Warnings and forebodings
Date: Monday, December 19, 2011
Author: Henry Thornton
Warnings and forebodings about the global economy are spreading like wildfire or a really nasty virus.
Better to get a realistic view on the table rather than some Panglossian fairytale, like an old geezer delivering gifts down the chimney.
Realism will spoil Christmas for some, perhaps including the two medical scientists Henry dined with last night.
'What is going on' was the question, and the tutorial was intense.
It is hard for well qualified and experienced professionals in fields other than economics to comprehend just how uncertain are some of the big issues of economic policy. Lack of effective action to solve the crisis in Europe, and lack of political agreement about economic policy in the USA, are exhibits one and two in support of this statement. Australia provides exhibit three.
Henry explained to the scientists as well as he could that the Club Med nations of Europe need two things to begin getting back onto their metaphorical feet.
The first is a good dose of debt reduction, and the second is a substantial depreciation of their currencies. The third, unavoidable, remedy is hard and sustained fiscal austerity, which will be part of the solution in any scenario.
Making austerity the whole solution, as seems to be the strategy of the Eurozone leaders so far, would be to impose great misery for at least a decade on the Club Med nations of Europe.
Morally this may satisfy those who ignore the banks and others who so enthusiastically promoted Club Med debt and sold it to investors. But the promoters of Club Med debt and their clients were equally (in Henry's view) morally culpable.
Taking a serious haircut to existing debt levels to allow less misery for the Club Med peoples would seem both fair and economically expedient.
Market forces should enforce the first of these classic remedies, but so far as Henry is aware it has been suggested only for Greece. The second classic remedy is ruled out by the membership of the Eurozone itself and will only become relevant as Club Med nations quit the currency union that is almost literally choking their economies to death.
'What happens when these countries quit the Eurozone?' asked one of the medical scientists. 'No-one knows for sure' I replied. 'There will be a lot of legal argy bargy, as the rules of the Eurozone are apparently silent on this possibility. The big difficulty is the Eurozone banks. The likely outcome would see assets in new Drachma, new Lira, new zloty, etc, etc, and liabilities in Euros, meaning bankruptcy. I doubt there is any body that could rescue all the major Eurozone banks. Widespread bank failure means Great Depression, that is an iron law of economics, or at least of economic history'.
The discussion continued - what happens to US and Chinese exports if there is a Depression in Europe, what does this mean for Australia and its programs to support medical science and other undoubtedly worthwhile causes?
I suspect there will be many such conversations to dampen the festivities this Christmas.
Thanks to The Australian's David Uren we learn today of a fine speech by the Governor of the Bank of Canada, Mark Carney.
'ONE of the world's most respected central bankers has warned the world economy is at a tipping point beyond which forcible debt reduction will bring collapsing asset prices.
'Bank of Canada governor Mark Carney said last week that the "global Minsky moment has arrived", referring to the work of American economist Hyman Minsky, who proposed in the 1960s that financial markets were intrinsically unstable.
'During periods of growth, excess cash generated speculative booms that encouraged people to borrow beyond their ability to repay. When markets turned down they would be forced to sell assets in a falling market to pay down debt'.
"Debt tolerance has decisively turned. The initially well-founded optimism that launched the decades-long credit boom has given way to a belated pessimism that seeks to reverse it," Carney said, in a speech underscoring the great challenge that confronts the world economy, achieving growth while trying to pay down debt. "Current events mark a rupture. Advanced economies have steadily increased leverage for decades. That era is now decisively over."
'The change can be seen clearly in Australia, where households and business have stopped borrowing and are working hard at lowering debt. The key vulnerability is household debt, which remains high'.
I strongly urge you all to take the time to read Mark Carney's sobering speech for for yourself.
His concluding thoughts are as applicable to Australia as they are to Canada.
'When we found ourselves in fiscal trouble in the 1990s, Canadians made tough decisions, so that on the eve of Lehman’s demise, Canada was in the best fiscal shape in the G-7.
'We must be careful, however, not to take too much comfort from these experiences. Past is not always prologue. In the past, demographics and productivity trends were more favourable than they are today. In the past, we deleveraged during times of strong global growth. In the past, our exchange rate acted as a valuable shock absorber, helping to smooth the rebuilding of competitiveness that can only sustainably be attained through productivity growth.
'Today, our demographics have turned, our productivity growth has slowed and the world is undergoing a competitive deleveraging.
'We might appear to prosper for a while by consuming beyond our means. Markets may let us do so for longer than we should. But if we yield to this temptation, eventually we, too, will face painful adjustments.
'It is better to rebalance now from a position of strength; to build the competitiveness and prosperity worthy of our nation'.
Here's to a sober as well as a deeply thoughtful Christmas holiday.
Those interested in a more detailed discussion of Henry's views on the reasons for the current crisis and the lessons for economic policy might find this presentation - with a link to the relevant chapter of Great Crises of Capitalism - of interest.
Saturday Sanity Break, 15 February 2014
Date: Saturday, February 15, 2014
Author: Henry Thornton
How to replace vehicle manufacture and retain a useful and productive manufacturing infrastructure? This is the question of the year and there is little but rhetoric on offer. Here is a modest suggestion. It is that we systematically develop the capacity to build and maintain Australia's defence kit in Australia, fuelled by state-of-the-art, even ahead of other people's art, research and development. Modern Australia has laughed at this idea, with government policy providing what is effectively anti-protection.
'While free trade is the modern economists’ mantra, the USA, Europe and Japan all protect their agricultural industries. Furthermore, in other strategic areas, including defence, their rules of engagement clearly favour local industry, and why not, one is forced to ask? While-ever the possibility of serious global conflict exists, no sensible nation should rely entirely on global free trade, trade that will immediately be disrupted in any serious conflict.
