Austerity or stimulus - the fateful choice
Date: Friday, November 04, 2011
Author: Henry Thornton
Robert Skidelsky, biographer of Keynes, has warned: 'The world economy is on the edge of a precipice. The best we can hope for now is a managed retreat from the wilder shores of globalisation. The alternative is the collapse of the euro, protectionism – and even war'.
'The resulting damage over the past four years has been huge. The world economy contracted by 6 per cent between 2007 and 2009, and recovered 4 per cent. It is 10 per cent poorer than it would have been, had growth continued at the rate of 2007, and the pain is not yet over. Today, we are in the first stages of a second banking crisis. It may already be too late to avoid a "double dip", but it may still be possible to avoid a triple dip. For this we need a robust intellectual analysis of what is required to ensure durable recovery, and the collective political will to implement it'.
'Economics is in a mess'. There are two explanations of the painful recession we are all experiencing - American profligacy (printing money, overlending and overborrowing) and Chinese frugality (saving too much). The old debates between Hayek and Keynes are being played out in modern garb.
In reality, says Skidelsky, 'there are elements of truth in both explanations'. The policy debate is between austerity and stimulus.
'According to Meghnad Desai, writing in the Financial Times of 15 September, "The long recession is a Hayekian phenomenon and not a Keynesian one . . . The need is to deleverage, not to spend." The private and public sectors alike need to increase their saving, even though this will reduce aggregate demand in the short run. Letting assets find their proper value will bring genuine demand at realistic prices and punish those who have taken wrong decisions.
'There will be more pain in the short term, but the Keynesian alternative of stimulus delays the adjustment, unfairly forcing taxpayers to pay the price of rescuing those who took too much risk. The boom was the illusion; the slump is the opportunity to liquidate the malinvestments'.
Skidelsky reaches back to the nineteen thirties in refutation: '... Keynesians argue that, even if the Hayekian diagnosis is right, the remedy of austerity is wrong. It derives, they say, from the medieval medical practice of bleeding a sick person to purge the rottenness from his blood - a species of cure that frequently led to the death of the patient. Lionel Robbins, retracting his opposition to Keynesian stimulus policies in the 1930s, wrote:
'Assuming that the original diagnosis of excessive financial ease and mistaken real investment was correct - which is certainly not a settled matter - to treat what developed subsequently [by austerity policies] was as unsuitable as denying blankets and stimulants to a drunk who has fallen into an icy pond on the ground that his original trouble was overheating.
'(Compare this with the German finance minister, Wolfgang Schäuble: "You can't cure an alcoholic by giving him alcohol.") The point is this: if both the government and the private sector are trying to increase their saving at the same time, you don't just liquidate the bad investments, you kill the economy as well, by reducing national income until everyone is too poor to save.
'That is why I have been arguing in the UK that when private enterprise is asleep, for lack of effective demand, the state must step in to stimulate the moribund investment machine back into lively activity'.
Robert Skidelsky at the end of the day is a Keynesian. 'With austerity in the ascendant, the world recovery is petering out. Europe is on the edge of a precipice, in a feedback loop from bank insolvency to an explosion of sovereign debt to a second round of bank insolvency. The United States is in little better shape, with its fiscal policy paralysed and the markets expecting a Japanese-style stagnation'.
Readers from the IPA will stop reading at this point, but although I am more of a Hayekian, I urge other readers to continue. Skidelsky reminds us of the downward spiral of protectionism and war that followed the austerity of the 1930s.
'We know what happened in the 1930s: the world economy broke up. The conventional wisdom is that this is impossible today under any circumstances. The cliché has it that economic integration is irreversible; that the revolution in information and communications is ineluctably turning the world into a "global village". However, this benign prospect ignores the possibility of great crises and collapses. People were saying exactly the same thing in 1914. Historically, globalisation has come in waves, which recede under the impact of crisis and catastrophe as economic life retreats to the relatively safe haven of national jurisdictions'.
His warning is stark. 'If China and Germany insist on being 21st-century mercantilists - exporting more than they import - the rest of the world will start to protect itself against them. Germany's policy will lead to the breakdown of the eurozone, China's to the breakdown of the world trading and payments system.
