Bye, bye, Bunga Bunga
Date: Monday, November 14, 2011
Author: Henry Thornton
Silvio Berlusconi has quit and has been replaced by (gasp!) an economist.
The Economist is scathing about the playboy Prime Minister: 'When the world’s third-largest bond market begins to buckle, catastrophe looms. At stake is not just the Italian economy but Spain, Portugal, Ireland, the euro, the European Union’s single market, the global banking system, the world economy, and pretty much anything else you can think of ...'
'Italy will be the crucible which tests the euro to destruction—or survival. Only a few weeks ago, that test still seemed avoidable. Now it is at hand. If the euro zone wants its currency to survive, it must stem the panic and make Italy’s vaudeville politics credible'.
'Italy is not yet insolvent. Although the rescue plan set out by the euro zone last month is in tatters, the European Central Bank could still gain time by pledging to buy Italy’s debt in unlimited quantities and to protect European banks, as The Economist has argued. The signs this week were that the ECB had stepped in to ease Italian yields. But it has not yet made that vital public pledge to do whatever it takes, without limit, to create a proper firewall and stop the panic'.
Even in Henry's sheltered life, spent mostly in Australia, it is noticable that economists are usually called upon only when there is a sufficiently important crisis. When Henry was farewelling the board of the Reverse Bank, the then Treasury Secretary said Henry would be recalled if there was another crisis. Such was the smooth path of the Australian economy since 1986, that has not been necessary.
Senior Monti has a hard task ahead of him. He needs to balance the budget by slashing outlays and forcing rich Italians to pay some tax. Spending cuts and tax hikes will increase misery among the battlers and make fiscal balance harder to achieve - the basic paradox of a bankrupt nation. The new PM will also curtail the number of Bunga Bunga parties and market reality may well cut back on launches of exotic clobber by anorexic young women and darkly handsome men.
The Economist again: 'For the euro to survive, Italy must succeed. For Italy to succeed, its squabbling politicians must find unaccustomed reserves of unity and courage. That depends on ordinary Italians being willing to make sacrifices, the ECB backing Italy, and France and Germany standing resolutely behind the euro. It is a dauntingly long list of things to go right'.
Courtesy: The Economist.
And here is a critical appraisal, by Asia Times Online'sSpengler.
'It’s hard imagining Italy going from bad to worse, but Mario Monti might be a worse choice for Italian president than Sylvio Berlusconi, who resigned over the weekend as Italy’s state finances came close to collapse. Berlusconi presided over a corrupt state, and personified its worst excesses in the form of alleged orgies with underaged prostitutes. In general, though the outgoing Italian prime minister was pro-American.
'Mario Monti hates America, viscerally. Over dinner with a friend of mine not long ago, Monti weighed in on the Americans: “They’re idiots. They think Venice is in Las Vegas.” He continued in that vein until my friend shut him up'.
Lest we forget
Date: Friday, April 03, 2015
Author: Henry Thornton
Do not miss Peter Craven's meditation on the Easter mystery.
'It’s a haunted, shadowed time, Easter, not least because it’s so full of the cultural memory of where our civilisation — and the mess we have constantly made of it — has come from. This is, after all, the greatest liturgical feast of the Christian calendar.
=What believers are celebrating tomorrow morning — perhaps at midnight tonight if they want the ritual of the midnight mass where the church goes from darkness to light as a symbol of what has happened — is the resurrection of the Son of God, killed on the cross just yesterday, on Good Friday, as that stark day is known, because, so the story goes, his death saved the world'.
Grim economic news
Date: Thursday, April 02, 2015
Author: Henry Thornton
The Australian economy is already in an income recession, and many experienced commentators now think we are headed for a production recession. Yesterday three pieces of dire news showed the parlous state of our economy - manufacturing production falling, indicating a manufacturing recession, household anxiety up, with fears about government policy top of the list, and costs too high to build warships in Australia.
1. The Australian Industry Group Australian Performance of Manufacturing Index (Australian PMI®) moved up by 0.9 points to 46.3 points in March (seasonally adjusted). This indicated a fourth consecutive month of contraction in activity (readings below 50 points indicate contraction) across the manufacturing sector following a brief stabilisation in November 2014.
Various 'activity indicators' in the Australian PMI® continued to indicate very weak domestic demand. Manufacturing production contracted (i.e. below 50 points) for a fifth consecutive month while new orders fell for a fourth month. Manufacturing sales declined for a 10th month in March. Supplier deliveries and stock levels also contracted for a second month in March after brief expansion in January, while manufacturing employment contracted for a third month.
Comparable figures for major economies show: China, slightly underwater and falling; Japan, slightly positive but still falling; Eurozone, positive and rising; UK, more positive and rising; and USA, strongly positive and still rising. In this group, including our major trading partners, we are by far the weakest.
2. NAB Quarterly Australian Consumer Anxiety Index - March quarter 2015
'Consumer anxiety rose again in March quarter after a short-lived improvement in the previous quarter, as concern over government policy overtook cost of living as the single biggest cause of consumer stress'. The NAB's economic team added: 'With overall anxiety increasing, consumers are cutting back on many 'non-essentials'.
The NAB Consumer Anxiety Index rose to 61.8 points in March quarter 2015 (60.1 in December quarter 2014), with higher concern in all categories except health.
According to NAB Chief Economist Alan Oster: 'Government policy is now the single biggest cause of anxiety for consumers, just ahead of cost of living, while job security continues to cause the least stress.'