'I present three examples of what I regard as inappropriate treatment of Australia’s strategic manufacturing sector. The first concerns the Joint Strike Fighter (JSF) project. ...
'A second example concerns the Australian-made Bushmaster. ...
'A third example is the breakthrough defence technology developed by Queensland company Metal Storm Ltd. The company has proved its technology for American military clients but remains zealously ignored by the ADF. As in the solar energy space, Australia Inc has managed to turn its back on a fine Australian invention'.
This item from the archives is recalled due to an article on P2 of The Australian today - 'Defence system could earn billions'. Sadly, this warrior for home-grown defence procurement must conclude that the breakthrough technology is far more likely to be simply given to the Americans. Should a start-up company raise a few millions in an attempt to develop and sell this technology, it will be ignored by Australia's defence procurement agencies and will eventually go broke. Then it will be gobbled up by an American company with strong positive links to the American defence establishment. That was the fate of Metal Storm Ltd, and I hope the Abbott government does vastly better than its predecessors in utilising Australian R&D.
Make no mistake, this is a bell-weather example.
There are two further, closely related, issues. The first concerns industrial relations, where calls for reform will simply not go away. While WorkChoices is 'dead, buried and cremated', high labor costs and whole libraries of regulations are strangling Australia's businesses. Dennis Shanahan says 'If Shorten wants a plan [as he keeps demanding], Abbott certainly has one'.
'It means stopping the boats. It means fixing the budget. It means building the future. It means building an Australia where everyone can expect a fair go and everyone is encouraged to have a go'. So far at least, the Abbott government has not provided businesses faced by unsustainable IR rules with a fair go, although its decision not to bail out Holden, Toyota or SPC Adrmona has sent a powerful indirect message.
And, as Henry's favourite journalistic hound from hell, Grace Collier, also in the Oz, says of the coming royal commission: 'We are set to see ALP-affiliated gangsters for what they are, and all won't be apples'.
The second additional reason for the decline of Australian manufacturing, and the weakness of many other non-mining businesses, is an exchange rate that has been too high for too long. While our currency has been talked down, helped along by rate cuts that have gone too far, as witnessed by powerful house price inflation and rising goods and services inflation, it is still well above levels that will give a fair go to the relevant businesses. The RBA has tried its damnedest (spell check here), it simply lacks the necessary policy to give Australian business a fair go. More here on this puzzling lack of understanding.
Mitch, you are a marvel. You have reminded Cap'n Smith of the number one cricket team in the world of just how damaging a well-directed bouncer at 150 km per hour can be, and the six other wickets you garnered in destroying the Sth Efrican's first innings of this series just underlined you message. Then Messrs Warner and Doolan put the South Efrican bowlers - rated the best unit in the world - to the sword, and destroyed Henry's normal sleep patterns in the process.
The footy has started, and the Hawks looked invincible in disposing of a hapless young Lions outfit. But the big news so far is the effect of Supercoach Paul Roos on Melbourne, a joke team in recent years, who beat Richmond in a thrilling game. Caaaarlton's main new hiring Daisy Thomas is out with a chest infection, while Juddy is having his nerves cut so he can no longer feel the pain of his achilles tendon. Scary stuff!
The skiing and snowboarding has battled for watchers against the cricket in the Thornton household, with the second TV too far away (down the hall) for easy relocation. The Aussie females, as in the real Olympics, are doing us proud. And the woman who beat Sally Pearson and set a new record in the 100 metres is another example of wimmin power in Australian sport. Henry's daughter Emily Rose, was the only member of Henry's brood who received umpires votes in the underage gender-free footy though this is not a popular point with the young males when raised at the dinner table.
Henry and brood are going to attend the first showing in Australia of the Lego Movie, whose trailer is here. Seats are selling like hotcakes in the mighty USA, and it is being said this is one of the best movies of the year. Cheap but very cute actors also, helping the bottom line.
Image of the week
Henry Thornton's True Unemployment & Under-employment (22.5%)
Date: Friday, February 14, 2014
Author: Henry Thornton
'Economists expect little improvement in the jobs market in the months ahead, after the unemployment rate hit six per cent for the first time in over 10 years'. Our headline, like Donald Horne's The Lucky Country is intended to convey irony.
Australia's jobless rate for January rose to 6 per cent in December, according to seasonally adjusted figures from the Australian Bureau of Statistics, from 5.8 per cent. Thus reports the Herald Sun, whose headline says 'highest for 10 years'. The report fails to mention that 'Economists' expected no change, although it quotes St George chief economist Besa Deda: "The unemployment rate should continue to edge higher over the next six months or so and this expectation fits in with the Reserve Bank of Australia's outlook for the jobs market." Nicely done Besa - what was your prediction, pray tell?
ABC Radio was brave enough to say the economists were shocked by the number of jobs lost, and one previously unknown economist from Charles Darwin said the 'real' rate of unemployment - assuming no drop in the participation rate - is 7.8 %. 'Struggling reluctantly to the truth', as others will soon begin to do.
Net jobs were down by a few thousand, so the major fact is the continued fall in people saying they are looking for work. Of course, regular readers will recognise that Henry believes the official numbers greatly understate the real situation - e.g. here.
In other news today, a large mining services company in Perth has been put into liquidation, meaning another swathe of jobs will be lost - now, not when the vehicle manufacturers quit in x years time. Incidentally, do you believe that Toyota and Holden will keep their current workforces until their final Australian-made car rolls off the production line? If so, you presumably also believe in Santa Claus and the Tooth Fairy.