'The two scenarios - Co-ordination and Disintegration - have in common that they presuppose more reliance by countries or groups of countries on domestic sources of growth, and less on foreign trade. That is what we mean when we talk of a more balanced world economy. The sole question is whether the retreat from the wilder shores of globalisation will be orderly or disorderly: whether we drift into the bloc economics of the 1930s, or whether we have the wisdom to build a managed and modified form of globalisation, free from the illusion that everything can be left safely to the markets.
'And here's the point - a disorderly, acrimonious retreat from globalisation is bound to overshoot the mark, reviving the economics and the politics of the 1930s; but leading, in an era of nuclear proliferation, to consequences that are even more terrifying. So we must resolutely work for the best, without illusion, and with only modest hope'.
Currency wars - a verdict from Moscow
Date: Monday, February 18, 2013
Author: Henry Thornton
The Russians know a thing or two about warfare. They were nearly conquered by Sweden (Sweden!) in the late 1780s, they drove back Napoleon in 1812 and they ended Germany's push for world domination at Stalingrad during World War II.
The most successful wars, however, have been on their own citizens - especially political dissidents and uppity billionaires.
Now they have hosted a G20 meeting that has grappled with the so-called 'currency wars'. (Here and here are two of Henry's earlier forays into this murky business.
Australia's own Wayne Swan - 'Comrade Swannie' in Moscow - has been nodding wisely and interjecting comments about his brilliant leadership back home.
A report from the Russion front says: 'Japan dodges G20 censure over yen'. Japan has suffered defeat before, notably in August 1945, but on this occasion was let off with a warning.
Meanwhile back home, in Moscow on the Molongo, Labor has suffered a massive new slump in the opinion polls. (Comrade Swan was heard to mutter 'bloody democracy' as he ascended to the front of the plane for his return home.) Prime minister Julia 'Red' Gillard is now contemplating her future as a smiling Comrade Kevin marshals his rapidly growing forces. As he stacks on the weight, Comrade Kevin looks increasingly like the young comrade Kim running North Korea.
He also makes a profoundly important point. It is that 'When [the Bretton Woods system] finally broke down in 1971, nothing really replaced it. For over 50 years, national governments have been freewheeling with their monetary affairs, unbound by any formal link with gold or the volume of economic activity'.
Regular readers will know that Henry has been an advocate of a modern version of the gold standard to provide a global anchor for a non-inflationary monetary system. It seems at least one of Australia's most promising journos understands the issue.
Those interested to delve further into this matter may find this Blog of interest.
'Mining levy debacle puts Wayne Swan's future in doubt', by Dennis Shanahan.
'Wayne Swan may be Treasurer but he's certainly no treasure', by 'contributing economics editor' Judith Sloan.
'PM in check, now Shorten must move', by Peter van Onselen.
Here is an extract: 'By their own key performance indicators, Gillard and Swan have failed. They rolled Rudd to fix the mining tax, slow asylum-seeker arrivals and solve carbon-pricing worries. Instead, they have served up a politically painful mining tax that doesn't collect revenue, failed to stem the flow of boats and delivered a carbon tax they pledged would not be enacted before the election (and that now looks set to be repealed by an incoming Abbott government).
'Throw in the broken surplus commitment, and rewarding Gillard (and Swan in particular) with staying in power would be to reward mediocrity.
'A significant benefit of changing prime minister is that doing so would also elicit a change of deputy PM and treasurer.
'Even if Shorten can't (or won't) see the obvious electoral benefits of switching to Rudd, surely he can see how doing so is in his personal interests. ...' Read on here.
And what about the Perth accountant who told Swannie that his mining tax sums were holelessly wrong, in effect a whistle blower, who was persecuted by Swan, aided and abetted by Treasury?
This is a long-standing tradition, and it has strength and a weakness. The strength is that it keeps Labor people loyal but the weakness is that it foster nepotism in all its guises, and means that the best that Australia has to offer is widely under-utilised while Labor is in office..