'In terms of their overall household financial position, however, not having enough to retire, being able to provide for the family’s future and meet medical costs were causing the greatest concern' said Mr Oster. Please refer to Henry's cri de coeur that relevant tax reform not include weakening the attractiveness of superannuation. Does the government really want to make Australia's most productive citizens, as measured by their superannuation balances, more anxious about retirement and even less inclined to spend?
These are two obvious and direct indications of Australia's slide into a production recession. Then we come to the overheated cost base, the legacy of the maddest boom in Australia since the gold rushes of the 1850s.
3. Australia's bloated cost base.
We learn almost daily of company retrenchments, a sure sign that costs are out of whack. But rarely do we hear a warning so stark that even deaf Freddy, first cousin of blind Freddy, could not possibly miss. This warning was delivered by Defence Minister Kevin Andrews. The Oz reported Mr Andrews as follows: 'Australia cannot afford to build warships unless companies and unions bring down costs'. This is the reason the government is forced to consider spending $20 billion overseas instead of $40 billion and counting to build our next generation submarines in Adelaide.
It means, comrades ...
Many countries are finally recovering from the severe GFC recession, albeit slowly, while Australia is rapidly losing its 'miracle economy' status. We were warned, here and by other experienced observers, but warnings were ignored. We pointed out in August 2013: 'The nation's leaders are walking unknowingly into a new economic crisis, ironically just as other developed nations are showing signs of recovery. Warnings have been sounded, and not just by this writer, and the only excuse for the steady tramp into recession is the insularity and self-congratulatory hubris of successive ministers and officials, especially those in Treasury'.
Part of the problem of the weaknesses of Treasury and RBA forecasting is almost total reliance on outdated 'Keynesian' mental models. Our debt and deficit problems are well known. But the major cost overhang is another equally heavy drag on economic performance. The problem is that is far harder diagnose or to allow for within an old-fashioned 'Keynesian' mental model.
Again this was pointed out in mid 2013: 'RBA Chief Glenn Stevens seems, based on the evidence of his latest speech, is still in apparent denial. He rehearses the state of play in the world economy and in the outlook for various source of demand in Australia's economy. Prudent households are saving. Nervous firms are reducing investment and hiring plans - and he notes that political uncertainty is fuelling that particular bonfire. Global growth is still subdued, and China's growth may fall still further. This is an essentially Keynesian analysis.
'Not a word from Mr Stevens about Australia's double-digit cost disequilibrium. This is surely not because Stevens fails to recognise the problem, more likely because doing so would throw a spotlight on the major dilemma facing the Reserve. Cutting rates further will relieve cost pressures for some, but will do nothing to reduce, and may worsen, Australia's generally high cost structure relative to competitor nations'.
Now interest rates are expected to dip below 2%, and housing markets are roaring, most noticably in Sydney. RBA officials presumably own houses in Sydney, and in corporate life this might preclude them from making decisions that involve such a clear conflict of interest,
This point aside, a leading economist has apparently today asked (according to the front page of the fin): 'Is the RBA insane?' My answer is, 'no, unless clinging to an out-dated mental model is a sure sign of insanity, a point that Einstein might have made about current Australian econocrats'.
Every recession or depression in Australia's history has occurred in large part because the cost base is out of control. Those who do not learn the lessons of history are condemned to repeat the mistakes of the past. This effects us all comrades - it is just not good enough.
Tax reform - the impossible dream?
Date: Tuesday, March 31, 2015
Author: Henry Thornton
Every Australian government in Henry's adult life has dreamed of reforming the tax and welfare system. Now that we have budget deficits as far as the eye can see one might imagine the matter would be urgent. But Labor, who created most of the deficit problem, is still playing doggie in the manger. And there are no Magis bearing electoral gifts to this manger.
As Australians gradually realise that modern Labor stands for zero economic reform and fixing tax by attacking the superannuation balances of rich, even 'merely well-to-do', Australians, Labor will be as popular as a pork pie at a Bar Mitzvah. Certainly, that is Henry's dream, since economic and tax reform will be possible again.
The estimable Treasury 'Tax Discussion Paper', titled (I think) Re:Think, features facts like flies at a Bbq. Its prime value, perhaps, is to compare the facts about Australia's tax system with those of other countries. This storyline is as clear as the opening siren will be on Thursday night at the 'G', when Caaaarlton! plays Richmond in the opening real game of Aussie rules for season 2015. Agreed facts (P13) include the following, with Henry's comments in brackets:
* The world of globalisation creates the need to reform the Australian tax system to prevent people buying GST-free goods from overseas - think Amazon - and to prevent global companies from avoiding taxes here by fiendishly clever transfer pricing. (A braver Treasury would also have mentioned the effect of currency wars fostered by ludicrously easy monetary policies in most 'developed' nations which have distorted Australia's industrial structure and decimated its manufacturing industries in particular.)
* As the Intergenerational Report (IGR) shows, average Australians are likely to be older in 40 years, placing upward pressure on various forms of social welfare and downward pressure on earning capacity of the younger Australians expected to support old and feeble Australians. (But I took exception when Re:Think asserted (on P11) that the IGR 'shows that Australia can continue to build prosperity and improve growth in living standards over the next 40 years'. 'Shows' needs to be replaced in this assertion by 'assumes provided economic reform is embraced and current political gridlock is resolved, two unlikely hypotheses.)
