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.
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."
And the rich get richer ...
Date: Monday, November 18, 2013
Author: Henry Thornton
In many western nations, over 50 % of the wealth - which is rapidly growing - is owned by a tiny percentage of the population.
Rampant asset inflation is stretching the wealth and income gap between the richest 1 (or 10) per cent and people at the bottom of the wealth and income ladder.
Now Fed chief (subject to confirmation, which seems a done deal), Janet Yellen, has indicated that she will not begin the 'taper' until the US economy is undergoing a strong recovery.
This is despite Ms Yellen's former criticism of Alan Greenspan's easy money policies and early recognition of the damaging American housing bubbles that ushered in the GFC.
The lady says there is no sharemarket bubble. As the Weekend AFR's editorial said, 'even major investors who have gained greatly from the markets' rise ... have expressed concern in various ways that QE is not working for the wider economy as intended: it is simply spinning its wheels as it pushes up asset values without creating a comparable amount of real economic activity'.
Expansionary fiscal policy has been used to the point where there is real concern that excessive debt levels will limit developed nations' ability to maintain government programs, and this will be doubly true when interest rates begin to rise, as they inevitably will.
Extraordinarily expansive monetary policy may have staved off a far more serious downturn - this is arguable - but is now laying the basis for a burst of goods and services inflation that could undo the benefits of thirty years of common or garden inflation. Booming asset inflation is making rich folk richer but the 'trickle down' is imperceptable.
Continued US/Eurozone/Japanese monetary expansionism is helping to keep the Australian dollar too high to allow balanced economic growth and the Reserve Bank has given up except for efforts ro talk the dollar down. The vehicle industry is just about ready to close down in Australia, and with it will go the futures of many small businesses and a vast number of jobs. Here is the simple analysis, but this is a very big question that no-one in a leadership position wants to confront.
If the Aussie dollar did crumble, the big question would be how to limit the flow-through effects so that Australian business became internationally more competitive. This is the second big question that no-one wants to confront. although slowing wages growth suggests market forces are moving slowly in the right direction.
The international brotherhood ('personhood' may be a more accurate description) of central bankers show little sign of the angst they should be suffering. So its on with the show. Henry will stay long shares and real estate and hope the eventual crash can be avoided - as described here - of if not avoided is not as powerful a crash as many people are beginning to fear.
Saturday Sanity Break, 16 November 2013
Date: Saturday, November 16, 2013
Author: Henry Thornton
Mrs Thornton this weekend has disturbed Henry's normal routine, damned inconsiderate of her, it must be said - by requiring surgical intervention to remove a troublesome gallbladder.
The night before this disturbance, Henry and Mrs Thornton attended a grand eating and drinking occasion at Henry's favourite gentlemen's club. As well as a grand speech, members provided a revue which was not half bad, and got better as wine was consumed by both players and watchers. In a short break, Henry's new dining companion, (innocent spouse swapping was going on between the courses), the lady-wife of one of Henry's pals got stuck into him on the matter of gender imbalance among the membership of Henry's club, the institution whose hospitality the lady was so obviously enjoying.
Henry mentioned that he had intervened (weakly) in support of efforts to even up the imbalance during the great debate that raged over this matter some years ago. 'Perhaps the Governor-General could be offered a place as an honorary member', Henry suggested, 'or the Chair of BHP if in some distant future this post is held by a lady'. 'Good for you' said the lady-wife. Basking in the glow of this compliment, Henry offered to provide the arguments against gender balance that had prevailed in that recent discussion. 'Think of this place as a men's shed,' Henry suggested, 'a place to escape from the world of commerce, politics or, frankly, the need to interact appropriately with (ahem) ladies'. Henry's interlocutor abruptly arose and said 'I am going to vomit. I have to find the loo'.
In fact, said lady-wife merely went to the other side of the table to instruct another lady-wife to swap places with her. Naturally Henry was shocked, and others who had heard the story have offered sympathy. But all this women trouble has put Henry into a slightly jaundiced mood on the subject of gender imbalance.
Normal transmission will be resumed when Henry has recovered from this inexplicable and disturbing incident.