As an occasional writer for Quadrant, I was upset to hear that its grant from the Australia Council has been 'slashed'.
Expansionary global monetary policy has boosted share prices. Now it is the turn of art.
The Wall Street Journal reports: 'London auction house Christie's International sold $127.7 million worth of contemporary art on Wednesday, thanks to an influx of newcomers eager for trophy art alongside veteran buyers who were willing to mop up the rest. Among the works buoyed by first-time bidders were a $14.6 million Jean-Michel Basquiat and an $11.9 million Peter Doig".
Ms Gillard and Mr Swan will find that this continued class warfare in the name of 'equality' (but in reality a desperate grab for revenue) will turn out to be the final nail in their political coffins.
'Go for it, Swannie. It will be galling to see you ride off into political limbo with your sack of pension money untouched, but a relief overall'.
The much derided mining tax is in the news again, mainly because it has so far delivered diddley squat, and its masters, the aforementioned Gillard'n'Swan, are looking increasingly like desperados swimming naked.
'A spokeswoman for Mr Swan said there was nothing unusual in Dr Parkinson's admission that Treasury did not know what values the mining companies would be using for their assets in calculating the tax.
"Treasury does not have access to the full financial details of individual taxpayers, but bases its forecasts on the best available data," she said.
'Broking analysts and mining companies suspected, from the beginning, that companies' ability to put a market value on their assets would have a big impact.
'A week after the tax was agreed, the then Coalition industry spokesman Ian Macfarlane suggested no tax would be paid: "The companies involved in the negotiations will be paying no more tax than they are now. We're starting to think the whole thing is a sham".'
David Uren has delved into the history of 'fiscal consolidation' which until the recent budget surplus promise was junked was Swannie's proudest boast.
'Even on the most recent and now obsolete published budget numbers, Swan relied much more on revenue growth than on spending restraint than did the consolidations of his predecessors. Had Swan achieved the return to surplus this year, it would, indeed, have been the fastest improvement since the "horror budget" of the Menzies government, under treasurer Artie Fadden, in 1951.
'From the peak 2009-10 deficit to surplus in three years would have been a consolidation equivalent to 4.3 per cent of GDP.
'This would have compared with Mr Costello's budget turnaround of 4.1 per cent of GDP across four years following the Coalition's election in 1996. He took the budget from a $6bn deficit to a $13bn surplus.
'The Hawke government, which gained power in 1983 as a two-year recession was abating, ran a big deficit of 3.3 per cent of GDP in its first year, but under treasurer Paul Keating devoted the next five years to returning the budget to surplus. ' 'That was a turnaround of 4.8 per cent of GDP.
'The consolidations achieved by Costello and Keating were striking for their spending restraint. During Keating's five tight budgets, spending fell as a share of GDP by 3.5 percentage points, while revenue rose by only 1.3 points'.
This is about a Treasurer who talks big but delivers ... just more spending.
The good news for the Coalition is that it is Labor which now has a big unfunded hole in their budget - Gonski and NDIS, even assuming there are no fresh revenue shortfalls yet to emerge.
'The world has 50-60 active tax havens, mostly clustered in the Caribbean, parts of the United States (such as Delaware), Europe, South-East Asia and the Indian and Pacific oceans. They serve as domicile for more than 2m paper companies, thousands of banks, funds and insurers and at least half of all registered ships above 100 tonnes. The amount of money booked in those havens is unknowable, and so is the proportion that is illicit. The data gaps are “daunting”, says Gian Maria Milesi-Ferretti of the IMF. The Boston Consulting Group reckons that on paper roughly $8 trillion of private financial wealth out of a global total of $123 trillion sits offshore, but this excludes property, yachts and other fixed assets'.
Household, business confidence surges, rates on hold?
Date: Wednesday, February 13, 2013
Author: Henry Thornton
Roy Morgan Research reports that Business Confidence in Australia in January 2013 increased to 122.5, up 7.7 points from 114.8 in December 2012 and is now at the highest level since April 2011.