* Australia's overall tax burden is relatively low compared to other developed countries. (Well done, elders past and present.)
* Australia relies heavily on income tax, particularly company income tax, compared to other developed countries as well as our Asian competitors. (I'd have added '/trading partners' here).
*Economic modelling suggests that the taxes with particularly costs to economic growth are company tax and stamp duty. (This is a tricky issue, guarenteed to lose readers.)
* Complexity and compliance costs have many drivers and are a growing problem in the tax system. (Amen to that. Henry's advice to a shadow Treasurer once included that he stand up on national television and tear pages out of the bloated and incomprehensible income tax act to illustrate his intentions in government. He ignored this advice and his team failed to be elected.)
* Australia's tax and transfer systems are highly progressive (meaning taking from the rich and 'merely well-to-do' and giving to the poor) 'which supports fairness'. Only the Scandinavian nations have more 'progressive' systems, (which is fine if one wishes to live in a thorough-going nanny state in which basket weaving and like pursuits are among the major industries - this assertion comes with an apology to Finland.)
* Tax 'settings' should give people incentive to save for the future, but full income tax on interest rates on bank deposits (for example) and many other ways to save are conflated with lesser tax on some capital gains and even less on superannuation, and none on the family home. (This is unfair, confusing and inefficient. With the high proportion of tax on incomes, this reduces incentives to save. This is totally inappropriate for a country requiring high investment if we are to match or even beat the growth rates of the past 40 years.)
I hope I have said enough to encourage readers to go to the Treasury website and download the full report. It is worthy of a good read, and will cure insommnia, but War and Peace it ain't.)
Reducing spending by government would be the single reform that would do most to reduce the current scary growth of deficits and therefore debt. While government debt as a ratio to GDP of 50 to 60 % would 'not be too bad compared to other developed nations', it would still be pretty bad. Suppose in 40 years, Australia had a debt ratio of 50 %. Suppose further that bond rates by then were a mere 6 %. That would imply 3 % of GDP would go to paying interest on the debt, making our ability to provide welfare, or encourage innovation or defending Australia far more difficult than it is now. Imagine a bond rate of 12 %, dear readers. We'd be firked. Other 'developed' nations would be more firked, in fact, no longer 'developed', but that would be cold comfort.
Hence Henry would like the government to focus on cutting spending. This is virtually impossible with the existing Senate, which is why an eventual double dissolution (dd) election is practically mandated by any government that has plans to reform Australia's governance. I offer a modest related suggestion below.
To continue the expression of Henry's views, the single reform that would most improve the efficiency and fairness of our tax system is to raise the GST to, say, 15 % and remove all exemptions. Please note that such a tax is 25 % in those pesky Scandinavian nations that come out as 'fairest' in Re:Think's overview of global tax and transfer systems.
Overconsumption is one of Australia's abiding economic vices and, if the increase in the GST were combined with real spending savings, abolition of nuisance (mainly State) taxes and charges and cuts to income tax, (especially to slash the top rate to 40 % and remove 'bracket creep), Australia would have a fair chance of becoming the economic powerhouse it could be. Labor, of course, and the fringe dwellers in the Senate, will not allow this reform, which is another argument for the dd.
Labor will however, be happy to 'soak the rich' and hit the 'merely well-to-do' by taxing 'large balances' in Superannuation funds. Except for senior pollies and public officials, whose pensions would presumably be inviolate while private pensions were slashed by taxing either super balances or withdrawals. Please note that attacking private superannuation attacks those who have contributed most to Australia's development during their careers. Such people have paid most in income tax during their careers (even Henry once paid 66 % in the dollar) and have otherwise planned a life that allowed them a decent income in their twilight years. Should 'soak the rich' become law, many elders will decide to soldier on to replace the money grab. This will reduce opportunities for young people to achieve promotions or, as increasingly the case already, even finding a job. But its main effect would be gross intertemporal unfairness.
At least Treasurer Joe Hockey has said any changes will be 'prospective'. And Tony Abbott was on the case against Labor's right-hand straight into the Superannuation accounts of rich and 'merely-well-to-do' Australians: 'It’s so typical of the Labor Party that they immediately want to see more tax, not less. As far as I am concerned, as far as this government is concerned, we want lower, simpler, fairer taxes.'
Who was the political leader who said: 'To be rich is glorious'?
Henry's modest suggestion was first articulated at one of those dinner parties enjoyed by the 'merely well-to-do'. Let's start a new political party, called the 'Don't Touch our Super Party'. DTOS with the right candidates would surely get sufficient votes to have a good chance of winning the balance of power in the Senate. At that point it would: (a) be able to prevent any government from raiding superannuation balances; and (b) support any government that offered real economic and tax reform.
Potential supporters or candidates may contact Henry here. Henry has no ambitition to be the Clive Palmer of DTOS, incidentally, as he has far too many useful other things to do, but would be happy to play some sort of facilitating role. Here is the key question. Is there is a potential leader - probably in her or his 40s - ready to stand up and seize the opportunity offered by Australia's current dire political gridlock?
The next day's (1/4) screaming headline from the Australian newspaper show just how hard it will be to roll back the tide of greedy cash grabs from people who manage to accumulate a decent nest egg. Or was this an April fool's Day joke?
'The unsubstantiated claims about the size of taxes foregone on super funds over $2m are a disgrace especially from Treasury.
