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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.

Policy reform or economic failure
Date: Thursday, June 25, 2015
Author: Henry Thornton

The International Monetary Fund (IMF) has reportedly said that: 'Economic growth glory days are over, Australia should rack up more debt'. Or, if you prefer the Newscorp version: 'Reform or good times will be gone'. Economists and newspaper 'lines' are meant to be different depending on who you talk to/read.  But the IMF spreads its views around like confetti, and this time the message is quite consistent.

As the Newscorp article said, is what was apparently a direct quote from James Daniel, head of the IMF's current mission to Australia: "We see Australia's outperformance ending, meaning Australians' income and living standards will grow significantly more slowly than they have been used to".  Henry half overheard a radio report that one of the big consulting firms has said that one third of Australia was now experiencing recession.  Kids trying to get jobs in Melbourne are still struggling, if the experience of young people in Melbourne's leafy eastern suburbs is typical. Gor Blimey, comrades, what is the world coming to?

The Greek crisis continues to worry pundits, and investment markets gyrate from day to day according to whether a Greek exit (Grexit) from the Eurozone is expected to be a triumph or a catastrophe. Mrs T, with characteristic dispassion, said last night 'I hope the Greeks do exit, as it will be very interesting to see who is right about its effects'. More here on the potential Grexit consequences.

No doubt the IMF's position is the same as it is for Australia, if a bit more alarmist - 'Reform or you're stuffed!'  Also on ABC we hear today that Martin Wolf is preaching global gloom and doom. The link to a relevant interview is available on the ABC website if you have the right browser, which Henry does not. A recent article in the Financial Times provides a scary summary.

'The outbreak of the first world war was, we are told, greeted with confidence and jubilation by the peoples of Europe. Something similar seems to be happening after years of economic crisis and political turmoil in Greece. A growing number of people feel that enough is now enough. The strident views expressed in these pages by the Italian economist, Francesco Giavazzi, are shared by many in high office. Meanwhile, Alexis Tsipras, the Greek prime minister, accuses Greece’s creditors of “pillaging” his country'.

Read on here, dear readers, assuming you are, like Henry, a subscriber to the pink paper.

We live in interesting times. As we said some time ago, there are a number of scary scenarios about.  Be cautious with investments, encouraging to kids seeking jobs and please write to your favourite MP about the need for economic reform.

Sunday Sanity Break, 21 June 2015
Date: Sunday, June 21, 2015
Author: Henry Thornton

The debate about citizenship rages on.  I'm with the Coalition backbenchers.  Let's find a way to deprive anyone who goes to join the terrorists of Australian citizenship. The UK does this, surely its plan should be good enough to adopt here. But if we need our very own scheme, here is an idea. Any Australian travelling to the Middle East must seek valid exit approval in advance.  This would be as streamlined as possible but reason for travel must be clearly stated and supported by documentation from whomever the travellor is planning to visit.  Anyone who is found to have violated the stated reason and is found to have joined a terrorist organisation will immediately have his or her passport cancelled. Duel citizenship or not, such people will presumably be accepted within their terror organisation of choice. And if not, why should we care?

Mrs T is more concerned than Henry about the principal of judicial oversight. 'Let the courts decide, but with the law providing a mandatory life sentance - no possibility of parole -  for anyone proved to have fought with terrorists against Australians or, for that matter, committing an act of terror in Australia'.  Henry's concern is the inefficiency of Australia's legal system and the scope for multiple appeals, easy freedom on bail and weak sentances. But there can be no doubt that the law needs to be strengthened and penalties increased. Ideally involving the death penalty when Australians are injured or killed, although one supposes the soft lefties would fight that with ferocity.

The debate about the economy had nothing much to sustain it in the week just past. The official view is that the Australian economy will gradual pick up steam, the housing bubble will slowly deflate, unemployment will peak in 2015 and then begin to fall.  The 'clowns, fools and wreckers' who doubt this scenario are ignored. If things are materially worse than the official view, no high official will lose his job, though the Treasurer might. 

 The Economist discussed prospects for the world economy last week, and there is plenty of cause for concern there. Here is the basic comment: 'Few economies have ever gone as long as a decade without tipping into recession—America’s started growing in 2009. Sod’s law decrees that, sooner or later, policymakers will face another downturn. The danger is that, having used up their arsenal, governments and central banks will not have the ammunition to fight the next recession. Paradoxically, reducing that risk requires a willingness to keep policy looser for longer today'.

Of course, I hear you cry, Australia is the poster child for the opposite view, with 22 or is it 23 years without recession. That result comes from the the Hawke-Keatings government's economic reform, the Howard-Costello government's wise management and the fact that China's economy underwent a nearly unique 30 years of double-digit growth.  Sadly that left us with double-digit cost overhang.  After the waste and mismanagment of the Rudd'n'Gillard'n'Rudd'n'Swan governments Australia is now approaching the state of other developed governments, with little fiscal or monetary firepower available if there is need of stimulus in the years ahead.

We must hope for the best while preparing for the worst. Here is Henry's 'Dreamtime' plan for a quick fix.  Some people think that the base problem is lack of confidence, 'negative Animal Spirits'.  This may well be true, and if so there is an example of how this can change almost in a heartbeat. The Caaaarlton! footy team.

