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Henry Thornton - Contributors: A discussion of economic, social and political issues Blogs
Whither Australia?
Date: Monday, November 28, 2011
Author: Henry Thornton

Australia is experiencing a 'once-in-a lifetime' boom in the terms of trade.  We are indebted to Treasury's Dr David Gruen for some highly relevant analysis, presented last week and linked here.


However, there is one important issue left unanalysed by Dr Gruen. This blog draws attention to the issue, which concerns growth of non-farm GDP, which was faster in the 1970s than in the latest decade.  I offer two possible hypotheses to explain this apparent anamoly - Australia has caught the so-called 'Dutch disease or else in the 1970s there was a Schumpertarian response to wild economic policy.


I suggest that if we do not understand this issue it is very hard confidently to prescribe macroeconomic policy.


This boom is expected to last for years, even decades, whereas previous large spikes in the terms of trade in the late 1920s and early 1950s were very short-lived.


Australia's terms of trade rose at about the same pace in the four years from early 1970 as in the corresponding period from mid 2002, but thereafter fell away while in the current decade the terms of trade have continued to rise, although with a setback in the crisis of 2007-08.


Chart 1 Terms of Trade



Note: The 2011-12 Budget forecasts are used for the assumed future evolution of the terms of trade.
Source: ABS Cat. No. 5206.0 and Treasury.


As the graph shows, Treasury predicts only a gradual reduction from current record levels.  Although the rapid growth of China, India, Indonesia and other developing nations is expected to support this assumption, current events in the Eurozone are capable of inflicting a set-back at least as serious as that in 2007-08.


(The Economist this week asks of the Eurozone 'Is this really the end?' The answer is 'Yes, Unless Germany and the ECB move quickly, the single currency’s collapse is looming'. The breakup of the Eurozone would be very messy and involve sovereign, corporate and bank failures that would make the credit cruch following the failure of Lehman Brothers look like a bankers picnic.)


David Gruen's analysis is based on a careful comparison of the implied effects of the terms of trade increase in the 1970s with the current rise, which has already lasted more than twice as long and reached levels above the spikes in the late twenties and early fifties of the twentieth century.


There are major differences between the two periods in both the policy framework and the economic response.


In particular:


* Now there is a floating exchange rate, wheras in the 1970s the currency was 'fixed' except when it lurched up (to US$1.49 if memory serves) and then was levered down, in both cases by amounts decided by Cabinet with Treasury advice. (And it should not be forgotten that Treasury opposed the floating of the Australian dollar in 1983).


* Now inflation has been low and stable, although early in 2008 there was a massive consumption boom (growth of 9 % in 2008) that nearly created a serious inflationary outbreak despite the 'independent' RBA having an explicit mandate to contain goods and services inflation.


* Government spending as a ratio to GDP fell during this boom (except for what Dr Gruen calls a 'well timed' increase during the global crisis, whereas it rose sharply in the 1970s.


* The rate of unemployment has been falling for most of the current commodity boom, with some modest reversal during the global crisis and perhaps again from now, likely to be especially marked if the Eurozone indeed implodes.


Chart 4 Growth in non-farm GDP



Source: ABS Cat. No. 5206.0 and Treasury.


The really interesting graph shows growth of non-farm GDP.  Dr Gruen notes that 'Non-farm GDP grew by an astonishing 8.8 per cent over the year to the March quarter 1973, at a time when the economy was already operating at close to full capacity. Non-farm GDP growth then turned briefly negative on two occasions following the 1970s terms of trade peak – in 1975 and again in 1977.


'As Chart 4 shows, economic growth has been much less volatile this time around, with a standard deviation of non-farm GDP growth in the current episode only a little more than half that during the 1970s one.


'The lower volatility of economic growth this time around is all the more impressive given the much bigger, and more sustained, current terms of trade shock, as well as the unwelcome arrival of the global financial crisis in the middle of it'.


However, my reading of the graph suggests that average growth has also been lower this time round.  Less volatility certainly, but a steady decline in growth except when the boom almost got out of hand in 2006, with subsequent experience including two years of near zero growth including the current year's likely outcome.


This point is not made by Dr Gruen, but it is just possible that lower average growth, despite far stronger terms of trade, is a symptom of an Australian version of the 'Dutch disease'.  This is a highly controversial statement, but one that cannot be ducked.  There is an extensive literature on this matter, sometimes presented as 'the resource curse'. Henry would welcome comment from anyone who has studied this question closely, or understands the point I am trying to make and has an opinion on the matter. Contact Henry here. 


In terms of stability of outcome, there can be no quarrel with Dr Gruen's main conclusions: 'The current macroeconomic framework represents a crucial improvement on that in place in the 1970s. It has helped mute the business cycle. It cannot, however, deliver us a bullet-proof economy. Sufficiently large shocks, or macroeconomic policy mistakes, can still occur and can still generate severe macroeconomic difficulties – as the experience of the major advanced economies over the past several years amply demonstrates.