This increase in confidence is due largely to the fact that more businesses now consider that economic conditions in Australia over the next twelve months will improve. These findings are from the latest Roy Morgan Research ‘Business Confidence’ survey of over 2,700 businesses in January 2013.
Although most Industries showed improved confidence in January, it was mining that increased the most and so returning it to the position as the most confident industry. Western Australia has obviously benefited by this and is now clearly the most confident state. A number of key sectors all remain below the average confidence level and as such pose a major problem for economic recovery. The Agricultural sector has the lowest confidence rating, followed by Construction, Manufacturing and Retail.
And the equivalent survey of households reports a corresponding increase in virtually all catagories, and overall.
The weekly Roy Morgan Consumer Confidence Rating shows Consumer Confidence rising to 121.4pts (up 2.9 pts since February 2/3, 2013) after the RBA left Australian interest rates unchanged at a record low of 3%. Consumer Confidence is now 5.7pts higher than at the same time a year ago, February 11/12, 2012 — 115.7.
The rise in Consumer Confidence has been driven by an increase in confidence about buying major household items and increasing confidence about personal finances over both the last and the next 12 months.
Now a much larger majority of 60% (up 6%) of Australians say now is a ‘good time to buy’ major household items compared to just 16% (unchanged) that say now is a ‘bad time to buy’.
Gary Morgan said: “Roy Morgan Consumer Confidence has risen to 121.4 (up 2.9pts) after the Reserve Bank of Australia left interest rates unchanged at a record low of 3%. Driving the rise were strong increases in Australians saying ‘now is a good time to buy’ major household items (60%, up 6%) and also that families are ‘better off financially’ than this time last year (34%, up 6%).
“Interestingly, a clear difference emerged between supporters of the two major parties when it came to looking at the next 12 months as increasing numbers of ALP supporters expect to be ‘better off financially’ in 12 months time (42%, up 4%) and the Australian economy to perform better over the next 12 months (42%, up 6%) while L-NP supporters became less confident on both counts with 37% (down 1%) expecting to be ‘worse off financially’ in 12 months time and 27% (down 1%) expecting ‘bad times’ for the Australian economy over the next 12 months.
“Despite the decision by the RBA to leave interest rates unchanged, the latest Roy Morgan January unemployment figure released last week showed Australian unemployment at 10.9% (1,327,000) and under-employment at 8.8% (1,068,000). This is a record high total of 2.4 million Australians (19.7%) looking for work or looking for more work.
“The high, and growing, level of unemployment and under-employment in the Australian economy means the RBA needs to re-commence making interest rate cuts as soon as possible to stimulate the Australian economy while the Government must look seriously at undertaking workplace reforms to encourage employers to begin hiring again.”
Henry adds: 'The rise in the overall unemployment and underemployment measure is somewhat at odds with the general rise in the various indicators of household confidence'.
Those who saw the Four Corners program earlier this week will wonder if Australia, like the USA, is developing an underclass whose views are not polled as they either out hustling for jobs when the interviewer knocks, or living in friends or relatives' spare rooms, or (God forbid) in cars and vans.
These missing workers are largely ignored by the government, and go unmentioned by the Reserve Bank. So it is a fair bet that improved business and household confidence will keep interest rates on hold. If these trends persist, that brave bloke who said the next move in rates might be up may be on a winner. He should have a bet with Westpac's Bill Evans before it is too late.
Australia`s reviving housing boom
Date: Monday, February 11, 2013
Author: Henry Thornton
After a serious correction, Australia's housing market is showing new signs of life. Falling interest rates, improved affordability and growing population are all factors stressed by experts, as will be reviving confidence of businesses and households at some stage.
Over the past year, the best performing house price performance in Australia's major capital cities have been Sydney (3.4 per cent), Canberra (2.7 per cent), Perth (2.7 per cent) and Brisbane (2.3 per cent). The only laggard amongst the eight conurbations was Melbourne, where prices were basically flat (minus 0.4 per cent).