Henry today has some good news about an article his editor wrote with Australia's leading historian Geoffrey Blainey. Over 40 years ago this was rejected by 5 economic journals, but now a serious UK publisher has requested permission, which has been given, to include it in a book about Keynesian economics.  Here is a link to said article.  (Memo Michael Moore - is this the work of 'Keynesian' economists?)


Fiona Prior spends some time with the Church of Scientology by viewing Alex Gibney’s newest documentary  'Going Clear: Scientology and the Prison of Belief' and finds it just as creepy as suspected.


Three weeks after Caaaarlton! sacked its supercoach Mick the Merciless Malthouse, the team is playing with flair and dash. Yesterday the team warmed the cockles of Henry's late middle age heart by twice dashing away from Port Adelaide then twice defending grimly when the Porters came back, to win eventually by 4 points. This was the margin for 10 or 15 excruciating minutes at the end when the game was there to be won or surrendered.

Like the NSW state of origin Rugby League team in mid-week, the Caaaarlton! Blues had the benefit of some controversial decisions, but then perhaps even referees have lapses and these usually even out over a game or a season. Anyway, I hesitate to predict of Caaaaaarlton! that 'They know we're coming' but we can reasonably expect some better performances in the rest of the season.  As a result of the upset win by the NSW Blues in Melbourne (go figure) we have the decider to be played in Brisbane in two week's time.

Then there is the cricket to look forward to.  The Poms have reportedly unearthed a fast left-handed opening bowler, who will presumably give our open batters a decent workout, but the key question is can he bat well and field brilliantly, like the Australian tailenders.

We must not forget the Aussie sheilers' futball team, facing the might of the Brazilian sheilas early Monday morning our time.  'Go girls, go' is Henry's admonition, the use of the word 'girls' haveng been creeping into polite conversations in old Melbourne town.

For many years, Henry has been a regular watcher of Insiders. He has accepted the clear lefty in order to learn about lefty bias and to cheer the occasional conservative counter attack. But today's Insiders was just a bridge too far. Bill Shorten as the guest pontificator, about the allegations he is appearing at the Royal commission to answer.  Three complacent lefty panellists cheering for Labor, sneering at the government, totally self satisfied about their views.

Image of the week

Courtesy The Economist

Modern Greek Tragedy
Date: Thursday, June 18, 2015
Author: Henry Thornton

'Greece-EU debt row hots up'. This is the state of play and has all the signs of becoming a real Greek tragedy. The standard of living of ordinary Greek citizens is already suffering with massive shortage of jobs and opportunity to build an acceptable life. Many Greek citizens are wondering if things could get worse. Perhaps sadly, 'yes' is the answer.

But before outlining a possibly sad future if the Greek government cannot find a way out of bankruptcy within the EU, what are the relatively benign possibilities?  The fact is that usually bankrupt nations get bailed out in one way or another.  For example in the Latin nation debt crisis in the 1990s Latin debt was bundled up and sold to the highest bidder. Some of these debt bundles were sold for 20 cents in the dollar, and later onsold for much higher prices, proving that capitalism can make a market in just about anything, like the betting shops were doing so vigorously during the State of Origin game last night.  Meanwhile governments of the previously bankrupt Latin nations were eventually able to borrow fresh funds and life gradually got back to normal.

In the case of Greece (and other weak EU nations of Southern Europe) their weakness is keeping the Euro weak, far lower for than it would be if the nations of Northern Europe were the only nations to be using the Euro.  Ergo, there is more than normal incentive to let Greece exit the EU ('Grexit') as that exit would mean the new-Drachma (or the 'Tsipras' or whatever the new,  greatly devalued (relative to the Euro) Greek currency) would be called. If Greece cuts and runs, other Southern European basket cases might take the same path, each defection raising the value of the Euro until (gasp!) Germany and other Northern Europe nations would be battling to trade with a far higher Euro to deal with.

Widespread defection from the Euro might create even far bigger problems for the solvent nations of Europe. Banks in the defecting parts of Europe might have assets in new (greatly depreciated) currencies and liabilities in Euros, and would immediately be bankrupt. How this would work out is impossible to say, and it is certain that no-one in the commanding heights of the Eurozone wants to find out.  Naturally, one imagines that the European Central bank (ECB) has run the relevant simulations, and the results of these are presumably understood by extremely nervous global central bankers.  My guess is that there is no way the global banking system could withstand the loss of the banks of southern Europe, followed by the banks of northern Europe, ... (Fill in your own banking disaster scenario.)

Keeping the EURO tamed and avoiding widespread bank failures together make the basic case for keeping Greece limping along within the Eurozone, tied to the modern 'cross of gold' as the global currency was sometimes called during the heyday of the gold standard.  (Given the apparent modern Greek liking for leisure over work, the modern description could be 'tied to a bed of euros'.)

