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Henry Thornton - Contributors: A discussion of economic, social and political issues Blogs
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.

(Here is Mr Uren's account, and here is a link to the speech itself.)

'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.

Sunday Sanity Break, 19/10/2014
Date: Sunday, October 19, 2014
Author: Henry Thornton (In Ceduna)

Growing inequality is damaging the USA, and especially its great tradition of equality of opportunity. This is unsustainable said US Fed Chairperson Janet Yellen on ABC TV yestertoday. (Or words to this effect.) Can it be very different here, gentle readers?

A simple google search provided access to the entire speech. Here is the summary paragraph.

 'The extent of and continuing increase in inequality in the United States greatly concern me. The past several decades have seen the most sustained rise in inequality since the 19th century after more than 40 years of narrowing inequality following the Great Depression. By some estimates, income and wealth inequality are near their highest levels in the past hundred years, much higher than the average during that time span and probably higher than for much of American history before then.2 It is no secret that the past few decades of widening inequality can be summed up as significant income and wealth gains for those at the very top and stagnant living standards for the majority. I think it is appropriate to ask whether this trend is compatible with values rooted in our nation's history, among them the high value Americans have traditionally placed on equality of opportunity'.

The dread disease of Ebola is racing ahead, and experts are warning that soon it may become a global pandemic.  The isolated cases in developed nations show the risk, as does the upward curve of deaths in Africa. Henry has been told that in principle a vaccine should be possible, but none has been developed because poor Africans cannot afford to meet their cost.  Inequality is not just an American challenge.

Henry has spent the night in Norseman.  This is a typical declining rural town, that reminded Mrs Thotnton of her ancestral town of Boggabri in Northern NSW. Here the ratio of closed to open shops is far higher to that in Kalgoorlie, about 70 % we guess.  Talk at the bar before dinner revealed that two out of three gold mines in the vicinity of Norseman are closed, reflecting high costs and a generally falling price of gold. Henry's travelling companion, a former mining mogul, offered the view that most of Australia's gold mines were at the 90 th decile of costs.  Henry's report on the Super Pit in Kalgoorlie is available here.

Henry's visit to Kalgoorlie is reported here. Next post covers the crossing of the Nullarbor.


Australia's cricket team whitewashed the pride of Pakistan in Quatar, or some similarly strange cricket powerhouse. The final over was a ripper, with Pakistan failing to score the two runs needed to win.  Great work, men.

Last night, like lambs to the slaughter, the Aussie Rugger bu**ers faced the mighty All Blacks. As we said: 'A win would be glorious, a draw would be wonderful but a thrashing would not be unsurprising'. Sadly, there was a near win, but the coach fell on his sword. Smart man.

This is the dead time for sport in the Thornton household, with only the footy trading to relieve the boredom. Essendon is letting go players likely to be banned in return for other players who will not be banned.  Caaaarlton! has let Waite go, and have traded Jeff Garlett and it said to have fired Mitch Robinson. Hard to see how we can do better next year, Mighty Mick.

Henry, Mrs T and the Mining Mogul have travelled the mighty Nullarbor and report in from Ceduna.  Nice hotel motel on the waterfront, but no internet connection, decent TV or newspapers anywhere.  It will be better tomorrow.

Image of the week

Global finance - `anomalies` and `dangerous combination[s]`
Date: Tuesday, October 14, 2014
Author: Henry Thornton

There are 'a number of anomalies present in financial markets in terms of pricing and volatility. There are also some misplaced perceptions amongst market participants about the degree of liquidity present in some market segments. That strikes me as a dangerous combination and unlikely to be resolved smoothly'.

This is the conclusion of a speech by Guy Debelle, RBA Assistant Governor (Financial Markets). The speech is called Volatility and Market Pricing, and is worth reading carefully.

It can be accessed here

Henry is escaping all this to visit the arid delights of the road across the Nullarbor from Perth to Adelaide. Having listened recently to an expert on feral cats, we shall not be camping out, but hunkering down in whatever motels we can find.