'Also recall that State and Commonwealth public servants are entitled to indexed 2/3rds of their final salary. So Treasury Sec and others need a lump sum of $8m to get the equivalent pension a assuming an average of 6% - giving a pension of $480,000.
'For them to build up a fund this big under the existing rules seems unlikely even with the post 50 year olds being able tip in $35,000 pa. Hence pollies, upper end public servants and judges have implicit mega Super funds. I could go on.
'Henry's comments are among the few to caution that the issue is complex, reeks of unfounded envy, etc.
The point about the massive capital cost penalty Australian projects face is a massive growth inhibitor and also results in a lower supply of infrastructure. Eg half as many subs or hospitals, etc'.
This is a comment on Henry's recent contribution on tax reform and costs of production, linked here and here. The senior pollies and bureaucrats have to open the kimono on their immensely rich Superannuation schemes. This used be justified by low salaries, but this is no longer the case. So getting the world's best Superannuation plan now that salaries are large, if not totally obscene, while turning the heat on 'merely-well-to-do' people in the private sector, is unconscionable.
One hopes a crusading journo, or a fair one, will acknowledge the point (and the source) when he or she next writes about superannuation.
Sunday Sanity Break, 29 March 2015
Date: Sunday, March 29, 2015
Author: Henry Thornton
Congratulations Mike Baird and your NSW coalition government. You have ensured continued good government in Australia's biggest state and provided great support to the Federal leader and Prime minister, Tony Abbott. The National Parliament has risen for the pre-budget break, and one hopes that more thought will go into both the substance and especially the presentation of the budget. Clearly debt of 50 or 60 % of GDP is worse than many others but also totally unacceptable. Sadly, the rhetoric on debt and deficit is still inconsistent and unconvincing.
Late last week Henry interrogated the man who manages most of his Australian-based equity investments. Coming in to the meeting, Henry wanted a more defensive asset allocation, while Mrs T was all for remaining more or less fully invested. This view was shared by Henry's favourite equity manager (HFEM). 'The US economy seems likely to slow from here, while the Eurozone may be picking up. China is not going to fall into a hole, and the US Fed's rate hikes may not begin in 2015', argued HFEM. There was further analysis of global bond markets and the assertion that the global equity boom may go on for far longer than most investment managers believe.
Since HFEM had the Thornton funds largely out of resource equities and small cap rubbish, Henry was forced to concede he may be right. 'Take care, Favourite Equity Manager', advised Henry, 'I don't want to be eating catfood due to being over-invested in equities during the Great Crash of 20xx'.
We also discussed strategy for Henry's Family Superannuation fund. There is growing confidence among poor people that the government is likely to impose some sort of tax on rich people's superannuation. Savers like Henry and his family during their declining years will be helping to finance the lifestyle of non-savers and those who have used all their super is a splurge so as to be eligable for a pension. We fully agree with Joe Hockey that Australia must abolish the 'entitlement mindset' but such a big idea needs constant reiteration and innovative illustration. 'X % of Australians receive some sort of specific assistance from government' is a compelling fact, especially when it seems that 'x' is 80.
The frocks are gorgeous too, if you had not already guessed.
Today has been declared national watching the cricket day in the Thornton household, as the ANZAC nations slug it out for the title of World champion of (One day) cricket. This is a bit like Australia playing the USA for the World champion of basketball, or baseball. We know if the title rested on one game, Australia might just pull it off, and the doughty fighters from NZ could do so today.
We wish NZ every good wish short of winning. Best perhaps would be NZ batting first and making a very fine 350. Then Australia's leading batters get dismissed cheaply to set up a dour struggle by middle and late order Aussie batters. Amazingly, the tail wags and with one ball to go Australia needs 6 runs to win. The NZ captain declines to order a final ball rolled down the pitch and Mitch Starc, 94 not out, wins the game with a mighty 6, landing on the roof of the highest stand. 'In your dreams, Henry', says his greatest NZ sporting pal.
In futball, the Asian champions hold world champions Germany to a 2-all draw, after being in front for much of the game. Ange is a genius and we look forward to the next World cup of Futball. Dodgy Eurozone referees will do their best to lock us out of the finals, but Ange Postacoglu and his team will find a way.
Footy's drug's scandal comes to a head just before the start of the 2015 season. Did I read that 'Bomber' Thompson when at Essendon tried 5 times to have the supplements program cancelled. Yet he was fined $30,000. Scale it up to the people who failed to notice, or to follow Bomber's advice, and you have the appropriate financial penalty. Plus a season on the sidelines?
Image of the week
Courtesy Herald Sun
Growing business-science links
Date: Wednesday, March 25, 2015
Author: Tony Peacock
People think of Parliament House as a place of disagreement. But if you were at the annual Science meets Parliament dinner in the Great Hall this week, you could not have witnessed more agreement. President of the Business Council of Australia, Catherine Livingstone AO, Industry and Science Minister Ian Macfarlane and Leader of the Opposition, Bill Shorten all spoke on the imperative of bringing together science and business.
Ms. Livingstone themed her speech on the critical need to build up Australia’s “knowledge infrastructure”. Mr. Macfarlane was passionate that science lies at the heart of economic and industry policy to create the jobs of the future. Mr. Shorten spoke in terms of his vision for scientists being able to create and deliver even greater benefits to society.