On the other hand, leaving the Euro would remove the bonds to the bed for Greek citizens. They could, absent other bad things such as a global banking crisis, arise and go back to work.  A lower new-Drachma currency would make Greece immediately more competitive in global markets.  Greece would no longer be tied to the approximation to 'free trade' as practised within the Eurozone. Greeks would all be working hard collecting firewood, growing vegies, milking cows and in fact doing a lot of things done by non-Greeks in the days of unrestricted free trade. Expensive imported cars, for example, would no longer be able to be imported, and Greeks would learn to make do with increasingly ancient cars.  Eccentric old men would run repair shops for aging cars and others would specialise in fixing dishwashers, DVD machines, televisions,fridges, and so on. Smuggling would again flourish, and the native Greek ingenuity previously stifled would begin to reemerge. Before long, most Greeks would again be gainfully employed and so long as the Greek central bank was able to print new-Drachmas quickly enough a subsistence economy with merely internal specialisation would emerge.  

I suspect most Greeks would be happier than they are now, though the brightest young people would find passage to the free trade zone of Europe in otherwise empty smugglers' boats on their home run.  Many Greeks would in fact find the new order a golden age, as it was remembered from the days of their youth, with hard work, hard drinking (after work), women largely limited work to work in the home and a regular sense of self-sufficient independance, at least for Greek men.

Tourists will be encouraged to experience a self-sufficient culture modelled on the 1950s, as well as old ruins from millenia past.

Again I hear the cry of 'you're dreaming Henry', but that is too bad, dear readers. Unrestricted free trade and a currency higher that the nation can stand has ruined the Greek economy.  There will be a backlash from these ideals of economists, and the current Eurozone crisis may trigger it.  If a return to the past works for Greece, and other Southern nations follow Greece's example, this would very likely trigger a major crisis of capitalism.

This comment appeared shortly after this article was posted.


Fast fix or slow?
Date: Tuesday, June 16, 2015
Author: Henry Thornton

'THE struggle has been long and arduous. But gazing across the battered economies of the rich world it is time to declare that the fight against financial chaos and deflation is won. In 2015, the IMF says, for the first time since 2007 every advanced economy will expand. Rich-world growth should exceed 2% for the first time since 2010 and America’s central bank is likely to raise its rock-bottom interest rates'.

Of course, the future is shrouded by the standard fog of uncertainty.  How will the Greek crisis end? Will there be further terror attacks on the capitalist heartland? Will China's slowdown get even worse?  Is the American recovery in trouble?  When the Fed finally begins raising cash rates, will asset prices crash? One can easily enough find reasons to be cautious, if not downright pessimistic. 'It is only a matter of time before the next recession strikes. The rich world is not ready', warns the venerable mag.

The Economist, from whose sources the opening quotes are borrowed, this week provides a typically polished overview. In brief:
* 'The good news comes mainly from America, which leads the rich-world pack. Its unexpected contraction in the first quarter looks like a blip, owing a lot to factors like the weather (see article). The most recent data, including surging vehicle sales and another round of robust employment figures, show that the pace of growth is rebounding. 
* 'In other parts of the rich world things are also looking up. In the euro zone unemployment is falling and prices are rising again. Britain’s recovery has lost a bit of puff, but strong employment growth suggests that expansion will continue. Japan roared ahead in the first quarter, growing by 3.9% at an annualised rate. A recovery so broad-based and persistent is no fluke'.
* 'Emerging economies, which accounted for the bulk of growth in the post-crisis years, have seen better days. The economies of both Brazil and Russia are expected to shrink this year. Poor trade data suggest that Chinese growth may be slowing faster than the government wishes'.

The big problem is that there is not much room to move should economies enter recession any time soon.  Fiscal policy was used to the max during the global financial crisis. Cash interest rates are almost everywhere close to zero, and will be raised, the US Fed assures us only 'gradually' in the immediate future. 'The logical answer is to get back to normal as fast as possible. The sooner interest rates rise, the sooner central banks will regain the room to cut rates again when trouble comes along. The faster debts are cut, the easier it will be for governments to borrow to ward off disaster. Logical, but wrong'.

Monetary policy can remain easy while regulators use so-called 'macroprudential policy'. Trouble, such policies have hardly been tried, or have been tried and failed. Nevertheless, 'Regulators have the ability to let the air out of asset prices by tightening rules on leverage and liquidity. An economy at full employment and with a healthy level of inflation will be better positioned to withstand a bout of financial instability than one that is flirting with deflation'.

And, despite debt to GDP ratios that are uncomfortably high, governments can do more. 'There has still been shamefully little growth-boosting investment in infrastructure. ... Growth is better than austerity as a policy for bringing debts under control. Governments should instead direct their energies towards overdue reforms to product and labour markets. Open product markets encourage enterprise. The freedom to hire workers under flexible contracts is the best way to keep people out of unemployment. Both reforms make an economy better able to cope with the next [adverse] shock'.

So there you have it, dear readers. Continued near zero cash rates, but macroprudential policy to contain asset prices. Fiscal reform to reduce budget deficits, but more spending on infrastructure. Plus 'Overdue reforms to product and labor markets'.

Two cheers for the Economist. The unanswered question is whether fast return to fiscal and monetary policy normality would produce a faster return to overall economic normality. (So far as this writer is aware this is an issue barely touched by the economics profession.) The unambiguous two cheers are for product and labor market reforms, two issues that are hard for any government. It usually requires a serious economic crisis to get such reforms.  Yet it is best to fix a roof while the sun is shining, and surely this approach applies to economic reform also.