It is worth noting that both RBA and Treasury predictions put the rate of unemployment heading for, presumably peaking at, 6.25 %. This is another number still believed largely by believers in the Tooth Fairy. Glenn Stevens is presumably resorting more heavily than usual in a something and water - hold the ice - as he winds down for the day. I can hear him saying in a puzzled tone 'The bloody glass is practically empty, darling. Would you like to top it up?'
The Napthine Government has stepped in to help save SPC Ardmona with a $22 million grant that is to be repaid if jobs fall below 500. ABC Radio early today reported that SPC Ardmona workers would cop, or were seeking wages frozen for 18 months - or someone thought this would be a good idea. Now that would indeed be a good idea, especially if the workers had suggested it. But perhaps Henry was still in dreamland, the very dry dreamland inhabited by serious economists.
In other (less surprising) news, the International Monetary Fund (IMF) has advised there is a big budgetary clean-up job to be done in Australia. These people fly around the world at the front of big aeroplanes in order to pontificate in the most obvious ways. Frankly, I'd prefer the real Pope to visit, at least his attempts to save souls might be somewhat useful, at least to saved souls, and men of religion have been known to break droughts.
The hardened warriors of South Efrica were expected to brutalise Australia's batters and then put Mitchell Johnson and his fellow bowlers to the sword. The hardened warriors got off to a good start with Warner, Rogers, Doolan (after a promising 27) and Clarke back in the shed for not many runs. But Messrs Marsh (the biggest surprise of the summer so far), Smith and Johnson wielded the willow to great good effect. Despite an unusually subdued effort from the tail, Australia made 397 runs.
Cap'n Smith started well, with 10 runs off the first over of the match, although 4 of the runs came from an edge between third slip and gully. Then he faced Mitch J, who bowled one of the all-time great bouncers, straight at Cap'n Smith's chest at 150 k an hour, or, more relevantly, 20 odd metres in 0.4 seconds. (Check the maths please, Bert.) As the commentators put it, Smith was not just out, but humiliated. Henry forced himself to lie awake listening as the South Efrican's vaunted batting crumbled. It was never like this with the Mont Albert Fourths, gentle readers, but it was beautiful to hear. When rain stopped play the enemy was 6 for 140 and Mitch had fourfa.
Henry must repeat a crucial warning - for a modern nation, economic success is inversely related to sporting success. So enjoy the cricket, but do not complain when unemployment picks on you or your loved ones. And writers of complacent editorials, get real, boys and girls. It's bloody tough out here, as at least 10 % of you will discover before this recession is over.
The Road to Recession
Date: Tuesday, February 11, 2014
Author: Henry Thornton
'Road to recession' says the Age. 'The end of car manufacturing in Australia - confirmed with Tyota's announcement that it would shut local production in 2017, taking thousands of jobs with it - could tip Victoria and South Australia into recession, ...'. They're sharp at the Age, taking up a theme discussed in these pages from various perspectives from twelve months ago. The RBA is still cheery, raising its forecast of real growth even as it raises its predictions about the course of inflation. Time will tell, but it is probably too late to stop the grim recession now staring Australians in the face. Here is a link to our major contributions to this debate.
As well as the direct and indirect effects of the loss of jobs in vehicle manufacture and the associated componant manufacturers there is a tough budget to come, a savage drought in most of rural Australia and (most importantly) the ongoing effects of double digit cost disequilibrium. While the dollar's fall to around 87 cents was hailed as helping make industry more competitive, higher than expected inflation has restored the dollar to 90 cents of a US dollar, reflecting a widespread belief that interest rate cuts are over and that the next move may be up.
Slower growth in China, the beginning of the end of the US Fed's monetary policy 'taper', slower than expected jobs growth in the USA and generally sluggish commodity prices are all reducing optimism in anyone with the ability to read the very large writing on the wall. The latest edition of The Economisthas a characteristically more cheerful interpretation.
Politics is returning to a measure of normality as the improbable post-election honeymoon of Bill Shorten and the Labor Party is waning. Perhaps due to the opposition leader's disinterest in wage restraint proposed by Paul Howes and his attempts to fend off the great big searchlight being applied to alleged corruption in the construction industry by Tony Abbott.
Hang in there, gentle readers. Australian business is slowly learning that it needs to take a tougher line on business costs, the most important of which are labor costs. When a key uninion official says 'Workplace culture is killing jobs', as Paul Howes did last week, one sees the arrival of a new era of moderation. Depending on the severity of the looming recession, labor costs will decline fast or slow. It will be a recession we did not need to have, but blindness to basic economic forces has afflicted Australia's managerial class since the end of John Howard's government. Sadly, it is ordinary workers who will bear most of the burden, but that is the rules of the game in the second great global industrial revolution.
Saturday Sanity Break, 8 February 2014
Date: Saturday, February 08, 2014
Author: Henry Thornton
Well, who'd have believed it? The people smugglers are stopped, corporate handouts are severely curtailed, a Labor leader has called on his brothers to make love not war on industrial matters, drought has tightened its savage grip on much of Australia, the economy is picking up - and soon house AND common or garden inflation will be bothersome - and the AFR is writing about 'A New Age of Realism'. Does Henry detect a new era is all this? (See Laurie Oaks on Howes, Shorten and Abbott.)