Be assured Henry shall be monitoring the global markets and domestic politics as well as checking the wildlife, indigenous and imported alike. But transmission may be intermittant.

Weekend Sanity Break, 11 October 2014
Date: Saturday, October 11, 2014
Author: Henry Thornton

The risks of a global recession are increasing.  The shadwos in the China story are lengthening with renewed emphasis provided by China's decision to impose tariffs on the import of coal. Spread of protectiomist policies greatly worsened the global depression in the 1930s and this action by China is like the death of the first canary in an old-fashioned underground coal mine. The fighting in the Middle East will become worse as airpower alone fails to subdue the Islamist fanatics. Serious damage to oil production would further damage prospects for growth.  Growth in the Eurozone is sputtering and there are deeply adverse population trends to reduce everyone's 'Animal Spirits'.

Avoiding a protectionist plague is vital, but will such self-restraint be uniformly maintained?  To add to the pressures, every developed nations' budget is mired in deep debt and any push to tighten budget policy will reduce growth further, at least in the short run, which means for several years.  'Budget gridlock' is the technical term.  If former Treasury Deputy-Secretary John Fraser, now a globe trotting wealthy capitalist, takes a deep breath and accepts the job of heading Australia's Treasury he will quickly find a government bereft of any consistent budgetary policy with 'Budget Gridlock' the situation,

As noted yesterday, monetary policy is also in Gridlock. Globally, the US Fed has to find a way to begin to return monetary policy to normal without bringing on global recession. There is plenty of bad news to smash share proces, but the news that American 'Quantitative Easing' is ending is most often claimed as the prime cause of the deep correction now reducing paper wealth globally. Henry hopes his favourite fund manager further reduced his exposure to global equities in recent weeks, but picking when to do this is one of the toughest decisions a fundie has to make.  John Fraser will know the feeling well.

In Australia, Glenn Stevens is facing a falling dollar ('Hooray, Comrades' is the cry) but also rising house prices ('Do something APRA').  Australia's monetary policy is also in gridlock, and may stand easy, like the Good Soldier Schwejk, for well into 2015.

Paul Kelly wants Tony Abbott to 'muscle up' to the economic challenge. This description will appeal to the Prime minister, who has a good record in confronting the challenge of the terrorists but has let the economic debate be hi-jacked by the charge of 'unfair'. The problem is twofold.  The first problem is adopting Wayne Swan's overoptimistic forecasts, for which we must blame Treasury and Treasurer Joe Hockey.  Always allow for the 'realistic worse case' is one of Henry's (Thornton not Ken) rules for forecasters and policy makers. This is a rule apparently unknown in Canberra, and Treasury and the Treasurer seem to have assumed that the Australian parliament would allow then to adopt a few tough (but unfair) budget improvement policies and the budget would 'whirr back into surplus'.  And now the PM has ruled out tax increases, during a quick break from the war front.

The second problem is an almost total inability to tell a coherent economic story.  It is pretty somple really. Australia's largent mining boom is over, and no former mining boom has ended without serious recession. The particular problem the government seems not to have noticed is a national cost base that has made all sectors of Australian industry uncompetitive. To compound the problem, the world is slipping back into recession and in any case is in a debt trap that will enforce slow growth for the forseeable future.

My prediction is this. Australia's budget will never again be in surplus until the GST is widened or its rate increased, or preferably both. Much as I hate tax increases almost as much as Tony Abbott, Australia's ability to remove supposed 'entitlements' is almost zero, and certainly so unless we can find a 'genius communicator' to devise and sell an economic narrative just as compelling as Tony Abbott is on geo-political matters.


What a great Rugby League grand final is was, gentle readers, and Greg Inglis' Goanna Walk will become an icon of Black Pride, whose time has come.