The good people in nab's economic unit are predicting continued modest per annum recovery as follows: Perth the strongest, 5 % in 2014; Sydney next at 3.7 %; Brisbane 3.5 %; and Adelaide and Melbourne lagging at 2.0 %. National average, a still modest 3.0 %.
In Great Crises of Capitalism, we boldly suggested that the housing boom of the 2010s would revive after the GFC-induced correction, and that the decade of the 2010s might be like the decade of the 1880s.
Here is an extract.
A new factor of great significance is the China boom. While this was interrupted for a short time during the global financial crisis, China is again growing at double digit rates and Australia’s terms of trade are again at record levels. In many ways, the past three decades are reminiscent of the thirty years from 1850 to 1880. With good policy, sizeable overseas borrowing and a lot of luck, Australia is again seen as a ‘miracle economy’. To continue the analogy, this is another time in which Sydney is in decline while Melbourne is booming. Australia generally, led by Melbourne, is experiencing a property boom. This is (so far!) by no means as mad at that of the 1880s, but sufficiently strong that respected international commentators claim Australia’s house prices are up to 40 % above fair market value.
Slightly lower estimates emerge from a thorough study by three Goldman Sachs economists published in September 2010. Depending on the valuation model they see Australia’s overvaluation at either 35 % or 24 %, with the latter estimate their preferred measure. They do conclude, however, that ‘We see an acute housing shortage developing in coming years’, which provides an obvious possibility of further overvaluation to come.
If one equates 1980 with 1850, 2010 is the modern equivalent of 1880. If this analogy holds, modern Australia is now entering the last, maddest decade of a forty-year boom, and Marvellous Melbourne is already growing quickly, working well (despite infrastructure bottlenecks) and playing hard.
The above comments were sent to the printer in late 2010, and the temporary correction in house prices has been stronger than implied there.
Also, Melbourne is now lagging the recovery of housing prices. But there was a small correction in the early 1880s before the last, maddest near-decade of housing and land price boom, and only time will tell how the rest of the 2010s evolves.
The following table summarises the situation in the 1880s compared with the 2000, plus the situation in Australia in the 1890s. Readers are invited to replace the question marks in the column on the far right.
Saturday Sanity Break, 9 February 2013
Date: Saturday, February 09, 2013
Author: Henry Thornton
The RBA finds the glass slightly less than half-full, reducing forecast growth for the Australian economy to a tad below the long-term sustainable rate.
The word 'slightly' is being applied to the RBA's discussion of many changes to its predictions, and I do not see any signs that further rate cuts are imminant. (Earlier evidence is reviewed here and here.)
There are two storms going on as the RBA calmly but slightly alters its stance. The sporting s**t-storm and the superannuation s**tstorm. (This being a family oriented blog, we do not wish to pollute the kiddies' eyes and minds with naughty words.)
Lance Armstrong and cycling generally, then global 'football' (ie soccer), involving organised crime as well as drugs, s*x and rock'n'roll, and finally our beloved AFL, NRL, Rugby (gasp, not the public schoolboys!) and presumably every other blessed organised sport.
One has to ask whether surpressing the use of drugs is the right thing. A medical man Henry consulted this week told me that a 'hammie' can take up to 8 weeks to fix, whereas with (currently illegal) steroid injections it gets fixed far faster. If there is a treatment that hastens recovery, it might be better to let it be done legally by professionals. And so the arguments go ...
Maybe we need a third class of athletes - the current two, amateur and professional, with a new 'enhanced' catagory. This would be like Tea Party/IPA economics - anything goes - with consenting adults doing anything they liked that a qualified doctor would be willing to administer. ('Why limit it to qualified doctors?' I hear you cry.)
Once America enforced prohibition, and this is now recognised as ineffective and to have created extensive black market activity and serious criminal activity. One of the benefits of 'enhanced' is that remedies for ordinary folks would probably be developed far faster, though clearly some enhanced athletes would suffer various side-effects. Just a thought, gentle readers.
Then there is the superannuation s**tstorm. This is almost certainly the final nail in the Gillard government's coffin and shows the value of advice about not interrupting your enemy while she is making mistakes. The threat of further meddling with superannuation is just one example of this government's activities scaring the horses and spreading uncertainty and unhappiness. And then the kiddies in ministerial offices wonder why the economic prospects are looking dimmer by the day.