1986 and now
It has been said that Australia handles prosperity badly but copes magnificently with adversity. It is around the thirtieth anniversary of the Banana Republic crisis. Then Treasurer Paul Keating, after hard advice from the RBA, that at first was violently resisted, turned a budget deficit into a surplus. Prime minister RJ (Bob) Hawke persuaded the unions to cop a cut in real wages by not demanding the full flow through of the effects of the large drop in the value of the Australian dollar that took hold when the full measure of Australia's lack of competitiveness was realised. With the Treasurer's agreement, the RBA tightened monetary policy. The trouble was, after a heroic recasting of economic policy, as the dollar recovered the RBA went easy in the mistaken belief that a rising dollar was tightening 'monetary conditions', against the advice of its then Chief Economist, who had earlier rung the Banana Republic bell. He resigned in disgust, and his successor went on to lay the foundations of 'the recession we had to have'.
The current situation is not unlike that in 1986. There is a large and deeply embedded budget deficit. There is a highly overvalued Australian dollar. Monetary policy is too easy. The differences are important. I suspect the underlying budget deficit is far larger. The labor market in is far deeper trouble, with realistic unemployment plus under-employment hovering near 20 % of the workforce. House prices are rising far more quickly than anticipated and common or garden (consumer) inflation on the RBA's preferred 'underlying' basis is for the past six months above the RBA's target range. The RBA was warned of the risks of inflation exceeding predictions but those providing the warning - eg here - were effectively told to rack orf.
So far as Henry is aware, the RBA has not rung the warning bell - indeed until recently we were being lectured that the glass was at least half full. Presumably the Treasury, an organisation asleep at the wheel in 1986, has been believing its own misbegotten and overly optimistic forecasts, peddled so foolishly by Treasurer Swan, Australia'sleast competent holder of that high office in many economist's opinions.
I could go on. The specific risk is like that in 1986. Strong budgetary action is likely to stave off the crisis that is virtually inevitable, and the government's tough line on corporate and personal responsibility may take the place of Mr Hawke's 'Accord'. A premature recovery may be aided by easy money for too long, and then we shall see 'the recession we did not have to have'. Henry's sober predictions about this matter are available on this site. Here is one important example.
Henry has been to the movies; Twelve Years a Slave will bring tears to your eyes; Philomena ditto; and The Wolf of Wall Street will remind you of those glorious days when money was freely dished out by gormless youths working for badly managed financial jugganauts. All three of these summer blockbuster 'based on a true story', incidentally. 'Wolf' far too long for most, but then that is the modern trend. Young Bert Thornton has described American Hustle as the best movie I have seen in a long while'.
The Ashes are over, with Australia's 'best in world' fast bowling attack ruining the PP's summer downunder. Now we even have a spin bowler who can turn the ball, and several rookie exponant of the same dark arts who have been coached by Shane 'Hogwarts' Warne. Batting is a bit of a broblem, as we rely for too much on the wicket keeper and the ability of the bowlers to make runs when the top order has crumbled.
Now this promising outfit is in South Efrica, where rain has limited training and the warm up games. The boasting about the bowling attack is a mistake, in Henry's humble opinion. It did not work for the Mont Albert fouth eleven, and is likely to stir the South Efricans, whose team after all is the undisputed number one, and is playing on home turf.
The more important news is the there are not too many sleeps til the footy season begins. Henry has seen no news that suggests Caaaarlton! can finish higher than 6th (its result in 2013) but the Thornton family will live in hope, as always.
A lighter moment
A young Sydney woman was so depressed that she decided to end her life by throwing herself into the Harbour.
Just before she could throw herself off Circular Quay, a handsome young man stopped her.
"You have so much to live for," said the man. "I'm a sailor, and we are off to Italy tomorrow. I can stow you away on my ship. I'll take care of you, bring you food every day, and keep you happy."
With nothing to lose, combined with the fact that she had always wanted to go to Italy , the woman accepted.
That night the sailor brought her aboard and hid her in a small but comfortable compartment in the hold.
From then on, every night he would bring her three sandwiches, a bottle of red wine, and make love to her until dawn.
Two weeks later she was discovered by the captain during a routine inspection.
"What are you doing here?" asked the captain.
"I have an arrangement with one of the sailors," she replied. "He brings me food and I get a free trip to Italy .."
"I see," the captain says.
Her conscience got the best of her and she added, "Plus, he's screwing me."
"He certainly is," replied the captain "This is the Manly Ferry ..."
Image of the week
Courtesy Sun Herald
Let them eat gumleaves
Date: Friday, February 07, 2014
Author: Henry Thornton
Henry has been in the heart of Australia's drought-stricken country attending the memorial service for his much loved Father-in-law after the funeral in Sydney. Both services were moving and strongly attended. Dr John Prior was a seriously good man, and after time serving in the occupation force in Japan the young medico purchased a practice in Boggabri where he served the community for 50 years.
All the signs are clear. The paddocks were pale yellow, sometimes reddish-brown when all the grass had been eaten. In one place, the remaining foliage was a pale mauve color, but no-one in our car knew what it might have been. We drove carefully through herds of cattle, some with ribs highly visible, apparently looking after themselves on the long paddock that is the roadside foliage. One old farmer I met in the street said he'd never known it so bad. 'The other day a large branch of a gum tree was blown down in the storm, and the cattle were eating the leaves - I've never seen that before' he explained.
Towns like Boggabri in northern NSW have been revitalised by coal mining. Houses have been painted and the dry grass of their gardens is carefully tended, and other plants kept alive with waste water. At Boggabri there is a vast camp for the fly-in fly-out miners which I spent two night sleeping, the family house being overflowing with Dr Prior's children and their children. Generally, the mining blokes were sitting on the small seats outside their rooms having a beer, while the mining wimmin were at corners speaking on mobile phones to (presumably) their loved ones. The blokes one passed in walking to and from the dining hall almost invariably said 'G'day mate, how yer doing' or similar, while the wimmin mostly kept their eyes on the pavement for the usual female reason of not encouraging any unwanted contact.