Meanwhile, the Essendon supplements saga must, surely, be ending soon.  Most people are saying Mr Hird will coach no more, and if 34 infraction notices are issued and remain on the table it is hard to see how the once mighty Essendon can field a team next year.  We grieve for this situation, but did you notice Dean Cox's book launch included reference to drugs problems in the West about the time they were laying waste to their opponants. ('Don't mention the war' seems to be the AFL's response.)

The Aussie netball team are again at their peak, and the wimmin's basketballers played well in losing to the mighty USA and again in winning the bronze medal in the playoff against Turkey.

Cricket will soon be with us. With a very busy season before us, serious viewers may find their drinking arm packing up like Watto's calf, so one hopes there has been adequate preparation.

Image of the Week

Linked here.

Slower growth and economic policy
Date: Friday, October 10, 2014
Author: Henry Thornton

The IMF has reduced its forecasts for global growth. With commodity prices plunging, Australia's budget deficit problem is getting worse. Australia, like other so-called 'developed nations' has a budget crisis.  As growth prospects worsen, what can we do?

Global monetary policy remains 'set easy'.  The RBA's monetary policy is not so easy as that of the nations with near-zero interest rates, like the USA and Europe. But monetary policy cannot perform miracles. The budget dilemma is obvious and clear.  Slow growth makes budget deficits larger, limiting the use of fiscal policy to  increase growth that seems to elected leaders 'too slow' and unlikely to help their chances of reelection. 

Sadly governments like those of Rudd'n'Gillard'Rudd in Oz have wasted the benefit of 'fiscal stimulus', and now governments cannot afford to tighten fiscal policy.  Or are not allowed to tighten fiscal policy, as in Australia with its recalcient Senate. None of this should be a surprise, gentle readers.  It was even predicted (gasp!) here.

So we have fiscal gridlock, gentle readers.  And monetary policy gridlock. Nations with near zero interest rates and 'quantitative easing'  need to withdraw excessively easy monetary policy - hardly likely to strengthen growth, and almost certain to reduce asset prices. The end of booming asset prices is already evident, and plunging asset prices are also unlikely to strengthen growth. Countries with excessive debt will be unable or unwilling to to tighten fiscal policy, at least until budgets under control again raise 'Animal Spirits'.

The only answer with these constraints is 'economic reform', but shell-shocked businesses and households - due to excessive debt, slow growth and high unemployment - are unlikely to welcome 'economic reform'.  In any case, to encourage growth requires years of steady, consistent economic reform, not twisting and turning like wounded rattlesnakes.

The only other 'solution' to the slow growth that is now widely expected is to cop it sweet and let nature take its course. Do not upset the voters with painful 'economic reform. Allow nature to fix fiscal deficits ever so slowly, and let monetary policy stay loose as an Ebola-infected goose. (Apologies for such an awful vision, gentle readers.)

As someone once said, 'When ignorance is bliss, it is folly to be wise'. So dream on, wise leaders. Muddle through.  Soon a real economic or geopolitical crisis will appear, and all this concern for overly large budget deficits and overly easy monetary policy will evaporate.

Then instead of slow growth or mild recession will shall all face deep depression.

Germany - a case study

'The German model is ruinous for Germany, and deadly for Europe', says Ambrose Evans-Pritchard

'France may look like the sick of man of Europe, but Germany’s woes run deeper, rooted in mercantilist dogma.

'The Kaiser Wilhelm Canal in Kiel is crumbling. Last year, the authorities had to close the 60-mile shortcut from the Baltic to the North Sea for two weeks, something that had never happened through two world wars. The locks had failed.

'Large ships were forced to go around the Skagerrak, imposing emergency surcharges. The canal was shut again last month because sluice gates were not working, damaged by the constant thrust of propeller blades. It has been a running saga of problems, the result of slashing investment to the bone, and cutting maintenance funds in 2012 from €60m (£47m) a year to €11m.