'Two decades of good macroeconomic outcomes without a recession is an impressive achievement. But it should not tempt us to embrace the dubious notion that the business cycle has been consigned to the dustbin of history'.


Let me ask my question as simply as possible. Suppose all our improved economic management has simply smoothed the business cycle, at the cost of lower overall growth?


Suppose the tariff cuts of the Whitlam era, the lurching currency, the damaging real wage hikes, rapid growth of government spending and other impediments to smooth and predictable growth somehow stimulated average growth?  Or perhaps the many inefficiencies in the previously protected Australian economy were blown away by the mad policies of the Whitlam era, a Schumpetarian response?  Either way, Dr Gruen's analysis raises at least one question that it fails to answer.


I  suggest that if we do not have an answer to this question it is very hard confidently to prescribe macroeconomic policy.


But, in any case, if the Eurozone implodes, all bets will be off.  China, India and Indonesia surely cannot keep growing at recent rates in the face of renewed developed nation recession.  And if growth in these nations is slower, Australia will not be immune.  The flexible exchange rate will provide some shock absorbing protection, and (if achieved) continued sensible wage outcomes might also help.  But the Treasurer's determination to return the Federal budget to surplus (presumably as advised by Treasury) will in all probability be a drag on economic activity. Quite possibly the currently predicted recovery will be postponed, perhaps for some time.


The greater question of whether the resource boom is a blessing or a curse remains to be answered. Watch this space.


A closely related article is linked here. 




Tough budget on the way, Caaaarlton! finally wins a game
Date: Monday, April 21, 2014
Author: Henry Thornton

The budget leaks and imspired guesses continue. It will be tough, pension age increased to, say, 70 years, but not until 2030, no means test for pensioners, cutting and scraping at Commonwealth public service, and so on and so forth.  But no broader GST, or broader and with a higher rate GST, the one reform virtually all econmomists see as the least bad way to balance the books with least damage, indeed some benefit for, incentives to work, to take risks and to save.


Henry suggests a Commonwealth version of Queensland's slick ads would be worth showing on prime time telly. 'Do you prefer spending cuts, tax increases or sale of assets?'. One gathers that neither 'None of the above' nor 'All of the above' are on the list, but at least this set of options is a nice way to tell people there is no such thing as a free lunch, a fact that oppositions keep suggesting is possible.  Click here to vote at the  'Advice to the Queensland premier' website and it seems you can vote multiple times, even if you live in Victoria, Burma or even Sweden.


When perfected, with a logically complete set of options, this approach may revolutionise politics, back to the old Athenian town meetings, conducted electronically.


Des Moore's view


Speculation continues on the federal budget without substantive economic analysis to support the large spending reductions needed to prevent, as Shanahan suggests below, a damp squib.


Let me be clear here: while there is no doubt that Labor left irresponsibly large spending commitments stretching into the future, commitments for next year (2014-15) are “only” 2 percentage points of GDP above what they were in the final year of the Howard government in 2007-08. It should be politically practicable – and not damaging to the economy unless Keynesianism is allowed  – to return to 2007-08 GDP rates or close to them in 2014-15. Such action would also come close to eliminating the deficit.


But Shanahan has felt it necessary, so close to the budget date, to raise the possibility of a damp squib and to leave the impression that the Coalition has not settled on the main aggregate outcomes. Given the lengthy period since it assumed office, that is a disheartening perspective.


Footy


At least Caaarlton! has won a game.  And it was without Judd, two-and-a-half men down in the last part of the game and using Brett Rattan's hard tackling, helter skelter, straight up the guts style ditched by Supercoach Mick Malthouse. One hopes this was the result of the players telling Mick thhat they preferred their old style and were thus empowered for the first time since Mick came along to destroy Caaartlon!'s free flowing, attacking style.  Could this be a collingwood plot? Stranger things have happened in the James Bond movies, and we all think truth can be stranger than fiction.


More here.


Easter meditation
Date: Friday, April 18, 2014
Author: Henry Thornton


16" x 36"
Oil on old kitchen cupboard door
Signed bottom left Jonson 68


Painted on an old kitchen cupboard during a time of adolescent religious fervour, the piece was rejected by the organisers of the local Church Art Show.  ("Far too modernist" might have been the comment but apparently the committee objected to the nail holes. "You have problems with the nail holes" was my response, but the stout Presbyterians failed to see my point.)  With Crowdy Bay, still my favourite painting.


Sunday Sanity Break, 13 April 2014, updated 16 April
Date: Wednesday, April 16, 2014
Author: Henry Thornton

Greetings from Wuhan, a small, well, smallish, town of 20 million souls, situated on the Yangtze River, two hours flight from Hong Kong. We are here to meet some brilliant scientists, and even more brilliant PHD students, all dedicated to remediating the environment. As we are reading Stephen Baxter's Transcendence, whose subplot is the final destruction of the Earth's environment, the subject assumes additional drama.