In the meantime, Henry's most read blog after a few weeks for 2013, destined to hold the year record, may be accessed here. It features the same image as that previous 'best selling blog', which seems appropriate following Henry's tale of the consequence of gender imbalance in a private club.
Image of the week.
Courtesy The Oz
Pushing back the boats
Date: Friday, November 15, 2013
Author: Gary Scarrabelotti
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.
Last week Indonesia refused to take back asylum-seekers picked up at sea by an Australian vessel. Apparently this was the third time out of six incidents. These are not prudent moves. Indonesia should resist the temptation to play games with Australia over asylum seekers now that Tony Abbott is Prime Minister.
Should anyone in Jakarta feel coming over them an itch to use the people smuggling business as a way of making mischief for this country, then they would be wise to pause and consider: Who are we dealing with now?
I tried to give a partial answer, for an Australian audience, to just such a question in May 2012 with a piece entitled “Comes the day, comes the man”.
The key paragraph – in so far as it sought to penetrate Abbott’s psychology – was this:
“When he served as John Hewson’s press secretary, Abbott and his growing family lived in Canberra. During those days, there was a time when he and I played golf together on the West Belconnen course. Each outing I got a thrashing. It wasn’t fun. So, when the demands of his job put an end to our forays onto the grassy sward, I was relieved. Abbott did not just play better golf than I — which is not saying much — he played with a relentless will to win that operates like a battering ram on the psychology of any opponent. I understood then what the punch drunk ranks of Labor MPs and their advisers still do not understand …”
Among the Indonesian political elites, there is, I’m told, a fondness for golf. So I think that they’ll get the point.
Abbott will always be courteous, respectful, and generally modest in his manners when dealing in international affairs — above all with Indonesia. His mode of address does not, however, signify a weakling. Abbott plays to win. He can be patient. He can endure pain. He has trained himself to play the long game. He has disciplined himself to receive setbacks. He uses them, instinctively, as opportunities for deeper reflection and as a spur to greater endurance and wisdom. This is why he is Prime Minister today and those who mocked him have tasted defeat.
Indonesia is potentially a very powerful country of great human and material consequence. But it is not there yet and it cannot afford to turn Australia into an aggrieved competitor — especially an Australia led by a man of serious intent and genuine toughness.
Suck it up, sunshine, #2
Date: Thursday, November 14, 2013
Author: Henry Thornton
If the USA pursues an extremely expansionary monetary policy, which is completely justifiable from its perspective, the problem is this spills over to the rest of the world, which experiences an exchange-rate appreciation as capital flows to earn a higher yield.
This is the guts of Guy Debelle's 'Suck it up, Sunshine' speech last week in Washington, as reported today the the veteran economic commentator Max Walsh.
(For obvious reasons, Henry is deeply sympathetic to old blokes having a red hot go. And also for crusty old journos giving succor to the RBA, whose officers occasionally notice such manna from journalistic heaven.)
Mr Debelle continues: “Even if the global portfolio reallocation that comes about from this is small from the US perspective, it can be large from the point of view of a small, open economy that is the recipient of these flows.
“In the emerging market world, the concern is often that the capital inflows will become capital outflows. In Australia’s case, an exchange rate appreciation that is not in line with fundamentals, if persistent enough, can lead to Dutch Disease [a hollowing out of those economic activities that are, or can be, exposed to offshore competition].
“This is the fundamental problem, be it a Trilemma, or Dilemma, as Hélène Rey labels it.
“But you might say, isn’t a strong US economy good for the rest of the world? Or, in other words, suck it up, sunshine".
This report, with quotes from the actual speech - available the RBA site, it must be said after quite a delay - suggests Mr Debelle's career is still on track. Indeed, in an age of increasing openness in all matters, it may already have been enhanced.
Mr Walsh suggests the speech conveys a sense of frustration that seems to be building at the bunker at the top of Martin Place: 'It wasn’t just the content, which was ripe with significant implications. It was also the tone of frustration that caught the attention.
'In this, he [Mr Debelle] reflected the current mood of monetary and economic leaders around the globe. Despite extraordinary measures of stimulus, the general economic disposition around the globe remains dispirited'.