'This is an odd way to treat the busiest waterway in the world, letting through 35,000 ships a year, so vital to the Port of Hamburg. It is odder still given that the German state can borrow funds for five years at an interest rate of 0.15pc. Yet such is the economic policy of Germany, worshipping the false of god of fiscal balance.
'The Bundestag is waking up to the economic folly of this. It has approved €260m of funding to refurbish the canal over the next five years. Yet experts say it needs €1bn, one of countless projects crying out for money across the derelict infrastructure of a nation that has forgotten how to invest, sleepwalking into decline.

'France may look like the sick of man of Europe, but Germany’s woes run deeper, rooted in mercantilist dogma, the glorification of saving for its own sake, and the corrosive psychology of ageing'.

Read on here.

The graph says it all, really.

Turnbull and the NBN
Date: Tuesday, October 07, 2014
Author: Michael Porter

The fact that accounting for the NBN as a losing business will (correct) the budget deficit is no cause for delay, contrary to Malcolm Turnbull.

By allowing multi-technology competition Turnbull will reverse the ‘de-commissioning” of businesses competing with NBN – HFC cable, copper and so forth. Allow competition. Reduce waste of our taxes by $40-60 billion.

Malcolm Turnbull seems intimidated by Hockey and Abbott’s foolish adherence to the accounting fiction in the deficit. Combined losses by the private sector investment in broadband will be replaced by a booming broadband market if we remove protection on the contrived NBN government monopoly.

The reports commissioned by Malcolm from both Bill Scales and Michael Vertigan are spot on – and should be acted on. A row with Hockey and Abbott on this would be a plus! And the savings would finance real quality service to the regions ten times over.

Read on here.  

Saturday Sanity Break, 4 Oct 2014
Date: Saturday, October 04, 2014
Author: Henry Thornton

Australia goes to war with fighter planes seeking jihadists and a debate on whether anything real can be achieved without boots on the ground. As in Vietnam, even with boots on the ground, fighting, it will be long and hard.

Henry's geopolitical guru, Gary Scarrabelotti begins a series on the struggle.

Joe Hockey has provided an update on the government's economic strategy.

It has an odd web address, but perhaps the Abbott government has outsourced its communication policy to a proven genius communicator.

The summary is as follows.

Australia's Economic Action Strategy.

'The Economic Action Strategy is providing the right conditions to drive growth and create jobs.

'Since coming to Government, growth has strengthened and nearly a quarter of a million jobs have been created.

'We are restoring confidence in public finances.  And we are promoting business confidence by creating the right environment to innovate, invest and thrive.

'This is good news for families and for Australia’s small businesses.

'Already the Government has:
• Scrapped the carbon tax– reducing costs for families;
• Scrapped the mining tax – making Australia a more attractive investment destination;
• Strengthened the Budget – and detailed how we will reduce projected debt by almost $300 billion in a decade;
• Cut $700 million in red tape so far – with another Red Tape Repeal Day to be held later this month;
• Launched the largest infrastructure programme in Australia’s history – with major road investments across Australia; and
• Signed free trade agreements with Korea and Japan – making it easier to for exporters and for job creation.

'These achievements are just the first steps as we build a strong, prosperous economy and a safe, secure Australia.

'There is much more to do.

'In coming months, the Government will continue to make decisions that strengthen the economy; repair the Budget; help small business create jobs and ensure families can plan for their futures with confidence.

'Click here to download the Government’s Economic Action Strategy'.

Henry's latest blog, linked here, expresses polite skepticism, but today I must defer to the Treasurer and the Australian Treasury.  Trouble is, the Treasury is the mob that led Treasurer Swan down a primrose path to perdition.

The AFR, stumbling along behind, says 'Top expats warn on slowdown'. Sadly no link I can find, but at least some people (Top expats) have worked it out.

You takes your money and you makes your choice, gentle readers.

Speaking of money, the markets have been unkind, gentle readers, but in Henry's humble opinion, it is not yet time to plunge in again.  Some unplunging is probably still wise, but your big bank Financial Advisor will, or should be able to, help.