The dining hall catered for all tastes and a special notice said customers could order steak, chicken or fish cooked anyway they liked. The internet and aircom worked perfectly, in the latter case after one friendly mining bloke showed Henry how to rig up a piece of toilet paper to keep the motion sensor busy while the resident was away at the mines. Nothing in the rooms except the bare minimum, and after a first inspection Henry headed for the local IGA to acquired orange juice, apples, tea bags and shampoo. 'I get a lot of business from the miners for those items' the IGA manager said. The camp already holds almost as many people as the population of Boggabri and a planned extension will double the capacity.
The current big city debate on wages and conditions of employment seems almost nonsensical in drought-stricken Boggabri. The old bloke whose cattle were eating gum leaves has no income this year. 'Its not worth truckin' 'em back if you don't sell 'em', he told Henry, 'and prices are dreadful'. Yet back in the bigger towns and cities, most people people have generous welfare payments for doing not much or jobs with lots of over-award conditions, including a 'shiny tin' allowance for forklift drivers at SPC Ardmona (forklift drivers who have the skill to pack unlabelled fruit at the highest level). Failing companies live with ludicrously generously working conditions and then have the cheek to ask for help from taxpayers. Joy Hockey is right on the money when he says we cannot afford current levels of corporate or personal welfare.
Paul Howes has cemented his place in Australia's economic history by his call for cooperation between unions and businesses to maximise jobs. This was a theme of Simon Crean's father in the dying days of the Whitlan government ('One man's wage hike is another man's job) and again with Bob Hawke's Accord in the 1980s. Tony Abbott is surely right to say it is up to companies and workers to sort out employment conditions that reward both groups. Any other arrangement is just not sustainable, and Bill Shorten's attempt to protect the role of unions may well make his party unelectable. Check out the proportion of workers who are unionists, Bill Shorten.
We drove through and then flew home over dangerously dry country and impoverished farming communities. There is already a jobs drought in the cities and it will get worse before it gets better. Stronger retail sales and higher exports has injected some optimism into the corporate sector, but recovery will be limited by the large cost overhang and unsustainable budget. It is indeed the end of the age of entitlement, and while-ever the Labor Party and Greens fail to see this they are condemning Australia to a mediocre future.
'Let them eat gum leaves', Bill Shorten and Christine Milne are saying in their economically illiterate way.
Saturday Sanity Break, 1 February 2014
Date: Saturday, February 01, 2014
Author: Henry Thornton
The debate on what will be called 'structural unemployment' has gone global. Spengler writes: 'The risk is that the unproductive, unskilled and unemployable portions of the industrial world’s people will decide to vote themselves rich. Their leaders encourage this by focusing on income inequality. That is President Obama’s message as well as the consensus at the World Economic Forum last week at Davos, and it is nonsense.
'The problem isn’t inequality of income, but inequality of knowledge. One pilot flying a modern military aircraft could destroy the whole of an ancient civilization. One farmer from Nebraska can replace a hundred in Egypt. A thousand years ago, everyone knew how a watermill worked; 200 years ago, most people knew how a steam engine works; how many people today know how a computer works?
'East Asia is faring better than the rest of the world in this great transformation because its culture imposes a merciless meritocracy. The West should be able to do better than this. If we can’t, we can see our future in Argentina'.
In the former 'miracle economy' of continent Downunder, debate rages also.
Henry's favourite journalist, Grace Collier, says in the weekend Oz that it is 'time to think again as players turn a blind eye to IR's corrupt heart'. Someone in the weekend fin has interviewed a builder, who says the government needs to erect a tougher barriers to union thugs before his colleagues will be willing to speak out. Fair enough, mate, but if there is a royal commission, you must be willing to stand up and be heard, as it will be the best chance in your lifetime to make a difference.
Judith Sloan, also in the Oz, has a nice - correction horrible - graph showing the decline in Australia's jobs from the peak in late 2008 (if I read the graph right) and the near parallel fall in workforce participation. The decline in participation explains why the rate of unemployment as measured by the ABS has 'only' risen from 4.9 % in April 2011 to 5.8 % now. As we have pointed out, if successively broader (and more realistic) measures are considered, there are 22 % of Australian workers who are actually unemployed (11 %), underemployed (another 8.6 %) or dropped out of the workforce (2.5 %).
Ather key bits of analysis come from international sources - the Economist and Ambrose Evans-Pritchard (click on their names for Henry's discussion) as well as Spengler, linked above.
We make no apology for quoting from the best journalists in the world, because economics, business and economic policy have been for many years a global matter, and these writers are dealing with vast global structural forces that are influencing Australia demand to be heard. Australia's jobs market was for a while protected by the China boom and then the mad, wasteful spending by the Rudd'n'Gillard'n'Rudd governments. The cost was the build-up of a disasterous cost disequilibriun and a monster budget deficit.
The RBA meets for the first time this year next Tuesday. RBA staff must now be feeling a bit shell-shocked due to the unexpected weakness of the jobs market, combined with higher than expected house price inflation and higher than expected goods and services inflation. The question members of the the board should be asking is this: 'Could the last couple of rate cuts, and the Governor's "glass half full" optimism have helped create the current mess?' This will not be asked, of course, as Governor Glenn and his minions have highly effective ways of dealing with dissidents, but outsiders can ponder these questions as they observe the journalistic cheer squad in action on Wednesday morning.