Australia's economy and policy settings have been well-served by our floating exchange rate and focus on containing goods and services inflation.
But when a currency like the Aussie dollar overshoots on the upside, and remains stubbornly high, it creates what is known as the 'Dutch disease' in Holland and as the 'Gregory thesis' in Australia, or at least at the ANU.
'According to the OECD, using a gauge of purchasing-power parity, the Australian dollar is 27 per cent overvalued against the greenback.
'According to Debelle [reports Mr Walsh], this has posed an interesting conundrum in Australia in recent years.
“We have,” he told his Washington audience of central bankers, “been experiencing a ‘boom with gloom’. We have had the difficult balancing act of trying to tell foreigners that the country is not as good as they think it is, so stop sending us so much capital, while, at the same time, trying to convince the locals that the economy is not as bad as they think it is. Now, that’s a real dilemma.”
Mr Walsh concludes by adding further gloom to the story: 'But, so far, there has been no alternative strategy presented that addresses the flaws in the present system, which load us up with a vastly overvalued currency for what could be a considerable and damaging time'.
Henry wishes to point out to Messrs Walsh and Debelle that a respectable alternative has been proposed, and is discussed in Henry's various articles on monetary policy for 2013, which can be accessed here.
As a parent, one is occasionally frustrated when one's children travel on paths that their more cautious parents know are likely to lead to trouble, or at least (one hopes) useful learning experiences.
Henry occasionally feels frustration when his intellectual offspring now running the RBA fail to see an obvious point, and ignore the wisdom of the relevant elder - Friedman, if not Thornton.
Today's advice? 'Suck it up, Glenn, and address your frustration (and the pain of other Australians) with a bold policy initiative'.
The economy and the outlook
Date: Wednesday, November 13, 2013
Author: Henry Thornton
Hints that the US Fed might begin to end its monetary policy 'taper' buoyed the US dollar and therefore reduced the Australian dollar. One assumes the RBA team quietly celebrated, although our monetary warriors will be well aware that the dollar has a long way to fall before the basis of 'balanced growth' is restored.
Maurice Newman, Tony Abbott's business advisor in chief, has delivered a zinger of a speech. Mr Newman, according to the AFR's Chanticleer, delivered the speech that the Prime minister might have delivered if he was allowed to tell us all what he really thought. 'Newman obviously believes it is his duty to shout from the rooftops how bad things are in Australia following six years of Labor Party rule'.
Meanwhile, in October, firms reassessed their confidence on the outlook as business conditions again disappointed. Capacity utilisation fell sharply – especially in manufacturing, construction, mining and retail – despite low interest rates and improved housing and equity markets. Other forward indicators deteriorated, reducing earlier gains and implying a continuing soft outlook for domestic demand. Price inflation outpaced by costs growth suggesting margins asre still tightening. This is the summary from Henry's banker. More from the mighty economics team at NAB here.
China remains on track to achieve its growth target for the year with domestic demand holding up in October, while exports picked up from the disappointing outcome in September. Industrial production was slightly better than expectations for the month, while retail sales and investment were slightly below. Regulatory distortions to trade data are making it difficult to gauge the health of export manufacturers, but solid industrial activity and a pick up in demand from major advanced economies is a positive indication. Demand from these economies is expected to gradually improve.
The acceleration in activity since mid-year is expected to lose some steam going into next year as efforts to rebalance and restructure the economy gain more traction – we should get more guidance on how these reforms will unfold following the 3rd Plenary Session of the 18th CPC Central Committee, which is currently underway. We have maintained our forecast for 2013 at 7.6%, with growth decelerating to 7¼% next year. Despite higher headline inflation, temporary price pressures suggest little incentive for the central bank to materially change its stance on monetary policy. We expect the central bank to continue ensuring adequate liquidity for domestic banks while maintaining tighter overall monetary conditions to discourage speculative investment and rapid credit growth. Bouts of tight liquidity could prompt a cut to reserve requirements, but the central bank has been reluctant to do this so far, and indications that foreign capital is returning will likely add to their reluctance. Therefore, reserve requirements and benchmark interest rates are expected to remain stable.