Henry's latest (but humble) advice may be accessed here.


Drat.  Henry was hoping that Hawthorn's belting of the Swans was the end of all the footy talk.  But the Essendon supplements saga refuses to go away, continued by Coach Hird's stubborn attempt to stay in the news.

Once the Rugby (League) grand final is over, and Australia's Rugby (Union) team is flogged by the Argies, it will be time to catch up on the cricket.

It's none too soon, comrades, as the new allrounder, Mitch 'Swampey' Marsh is said to have a hammie.  It's tough being an allrounder, Mitch, as your predecessor, Shane 'Watto' Watson has discovered.  Don't they have expert help, these fellows? Surely there is a supplement for overworked allrounders, Mr Dank?

Speak of the divil, comrades, why has said Mr Dank not been banned for life, or flogged in the middle of the 'G' by Paul Little as a half-time entertainment for the footy crowd?

At least there is the Netball World Cup to watch, and if in albury on the right weekend the National boomerang throwing Championship.

Image of the week.

Courtesy The Oz

RBA`s next major dilemma
Date: Friday, October 03, 2014
Author: Henry Thornton

'Be careful what you wish for' is a useful piece of advice for naive youngsters.  But one assumes that grown-ups do not need reminding about such an important matter.

The RBA has been confronting dilemmas.  Policy #1, cut interest rates more than is strictly needed to control domestic inflatiion to discourage the excess capital inflow that has been keeping the dollar so high. To little, too late, Guv'nor Glenn. Already whole swathes of existing globally sensitive industy is weakened, and in some cases decimated.

With Policy #1 'working', watch the housing market take off, fuelled by overseas buyers and local investors, 'crowding out' (foregive the technical term, gentle readers) local potential home owners. The frustrated domestic home owners include the young people who are further discouraged by the enormous difficults in getting jobs, partly because of the dire effects of Policy #1, the non-policy of letting the Aussia dollar rip.

At least the RBA seems to have spotted the fallacy of trying to introduce Policy #2, raising interest rates to slow rampaging house price inflation.  They have handballed responsibility of containing house price inflation to APRA, as the designated custodian of 'counter-cyclical Australian macroprudential policy (C-CAMP).  Let's hope APRA does not respond with 'Que?'.

Now the Aussie dollar is on the skids, helped along by falling iron ore prices. Now that iron ore prices have halved from their peak, the fall in the Aussie is likely to become precipitous, to the point of being damaging. An economy cannot restructure on the whim of international currency speculators, which is why policy #1A was proposed here almost two years ago.

A distinguished friend provided Henry with some chilling arithmetic. 'When the commodity boom was at its peak, the current account deficit was around $17 billion. What it will be now commodity prices have collapsed is anybody's guess, but it will not be pretty. Overseas investors are likely to abandon Australia, forcing the dollar even lower. (As you know, Henry, financial markets almost always overshoot.)

'A much lower dollar will be very damaging for the banks, who still fund a lot of their lending from offshore.  And now it seems punters are waking up to the risks with so-called 'hybrid' securities. Remind your readers to 'Fasten seat belts' Henry.  There has never been a commodity boom that ended well. You predicted recession more than a year ago - and here it comes. And domestic inflation will soon be the problem du jour, and the RBA will have another dilemma. Bloody hell!'

'The glass shall be dry, Henry, not just half-empty'.

ISIL, ISIS, Islamic State, whatever.

Gary Scarrabelotti shares his thoughts on developments in the Middle East and suggests an approach, including 'No boots on the ground', at least for now.

Even if Islamic State were one day to control a territory that stretched from Damascus to Baghdad, Gary says, that would not represent, in and of itself, a strategic threat to Australia.

True, the glamour won by Islamic State, for upending the political geography of the Middle East, would drive waves of influence across the globe and inspire would-be Sunni insurgents elsewhere.  And true, it would be a real worry for Australia if, for example, Islamic State imitators were, one day, to take hold in some part of Indonesia and could not be rooted out.  That would have strategic implications for Australia. Right now, though, that’s a far-off scenario.