Capitalism red in tooth, claw and cassock
Nescafe manages to arrange a meeting with the Pope at the Vatican.
After receiving the Papal blessing, the Nescafe official whispers 'Your Eminence, we have an offer for you. Nescafe is prepared to donate$100 million to the church if you change the Lord's Prayer from 'give us this day our daily bread' to 'give us this day our daily coffee.'
The Pope responds, 'That is impossible. The prayer is the word of the Lord. It must not be changed.'
'Well,' said the Nescafe man, 'we anticipated your reluctance. For this reason we will increase our offer to $300 million.'
'My son, it is impossible. For the prayer is the word of the Lord and it must not be changed.'
The Nescafe guy says, 'Your Holiness, we at Nescafe respect your adherence to the faith, but we do have one final offer…. We will donate $500 million - that's half a billion dollars - to the great Catholic Church if you would only change the Lord's Prayer from 'give us this day our daily bread' to 'give us this day our daily coffee.' Please consider it.'
And he leaves.
The next day the Pope convenes the College of Cardinals.
'There is some good news,' he announces, 'and some bad news. The good news is that the Church will come into $500 million.'
'And the bad news your Holiness?' asks a Cardinal.
'We're losing the Baker's Delight account.'
Image of the week. 'Its bad out there'.
Date: Friday, February 08, 2013
Author: Henry Thornton
'I'm all right, Jack', says the Treasurer, 'cop this extra tax on your superannuation fund'.
This is the attitude of Wayne Swan, whose reckless spending and promises impossible to keep have caught up with him.
Fortunately, major players are refusing to cop it sweet, and the fuss over super-theft will make the mining tax imbroglio look like a teddy bear's picnic.
JULIA Gillard moved promptly to rule out taxes on income from superannuation balances over $1 million for people over 60 years of age (Disclosure: sadly, this lot includes Henry.) Moderately well-to-do retirees all over the nation heaved a huge sigh of relief (with fingers crossed on the matter, as previous promises have famously been broken). But Henry suspects that considerable further damage has been done to this government's reputation.
The board of the Business Council of Australia (BCA), seemingly more ready to tell it like it is under the leadership of Tony Shepherd, said that talk of cutting superannuation tax breaks for top earners is damaging the super system and its ability to help address the pressing issue of how to absorb the costs associated with an aging population.
'Philosophically, I object to the term 'concessions', BCA president Tony Shepherd said.
'The money is ours. We go to work, we get paid. The money is ours. It's up to government to justify how much they take from us. It's not theirs, it's our money. It's not a concession, it's our money'.
Wesfarmers Ltd chief executive Richard Goyder said politicians should not consider changing the system, which until now has encouraged income earners to put more into their super. He said that taxing withdrawals from super accounts will punish those who have saved for their retirement based on the structure of the existing super scheme.
'Why should [income earners] be penalised for doing that?' Mr Goyder said.
One of the architects of Australia's compulsory superannuation scheme, Industry Funds Management chairman Garry Weaven, more or less immediately said 'don't meddle, comrades'.
Just about everyone except 'Swannie' accepts that saving for retirement is a good thing and that taxing such savings is a really stupid thing to do.
Of course, the books must be made to balance. Item 1 of Henry's economic policy reform list published earlier this week would be a far better way to begin the hurculean task before the nation.
On the other matters in that article, especially the mooted tax on capital inflows, there has been so far little explicit response, but there is ongoing powerful news and comment on the state of industries being severely handicapped by the high dollar.
A colleague reported to Henry that Professors Ross Garnaut and Bob Gregory have said the answer lies with lower interest rates.
Do you not accept that monetary policy cannot serve two masters, Professors?
Or is it just that you think the local economy is in such dire straits that it needs interest rates below the levels needed during the depths of the GFC crisis?
'Professor Gregory predicted that Australia’s real income could fall by 15 per cent in the next few years and whatever government gained power would have to convince people to accept lower living standards.