Henry has been struggling with the Chinese censor and the (alleged) shortcomings of his steam-powered notebook. He has three ways to communicate with home, with Mrs Thornton presiding - Skype, gmail and bigpond.com. Skype was not available in Hong Kong, and is also not available in Wuhan. Google was not available in Hong Kong, and so far at least is not available in Wuhan - 'It is intermittantly available', as one native said. Bigpond.com is available, and informed Henry of the disgraceful Caaarlton! loss to Melbourne - what were they smoking Mick? Whose tenure, and/or that of others, must now be under scrutiny.


Bigpond.com is available, as I said, but when I tried to open Webmail I got the same messages given by Skype and Google - 'No security certificate available' - which is not what one gets in Melbourne, London, Tokyo or New York, or for all I know Burma.  What is the reason for blocking these sites, if that is what is going on? Facts plus factoids (Google); communication with the outside world (Skype) or bigpond webmail (ditto).


I must confess that the hotel staff in Wuhan have attended in large groups and are implying it is Henry's steam driven notebook that is the problem.  More tomorrow, provided Henry's site is allowed to continue broadcasting.  It was unavailable in Hong Kong, and suddenly was available in Wuhan. Who knows what will happen in  Shaoguan?


So far we have travelled by aeroplane - 14 hours to Hong Kong, on CX 104, then after a brief sleep in the Regal Airport Hotel, within walking distrance of the airport, 2 hours by Dragonair to Wuhan. Tomorrow it is the bullet train to Shaoguan, another meeting and dinner, another sleep followed by the bullet train to Hong Kong.


Monday


Attended a great conference today mainly very bright young Chinese students reporting on their research. Then headed for the bullet train for Shaoguan a city about halfway between Wuhan and Hong Kong. The line goes on to within 45 minutes by road to Hong Kong. 'China would complete the link to Hong Kong in a year or so, but Hong Kong has a democratic government that is weak', explained our Chinese travelling companion.


Security was less than at an airport, but all luggage was scanned and bodies were frisked electronically.  Our tickets took us to the rear carriage where first class seats had been booked. The carriage was marked First/business, and we were in a small compartment with five seats almost as luxurious as those in a Gold Class cinema. Our fare was 600 RMB, and when two of us sat in the two larger 'first class' front facing seats we were told firmly that they were double the price of the mere 'normal' first class seats.  So in this socialist paradise, there are four classes of bullet train seats - Economy, Business, First and Superfirst.


The train rode near-silently on its cushion of air and quickly and effortlessly glided to its travel speed of 300 kph.  (It was 350 kpm until a vast crash at this speed had killed many passengers.)  We chatted as the green and hilly countryside glided past - neat fields and two story houses and in the hillier parts forests. Sadly saw no pandas chewing leaves. Our travelling companions told me the general Chinese view of what had happened to Malayian Flight 780. The captain, a known friend of Mr Anwar, so the story goes, had hijacked the plane to barter the life of his passsengers for Mr Anwar's freedom.  If the trade was not agreed, the captain said he would fly the plane into a prominant city building. The government said 'no way Jose' and asked the USA to shoot down the plane, which it promptly did.


Other stories abound, all with the theme that the USA, China and Japan knew at all times exactly where the plane was located.  One varient had lithium batteries in the hold, one or more of which caught fire and created a small breach in the hull.  Gradual aphixiation overcome the crew and passengers and the plane flew on until it ran out of fuel. Mr Abbott's recent very confident assertion that the black box recorder would soon be found played into the conspiracy theories. 'On the facts we know, he should not be so confident', said one of Henry's companions.


Soon the train will rocket into Hunan, birthplace of 'Uncle Mao' as one wag described his statue as we were driven to the train station in Wuhan. Like most other things in China, the railway is built on a vast scale, with wide platforms and many sets of rails.  There was notable signs of forward thinking, or poor planning, in vast apparently completed but unused freeways.


We arrived safely at the end of the rail to be picked up and driven to Hong Kong where business will dominate proceedings. We have been warned that exiting 'China' and entering 'Hong Kong' may be a bit tiresome. But then we shall be in the city that has been described as China's main exemplar of a free society, showing the path ot a more dynamic economy and a freer society. Will Henry be able to access his favourite web sites?  That will be a (minor) sign of progress, or its lack.


Return home.


Henry arrived home at about 8 AM today (16 April) after the three-movie flight from Hong Kong. All was well, except for the massive build up of unanswered emails due to lack of internet connectivity in China/Hong Kong.  One was able to read the Oz and the Fin in the airport lounge, which suddenly reminds one of the almost total lack of English newsprint or TV coverage in Wuhan and Shaoguan. In Hong Kong there is The South China Post and other options, including on TV.