Henry's expectation is that the board will decide that the current 'bias to easing' should be removed, implying (even stating) that the next move of cash rates could be in either direction.
However, we should not be too harsh on the gnomes of Martin Place. The RBA employs the most professional group of economists in Australia, and Henry is sure they do their best inside a rather insular culture. More importantly, the problems facing the Australian economy are, in order of inportance, the double-barralled cost overhang built up in the mining boom and by the Rudd'n'Gillard'n'Rudd governments' indulgent vainglorious spending boom and the horrible budgetary situation now faced by the Abbott government. Not much that the monetary gnomes can do except hold monetary policy firm and offer advice to the government, should Glenn Stevens feel that is part of his task.
Tennis has come and gone, and how good was it to see Li Na and Stan Wawrinka emerge victorious at the Australian Open. The others will be back, but Henry enjoys an upset as opposed to the mechanical repetition of wins by the suprstars.
It is only 14 or 15 sleeps until the footy starts again, and we can begin to judge how our teaqms are likely to perform in the 2014 season. Caaaarlton!'s one rolled gold superstar Chris Judd is said to be raring to go, and will play more in this year's preseason NAB cup than last year when he was said to be 'underdone'. Teams like Hawthorn, however, have 4 or 5 rolled gold superstars, and there is no evidence that Caaaarlton! can match those above them on the ladder in 2013. Indeed, we have let go to players who would have been on Henry's top 22 this year, Betts and Hampson, and the preferred ruckman, Warnock has two clearly obvious bad habits that Henry feels should be eliminated if he and the team are to begin to trouble the top teams. (Memo Mick Malthouse: Henry is willing to help Mr Warnock overcome these habits.)
Cricket is almost over at home, and since it included something like 11 wins out of 12 against the pestiferous Poms, with one big bash event to come we can at least feel we are approaching our proper level in world rankings again. But playing the number one South Efricans on their home turf is a truly great challenge, and if we win one test out of three with one hard-fought draw, it will be worth sitting up for.
Image of the week
Courtesy Sun Herald
A distopian future, even for Australia, former `miracle economy`.
Date: Thursday, January 30, 2014
Author: Henry Thornton
Well, what a surprise, the ABC has discovered that rorts, corruption, intimidation, even death threats are rife in the construction business. Warm congratulations to those brave souls who spoke out, and also to Grace Collier of the Oz who is pursuing IR matters like a hound from hell. As Ms Collier says today, it is not just the union but the big construction companies who are complicit in in the whole mess, and we must now hope that the police get on with the job of organising some really juicy prosecutions for the industrial version of the coward's punch that has been so much discussed in recent months. Where does Bill Shorten and the parliamentary Labor Party stand on this one, folks, that is the political question.
Senator the Hon Eric Abetz, Minister for Employment, is also on the case, and his recent speech is getting some publicity.
The AFR reported as follows: 'The Abbott government has signalled a broad-ranging royal commission into the union movement following fresh allegations of corruption in the construction industry, setting the scene for a drawn-out assault on Labor’s traditional support base.
'At the same time, Employment Minister Eric Abetz upbraided businesses which habitually cave in to unrealistic union pay demands, jeopardising their viability and risking a wages breakout.
'In a blistering attack on business and unions for their roles in lifting wages to unsustainable levels, Senator Abetz called on companies to band together and resist spiralling claims'.
This continues the government's theme that if a company needs government support is should first put its house in order, and as we have pointed out labor costs are an important set of costs that are rendering Australian industry globally uncompetitive. Part of labor costs are the rorts and corruption in the construction industry, which includes the out-of-control NBN
Here is a link. If past practice is a guide, a video of the event will eventually be provided by the Sydney Institute.
Last week's inflation shock has provided aftershocks as the analysts get onto the case. For the December quarter, CPI inflation was 0.8 %, twice the predicted 0.4 %. 'Underlying' CPI inflation, the main guide to RBA action, is said to be at the top or even above the 2-3 % range for the past six months. Worse, traded goods inflation and inflation of services provided by or heavily influenced by governments are running at almost twice the average. On top of the unexpected strength of housing prices, this would seem to leave little room for any more rate cuts, and suggests in fact that the two previous rate cuts were a mistake. Much egg to be wiped from the RBa's dial as this is the entirely predictable (and predicted) consequence of using monetary policy to reduce the overblown Australian dollar.
The various nasty economic currents include doubt about the strength of China's economy putting downward pressure on commodity prices, fears about the further 'taper' of American money printing policy putting downward pressure on share prices and problems for 'emerging economies' as money flows back to the USA.
We highly commend Gary Scarrabelotti's fine contribution on the theme of 'a floating dollar requires floating wages', published here on Tuesday.
However, the real global nastiness is the vast and accelerating change that is the result of the second great age of machines. A reader has drawn attention to an excellent diatribe by Ambrose Evans-Pritchard who asks the question 'Will the 2nd Great Machine Age be a frightening jobless dystopia?"
As the reader says, 'it puts our debate on the future of manufacturing to shame'. But we are a small country far from the big centres where competition raises standards of debate on most matters, so we must borrow from the best in class when we can. (This bodes ill for local journalists, incidentally, but that is another matter.)
The basic thesis is that machines have been displacing jobs for years and the rate is accelerating.
Ambrose Pritchard: 'Phillip Jennings, head of the UNI global labour federation, said it would be a "miscarriage of justice" to blame the 32 million job losses since the Lehman-EMU crisis on the iPad or the driverless car.
"You can't put technology in the dock for 50pc youth unemployment in Greece or Spain. I blame the EU Troika. It was the economic and political decisions taken that have led to the collapse of jobs. In Greece it has gone beyond depression into a humanitarian crisis," he said at the World Economic Forum.