“The investment boom is going to peak and I can’t see something filling the hole quickly,” he said.
He said even if the exchange rate fell and Australia became more competitive, it would take some time for sectors such as manufacturing, home construction and tourism to pick up the slack. Even on an optimistic scenario, unemployment would rise to 6 per cent.
G & G I judge both to be good Labor men, and what a judgment they are making on this Labor government. We are facing a domestic slump of considerable moment despite Australia's biggest resource boom going from 'red hot' to merely 'hot'.
It's not just the superannuation plan that is in strife. It's all of us, if the professors are right. Who was it who said the situation in this government's bunker is like an episode of Downfall?
RBA holds firm, correction, a bit easy.
Date: Wednesday, February 06, 2013
Author: Henry Thornton
Henry's year just took a giant leap forward when he found himself staying in the same Canberra hotel as the Australian cricket team. Readers will be pleased to hear that self-restraint was in place and no autographs were requested. Nor was advice offered, notwithstanding Henry's stellar season many years ago with the Mont Albert Forths.
'The group putting the views of Australian business at next year's G20 meeting will focus on the strong Australian dollar, trade and access, the flow of funding, food security and the push to reduce the regulatory burden on companies, its head, Wesfarmers chief executive Richard Goyder says'. (AFR, p 10)
This is some shopping list, and Henry doesn't even know what some of the items mean. What is 'the flow of funding' Mr Goyder, and what is the state of 'the push to reduce the regulatory burden on companies'? But we do have a plan to fix the Aussie dollar, and other things you'd like to see done.
The RBA of course agreed with Henry about the wisdom of holding its fire on interest rates. Curiously there has been no call from a junior official to say in the usual frosty tones 'your views have been noted, Henry'. Not an institution that reponds well to unsolicited advice, although one notices the fulsome thanks to invited guests at their annual talkfests.
Still, there is no other plan Henry is aware of to get the dollar down, except more graft and corruption, interest rate cuts and general governmental incompetence. This will work in the end, more's the pity.
The press have various views about the next move in cash rates. The AFR says 'End may be nigh for rate cuts', the Oz says 'RBA holds off with eye on the future' (but may not need to cut further), while others note that the RBA has said there is room to cut if necessary. One brave ex-RBA man has said the next move is likely to be up. Henry will not name this brave lad to avoid having him cut from the list of 'friends of the Bank'. We remember Lou Richards, whose footy tips were widely regarded (with good reason) as the kiss of death.
The footy season is just about upon us and it has started with a bang - Essendon in possible drug scandal. As previously reported, a Caaaarlton! player supposedly said 'We don't do drugs and shit like that'. Henry's advice to this bloke is 'lie low and say nothing to draw attention to yourself, son'.
Political economy and the coming global crunch
Date: Tuesday, February 05, 2013
Author: Henry Thornton
It has been a big month in both politics and economics, and the excitement goes on.
Last year you will recall Henry frequently reiterated that Australia's problems could not, and would not, be solved by easing monetary policy. Instead what we needed was economic reform, reform that focussed on making the Australian economy more productive.
However, reform was not on the agenda, and with a squeeze on many industries it was desirable that interest rates be cut, and we were largely in accord with the RBA in the speed and size of rate cuts.
The mining boom has however driven the currency to levels where many non-mining industries, and most 'junior' miners (especially exploration juniors) were struggling to survive, and at the same time even the big mining companies were battling excessive costs.
By the end of 2012, we were more or less of the view that further rate cuts would be futile. If rate cuts continued to a point where the excessively strong Australian dollar was driven down (even if this could be achieved) this would ignite inflation and create further pain for all Australian industries, big and small, mining and non-mining.
Australia needed, we asserted in early January, a variable tax on capital inflow, to help keep the Australian dollar from excessive strength, while monetary policy focussed on the state of the domestic economy and domestic inflation in particular.