The goals were the same from all three speakers – a more knowledge-based economy for Australia that can continue to compete and provide the jobs of the future. The way forward was even the subject of consensus. It now seems obvious that a stronger STEM base in education and a more strategic, more stable research environment is needed. Chief Scientist, Ian Chubb AC, has long laid the groundwork for the degree of agreement we are currently experiencing.
After the speeches a few scientists in the audience expressed a bit of frustration to me about the “when” and the “how”. They essentially ask “if there is so much agreement, why isn’t more happening?” Those comments echo questions about the Cooperative Research Centres Review – “when will it be finalized? Will the 18th funding round go ahead straight away? What about the manufacturing, northern Australia and resource CRC proposals that are still up in the air?
With my CRC hat on, it is easy to share those concerns and pine for some announcements. But, as a very stronger backer of a more strategic approach to science in the country, I temper those concerns with the need to give the new Commonwealth Science Council and the government time to get it right. Professor Chubb’s has released the draft priorities from the Commonwealth Science Council. Form follows function. We all want to know the “how” and the “when” on our individual programs but, quite properly, the government needs to settle on the “what” first. We really can’t expect the government to make any specific announcements until the science priorities are bedded down. In the case of the CRC Program and the R&D tax incentive, reviews are due imminently and these must be incorporated.
We know that there are fantastic proposals out there for new or continuing CRCs. No one wants to see them funded more than me, and I know how strongly industry is backing them. They tick all the boxes for what the Business Council, the Government and the Opposition all say should be the future direction. In other areas of the science portfolio there are similar issues. But in reality, we can’t have it both ways – we can’t plead for great strategy and stability in science funding but then expect the Government will announce our particular issues today. Let’s give the Minister and Commonwealth Science Council a bit of room to get the strategy right – it seems like there is widespread consensus.
The budget dilemma
Date: Tuesday, March 24, 2015
Author: Des Moore
It is unfortunate that Abbott has again been messing around with his budget presentation strategy. First he tried to secure savings through the passage of various expenditure cutting measures through the Senate in order to eliminate the deficit he inherited. Now, while not completely abandoning savings in the specified areas, he suddenly says that the forthcoming budget will be “dull” and a $50-60 billion debt in mid century would be a “pretty good” result. He also foreshadows a significant increase in spending on an area already overblown with government assistance viz child care. This is confusing his own backbenchers (who appear not to have been consulted or told) and many others.
What he should be doing is continuing the message in the IGR report, which has a graph showing that, if all Abbott’s proposed savings measures were passed, the deficit would disappear around 2019-20 but if the previous policies adopted by Labor were continued, the deficit would continue increasing to reach 12 % of GDP by 2054-55. Abbott has in fact tried unsuccessfully to obtain a reply from Shorten in the House by asking what he (Shorten) would do about the deficit (and even left wing ABC interviewer Jon Faine got the same treatment). It would do no harm if this graph was advertised in various ways.
Abbott should also be adopting similar tactics with some of the Senate cross-benchers who are shown to have no logical basis for opposing at least some of the measures that will get the budget back into balance. An advertisement showing the explanations of some of these Senators might also help: it couldn’t make matters worse than they are now.
The overall strategy should be that the forthcoming budget is being forced on the government by members of Parliament who cannot explain what they would do to reduce the deficit. Given the left wing bias in the media, much of which is using Abbott’s sometimes off-beat statements to attack him and the Coalition, some more coherent response is needed.
Abbott has certainly deserved criticism for some of his remarks but the left media reaction is over the top. The existing situation puts Abbott in the position where he needs to be rather more aggressive in responding to the ABC and the Fairfax press. If a more aggressive approach is not adopted, there is a risk that polls will reverse their recent improvement and another spill or a challenge will emerge.
Read on here, (page down to Malcolm Fraser), and note the similarity of Abbott's budget dilemma and that of other governments in the past 40 years.
Saturday Sanity Break, 21 March 2015
Date: Saturday, March 21, 2015
Author: Henry Thornton
Farewell, Malcolm Fraser. Mr Fraser was the conservative leader to restore sanity to national affairs after the chaos and dysfunction of the Whitlam years. He was a humanitarian man who opened Australia's doors to our former allies in Vietnam, fought apartheid in South Africa and did his best to help Australia's indigenous peoples. In his later life his opinions moved to the left, but whilst in office he was a true conservative and initiated little that was new. His major mistake, it seems to me was failure to float the dollar and deregulate finance as advocated by the Campbell committee.
My tentative explanation, stimulated by remembrance of the floating of the Australian dollar, is as follows. 'Why might [John Stone] oppose, or give the appearance of opposing, such a major reform, supported by almost all respectable economists at the time? He should surely have realised that opposition would at best delay the decision and at worst, as knowledge of his opposition leaked out, might cause international investors to doubt Australia’s commitment to sensible economic policies. So why did the secretary of Treasury not cut his losses and support the float in December 1983? This is another of the mysteries facing any Agatha Christie of economic policy reform.
'Such opposition in December 1983 might (I speculate) have been a response of an institution overly conditioned to oppose the government of the day. Treasury was used to fighting economic nonsense, witness the Khemlani affair during the Whitlam government. Treasury then rightly objected to the policy agenda being hijacked by enthusiastic and incompetent amateurs. And assuming Treasury was the reforming institution Mr Stone says it was, how do we explain the Fraser years, which are famous for their lack of economic reform? Perhaps by the time a competent Labor government arrived Treasury’s senior men were unused to proposing specific reforms, or even locked into opposition to reform proposals suggested by the government or its Prime Minister'.