'He said some $2 trillion of corporate cash is on the sidelines in the US, $700bn in the UK, and another $2 trillion in the rest of the world. "There is an investors strike. This is a problem of demand in our economies, they are comatose," he said.
'This has a kernel of truth. The current policy settings are pushing the global savings rate to a record 25.5pc of GDP, creating a chronic surfeit of capital over labour. It is a Marxian world'.
Today we learn thanks to the ANZ bank that Australian investment is falling off a cliff and regular readers will recall that real (as opposed to ABS) unemployment has been rocketing up. While the mining boom may have staved off the problems already endemic in other 'developed' nations, it seems distopia is finally reaching Australia.
Read on here, folks, and work as hard as you can to help get your children into jobs that cannot (yet) be done by robots.
This is a companion piece to those by the Economist reported on last week, and linked here.
Should we be worried? You bet.
Floating dollar means (inevitably) floating wages
Date: Tuesday, January 28, 2014
Author: Gary Scarrabelotti
The truth about an iron law of economics must come out – and here it is: in a multi-dimensional economy the floating of the dollar was a one-dimensional reform – important in its own right and with many benefits - but a genuinely multi-dimensional reform would also provide for the “floating” of wages and salaries.
“Did he actually say that?”
“Yes, he did.”
Wages and salaries not only go up. They can go down – sometimes with inexorable force.
And here’s another shock with which to end your Happy Australia Day Holiday: John Howard was right about Work Choices.
Indeed he was. Because embedded in Work Choices was an important principle – the one I am now openly advocating – that wages and salaries are not on a one-way street north. They travel along a conventional two-way route and on the other side of the road traffic is heading south.
What was wrong with Work Choices was that it was a bridge too far at the time: industrially it was unnecessary; politically it was an error of judgement.
Prior to the 2004 federal elections, Howard government IR legislation had already set in motion throughout the labour market forces that were likely to have achieved in time, and with a conservative caution, much the same result as Work Choices – the natural complement of floating of the dollar.
Do I hear outrage there on my Left?
Sure do. I have said the unsayable.
Do I have a theoretical argument?
No, I don’t. But I do have the observations of “real life experience”. Let me tell you about them.
You see, I run a small business: a micro business, in fact. And this is what I have noticed: when my customers dry up, the business income dries up too; and when business income dries up, the wages that I can pay myself fall.
It has nothing to do with Theory of Money or “corporate greed”. It’s just a fact. Shrinking market, shrinking wages. Don’t ask me to explain it. It happens.
On one painful occasion I recall all too well, the market simply disappeared. What then occurred happened with the inevitability of a physical law. I had to stop paying myself a wage. To keep the business ticking over, I also had to stop making super contributions. And to meet my personal needs, I had to draw on savings. In other words, I took a gamble: I raided the Scarrabelotti Future Fund to pay for the present. Only time will tell, what the implications of that might be. For now I try not to think about it.
I did not come here, though, to write about me and my gambler’s decisions – after a certain point, me and mine had little to do with it. My business was like a tiny boat that had chugged out ignorantly upon a placid-seeming sea only to be picked up by a huge and unexpected wave and hurled mercilessly shoreward.
I also observed, as we sped toward our fate, that when my wages were cut – eliminated, actually –there was no respect paid to providing me with a living wage as defined by some industrial court or, more abstractly, by theologians and moral philosophers I have known. None at all! The wage was cancelled outright as if by an automatic principle imbedded in the universe. I was astonished by the shear amorality of it. Hadn’t the “business cycle” heard of justice?
Now don’t get me wrong. I don’t deny that employers should pay workers a just wage. Let’s leave that for another time. For now, I want to focus on my personal encounter with the market place. In the instance I am reporting, there was literally no space for justice. It’s great to have it, if you have the means of delivering on it. Sometimes – very often, indeed – the means can be snatched away from us.
Here’s your takeaway then: in markets values rise and fall, including the value of wages. That is a shocking thought in a society habituated to the notion that wages can only rise. Unfortunately, a society that refuses to tolerate wage-and-salary falls is one committed – whether it appreciates it or not – to the long run destruction of work and employment.
You don’t believe me?Well, why not conduct an experiment? Go start a small business and watch what happens.
“OK. Been there, done that. Cut my wages. Cut my employees wages. We survived. But today the employees don’t seem too grateful. What now?”
Well, think about this. The employees who accepted the wage cuts have just acquired a stake in your business. They are like the venture capitalist. They have stumped up the new capital you needed to run the business. Now they have a claim to part of it.
“Whoa! Say that again.”
I will. Later.
“By the way, what happened when you hit the beach.”
Australia Day Sanity Break, 25 January 2014
Date: Saturday, January 25, 2014
Author: Henry Thornton
Here's to a wonderful Australia Day long weekend, gentle readers, and congratulations to all those eminant Australians who have been 'gonged'.
We are late to post this weekend because we have been 'camped' in Avoca celebrating a dear friend's eightieth birthday, disguised as an event to 'open' a grand new hay shed. Little internet here, and Henry has not learnt to access it via his mobile phone. The 'camp' in our case was a nice 'Eco Lodge' about 7 km from the town centre and offering fine views, including bunnies, wallabies and stunning vistas of stars at night. For us the festivities started Friday night at a real camp beside a lake in the middle of a sheep'n'cattle run with a large fire, meat slowly roasting on said fire, dogs (and large bullants) running about and lots of red wine and fine scotch.