'The authorities', including the RBA and Treasury, did not appear to show any interest. Economists who responded all agreed that I had nailed the problem of two targets and one control lever ('instrument' in economist's jargon) but were unsure if a tax on capital inflows was the solution. Warwick McKibbin pointed out that widespread economic reform would be a better response, and I am in keen agreement with this diagnosis. But, on sober reflection, I think even if we got such reform, the Australian dollar might experience even further upward pressure, as Australia would be an even more attractive destination for footloose capital.
Today the RBA board reconvenes after its extended summer holiday. My first advice advice to it is to encourage Governor Glenn Stevens to inform the Treasurer that a tax on capital inflow is needed and then get on with the implementation.
Ending the world's ultra-easy monetary policy - which has to happen sometime - will involve severe economic unhappiness, with recession or worse in the major countries and a global crunch that has the potential to hurt Australia far worse than the recent crisis. Australia's economy is already weakened by excessive domestic costs and a high exchange rate.
What we need to do is strengthen our economy to the maximum extent possible to minimise the damage from the coming global crunch. Henry's article today makes this point and contains my recommended reform agenda. While this package is of course available to the current government, it is highly unlikely to pick it up and run, despite Paul Keating's doing something like that in 1986. As an important point of political economy, my approach focusses on process, meaning that if the opposition was attracted to such a package it is the commitment to the process, not ludicrous (and impossible) 'costings', that will give the electorate confidence.
Australia can protect itself from the coming global crunch, and make its economy far stronger by doing so. A brave RBA governor would take such a package to the Treasurer and convince him that its adoption is vitally necessary. I believe Glenn Stevens has the bottle to do this, but he may not share my concern at the need to do so.
Global monetary policy in fast forward
Date: Sunday, February 03, 2013
Author: Henry Thornton
Ben Bernanke has tied his hands and those of the Fed to money printing and cheap money until the US unemployment rate is 6.5 %. China is stimulating its already buoyant economy. Japan has joined the fun and the ECB has pledged to 'do whatever it takes' to stimulate the Eurozone economies.
'Mr Carney, hired away from the Bank of Canada, has recently given hints that he wants to shake up British monetary policy. He has talked about the need to stimulate an inert economy until it reaches “escape velocity”; he has said that a central bank might need to “tie its hands” by announcing thresholds to be reached before it reduces stimulus; and he has suggested that the level of nominal GDP—the cash value of output without adjusting for inflation—might be a better target than inflation alone. This willingness to think afresh is admirable. But Mr Carney must now connect the dots between his ideas'.
How the world can emerge without a major recession from this era of very easy money and near-zero official interest rates is obscure, but Henry is certain it will be difficult and painful.
More on this in Henry's regular column on Australia's monetary policy and related subjects tomorrow.
David Uren has joined the line of guru's saying the RBA will 'likely' leave rates on hold tomorrow.
The key issue is will they do anything apart from sitting pretty?
Newspoll slumps for Labor, Abbott's popularity rises.
'LABOR support has slumped back to levels seen at the end of last year and Tony Abbott has surged against Julia Gillard as the nation's preferred prime minister after the start of the record-breaking seven-month election campaign was marked by chaos and confusion in government ranks.
'As Labor MPs returned to Canberra last night for the first sittings of the parliamentary year - and as senior ministers publicly expressed support for the Prime Minister and her tactics - the latest Newspoll, conducted exclusively for The Australian at the weekend, puts the Coalition in a clear, election-winning position.
'Government MPs have been unsettled by Ms Gillard's surprise decision to name September 14 as the election date - a move that was immediately overshadowed last week by charges against former Labor MP Craig Thomson and the resignation of two ministers that some inside government believe could herald more senior departures. It was revealed last night that the Victorian branch of the ALP is expected to delay the search for a replacement for former attorney-general Nicola Roxon in the Melbourne seat of Gellibrand in case other ministers or backbenchers also resign'.
The generally negative tone of Fairfax Newspapers about the guv'mint over the weekend was also noteworthy, and even The Insiders seemed to be striving for a more balanced coverage that at the end of 2012.
And Michelle Gratten on ABC radio this morning seemed far more subdued than usual about 'Isshues' faced by Julia Gillard.