I added by way of a footnote: 'After writing this paragraph I came across David Kemp, ‘Advisors and Decisions 1976’, The Australian Journal of Public Administration, vol. 66, no. 1, pp 13-22. Dr Kemp says "At the core of the [Fraser] government there was an epic battle between the Prime Minister and the government’s senior advisors in the Treasury, The Department of Foreign Affairs, and the Department of the Prime Minister and Cabinet". And later, in discussing economic policy and the devaluation of 1976, Kemp says: "This refusal [to draft a statement on the economy] was essentially a strike that threatened to remove the government’s capacity to defend its position".
'It is also interesting to learn from Dr Kemp that in mid-October 1976, Friederick Hayek visited the Prime Minister and "opened the conversation with the suggestion that the exchange rate should be allowed to float".’
Mr Abbott's government may also eventually be seen as that of a true conservative. In the face of Senate opposition to most if not all of its more radical attempts attempt to fix the budget deficit, the current tactic seems to be backflips with a changing message. The most welcome backflip is the Minister for Education's double backflip with pike concerning the threat to the Senate to junk 1700 research jobs if the Higher Ed deregulation is not passed. The most serious change of communication is the switch in rhetoric about the budget. Initially there was a 'budget emergency' and the promise of a modestly tough budget. Now when a number of vital fixes have been knocked back, the next budget is going to be 'dull' and presumably relatively comfy, even though the intervening Intergenerational Report threatens eventual economic fire and brimstone. Gor blimey, comrades, Henry is totally confused and will blame no-one if she or he shares this state of mind.
The political discourse this week has included speculation that the Abbott government may bring on a 'double dissolution' of parliament. This was a view first voiced by Mrs Thornton last weekend, and I must check the phone calls next time the bill arrives.
'There is a link of sorts between what has happening so far under Abbott and what happened under the government of Malcolm Fraser.
'The latter’s death has naturally led to a wide range of commentaries. Greg Sheridan’s article (linked here) probably provides the best overall assessment as well as identifying exaggerated claims on foreign and immigration policies made by Fraser'.
India smashed Bangladesh to progress to the semi-finals.
Australia won well against Pakistan after one of the most engaging battles between bat and ball ever seen in a world cup. Pakistan won the toss and batted, reaching a modest 213 runs. Mitchell Starc apparently sledged bowler Wahab Riaz, who seemingly could not hit the ball, not good enough even to get an edge, creating deep frustration for the Australian bowler. Riaz scored 16 shaky runs, and when Australia batted was looking for revenge.
Finch failed again, Warner made a brisk 24 and new number 3, Steve Smith settled in to rescue the innings. When , Cap'n Clarke went for 8, out came Shane Watson. Two games ago dropped and we were all told it was the end of his one day career. Mysteriously restored, as number 6, for the game against Scotland to make a brisk 67 and apparently this saved his bacon.
Wahab Riaz came on to bowl determined, it seemed, to kill 'Watto'. (As a press report said, aiming every ball at Watto's throat.) Watto ducked, weaved took his eye off the ball and then was almost caught on the boundary trying to fight back. Riaz was running through to poke fun at our man, and then resorting to blowing kisses and other undoubtedly nasty suggestions.
Watto took everything that was tossed at him and when Riaz was taken off, exhausted, after six of the best overs ever seen, Watto began to really go for it. With Smith, his replacement at number 3, and then his mate Glenn Maxwell, Watto went on to hit the winning run, a 4, to end 64 not out.
I have three gripes. Apparently both Riaz and Watson have been charged with some sort of misbehaviour. From what I saw, Watson was clearly the victim, and remained calm throughout. How could this be? Riaz was practically out-of-control.
In addition, it seemed to me that there were far more than the allowable 2 bouncers per over hurled at Watson during that 6 over barrage. Was this the umpire's revenge for being bounced by Lillee or Thompson, or some other Aussie fast bowler, 30 years ago? One is tempted to ask.
Third, why was Watson dealt with so shabbily by the Australian selectors? Perhaps being given the ultimate psychological shake-up, but in Henry's view that was totally unwarranted given Watto's record as an Australian all rounder.
The other quarter-final sees New Zealand apparently smashing the West Indies.
Caaaarlton! jumped out of the box to smash Collingwood in the first quarter of their NAB Cup workout. Then Collingwood fought back only to fail by 7 points to catch the Blues. A clever Collingwood supporter - yes, Henry knows two such - suggested the following scenario: 'Mick Malthouse told Caaaarlton! to really stick it to Collingwood in the first quarter, while Nathan Buckley told his players to take it easy so they could practice coming from behind to win'. Barely possible, dear readers, but surely such complicated games could not be played, or even imagined, by leading footy coaches? Sort of like using live bait in training greyhounds.
Henry's right hand is slowly recovering from a carpel tunnel operation, and Henry has been told not to use his mouse with the usual ('excessive' says my surgeon) frequency. That is hindering supply of blogs, but we hope normal transmission will be possible within another week or so.
Image of the week
Courtesy The Oz
Sunday Sanity Break, 15 March 2015
Date: Sunday, March 15, 2015
Author: Henry Thornton
Australia has a small economy struggling to support modern hi-tech jobs. It's hard to believe, but the Abbott government is trying to blackmail the Senate to support its higher ed reform by threatening to cancel the jobs of many researchers. If this madness is not quickly ended many fine young scientists will be on the dole, stacking shelves at supermarkets or applying for jobs overseas. This will in effect sabotage what should be a unified and consistent attempt to create a smart nation with clever businesses.