The great dragon is roaring, gentle readers, but growth seems to be slowing and there are continuing concerns about property markets, the so-called 'shadow' banking system and the need for State Owned Enterprises to focus on making money instead of creating jobs.


Tony Abbot's visit and Australia's work in coordinating the search for the lost plane seems to have reinforced our status as a friend of China, also helped more indirectly by the freer trade agreements with South Korea and Japan announced on the same trip. Some of the business propositions we were presented with, involving remediation of a number of specific environmental problems in what is a seriously polluted environment, would reinforce that positioning.


Freer trade makes us stronger
Date: Thursday, April 10, 2014
Author: Henry Thornton

Another day, another country, and another free, correction, freer, trade agreement.  What fun the PM and his band of 600 sherpas must be happening, except of course when the big Australian Airforce plane cannot take off.  Still, this is about this government's best week, and it has produced substantitive results. Despite caveats - bad luck rice farmers - freer trade makes us stronger and builds links that go way beyond the fun of international conferences and windy communiques.


The PM has arrived in China to be greeted without a frown from his hosts (important that), allowed to review the troops (one assumes a sobering moment) and to begin talks that we hope eventually produces a freer trade agreement with China that includes the rice farmers.


Henry's review of Ian Morris' splendid Why the West Rules - For Now introduces a book that should be required reading for anyone in the China deal-making or even just the Chinese commentary business.


Meanwhile, back home, or where-ever Joe Hockey calls home these days, the battle for the budget goes on.  Today's assistance comes from the International Monetary Fund, who earlier this week was helping us get our monetary policy right. 'She'll be right as it is, comrades, said the current leaders of the financial services business in Australia.  Let's hope so, or there will be some hangings followed by a bonfire of the vanities.


The IMF points out that, while Australia still has one of the lowect ratios of government debt to GDP, that debt is rising faster than that in almost any other 'developed' nation, and it will require a hurculean job to rein in spending, raise taxes and produce a surplus.  The hurculean effort will somply stop the rot.  Repeating the effort of Howard and Costello so that the debt is wiped out and the Future Fund can start growing via new injections is just about unthinkable. 


A snippet of news today says that business insolvencies are starting to mount.  This reminds Henry of the situation in 1990, reported here to an unresponsive Treasury and RBA. Nothing like it was in 1990/91, with cash interest rates at record levels, a deteriorating budget and Australia's costs well above those of competitor nations.  Come to think about it, it is only the RBA that is (so far) acting different.


The lead up to the experience known as the 'GFC' has been called in Australia 'The Great Complacency'. Thanks to the China boom, we sailed through the GFC virtually unscathed, a 'miracle economy'. But the signs were all there - low productivity growth, costs rising faster than in competitor nations and still complacent econocrats. Having enjoyed the dance, now the piper must be paid, and we shall all share in the payments.


Luckily, the freer trade deals will make us better able to pay the piper.


Monetary policy - `the narrative` matters
Date: Tuesday, April 08, 2014
Author: Henry Thornton

Bugger me dead, as Henry's old footy coach used say.  The International Monetary Fund (IMF) is chanelling Henry, via David Uren. Medium Uren reports: 'The International Monetary Fund has urged the return of multiple objectives for central banks, arguing that an exclusive concern with price stability has been shown to be inadequate.


'The fund says monetary policy faces a highly uncertain future, with doubts about its objectives, its policy decision rules and central bank independence.


“Until these issues are better understood, monetary policy will involve more art and less science,” the fund says'.


These stunning insights allegedly come from a 'staff paper prepared for the IMF ministerial meeting this weekend'.  This is the news before the news, unless of course you have followed the debate in these pages, and summarised in Henry's submission to the Murray inquiry.  We had been steeling ourselves to be ignored, but if the IMF is on the same page, just maybe Mr Murray will ask Kevin Davis to take a look and report back.


But I digress.  Mr Uren goes on. 'The fund says the global financial crisis has challenged the notion that achieving price stability is sufficient to deliver macro-economic stability and raises the question of whether other objectives should enter the mandate of monetary policy.


'Yet the IMF says that while there is a consensus that financial stability must form part of overall economic policy, it is less clear to what extent central banks and monetary policy should deal with it.


“Would you put two million people out of work because banks are too leveraged or house prices are rising too fast? Instead, the first line of defence should be instruments that can target financial stability more directly and efficiently, including macro­prudential tools, such as loan-to-value and debt-to-income limits, and capital flow management measures.


"Yet , when these tools prove insufficient, we may have to accept a new trade-off for monetary policy, and the interest rate may have to lend a hand to maintain financial stability.”


And, after a theoretical section about whether stabilising inflation may produce greater instability of output - a proposition that Henry doubts - the narrative continues with a stunning admission for Australia's free floaters at the RBA - the 'whatever don't kill you makes you stronger' boys.