In October, indicators of global economic activity were mixed, casting some doubt over signs of recovery in the advanced economies that emerged in previous months. The upturn is still under way, but the pace of industrial growth and business sentiment in some big advanced economies has stopped improving. Activity in emerging economies has also varied.
Volatility has remained a feature of financial and commodity markets given political uncertainties and hesitation over the timing of US Fed tapering.
Oil prices were lower on balance in the month from the dissipation of geopolitical risks in the Middle East and data on rapid crude stocks accumulation in the US. However, WTI was disproportionately weighed down by the political uncertainty in the US while Brent was supported somewhat by renewed unrest in Libya. As such, the differential between Brent and TWI is wider than at anytime since March this year. Steel input markets have been held up by improved activity in China, but we are entering a seasonally soft period for construction which should keep prices relatively range bound for the rest of the year. Thermal coal prices have now lifted slightly from their recent floors.
Base metals prices rose modestly in October, helped by stronger than expected growth in China in the September quarter as well as reduced fears of a potential US economic meltdown. With the market currently anticipating no change to the Fed’s asset buying program until early 2014, investors seem reasonably comfortable holding gold in their investment portfolios, providing some support to prices in the second half of October. Nonetheless, the average price was around 2½% lower in October.
Overall, our forecasts for commodity prices have been left largely unchanged. Our near-term forecasts for some metals were raised slightly, while we have also widened our forecast for the WTI-Brent spread. We continue to expect only a modest recovery in demand over the forecast horizon, but the recovery is expected to be bumpy, ensuring ongoing volatility in commodity markets
Global growth expected to rise from 2.9% in 2013 to 3.5% next year. The national accounts and business surveys show a quickening pace of growth in the big advanced economies with the UK and Japan the standout performers. The emerging economies present a mixed picture with solid outcomes in China, a disappointing record and outlook for activity in India and only moderate growth across Latin America and East Asia.
Australian GDP growth to soften to 2.3% in 2013, rising to 2.4% in 2014 and 2.9% in 2015. Unemployment to nudge 6% by end 2013 and reach 6½% by end 2014. Given the soft outlook, core CPI expected to edge down to 2.3% by end 2013 and 2.4% by end 2014. Rising asset price trends and higher confidence likely to see RBA wait to see how labour market trends play out before cutting again in May (previous cut expected in February).
Deflation and asset inflation
Date: Monday, November 11, 2013
Author: Henry Thornton
'WHAT is a central banker’s main job?' asks the Economist. 'Ask the man on the street and the chances are he will say something like “keeping a lid on inflation”. In popular perception, and in their own minds, central bankers are the technicians who squeezed high inflation out of the rich world’s economies in the 1980s; whose credibility is based on keeping it down; and who must therefore always be on guard lest prices start to soar. Yet this view is dangerously outdated. The biggest problem facing the rich world’s central banks today is that inflation is too low'. (Read on here.)
Courtesy The Economist
The Economist this week writes about the 'perils of deflation' and warns that both the USA and Europe seem to be slipping into deflation, the problem that afflicted Japan for two decades after its asset bubbles burst from late 1989.
'As Japan’s experience shows, deflation is both deeply damaging and hard to escape in weak economies with high debts. Since loans are fixed in nominal terms, falling wages and prices increase the burden of paying them. And once people expect prices to keep falling, they put off buying things, weakening the economy further. ...
Ultra-low inflation or outright deflation 'makes both government and household debts harder to pay off. And low inflation makes it tougher for uncompetitive countries within a single currency to adjust their relative wages. With Germany’s inflation rate at 1.3%, Italian or Spanish firms need outright wage cuts to compete with German factories.
'What’s more, too little inflation will undermine central bankers’ ability to combat another recession. Normally, during a period of growth bankers would raise rates. But policy rates are close to zero, and central bankers are reliant on “unconventional” measures to loosen monetary conditions, particularly “quantitative easing” (printing money to buy bonds) and “forward guidance” (promising to keep rates low for longer in a bid to prop up people’s expectations of future inflation). Should the economy slip back into recession, the central bankers will find themselves unusually impotent'.