Despite this point, here is an example of 'Dreamtime economics', a fast fix plan for Australia.  The Economist's gradual reform approach will undoubtedly keep voters happier than an attempted fast fix. What a pity there is no convincing research, or actual example, of an economy pursuing a fast fix.  But wait! Does anyone know what happened in Iceland after the PM advised people things were dire, and they had better take up fishing again?

Courtesy The Economist

Saturday Sanity Break, 13 June 2015
Date: Monday, June 15, 2015
Author: Henry Thornton

'Get a job that pays well' said Treasurer Joe Hockey. This has been widely lampooned as stating the obvious.  A cruel prescription for the many battlers who cannot find any job, let alone one that pays well.  The Australian has been featuring people who went to live in Tamworth, or in a suburb distant from the CBD in one of our boomtime cities. And on the issue of stating the obvious, Henry has also been accused of that particular sin.  His answer is 'I do sometimes do state the obvious, which is necessary as most people don't'.

Curiously, smokin' Joe's advice is the same as that offered by Henry all those years ago, in early 2000.  Here are Henry's 'Six rules for building wealth'. Here is the link to the whole discussion, which grandparents have sometimes passed on to their grandchildren.

1. Earn well. Obviously the more you earn the more you can salt away. It pays to think hard at an early age about the importance of money in one's life, as it will be frustrating to end up as a highly respected Professor of Classical Greek (for example) if you really wanted to be able to take your annual vacation somewhere in the asteroid belt.

I choose the example of Classical Greek because it seems unlikely that such an occupation will allow lucrative consultancy opportunities. But in most academic jobs nowadays it is possible to earn well beyond the basic academic salary in a variety of ways. The recent stock market float of Melbourne IT is one startling example.

It is also increasingly possible to change direction more than once in a career Twenty years as a poorly paid (but influential) public servant can be followed by time as a highly paid corporate executive. Business executives sometimes become venture capitalists, or start an innovative business as the principal shareholder. [Now experts say it is necessary to change jobs and areas of expertise, perhaps six times in a lifetime. Henry has made 4 such changes.]

Some people do it the other way round - first accumulating wealth in commercial activities and then spending their autumn years as an influential academic or politician. President Reagan is one prominent example.

[I must confess that, given the current dire state of Australia's labor market, this advice can, like Joe Hockey's, can sound excessively cheerful. All I can do is to aplogise and urge parents to do all they can to instill the desirability of a well paid job into their children's characters, and help them in their search.]

Other rules are as follows:
2. Save strongly. Given income, the biggest single potential influence on wealth is what economists call the propensity to save. ...
3. Avoid the twin temptations of fear and greed. ...
4. Invest wisely. This is a difficult subject, since investment wisdom is obvious mostly in hindsight. ...
5. Get good advice. ... [Not from a dud Financial Planner.]
6. Have fun. Earn a lot, save a lot, spread your risks and don't try to be too clever at picking individual investments or changes in market sentiment. The rules so far may seem rather old-fashioned, even boring The saving grace is that there is one final rule that makes the others bearable - have fun. ...

The housing debate.

Treasury Secretary John Fraser has said Sydney and 'parts of Melbourne' are experiencing a housing bubble. RBA chief, Glenn Stevens has said Sydney house prices are 'crazy'.  Both these eminent economists are presumably 'clowns, fools and wreckers'. But whatever the merits of the case, it is refrehing to see these worthies speaking their minds for a change.  Another fine economist, Australia's Mike Porter once said 'the answer to a leak is a flood'. The traditional levee of official secrecy has been breached.  Let's read the RBA board papers with our breakfast, let's hear more often what the Head of Treasury really thinks.

Alan Kohler in today's Oz lays out the case with the sort of graphs undoubtedly used in presnetations to the RBA board.  Is it a bubble or merely high prices requiring government policy to boost supply of housing?  This is the sort of question pondered in the better science fiction books, but Mr Kohler makes a point that is solidly based in economic history.  We'd better hope it is a bubble, because the bubble will burst and high prices will be fixed.

Here is the link, dear readers, but you'll need the fish'n'chips version where the graphs are easier to read.

Dennis Shanahan provides some political analysis, but though Henry is a lifetime subscriber to the Oz, the link to Shanahan is unreadable because of an offensive ad by Origen Energy.  Outrageos, we've already paid for the privilage of reading Mr Shanahan online, but then we cannot.

The citizen issue

Des Moore has weighed in with a blockbuster that deserves careful reading.  It is posted here with Mr Moore's gracious permission.

Here is the link. 


Fiona visits Sicily's mafia in an unlikely romantic comedy The Mafia Kills only in Summer


Steve Smith has made merry against the hapless Windies, whose captain compounded their troubles by only allowing his Wes Hall-like quick a few overs when he had the Australian batters on toast.  After his unbeaten 130 in the first innings, it was sad to hear Mr Smith was dismissed for 199 runs in the second dig.  But all is not lost for the Windies.  As well as that tearaway, they seem to have found a man with a mystery ball, like Australia's Shane Warne.