'The IMF says that the success of the Swiss central bank in putting a cap on the value of the Swiss franc raises the issue of whether central banks should also target external stability'.


Gor blimey, Comrades, what are they smoking in Washington?


Mr Uren's commentary may be accessed here. Henry presumes that confidential staff papers are only available to friends of the leaky staffer, and if anyone has such a friend Henry would appreciate a copy of the paper. 


Interested readers are referred to our submission to the Murray inquiry, which is available here.


To quote just a few of the relevant sentances. The issues [in this submission] concern better management of monetary policy, which requires additional ways to manage Australia's currency and credit growth - in short, effective 'macroprudential' policy.


Monetary policy – defined in the usual way by manipulation of cash rates of interest - cannot by itself adequately control the financial system. ... another policy instrument is needed to modify the effects of a currency value too high to allow the country to have a balanced set of industries.


Other forms of macroprudential policy are needed to modify other asset prices. ... I recommend variable prudential ratios, ratios that rise as asset prices rise and therefore provide some resistance to the development of asset inflation.


I recently presented on 'Asset inflation and monetary policy' at one of Melbourne's distinguished universities. One of the issues our team is grappling with is how to define 'monetary policy'.  Is it growth of money supply (Friedman); cash interest rates (Historic gold standard,Taylor, modern central banks); 'Chairman's discretion (Zero cash rates plus 'innovation', eg QE); or some complicated mix of all those things plus 'state of the economy'.


A young professor who had spent significent time at one of the American Federal Reserve banks said something like: 'The Fed makes a judgment on all the available evidence', which reminded Henry of Australia's long-ago dismissed 'check list'.  This is what I now call 'the narrative'.  A central bank should relate its decisions about monetary policy to the entire set of economic indicators, and explain itself in those terms.  The question for outsiders is, or should be: 'Does the narrative make sense'.


There is nothing truly original under the sun, Comrades, but it is good to see the IMF is also stumbling slowly to a better approach.  Like generals fighting an old war, however, Australia's financial system regulators are reportedly satisfied that all is well here, due to their brilliance.


Saturday Sanity Break, 5 April 2014
Date: Saturday, April 05, 2014
Author: Henry Thornton

Gor blimey, comrades. That Martin Parkinson has got a bit of gorm, discovered his mojo, telling the nation that we have a choice: a steadily increasing avaerage rate of income tax or a widening and broadening of the GST.  What a pity he didn't say all this when Australia's least competent Treasurer, Wayne Swan, was busy creating the complete disaster that is Australia's Federal budget.  Would have been a career limiting move way back then, of course, but them's the breaks if you are fair dinkum, Parko, old mate.


We haven't seen the report of the Audit Committee yet, but it presumably contains even more ungilded views, justifying the government's latest descriptions, collected here by the AFR's Phillip Coorey.


“Terrible”, “awful” and “horrific” Treasurer Joe Hockey told Alan Jones on Monday this week as he spoke of the legacy inherited from Labor, including a “tsunami” of spending.


An “absolute cataclysmic mess”, was how Prime Minister Tony Abbott described it to Coalition MPs and senators the week before, urging them to spend the six-week autumn parliamentary break in their electorates “reminding people of the challenge we face”.


Fixing the budget is indeed a great challenge. Australia's greater economic challenge is the overall cost level, which Henry has been saying is of the order of 30 to 40 % higher compared to that of competitors and customers.


No newspaper has seen fit to repeat this suggestion, though every week there is fresh evidence.


* In the week just past, BHP let it be known that it costs 50 % more to dig up coal in Australia than in the USA, and several more companies announced their closure here.
* Qantas is doomed as an international carrier, because Aussies will not pay the extra 30 % for the priviledge of international travel on the big bird with the flying kangaroo.
* Evey week we hear of another bunch of businesses closing down, Toyota, Holden, Forge, the list goes on.


Confirmatory indirect evidence is the detioration in the labor market. Officials and econocrats stick doggedly to the official (ABS) unemployment, which says the rate of unemployment is 'only' 6%, albeit rising slowly.


Those who ask more focussed questions, like Roy Morgan Research, or provide better research, like former Labor pollie, John Black, find a far gloomier situation.


Mr Black's expose is in two big stories in the Weekend Oz; linked here and here.


'The  Rudd government inher­ited a labour market from John Howard and Peter Costello at the end of 2007 that was generating year-on-year almost as many jobs as could be provided annual­ly by growth in members of the population aged 15 or older.


'In September last year, the Abbott government inherited a labour market from Kevin Rudd and Wayne Swan that was generating jobs for only 28 per cent of potential new entrants to the workforce — 94,300 jobs for 334,700 potential new workers.


'In December, this figure dropped to 52,400, or 15 per cent of potential new workers, before climbing slowly back to 68,700 jobs in February. This means the government was then generating enough demand for the market to find places for only one in five potential new workers'.


