast about keeping interest rates low for a “considerable time” should be seen as a signal that it will not raise rates at its January or March meetings.  Read on here.

Most interest rate experts say US cash rates are unlikely to begin to rise until mid 2015.  But this is contested by some old-fashioned types who remain committed to pre-GFC economics.  The old-fashioned types expected excess money to generate goods and services inflation. While the labor and goods markets remained depressed it was possible to rationalise lack of response of goods and services inflation.  Smart old-fashioned types - eg Rupert Murdoch -  could also rationalise excess money raising asset inflation.

The emerging global issue is deflation of goods and service markets, and the recovery in the US economy is hardly strong enough to drag the global economy into the full-employment zone.  Unless and until this happens, global excess money, generated in Japan and the Eurozone, even if no longer by the US Fed, is likely to continue to flood into asset markets. When the Fed begins to raise interest rates global asset inflation may be checked, but while excess money keeps coming, this may be only a temporary check.

The economic textbook are already out-of-date, and 2015 may see wider recognition of this vital point.

Henry's first attempt to write the next generation of text book is available here.


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