Onward to the pestiferous Poms (PP), team Australia. The PP groundsmen are doctoring the pitches as we write, dear readers, so keeping the Ashes will be no mere stroll in the park. We shall of course be polishing the cliches for reporting on the titanic tussle to come.

Richmond beat Freo in the west.  Since Richmond only just beat the Blues in the opening match of the year, the Blues appear to have little to fear when they face top of the table Freo. 'Que?' I hear you say. 'Footy is not transitive'.  Amen to that piece of folk wisdom.

The Aussie shielas fought the mighty American futballers and held them to a one all draw in the first half.  Sadly, our shielas faded in the second half and must saddle up (another useful cliche) against Nigeria, whose players are descended fron Zulu warriors, and who in the futball world outrank shielas descended from convicts and other sweepings of London's grimy eighteenth century streets.

And we learn from the sporting pages that an Aussie lad from Australia's hot and dry interior has siezed his chance in the NBL finals to show what a gritty aussie battler can achieve. Chip Le Grand reports: 'Dellavedova plays basketball like a red heeler. His uncompromising approach hasn’t endeared him to all basketball fans but, in Dellyborough, they’ll tell you it is the way he has played since he was a kid running around for the Maryborough Blazers U12s.

'Brady Neill, who played alongside Dellavedova in Maryborough and Bendigo teams, says he lost count of the times he had to pick his undersized point guard off the floor — just as Cleveland star James LeBron has done so often in this best-of-seven series, which is now locked at 2-2. “People used to complain that he was too phys­ical,’’ says Neill, who coaches the Blazers U16 boys team. “Because he was one of the better ones they would try to target him a fair bit.” '

More here.  

Image of the week

Courtesy The Oz

Long weekend Sanity Break, 6-8 June 2015
Date: Saturday, June 06, 2015
Author: Henry Thornton

The contradictions of the Australian economy continue to confuse us all. Slow wages growth and low retail sales are effects of uncertainty and fear that jobs will be lost. But with national income falling, household saving is falling from the post-GFC high even to maintain low levels of household spending.  Meanwhile falling mining investment and feeble non-mining investment adds to the gloom. A massive $3.9 billion current account deficit (CAD) sparks memories of the trigger for the 'Banana Republic' crisis of 1986.

Those of us who are concerned by these facts are labelled 'clowns, fools and wreckers'. It would be interesting to help Glenn Stevens drink a bottle of Grange and ask him if the glass was half full or completely empty when he'd finished. Or to get his private thoughts about where we are and what is needed to put Australia back on the road to prosperity in a post-GFC, post-China boom world. Henry's 'Dreamtime Economics' provides some ideas.

Calls for a broader and higher GST are increasing, most surprisingly from David Marr on last week's 'Insiders'. It will be interesting to see what the White Paper on tax reform says. About as much as the information paper on what to do about citizens who fight against Australians. If they are overseas, cancel their passports. If in Australia, send them to Port Arthur. Henry is with government backbenchers on this one.

Vale Joan Kirner and Alan Bond.  Both notable Australians in very different fields of endeavour, but we are poorer for their passing.

Kulture 1

Fiona Prior lets the light-meister James Turrell play havoc with her optic nerves and imagination.

image: courtesy of the artist James Turrell

Kulture 2

Gary Scarrabelotti offers some sage political advice Tony Abbott, with its core a feature of an important culture group in this great South land.


Wonderful to see Mark Murphy and his Blues finally put up a good show against a quality team. Murphy himself starred along with most of the team.  Very sad to see Juddie carried off with what looks like it could be a career-ending knee injury. And we cheered Richmond last night as the walloped Freo in Perth. Is there light at the end of the tunnel for two old-fashioned teams of battlers in suburban Melbourne?

On the wider global scene of futball, FIFA President for life, Sep Blatter, has resigned, or plans to resign as the American plod close in. One hopes FIFA finds a honest bloke or woman to clean the stables. Lots of anger at the handball that favoured France in a World Cup.  What about the dodgy penalty kick that kept Australia out of the finals of another World Cup?

The rampaging Aussie cricket team belted the Windies in three days, helped by a century on debut by Adam Voges. How such an accomplished player was overlooked for so long is just one of the mysteries of sport at the top level, Let's hope Mr Voges gets a fair suck of the sausage selection in future. The Pestiferous Poms have had a better preparation playing New Zealand and this may make the coming Ashes series worth watching.

“Ewwwww! No! No! No! We ... are staunchly opposed to armpit hair (on women), nose hair, ear hair and toe hair.”

More here for fans of actress Jemima Kirkes.

We wish our loyal readers a safe and happy Queen's Birthday weekend.  Long may she rein as it is hard to see such affection for King Charlie, even if we still get a holiday.

Image of the week

Still searching - please send your favourite weekend cartoon.

Dreamtime economics
Date: Wednesday, June 03, 2015
Author: Henry Thornton

What a muddle.  House prices in Bubble territory (in Sydney and 'parts' of Melbourne) and new 'Macroprudential' policies so far failing to stem the tide. Market participants calling for 'more guidance' on RBA's intentions. Business investment heads for the cellar, in mining no surprise but dismal outlook for non-mining investment is creating an enormous disappointment for professional forecasters.