The fallout is worst for young people, graduating at far too fast a pace for more than a few to find jobs, as discussed here earlier this week with input from Professor Jeff Boreland of Melboure University.


Kulture


Fiona Prior sees what will become a Middle Eastern classic, the film Wadjda and is swept away by the Seraphim Trio.


Footy'n'cricket'stuff


Last night the Hawks smashed Freo, who had started well this season after giving Hawthorn a good fight in last year's Grand final.  Collingwood belted the hapless Swans last week, and meet the Catters at the 'G' today. Caaaarlton! meets Essendon on Sunday evening, a really bad time for those of us with jobs to attend, or even to watch on TV, and likely to be a really bad time for the Blues if their inconsistent form in two losses so far this season is any guide.  I suppose there is just a chance they put together four scintillating quarters to beat Essendon by a point or two, but I'd rather save that result for the 2021 grand final.


The Aussie shielas' cricket team is into the T20 final and have a fair chance of winning, though I cannot for the life of me think who they are playing.  The blokes salvaged a sliver of pride to finish one-three (three losses) by beating Bangladesh.


Otherwise it is  the dry season for sport, though we did notice that a famous Aussie swimming family roared into Commonwealth Games contention this week. No doubt there are Aussies doing well in darts or two-up contests or boomeranging throwing in foreign climes, proving yet again that 'Global sport' ranks as highly as mining, agriculture and health services in the list of things we do well enough to make a national objective.


With Mrs Thornton, Henry plans to visit the Bendigo Art Gallery for its acclaimed show, then our next kultural highlight will be a visit to St Petersburgh. (Check out the image of the week for the image of the real Henry Thornton, with Wilberforce a great anti-slavery crusader.)


Image of the week



Those who do not understand history ...
Date: Thursday, April 03, 2014
Author: Henry Thornton

'The Reserve Bank of Australia has dumped its overt strategy of talking down the dollar and has ramped up warnings about steep rises in property prices.


'As the central bank’s board left the cash rate at a record-low 2.5 per cent for an eighth straight month, governor Glenn Stevens pointedly declined to describe the currency as “uncom­fortably” high – a term he used in December when the dollar was several cents lower than US93¢, which it hit on Tuesday.


'Mr Stevens said the currency’s recent gains reduced the benefit to the economy. At the same time, low rates are expected to boost economic growth, helped by a surge in new home construction.


The shift in tone is a significant acknowledgement recent attempts to “jawbone” the dollar lower have ­floundered and threaten to undermine the bank’s credibility'.


Curiously, Jacob Greber, AFR's 'Economics correspondent', whose full story is available here, (including a nice video comment), fails to note Henry's clearly articulated explanation of the inconsistency in the RBA's views, posted Monday and available here.


Henry's view is based on the fact that 'monetary policy cannot serve two, [or even three], masters'.


That is, moving cash rates might have a reasonable effect on the economy, and should if managed appropriately, keep goods and services inflation controlled, as in the RBA's agreement with the government.


But moving cash rates cannot, except by chance at particular times in the economic 'cycle', also control the exchange rate or house prices.


Henry's editor's submission to the Murray Enquiry spells this point out as clearly as Henry is capable of doing, and is linked here.


Sadly, those who do not understand history are condemned to repeat it.


Memo Jacob Greber: Henry may be contacted here if you feel a tutorial may be useful.


Youth unemployment - a baffling jigsaw
Date: Wednesday, April 02, 2014
Author: Henry Thornton

No decent person can fail to be moved by the plight of contientious youngsters, with excellent qualifications and aptitude, who cannot get a decent job. The Global Financial Crisis must take a lot of the blame, since 'flight to quality' includes hiring processes. But in Australia's case I also blame the policy of letting 'higher ed' rip, encouraging far to many people to go to universities while downplaying the virtues of good technical training for people who are unsuited to Eng Lit, Maths or Physics or who find Economics boring.


Today's announcenment that the Victorian opposition will rescue a redundant Swinburne Campus from developers and turn it back into a good old-fashioned TAFE is likely to be a small step back to reality with the mix of types of education to match demand in Australia.  I predict it will be very popular with voters.


One of Australia's finest economists - of the non-boring variety - is Jeff Boreland of Melbourne University. Jeff is on a one-man crusade to explain the facts of Australia's labor market, and today I present his summary of the youth unemployment, with a link to all articles in his series so far.


Key points


• A substantial decline in the employment/population rates of the younger Australian population (aged 15- 19 and 20-24 years) has occurred since 2008.
• The decline has been concentrated amongst those not in full-time education who are working full-time and those in full-time education who are working parttime.
• The main explanation for the decline has been a slow-down in hiring during the current downturn, which has disproportionately affected young workers.
• Employment growth for the younger worforce has been much lower than for the aggregate workforce in manufacturing, construction, retail trade, accommodation and food services, professional services, and health care and social assistance.


Read on here for the full presentation.