Long before that could happen, an Islamic State triumph would energise its natural rivals: Iran, certainly; and, very likely, both Turkey and Saudi Arabia. With any great Islamic State victory, the survival instincts of its neighbours would kick in.  The result would be general war in the Middle East.  It’s a war Australia would not need to fight, any more than we needed take sides in the Iran-Iraq War of 1980-88.

So why are we so agitated, then?

It comes down to our “light on the hill” social experiment with culturally colour-blind immigration. We imported the Middle East into our suburbs.

So, yes, we do have a problem. Do we, however, have to go to Iraq (and maybe also Syria) to remove the temptationto join jihadthat Islamic misfits into our society find so alluring?

No, I don’t believe so.

Our focus should be on pre-empting terrorist attacks in Australia.  As for cutting off the supply from our shores of recruits to foreign wars we don’t like,well, I wouldn’t make it a priority.  If it were up to me, those who want to ‘do’ jihad in foreign climes, I’d let them go: give them time to reach their destinations, cancel their passports, and let fate take its course. The prospect of being rendered stateless should, in any case, sober up a certain number of angry young men. Genuinely penitent jihadis could always be re-issued with a passport as an act of mercy.

Read on here.  

Saturday Sanity Break, 27 September 2014
Date: Saturday, September 27, 2014
Author: Henry Thornton

The coalition of the willing is beginning its task of dismantling the Islamist fanatics with overwhelming air power, but one naturally wonders if this job can be done effectively even with lots of boots on the ground.  There are many different views on whether the current approach (without Western boots) can work but, with the terror coming to Western nations so decisively, what other approach is feasable?  We sincerely hope that moderate Muslims, of whom there are many, rally around team Australia at this difficult time.

The efforts of disaffected youths is a particular problem.  With middle class youth in the affluant suburbs of Melbourne finding it difficult to get jobs, one has great sympathy for young unemployed people in the poorer areas of our great cities. Poor parenting must be part of the problem, and the stories about the parenting of some of our indigenous football stars in today's press shows it is possible to do a good job in even the direst circumstances.  Australia must fix the jobs crisis as part of any anti-terror  program that has a chance of working. Is the Labor opposition willing to embrace this notion?  Time to ask them, Mr Abbott.

A close friend has pointed out that Australia has embraced many immigrants, on balance at great benefit to the nation. But perhaps the skeptics about large-scale immigration from troubled parts of the world have a point.  Henry's friend said: 'I never thought I'd see the day when police and military personal, including school cadets, are instructed not to wear their uniforms when travelling about. I understand why this is necessary, but what a comment on an overly generous "multicultural" immigration policy'.


Henry found some supporters at 'The Melbourne Forum' this week, as reported here. The economy is in a parlous state, and headed for 'The recession we did not need to have'.  The powers do not seem to understand, but it now seems certain that the problems of insufficient jobs, especially for already disaffected youths, are likely to get far worse.

Yet the budget deficit we do not need to have - check New Zealand if you doubt this assertion - is still mired in the Senate and there is very little sound policy on offer, although the BCA's efforts are worthy of praise.

3D printing - this is a vital part of a viable part of a modern manufacturing industry, and here is a nice illustration.

Film piracy is also a key activity for disaffected youth.  The good guys in this debate are removing the excuses of pirates by offering small if any times between release overseas (especially the USA) and reasonable fees, though US levels will be hard to achieve with Australia's relativey high levels of costs.  More here.

Did you see the report this year that average levels of wages in US mines are twice Australian levels?  Even truck drivers in mines are being replaced by robots, gentle readers.


The AFL season comes to an end today, barring a draw in the Grand Final.

It promises to be a battle for the ages. Sydney Swans have the 'Bondi billionaires' plus a bunch of home grown, well drilled stars from previous finals campaigns.