This is yet another ham-fisted attempt to reform economic policy that appears poorly thought out and with no attempt to carry the public with it. Henry had great hopes for this government, but it seems as if the coalition is mimicking Labor's arrogance and incompetence. Perhaps these characteristics are transmitted in the overheated air of parliament.
Certainty to the unbiased observer the House of Reps often seems like an asylum whose inmates have taken control.
It seems possible that some boffins in Brisbane have discovered that the amaloid plaques that a believed to cause Alzheimer's disease can be eliminated in mice by some sort of ultrasound. If this turns out to be a reliable way to roll back the symptoms of this dread disease the benefits for elderly Australians, not to mention elderly people everywhere, will be so great that decades of spending on medical research will be justified.
Please do not play chicken with Australia's future Mr Abbott.
Global monetary policy
The mighty US economy is creating many new jobs while many other nations a wallowing in serious, long-lived recession.
With more reliable evidence that the American economy is recovering, the US Fed has changed its language about the state of the US economy, sending waves of fear through financial markets. [Ed: later news saw US, and then global, markets, advance further. Funny things, markets.] America has already ended 'Quantitative easing', and the logical next step is to begin raising interest rates. This is happening at a time when most other developed nations are still practicing 'QE' with no plans to raise interest rates from current near zero rates.
One result is a rising US dollar and the emergence of 'currency wars'. Even Australia's RBA has decided it needs to create new record lows for interest rates, even though its governor Glenn Stevens must know that the only way the Australian economy will receive a lasting boost will be if the government embarks on real, substantial reforms.
Attempting to blackmail Senators by threatening to end the jobs of thousands of top high class scientists is just nuts.
Maybe the next discovery will be that those amaloid plaques are caused by shouting abuse in a badly ventilated House of Reps, or watching on the daily TV news.
Australia's cricket team beat Scotland and the rain to finish second in Group A of the World Cup. Captain clarke opened and, wait for it, 'Watto' returned to number three. Both did well, but Michael Starc was the star with a truly great bowling performance.
It seems that Australia will play Pakistan in the quarter final rather than South Efrica as would have been the case if rain had beaten Australia in Hobart. India, New Zealand and South Efrica await if we overcome the Pakis. The minnows of world cricket, Afghanistan, Ireland, Zimbabwe and those gritty Scots were the heroes, fighting hard against the superstars. Funny game cricket.
ASADA's decision about the future of 34 Essendon and former Essendon players will be known by 31 March. Then the footy can get off to a real start, with Richmond vrs Caaaarlton! at the 'G' on April 2. If Essendon gets off with a light smack on the wrist, Carlton's massive penalty for rorting the salary cap will be seen as the totally unfair travesty that it was.
The latest sports atrocity is the poisoning of a leading dog at the major pommie Dog Show. Shades of Phar Lap's mysterious death in America. Both atrocities would provide great challenges for Sherlock; would make for great episodes.
Plenty of 'stuff' this week, including bankruptcy of two male basketball teams, and the possibility of no national competition next year. The relative success of the women's league is a wonder to behold.
As we watched the 'Offsiders' today, Mrs T was moved to comment on the rise of women sports commentators. Henry noted the relative IQ levels shown by female commentators and suggested it is like the rise of female pollies. 'Soon the Neanderthal grunts of the males will be replaced in both sport and politics' Henry opined.
Image of the week
The Raff Report – March 2015.
Date: Wednesday, March 11, 2015
Author: Nick Raffan
Clip clop, clip clop, clip clop: it must be the King approaching in all his finery. The crowds are cheering as he passes by. But he is absolutely starkers. This fable reminds the Raff of the current status of financial markets. Last night some of the crowd saw the King as he really is and the Dow fell around 333 points, a fall of 1.85%. European stock markets also took a battering. The price of gold fell to a 3-month low of US$1,155.60/oz and silver tumbled to US$15.67. The Aussie dollar fell a cent against the USD to 0.7634. Why was this so?
it seems, all of sudden the punters perceived that the US Federal Reserve was set to hike interest rates soon. Readers might recall that when interest rates rise, the discount rate used for future cash flows rises, and the discounted value of future cash flow falls. This results in contraction of price earnings multiples and share price falls. Of course, it won’t only be the price of equities that will be affected, so too will be bonds. At its most simplistic, when interest rates back-up, the price of bonds fall and vice versa. For many years now the bond markets have been a one-way bet. When US interest rates start to rise it’s all over red rover for bonds.
What has been the real deal about equities in the US? What the Raff is about to say is not new but needs repeating because of its importance. Many US public companies have been borrowing at near zero interest rates to buy back their own shares. So what does this do? Let’s suppose that a company’s profits are the same every year. By buying back shares, each year the number of shares on issue fall and the earnings per share rises. At a constant price earnings multiple, the company’s share price increases every year. This steady rise in the share prices of companies with a strong influence on the leading US Equity Indexes ensures the good times keep rolling. Many share price performances have absolutely nothing to do with management running a business better or growing the business or doing anything else that might generate real value for shareholders. It is dear readers smoke and mirrors.
The prospect of a near term hike in US interest rates deserves pondering. Readers might recall that the spike in US orders a few months ago was because of an abnormal increase in new orders for aircraft which distorts the 12-month moving average, as shown in the following chart. By the Raff’s reckoning the previous business cycle started in December 2002 and ended in April 2008 for total 7 years and 4 months. This current cycle started in February 2009 and thus has gone on for 6 years and 2 months.