Professor Boreland's 'Labour market snapshots' are available here.


Many years ago, when Henry was a visiting Professor at the University of Rome, we met over dinner a lady professor.  She explained that jobs like hers were very hard to get in Italy, and she had to work for seven years without pay to get on the academic ladder, which she then climbed with great success.


In the past two years we have been helping our kids, and some of their friends, to get jobs, with a success rate of 5 out of around 8 so far.  It goes without saying that all were highly credentialled, well presented and had been coached by friends and relatives in how to approach the dreaded interview. In three of the five cases, it was it seems the practical experience in a real but unpaid job as an 'intern' that seemed to make a difference.


The Roman lady professor's husband, the man who invited Henry to visit his university, explained that the magnificent apartment we were dining in had not been purchased on two professor's salaries. 'In Rome', he explained, 'you only own a property like this if you inherit it'.  Australian house prices are headed up again far too quickly for this homeowner-with-children's comfort.  Could we be headed for Italy's real estate problems as well as their labor market constraints and practices? 


Monetary policy stuff-ups
Date: Monday, March 31, 2014
Author: Henry Thornton

'Monetary policy should be conducted with clear focus and without surprises that confuse people in the financial system or more generally'.  That is the advice given to the young Henry Thornton by the former RBA governor Sir Harold Knight.


Consider the current RBA's recent three-stage approach to currency management.


1. When the currency was initially well above parity with the US dollar, senior RBA staff delivered the unreasonably brutal message - 'What doesn't kill you makes you stronger'.


Perfectly reasonable, you may think. However, for businesses that were unable to become stronger, liquidation or substantial downsizing was the outcome.  Manufacturing, inward tourism, exports of educational services all suffered significent overall shrinkage, while most survivers were weaker, not stronger.


2. Then there was a phase in which domestic interest rates were cut, arguably lower than was ideal, combined with gubernatorial exhortation, so-called 'open mouth' policy. This phase of policy had some success and for a while the currency seemed headed to 85 cents, a level 'mentioned' as better than levels in excess of parity. This phase of policy reminded Henry of the (unannounced) aims of cutting interest rates in the late 1980s, despite explicit board recognition that monetary policy needed to be tightened, not eased. Nemisis came when cash rates had again to be raised, this time very substantially, leading to the early 90s 'recession we had to have'.


3. Now we have moved to a 'no comment' or 'don't mention the war' in which the RBA has let it be known cash rates are likely to be stable for some time. Since the housing boom suggests the next move in interest rates is likely to be up, the Australian dollar is again moving up.


In short: no consistency of purpose, confusing changes of approach, and further squeeze on exporters  and those domestic companies struggling to compete against imported products and services.  Verdict - 'failure, a weaker economy, not a stronger economy, and confusion.


The current RBA management will no doubt say 'Sir Harold Who?' and 'Henry Who?' should this Blog ever come to their attention.


Yet Sir Harold's advice remains the gold standard of monetary policy, and the mistakes of his sucessors RA 'Bob' Johnstone and Bernie Fraser should resonate with Glenn Stevens and other current senior officers who were watching and in some cases advising in the late 80s and early 90s.


Maintaining a clear focus on low goods and services inflation and a viable industry structure, and to lean into excessive house price inflation, requires additional policies.


* A variable tax on capital inflow to tame the excessive Australian dollar, as argued here in January 2013; and
* A pro-cyclical bank prudential capital ratio regime in which bank lending is reduced as house prices rise.


Without these additional policy 'instruments' , RBA governors will simply lose credibility and 'clients' will remain confused about the gameplan being followed.


Not a good look, and not a good outcome for the 'clients' - which means the rest of us Aussies, especially who do not have highly generous salaries and wonderful defined benefit superannuation schemes.


Postscript


The latest RBA pronouncments has nothing about the (rising) currency, but a reminder that house prices can fall as well as rise.


If you miss target A, aim at target B seems to be the game.


More reading:


'Tax capital flows to tame dollar', The Australian, 12 January 2013.


'The messages of boom and bust', From Great Crises of Capitalism, 1 January 2011.


Submission to Australian Financial System Review, March 2014.


Saturday Sanity Break, 20 March 2014
Date: Saturday, March 29, 2014
Author: Henry Thornton

The general view of the economy , lead by the RBA, which is Australia's most reliable (but far from omniscient) forecasting agency, is that things are pretty good - glass half-full sort of view.  The evidence is in the RBA leader's recent speeches, and in particular by Gov'nor Glenn Stevens' latest, 'The Economic Outlook'.


Yet, in Australia at least, today's headline about the early rollout of the NDIS that applies equally to Qantas, Toyota, Holden, Forge and many other failed or failing companies. 'NDIS trial costs blow out by 30 per cent'. The problem of what we have called 'double-digit cost disequilibrium' has nowhere been acknowledged by our leaders, including the RBA, although business leaders do talk about high costs and ask the government/IR bureaucracy to keep wage hikes to a minimum, or in some cases, to do away with overtime loadings or even to freeze wages.