Henry had a mild traffic accident (BEFORE the drinking started), and the car was rendered driveable by the friendly owner of one of the local service stations. A sideswipe was due to Henry's uncertainty about the double two lane highway through the town and he was quick to tell the young person who had been startled by Henry's sudden lurch to the right it was his (Henry's) fault. No-one was hurt, and both cars are easily repairable, and this will boost Australia's GDP, but Mrs T when phoned to report the event was quick to question Henry's competence as a driver. 'Are you ok', she demanded to know, 'you're slurring your speech'. This is the latest line of attack on poor Henry, who over the years has been the recipient of most reasonable criticisms, as well attention being drawn to several (highly implausible) alleged weaknesses.
There were two copies of the Australian in the newsagent but no Age, showing the innate good sense of the residents of Avoca. The local news was of a bizarre murder, with the body dumped in an old mine shaft. 'This tipped the police off, as the perps must be men with detailed knowledge of the old mines and their locations', explained the bloke who kindly fixed Henry's car. 'They made two arrests almost immediately'.
On the national scene, we salute Adam Goodes, the official Australian of the year, as well as the five 'Champions of indigenous advancement' named as joint winners of a newspaper's similar award, one of whom was Adam Goodes. Also we cheer Li Na, who should be made an honorary Aussie for her fine win in the Australian Open. Coming as it did after two stoic losses, and thoughts of retirement, this is a rival for Mao's last dancer in Henry's heart at least.
Tony Abbott has been hailed for his speech of great economic commonsense at Davos and it has also been revealed that 'Jakarta rift won't deter PM on boats'. The largely country folk at the birthday party were probably natural conservatives but several expressed the view that 'nothing much' has happened so far under the new government. We were seeking to understand the complex family interrelationships among the guests and in any case it would have been impolite to attempt to poll the other guests on their political views.
Our guest of honour was a distinguished medical man who is known for his pioneering work on the so-called Bairnsdale Ulcer, aka Mycobacterium ulcerans disease or the Buruli ulcer. As well as diagnosing this dread affliction, which is related to leprosy and tuberculosis, John Hayman also devised the theory that it originated on the Gondwana supercontinent before it split apart. Analysis of the genetic structure of the Bairnsdale ulcer and similar diseases on the former parts of Gondwana has supposedly disproved this theory, but the senior medical man who was MC for the day expressed his view that John's theory would eventually be proved correct. Here is a link.
John Hayman's career has another, even more distinguished, highlight. In a moment of inspiration, he suddenly realised the nature of the previously mysterious illness that afflicted Charles Darwin. The symptoms included frequent vomiting, headaches and depression, hence the colorful name of the 'vomiting disease'. Previous theories focussed on depression, implying or stating outright that Darwin was a feeble person with a severe psychological problem. Even if this was correct, it would be a major burden, making his achievements even more worthy, but John Hayman's theory has been published in a refereed journal and seems widely accepted. There can be no definitive proof short of digging the body up and checking the DNA, although analysis of Darwin's (female) ancestors and their illnesses provides supporting evidence. The abstract to Dr Hayman's definitive paper is available here.
The theme of Henry's talk was that John Hayman is a man for the ages due to the many achievements of his medical career and in particular his work on Darwin's illness. But he is also a very good bloke with a great talent for friendship and a great love for the members of his extensive family, his dogs and even his many trees.
The country around Avoca in summer is classic Aussie landscape. Bright yellow grass, gum trees in numbers far too numerous to count, wire fences and blue hills, one of which is named, presumably with a sense of irony, Mount Avoca. We were taken to see a massive Red Gum, estimated to be three or four hundred years old. It was in the middle of a large paddock, and had a ring around its trunk about four feet from the ground, which one expert said was evidence that it survived an attempted ring-barking. As there were the dead bones of similar enormous trees in the centre of many other large paddocks in the area, Henry speculates that the original idea was to provide shade for the stock, but a later fashion, presumably encouraged by the Productivity Commission, decreed that the shade trees be cut down to provide more pasture.
One of the speeches praised John Hayman for the large number of trees he has planted. 'But I feel sure Jack (real name surpressed, but a worker on the estate) will chop them all down once I am gone', John Hayman noted in his reply.
Image of the week
Henry arrives, disguised as a local, photo courtesy Tom Hayman
Inflation, cost disequilibrium blues
Date: Thursday, January 23, 2014
Author: Henry Thornton
Gor blimey, guv'nor, the mob has caught on. Australia's cost base is way over a level at which we are competitive and a falling exchange rate is necessary but not sufficient to fix it. We was warned by the Gov'nor of this proposition very recently, only a year or so after it became bleeding obvious to the outsiders who try to help.
The RBA boss, Glenn Stevens, has now faced two strikes aginst his administration. First the resumption of house price inflation came far sooner than he expected, and his only response was to point out that these hikes did not a bubble make. Then goods and services inflation for the December quarter come in about twice the level expected by guv'nor Glenn and his forecasting team and all and sundry are giving advice that is intended to be helpful. Even one of the old and bold bizoids, a former RBA board member no less, has pointed out, well after the inflationary horse has bolted, that Australia's double-barreled cost disequilibrium been building up for years. Hope he will now reveal the warnings about the advice he gave the guv'nor along the way. Here is one of Henry's efforts, in May 2013.
'Australia needs wage restraint' say some, and the more enlightened people even say 'Australia needs wage cuts'. Yes we do comrades, but how can this be done in an IR system that favours unions and with an absolutely poisonous political atmosphere? That is the question and there is no easy answer. Short of political and union cooperation the conventional answer is severe recession. Here is Henry's most recent attempt to be helpful.