Orders seem to have peaked and without the unusual spike in aircraft orders the 12 month moving average would show rolling over heralding the plateau of this business cycle.
It seems odd that the Federal Reserve would increase interest rates at the top of the business cycle but nothing surprises the Raff any more. Maybe the powers that be want to teach financial markets a lesson and will try to regain control once more to dominate us all.
At the time of writing ASX Materials Index is down 3.1%. BHP is down 5.5% versus RIO only down 1.4%. BHP has been creamed because of its exposure to oil where the price is hammered by a global glut and strong USD. The battle between USD and precious metal continues with the former still winning. If anyone thinks that low commodity prices are a sign of a healthy global economy then they must be in the crowd cheering on the King as he passes by in all his finery.
From where the Raff sits the world is in deep trouble. The Raff is pondering when will come calls for tariff protection. There is no such thing as a flat playing field. The free trade agreements are one-sided. Manufacturing is near to dead as a Dodo in this country. Opportunities for the young are like hen’s teeth. Boy have we stuffed it. The Raff does not see any political party with a plan to remedy the situation. Throwing money at the problem will not help; just ask the Japanese.
Dan Greenhaus comments
Yesterday's release of the durable goods report for February missed expectations. The report joins a long list of recent economic data points that have fallen short of expectations. February existing home sales and industrial production and March Empire Manufacturing index and consumer sentiment readings are but a few of the recent reports meeting this description. While the Bloomberg consensus still looks for Q1 GDP to come in around 2.2%, we think GDP is tracking closer to 1.0% than 2.0% and expect the consensus to play catch-up in the next few weeks.
This communication does not provide complete information regarding its subject matter, and no investor should take any investment action based on the information contained herein. For additional and more complete information, including Important Disclosures and Analyst's Certification and the full post, please click here.
Click Here for the Full Blog Post: 'First Quarter GDP Tracking Close to 1.0%, May End Up Even Less'.
Stumbling reluctantly to the truth
Date: Tuesday, March 10, 2015
Author: Henry Thornton
'China dependency to hit Australia hard' says Crispin Odey, a wealthy hedge fund guy whose fund is no doubt set for the coming recession. Other similar hedge fund men are also mentioned as agreeing in the article that starts on the front page of the AFR.
Leafing thru this august news source, one is not surprised to read 'China slashes our imports'. The featured article on the same page says 'US jobs surge points to Fed rate hike'. US 'Quantitative easing', along with near zero cash rates, plus America's strong resilience, has stimulated America's recovery. Like destroying the villages to free the inhabitants, this has created the competitive currency devaluations that are giving our RBA (and all Australians) such a hard time. The same article reports 295,000 new jobs in the USA which, coming on top of several months of strong jobs growth, has reduced the rate of unemployment to a 'mere' 5.5%. Just as our unemployment is 6.4 % (or more) and 20 % for young people.
In Australia, jobs growth, and jobs ads, remain depressed and the issue is whether further rate cuts can have any effect, apart of course from fanning the fires of asset inflation. Some economists have suggested that rate cuts will further fire the housing boom and therefore stimulate the slow growth of our former 'miracle economy'. The sane members of the tribus economicus point out that it is lack of supply that is the main reason for the housing boom, not lack of demand. Why is supply constrained? Ask you local council, dear reader, regulation piled on regulation.
This is a paradigm of reasons for our overall sluggishness. Another AFR article asserts the tax reform is the priority, which gets one (feeble) cheer from Henry. Tax reform is strongly needed to pay for the many programs that we cannot afford now that the mining boom has ebbed. Of course it would be good if the loonies in the Senate would come to their senses and find ways to cut spending. With China struggling, global demand is not going to actually encourage aggregate supply in Australia. Strong overall supply, especially strong exports and strong domestic sourcing of product, replacing imports, is what is needed.
The Oz asserts today that 'we can ride out recession'. Since the RBA is not expecting recession, this is no great comfort. But the mere existence of the relevant research report suggests someone in authority is beginning to fear 'recession' is likely, or at least possible. It is slightly more than 18 month since Henry said: 'Put crudely, Australia has pissed the proceeds of the mining boom up against a wall of gullible voter expectation. In the process, mining companies allowed their cost bases to expand to unsustainable levels. Cost bases expanded in sympathy in the non-mining parts of the economy in a climate of easier than desirable monetary policy and encouraged by those vainglorious spending programs of the Rudd and Gillard Governments.
'Restoring Australia's economy to robust health will require massive effort by all Australians. The budget must be restored to a point where it has a sustainable balance, that is a balance over the course of the conceivable ups and downs of the global and local economies. Ideally there will also be a return to sustainable budget surpluses, but that is for a future government to consider when the basic repair work has been undertaken. Tax reform is needed to improve incentives and enable elimination of the many nuisance taxes that cost so much to administer. Regulations generally must be slashed, and labour market regulations revamped, to give owners of small business encouragement to create sustainable jobs'. Full article here.
RBA legend, Austin 'Aussie' Holmes used point out that someone was 'stumbling reluctantly to the truth' when he had come very late to one of his (Austin's) radical prophecies or proposals. Henry is delighted to bestow the inaugural Aussie Holmes award to the editors and staff of the AFR and the Oz.