Business (including Henry, please note) say the core problem is lack of competitiveness, but Treasury and RBA continue to use outmoded overly simple 'Keynesian' analysis. (Keynes himself, of course, would not have been so naive.) 

Respected journalists say low wage growth and strong employment growth is 'suprising', but both are signs of household fears of recession and loss of precious jobs.  With household debt at 150 % of household income, Treasurer advises households to 'borrow and spend'. Household spending behaviour is just another sensible response to concern over loss of jobs.

Budget deficit is out of control, with little realistic chance of stemming growth of Australia's international debt. Extrapolation says this is a dire problem, but leadership has flipped from 'emergency' to generally endorsed 'dullness'.  Dollar needs to be lower, practically everyone agrees, but it keeps recovering, especially whenever RBA declines to say more rate cuts are on the agenda. Market participants are ungruntled, deservedly so in Henry's view.

It is a serious clusterf..k, dear readers. What can de done about it?

Here is a set of policies that would rapidly restore competitiveness and produce a highly prosperous Australia.

* Cabinet agrees to take a 20 % cut in its members' salaries until the economy is restored to blooming health.  PM and Treasurer urge parliament and the public service to adopt a similar approach and for business leaders to follow cabinet's example. Anyone who adopts this approach gets an AO in the next honour's list.
* The government and opposition agree to list budget savings in order of preference, government gets odd numbers picks (1,3,5 etc) and opposition even numbered picks. Treasury keeps score, producing figures on costs and benefits of each policy as objectively as possible, including its best guess of net effect of each pair of budget picks on the net budget trajectory. (If odd and even picks contradict each other, ask the parliamentary budget office to mediate.) Senate endorses these cuts so Australia has a rolled gold return to a healthy budget.
* The RBA devises and implements a variable tax on capital inflow to prevent, or at least inhibit, the sharp rise in capital inflow and the exchange rate likely to be produced by the first two policies.
* Government and opposition sit down and begin to negotiate a set of improvements to structural policies (including taxation policy) to increase efficiency and competitiveness of Australian industry.  If they cannot agree, try the system of alternative efficiency raising picks.  (Ask the Productivity Commission to publish its judgments on costs and benefit of each pick and mediate if agreement is not achieved.)

I can already hear the cry of 'You're dreaming Henry!'  No doubt I am, but the alternative is years of slow growth, even if outright recession is avoided. Also years of mean, nitpicking cuts to programs, bracket creep in taxation and general unhappiness.

Some effective version of this no doubt outrageous approach would produce a quick and sustained return to strong prosperity.  Or perhaps Australians prefer a future of mean, nitpicking mediocrity?


People who are concerned about Australia's economic future are 'clowns, fools and wreckers', says Treasurer Joe Hockey.

Time will tell, Treasurer, but I recall Treasurer Keating snarling at the 'clown' who warned him of the economy off the rails in 1986. Indeed, Mr K said something similar just before his famous 'Banana Republic' backflip.

With Mr Keating the backflip trigger was a record current account deficit (CAD).  Did you notice the $3.9 billion CAD Treasurer Hockey?

Saturday Sanity Break, 30 May 2015
Date: Saturday, May 30, 2015
Author: Henry Thornton

'Just how bad is the investment outlook in the latest official survey of business capital expenditure? It's very bad, and the sort of number you do see in a recession'.

The penny drops slowly for even great organs of news and opinion like the AFR.  Phillip Baker's article in the online version of the fin is headed 'Recession looks likely'. Gor blimey comrades, you heard this message here in August 2013 - 'The recession we did not need to have'.

Mr Baker's article continues: 'As Betashares chief economist David Bassanese [an economist in a betting shop!] said, that might not come to pass, but the weakness in business investment next financial year implied by the latest survey is of the magnitude that is usually associated with a recession.

'The risk now for investors is if some of the business confidence numbers down the track start to turn south in a big way and back up these latest disappointing investment intentions.

'There is no sign at all of the "animal spirits" the Reserve Bank is so keen to see.

'Instead, rather than businesses getting on the front foot and looking to be more confident now the political landscape has settled somewhat, the survey implies they are becoming more gun-shy.

'Spending intentions in the next financial year have fallen more than 20 per cent, while this year is also lower than what economists thought. And just to make sure the whole survey was a truly horrible set of numbers, previous reports were also revised down'.  More here.

The great man himself, Ben Bernanke, has been here preaching on how he saved the western world from depression, why governments should provide stimulus now and how good it is that 'macroprudential' policies are being provided by the financial system regulatory organs such as APRA in Australia.

This is the man who followed Greenspan in saying asset bubbles could not be diagnosed or moderated by policy.

Better late than never, perhaps. Ben 'Bubbles' Bernanke is another great man stumbling reluctantly to the truth.

Kulture 1

'The battle over the banking industry's reputation intensified on Friday, as two of Australia's top regulators took a simultaneous swipe at the culture at the heart of the nation's largest financial institutions.

"When culture is rotten, it often is ordinary Australians who lose their money. Markets might recover, but often people do not," Australian Securities and Investments Commission chairman Greg Medcraft said at the Stockbrokers Association of Australia's annual conference on Friday, in a speech calling on financial institutions to clean up cultural problems.