Mr Stevens said of the global scene: 'The United States continues its recovery'; 'The euro area has resumed growth, albeit in a somewhat hesitant fashion'; In China 'Recent indicators have shown possible signs of slower growth in the early part of 2014 (Ark!!! says the petshop parrot); and 'Around the Asian region generally, at this stage, our sense is that economic growth is continuing at about its trend pace'. ('Sensing' a result implies some sort of sensing device, perhaps a really bright young economist from Malaysia.)


Coming to Australia - the speech was in Hong Kong - 'Australia certainly weathered the financial crisis well, and with a real GDP some 13 per cent larger than it was at the beginning of 2009, compares well with many other advanced countries'.


* 'There have been very strong conditions in the natural resources sector' though the terms of trade have fallen and investment has dived.
* 'In the rest of the economy, ... consumption and residential construction have been soft for a while. And ... many businesses exposed to those sectors, including retailers, builders and banks, have found the going harder'.
* 'In addition, because the mining boom was associated with a very high exchange rate, other trade exposed sectors have also faced more challenging conditions'.


Now comes the crystal ball: 'Looking ahead, as the resources sector's capital spending continues to fall, it will be desirable to see some other sources of growth strengthen'. (Ark, Ark!!! says the parrot, his version of Hear hear!.)

* 'export volumes for resources, ... are already growing strongly'.
* 'It will be helpful if some of the other areas of domestic demand that have been subdued start to grow faster'
* 'Businesses outside of mining would need to have made some progress in containing costs, and raising efficiency'. (At last, a nod to the unspoken problem. Ark, Ark, Ark!!! says the parrot as he dances a jig on his perch.)
* 'Measures of business confidence have improved over the past six months. Businesses seem, so far, to be taking a cautious approach to investment, however: they are waiting for stronger, more persistent signals of improved conditions before committing to significant increases in capital expenditure'.(The parrot is downcast.)


The cagy Mr Guv'nor points out that there is a 'very substantial' degree of uncertaintly surrounding his mildly positive central projection. 9The parrot gets lost in the detail and begins to nod off.0


Gov'nor Glenn continues, however.  He acknowledges the housing boom, seems to have given up his attempts to talk the dollar down and mentions as an aside: 'There is, of course, the full panoply of other ‘risks’. (The parrot twitces a wing, but by now if sleeping upside down on his perch, snoring gently.)


And, most importantly: 'Other conditions need to be right for growth. These include ensuring the environments for competition, innovation and investment, including in human capital, are sound. In those areas, various other government policies must come to the fore'.


Read the full speech here, without the intrusive reports on the response of the parrot. 'The bloody parrot's dead', asserts Mrs Thornton, who has arrived with a cup of coffee. 'Its not dead, merely sleeping' Henry replied, but he may have just been dreaming. Coffee? Delivered by Mrs T? 'You've been dreaming Henry', asserts the parrot.


Footy'n'cricket'n'stuff


The over-hyped Aussie T20 team got beat by the West Indies, who recaptured their form of the sixties following some trash-talk by the aussies. Memo to George Baliey: talk softly and carry a big bat, mate, much better than the opposite approach. Now the swaggering Aussies have a must, must, must win match against India.


Luckily the shielas seem to be doing a bit better in their world cup. What about a female chief editor at these newspapers, comrades, then we'd might get a fair suck of the sauce-bottle on sport.


Sadly, Caaaarlton!'s gross inconsistency meant a loss to Richmond on Thursday night, leaving Mick the Merciless to ponder the two-zip start to the season. Time to make them drink Ovaltine when they go to bed at 9 PM coach, or slip some other useful substances into their breakfast muesli. And it was heart-breaking to see Eddie Betts kick three goals in the second quarterfir Adelaide against Port Adelaide.


Essendon to come next week.  Henry caught the final minutes of Hawthorn's stirring victory over Essendon last night, and clearly Bomber Thompson is not a bad stand-in for Mr Hird, now one hopes happily reconciled with Mrs Hird. Essendon Chairman, Paul Little, may well have learned a thing or two about industrial law - ie an employer cannot punish a player for comments made by his or her spouse. Free speech is still a core value of Australian society. Still no charges from ASADA, and it is beginning to look as if the while supplements affair has been a storm in a sample bottle.


Very sad about that young man who got his neck broken in what one old salt on a sports show called a 'legal tackle'. Wonder how said old salt would cope with being driven head first into the ground by three beefy young blokes who look as if they've spent all their lives in a gym, with help from Steven Dank.


And Israel Falou is not playing this weekend and did Henry hear he was suffering from an injury to his neck?  It one way to try to win a game. Ask Mone Morkal.


Image of the week


Courtesy The Oz


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