All these are good points. They make a case that super-easy monetary policy is legitimate. Super-easy monetary is creating asset inflation, which is no great surprise. But there is a point not made by the Economist. As Henry's research shows, super-easy monetary policy usually creates asset inflation. If goods inflation is subdued, as it was by goods price controls in the US economy in the second part of WWII, easy money will produce asset inflation far greater than it otherwise would.
Indeed, even with monetary policy apparently under control, (eg as judged by growth of the money supply), times when goods or goods and services inflation is subdued tend to be times of massive asset inflation. Examples from Henry's research - available here - are the USA in the 1920s, the 1950s and the 1990s.
Current super-easy monetary policy and low goods and services inflation bordering on deflation may be uncharted waters, and central banks need to be especially careful.
Luckily, Australia's RBA has not descended into the region of super-easy monetary policy, but faces (with low goods and services inflation) rising house prices and a stubbornly high exchange rate.
Beware the asset inflation, gentle readers.
Saturday Sanity Break, 9 November 2013
Date: Saturday, November 09, 2013
Author: Henry Thornton
RBA downgrades forecasts; leading journos question future of the motor vehicle industry; banks announce record profits; Sydney house price boom; $A remains greatly overvalued; ATO pursues a genuine baddie; Indonesia grumbles about alleged spying; and parliament resumes. It's all happening folks, in the former 'miracle, glass half-full, 'suck it up sunshine' economy'.
Sadly it seems as if the global crisis has arrived downunder, like the radioactive cloud in 'On the beach'.
Treasurer Joe Hockey has announced that incomes may actually (gasp!) fall if Australian productivity does not surge. Of course, Mr Hockey has yet to announce the new policies that will miraculously raise productivity growth tby the large amount needed, but these will surely come in due course.
Here is the line of argument offered by Henry when a small group of non-economists were discussing the future of Qantas recently.
'Australia's living standards, and general cost levels are, say, 30 % higher than those of competitor nations.
'Therefore, unless Australians are prepared to pay 30 % more for the privelege of flying Qantas, the airline is doomed'.
In response to the cries of outrage from representatives of other industries under threat, Henry continued.
'Pick your industry; in agriculture and mining we are still competitive, essentially because productivity is sufficiently high that the cost differential can be overcome.
'Industries that cannot match this performance will all wither and die'.
So what other industries have a chance? the non-economists cried.
'Our best chances are in medical research and treatment, tourism, education and sport, although the last of these is fading before our eyes as the cricket team gets belted, the Rugby team can't buy a win and the indigenous all stars get flogged by the Irish in the hybrid game that is definately not played in heaven. Seeding and reforming these industries should be the aim of a sensible government, while letting all the others die as the natural forces of globalisation do their thing.
'Personally, I'd add defence to the list of industries that deserve help. The government is the monopoly buyer (now that the bikie gangs are being suppressed) and encouraging a robust skilled manufacturing industrial base will be facilitated if defence kit is purchased from Australian firms and maintained here'.
The discussion sputtered out, but it is the debate cabinet should be having, and perhaps has been having.
Blainey awarded University of Melbourne top honour
Melbourne University announced this week that: 'Distinguished Australian historian Professor Geoffrey Blainey will be awarded the University’s inaugural Tucker Medal, in recognition of his substantial contributions to the University, the Faculty of Arts and to public life'.
Those who know the story of the University's earlier treatment of Professor Blainey will cheer quietly.
Rowan Dean today explains the case of the missing young women 'found wandering dazed and confused through the ABC's Lateline studios last week'.
'Believed to be called Tanya, the blonde female known to the public as ‘the lost girl’ has been desperately trying to find her way onto the front page of every newspaper and weekend magazine for the past few weeks.
'Media agencies have been trying to establish the woman’s identity since she was found in an overtly distressed state screaming abuse at the TV screen on a Saturday night exactly two months ago.
'Originally thought to be an undergraduate student because of her unblemished skin and adolescent mindset, authorities now believe Tanya is in fact much older and may indeed be the deputy leader of an obscure Australian political party known as Labor'.