Hawthorn, last year's champion team, has lost Buddy to Sydney but is full of even more well drilled stars with a relentless commitment to winning whose tradition was established by 'Kennedy's commandos all those years ago.

The pundits are mostly favouring Sydney, but all of them think it will be close, so a draw is a distinct possibility. Sadly, Henry cannot say 'Go Blues'.

But, in fact, what a boilover.  Hawthorn was relentless and brilliant, to the point that Sydney seem shell-shocked from the get-go. Hard to watch, and indeed Henry switched off at half-time. Lot's of implications for 2015, but it would be best to enjoy the festive season and some cricket before thinking about this generally depressing subject..

Image of the week - iron ore mine working a low level.  (More paintings here.)

Monetary policy, asset inflation and the exchange rate
Date: Thursday, September 25, 2014
Author: Henry Thornton

As widely reported, the RBA's latest Financial Stability Report has confessed concern at the hot property market, especially in Melbourne and Sydney. It has said it is looking at action, perhaps even what APRA calls 'countercyclical macroprudential policy', especially applied to investment properties. Another area of scrutiny is houses purchased by overseas buyers.  The rules say such purchases should only apply to second hand houses but 'everyone' except the regulators say there is a lot of overseas buying of new houses. In any case, trying to limit overseas buyers to new houses would be guarenteed to fail.

The AFR calls any sort of 'macroeconomic policy' a return to the failed direct controls of the past, and says instead interest rates should be raised. This would be a 'return to the failed macroeconomic policies of the past', when monetary policy - the use of movements in cash interest rates - failed to fix an overvalued exchange rate, and failed to restrain runaway house prices.  This is no great problem, however. In both cases this was because monetary policy should stick to its primary strength, which is nudging the overall economy into a state of sustainable growth with low goods and services inflation.

Many years ago Milton Friedman said 'monetary policy cannot serve two masters' and current dilemmas show exactly why this is so. Assuming it was planning to control the overall economy plus the currency and house prices with monetary policy - movements in cash rates of interest - which way would it move at present?  Raising rates would help restrain house prices.  Reducing cash rates would help reduce the overvalued exchange rate. The RBA is entitled to ask: 'Que?'

Today Henry had the chance to debate this weighty matter at Melbourne University, like a Chinese dissident of 30 years ago being allowed slight renewed access to the political leaders. Kevin Davis from the Murray Inquiry and Glenn Stevens from the RBA amongst other worthies were the stars. To prepare, Henry read the RBA's 64 page Financial Stability Report. War and Peace it aint, but it is well written and crammed with facts. The next breakthrough for central banks is to debate policy, even with discredited former leaders.

Great but (naturally) guarded speeches by Kevin and Glenn which I shall link to when links are available. Janine Dixon presented some simulations of the likely effect on unemployment of a substantial currency depreciation not met by price and wage restraint.  She said that this meant an increase of unemployment  of 4 percentage points, to 10 or eleven percent!  This is broadly like it was in the recessions of 1981 and 1991 and so has some inherent plausibility.

Then Nicholas Gruen presented some seriously radical ideas about really deregulated banking which cheered the room and bankers (except central bankers) are regarded by academics as among the more villanous members of polit society.  Max Corden reported that he is reading the ('brilliant') manuscript of Martin Wolf of Financial Times fame, and thought that Nicholas was on a similar tram. Professor Helen Sullivan, director of the Melbourne School of government spoke of some highly relevant matters of governance.

Henry's comment was on 'Monetary policy and macroprudential policy', a matter that will not be new to readers of this blog. However, the thrill of the occasion produced a new thought, or at least a new way of looking at a favourite subject, which is why one should attend and speak even at soires where everyone are either old friends or (ahem) enemies.

'In the 1990s, during the so-called "Great Moderation", monetary policy seemed under control, with inflation targets widely believed to be an excellent guide to monetary policy. Yet asset inflation was out of control and this led directly to the Global Financial Crisis. Obviously not all was under control in the monetary garden, and now we know we need macroprudential policy, even 'counter-cyclical macroprudential policy' to quell the weeds of excess asset inflation (='bubbles')'.