'The regulator is worried that a crisis of confidence among many members of the public, in the wake of a slew of governance scandals in some of Australia's largest banks over the past year, could weaken the integrity of financial markets. Commonwealth Bank of Australia, ANZ Banking Group, National Australia Bank, Macquarie Group, and UBS are among those that have dealt with the fallout from scandals over the past 12 months'.

Read on here.

Kulture 2

Fiona Prior sees Wild Tales, a film of unbridled revenge. Watch it if you dare!


The wiley old reptile who has presided over much rumoured and confirmed (by arrests) corruption in futball has been reelected. 'Soccer' as we know it here is booming, but we shall not give it real support unless and until the sport is cleansed. A new president and a new board, whose members are mainly honest women and men, would be a sign that corruption will be dealt with. 'Splatter the blatter' could be the rallying cry.

With Mick the Merciless gone, the Blues tried as hard as humanly possible to be competitive against the Swans last night and went down fighting. Buddy was awesome but got such clean and accurate ball that not even the game's best fullback could have held him back. Several Blues fought especially well - Rowe (acting cap'n), Armfield, Bell, Buckley, Carrazzo, Everitt, Henderson (but only workmanlike), Wood, but the real story was that everyone had, as they say, a redhot go.

Some big games to come today, and we celler dweller supporters can only watch and gape at the top sides' strength and skill.

One of the dailies featured several pages on the sheilas at play, and for a while Henry was tempted to suggest that a sheila infusion was just what the Blues need. But, sadly, last night's game was a timely warning.  It should however be recorded that one of the great coachs once told Henry that he knew a sheila who was good enough to play in the AFL at the highest level. More here by Blues hero, Ted Hopkins.

Soon there will be test cricket to divert us from the Blues' diabolical loss of form.  Up and at 'em, lads, the old enemy deserve a good thrashing, and nothing else will do.  Mitch, hope you're back to your scary best.

Image of the week

Courtesy Macca, Herald Sun

Tax avoidance - simply borrow money
Date: Friday, May 29, 2015
Author: Henry Thornton

The Economist has delivered a telling attack on debt - which it calls 'The Great Distortion; Tax Free Debt'. With household debt a worrying 150 % of income, and households being urged to borrow and spend, it seems Australia is a prime candidate for tax reform.

The Economist goes on: 'A vast distortion in the world economy is wholly man-made. It is the subsidy that governments give to debt. Half the rich world’s governments allow their citizens to deduct the interest payments on mortgages from their taxable income; almost all countries allow firms to write off payments on their borrowing against taxable earnings. It sounds prosaic, but the cost—and the harm—is immense'.

'In 2007, before the financial crisis led to the slashing of interest rates, the annual value of the forgone tax revenues in Europe was around 3% of GDP—or $510 billion—and in America almost 5% of GDP—or $725 billion.

'This hardly begins to capture the full damage, which is aggravated by the behaviour the tax breaks encourage. People borrow more to buy property than they otherwise would, raising house prices and encouraging over-investment in real estate instead of in assets that create wealth. The tax benefits are largely reaped by the rich, worsening inequality. Corporate financial decisions are motivated by maximising the tax relief on debt instead of the needs of the underlying business'.

The facts are scary.

* 'Economies biased towards debt are more prone to crises, because debt imposes a rigid obligation to repay on vulnerable borrowers, whereas equity is expressly designed to spread losses onto investors. Firms without significant equity buffers are more likely to go broke, banks more likely to topple (see Free Exchange). The dotcom crash in 2000-02 caused losses to shareholdersworth $4 trillion and a mild recession. Leveraged global banks notched up losses of $2 trillion in 2007-10 and the world economy imploded.
* 'A [more] neutral tax system would also lead to more efficient choices by savers and lenders. Today 60% of bank lending in rich countries is for mortgages. Without a tax break, people would borrow less to buy houses and banks would lend less against property. Investment in new ideas and businesses that enhance productivity would become relatively more attractive, in turn boosting economic growth.
* 'Removing the advantages that debt enjoys would also lead to a fairer system. Relief on mortgage payments is a subsidy that flows to people who need it least: studies show that the richest 20% of American households by income gain the most'.

Policy reform will be hard, but what to do seems obvious.  The venerable mag suggests the following: 'The best approach is gradually to phase out tax breaks for debt at the same time as lowering the corporate-tax rate. That would make the policy revenue-neutral, and would also defuse the risk to governments who want to push ahead but fear losing a war waged on tax competition.

'Acting in concert or alone, countries should act soon. When interest rates are low, as now, the sweeteners for debt are smaller and thus easier to remove. When rates rise—as, inevitably, they will—the subsidy will become more valuable. This is the moment to tackle the great debt distortion. There may never be a better chance'.

There is a further, and longer, article in the same edition of The Economist, titled 'The senseless subsidy'.  It begins as follows: 'Despite the fact that the world is mired in debt, governments make borrowing costs tax-deductable, cheapening debt and encouraging borrowers to pile on more'.

One hopes policymakers everywhere have read these two articles.  If you are a policymaker or can influence policymakers, please draw a relevant person's attention to the May 16-22 2015 edition of The Economist.