Reflecting on this matter, and the clearly excellent state of australia's cartooning industry, Henry wishes to add 'Satire' to the list of industries to be encouraged by Australian governments. Of course, no actively different behaviour is needed - so long as Australian politicians continue to act as they have been, our satirists will need no further help.
The pestiferous Poms are complaining at the weakness of the bowlers in the Australia A team, plus the inclement weather in Hobart, as hindering their preparation. Surely next time they visit we can arrange a game on Bruny Island, with a rough grass'n'tussock pitch and Lillee'n'Thompson opening the bowling.
Meanwhile, competition for places in the Australian cricket team has hotted up, prompting all right thinking Aussie economists to smile at the virtues of competition.
The much maligned Rugby team gets its chance to be flogged again, this time by the pasta eaters of Italy. The Rugby League team is doing well so far in the world cup, and wisely being modest in its expectations. Footy, as opposed to the round ball game called 'Futball', is only in the early stage of season 2014. Fresh light has been thrown on the sacking of the St Kilda coach this week. Coach Watters is apparently vertically challenged, and player unhappiness with his methods resulted in the hiring of two even more vertically challenged entertainers. Setting fire to one of the entertainers was apparently a politically incorrect action designed to symbolised what the players thought ought happen to their then not-much-loved-coach.
Image of the week (Courtesy AFR)
Suck it up, sunshine
Date: Friday, November 08, 2013
Author: Henry Thornton
This insensitive advice was allegedly (according to the AFR, attributed to Bloomberg) offered to anyone who was listening at an IMF conference overnight. It is attributed to newly promoted (presumably) 'Deputy governor' of the RBA, Guy Debelle. To further advance the young man's career, the AFR's engaging photo shows Mr Debelle's film star visage, slightly wild hair and non-white shirt.
Time to get the image smoothers'n'spinners in, Mr Debelle, and to learn the power of the clever crack.
(Policeman judged to be young used to be the sign that the perceiver was getting old. Perceiving 'Deputy governors' of central banks as young blokes presumably carries a similar message about the ravages of the old bloke with the sythe and the loudly ticking watch.)
With many others, two of Henry's about-to-be graduated offspring cannot find a paying job for the year ahead. The good news is that one has won an unpaid 'internship' and the other is pursuing (further) higher ed.
Henry's offspring will be fine, but there are many Australians with far less opportunity including victims of an exchange rate that has been far too high for far too long. Farmers, junior miners, people employed in tourism, manufacturing and small businesses of all types are presumably today sucking it up and reflecting that the glass half-full that was officialease for the state of the economy earlier this year is suffering fast evaporation.
Was Mr Debelle misquoted? Henry's visit to the ever-reliable RBA website shows no speeches by the 'newly promoted' (presumably) 'Deputy governor' since August 16, when Mr Debelle was described as Assistant Governor (Financial Markets). One hopes sincerely that Mr Debelle survives this verbal slip, if slip it was. In Henry's day as a start a verbal flogging would have been administered by men who knew how to hand out a good tongue-lashing, and possibly the deadly word 'unsound' would have been inscribed on the perpetrator's file.
As to the reality of the Australian economy, now it seems the RBA has reached the end of what can be achieved with subtle moves of cash rates and is resorting to open mouth policy. 'Suck it up', 'in case you failed to notice the glass is half-full' and 'the dollar is higher than it should be, wait a bit and all will be well'.
Gor blimey, Gov'nor Glenn, what if the USA keeps super-easy monetary policy through 2014, the green shoots of confidence in Australia curl up and turn drought-stricken again and this time next year there is even less water in the glass to be sucked up?
A reader sent the following snippet: 'Thought this was the funniest thing I read today, from an esteemed central banker, Mr. Mario Draghi.
'Mr. Draghi rejected comparisons to Japan. "The fundamentals in the [euro zone] are probably the best in the world," he said, citing reduced budget deficits, low inflation and high current-account surpluses.
'Can he possibly be serious!'
'Suck it up, Greeks, Italians, Spaniards', other lesser people without the law'.