Australia`s Innovative Manufacturing
Date: Tuesday, May 26, 2015
Author: Henry Thornton

MEDIA RELEASE Melbourne – 26 May 2015

New Industry-led centre to help transform Australian manufacturing

An ambitious venture to transform Australian industry has been announced today by the Hon Ian Macfarlane MP, Minister for Industry and Science. The venture is a new Cooperative Research Centre (CRC) designed to accelerate Australia’s transition into high value, knowledge-based manufacturing. The new Innovative Manufacturing CRC (IMCRC) brings together a powerful coalition of businesses and researchers. It will have its head office in Melbourne and operate from nodes around the nation.

The IMCRC is a collaboration of:
• 14 initial manufacturing companies and end users who are already global, innovative and prepared to innovate further including many participants from the successful Advanced Manufacturing CRC
• 4 peak industry bodies that will help recruit over 300 additional SMEs as ‘Portal Partners’
• 16 Australian universities, CSIRO and the Fraunhofer Institute for Laser Technology

IMCRC Interim Chair, Dr Peter Jonson, said, “The decision to establish the IMCRC is visionary and provides an exciting opportunity for Australian manufacturing.  We shall be part of a powerful movement to transform the future of Australian manufacturing. Key members of this exciting cooperative venture will hit the ground running to help transform manufacturing in Australia. Ten major industry-research cooperative projects are ready to start just as soon as necessary formalities are finalised”.

Dr Jonson said that the Commonwealth’s grant of $40 million would be matched by more than $210 million of cash and in-kind contributions from industry, research institutions and State governments that will lift the total budget to over $250 million to seed the process of transformation.

The IMCRC’s four research themes will deliver high-impact programmes of collaborative research to intersect with the challenges of Australian industry. The IMCRC will focus on the needs of industry, which will be met by emerging technologies delivered by Australia’s finest researchers. IMCRC’s multidisciplinary research programmes will provide significant benefits to our participants and create important insights to be shared with our wider industry ‘Portal Partner’ community.

IMCRC's research programmes will be concentrated on the high-growth sectors recently identified in the Commonwealth Government's ‘Industry Innovation and Competitiveness Agenda’.The IMCRC will work in close cooperation with the new Industry Growth Centres (IGCs) to help companies build the innovative capacity to develop market-ready opportunities. Our participating peak industry ‘Portal Organisations’ will help facilitate the mission of the IGCs to better understand the needs of industry and to inform policy recommendations for government to improve Australia’s competitiveness.

For further information:

Peter Jonson – IMCRC Interim Chair on 0403 048 104 or peterdjonson@gmail.com
David Charles – IMCRC Interim Director on 0412026 302 or dtcharles@gmail.com
Robin Batterham – IMCRC Interim Director on 0417 351 776 or r.batterham@unimelb.edu.au
Mark Raphael – IMCRC Interim Operations Manager on 0432 752 646 or mark.raphael@imcrc.org
Website - www.imcrc.org

Further information follows:

Professor Robin Batterham, former Chief Scientist of Australia and a member of IMCRC’s Interim Board said, “Manufacturing in Australia has a bright future. It will involve change and it will involve innovation. It is about more science but primarily it is about more innovation – that is, when something new hits the market of end users prepared to pay real money. The IMCRC will be focussed on helping companies create new products and new businesses, assisted by an experienced team of researchers including scientists, engineers and business innovation experts.”

Dr David Charles, Chair of the Advanced Manufacturing CRC said,“the IMCRC is well positioned to build on the successes of the AMCRC and to contribute through collaboration to the change process both in industry and associated research organisations.”

The IMCRC’s ‘Industry Portal’ will undertake the important task of ensuring the diffusion of the new manufacturing paradigm to a wide range of small to medium sized Australian companies who have the potential to become Australia’s ‘Hidden Manufacturing Champions’. Through its ‘Industry Transformation’ research theme, the IMCRC will be giving high priority to putting in place the conditions needed for success. The support of the IMCRC’s strong ‘Portal Organisations’, the Australian Industry Group, Australian Manufacturing Technology Institute Limited, prefabAUS and STC Australia, will be vital in this regard.

The IMCRC includes a focus in the Medical Technologies & Pharmaceuticals growth sector with a number of highly innovative programmes of research already well advanced in their planning.

As one example of the many exciting programmes to be undertaken, Professor Peter Choong from the Department of Surgery at St Vincent’s Hospital Melbourne will lead a programme that brings together advanced techniques in robot assisted surgery and additive manufacturing to give patients with limb cancer new hope for better survival while saving limbs.

Professor Choong said, “this collaboration between the University of Melbourne, RMIT University, University of Wollongong, industry partners Stryker and Anatomics and the CSIRO focuses on the delivery of just-in-time patient specific implants by developing new ways to acquire, manipulate and transfer data related to patient tumours to facilitate the role of robots in surgery, and 3D printing of limb parts. This programme will push the boundaries of personalised patient care in manufacturing and treatment”.

Further details on the many exciting programmes to be launched soon are available at the IMCRC website www.imcrc.org

The speech by Minister of Industry and Science Ian Macfarlane that announced the IMCRC is available here.

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