This led to my advocacy of taxes on capital inflow and 'dynamic asset ratio' policy' (='counter-cyclical prudential policy') to help bring the exchange rate to heel and to contain house prices. Naturally I mentioned negative grearing as an important cause of house price inflation and, in a burst of generosity, pointed out that reform of negative gearing would do much to fix house price inflation, a matter for which Gov'nor Glenn was carrying the can. He risked a wry smile at that point, though he had earlier dismissed tax on the exchange rate with 'we need capital which means we are stuck with a high exchange rate'.  Henry did not bother to point out that we need less capital than we've been getting as that seemed an obvious counterpoint.

Other matters.

Do not miss the latest Raff Report. The Raff explains why he is not yet wading into mining stocks.

And Henry has posted another new painting, of a large open cut iron ore mine in the Pilbara.

Saturday Sanity Break, 20 September 2014
Date: Saturday, September 20, 2014
Author: Henry Thornton

We are in bubble territory, gentle readers, with shares generally and housing in 'parts' of Sydney and Melbourne, and possibly Brisbane. Gor blimy, comrades, what is the RBA doing? Urging prices to fall, seems to be the game plan, because Gov'nor Glenn equates modern macroprudential policies with 1970s 'direct action', with bank managers lending only to cronies and investors of long standing with 'their' bank. Gov'nor Glenn's inaction left the Aussie dollar too high for the health of our economy for too long, contributing to the depressed state of many trade-exposed industries, some parts of which will never recover once the $A plunges.  As it will surely do just as soon as international investors figure out our supposed 'miracle economy' is normally fallible.

As gov'nor Glenn surely understands, the market will eventually deal with gross disequilibrium, eventually.  Until the discrepency between reality and bubble behaviour become too disjoint.  Then the crash will inflict pain on everyone.  Correction, gentle readers, everyone but speculators who bail out in time and RBA staffers who benefit from massive fully protected pension plans.

So there you have it, comrades.  Henry is especially irritated today because he was denied access to an article in the On-line AFR.  Indeed, he could not find a page from which login could be attempted, and after pressing buttons for the help desk he was told by a robot to call again on Monday, between the hours of 9 to 5.  Silly buggers. The Economist never locks a fully paid-up subscriber out. Hi-tech, perhaps, or concern for the customer.

Anyway, to come to the news, uncertainty stalks international markets and politics.  Tony Abbott is consolidating his status as a great new global war-leader, George Brandis is prosecuting the home-grown baddies, having (thank goodness) saved someone from a beheading in George Street, and President Obama is still dithering about just how far to go in smashing the international baddies. The French, however, have been happy to tell the world of their contribution to baddie-destruction and a small number of Muzzies have demonstrated against the firm decisive actions of Tony and George. Ebola is decimating Africans and there is an ever-present risk that an infected person will slip through at immigration net and infect a major city in the West.

Happier news is that Scotland has voted to stay with Great Britain, which will surely be a great comfort for sensible Scotspersons as global chaos and madness rises.

As previously reported, various gurus have warned that asset inflation is due to turn into asset deflation, and any readers who are reaching the end of their time as asset accumulators should consider a defensive investmentposture.


We find ourselves at the business end of the footy season.  Overnight, the Swans hammered the Kangaroos, showing they are in a class ahead of any other team but possibly the Hawkes. As Buddy Franklin blitzed the Kangas, helped by Kurt Tippett and Adam Goodes, one could but admire the brilliance of whomever plotted the acquisition of the so-called 'Bondi-billionaires', Buddy and Kurt.  There is a theoretical chance that Port Adelaide will beat Hawthorn today, and if so it will represent the triumph of what Andrew Faulkner called 'chaotic beauty' of Port's playing style.

Do not miss Andrew's description of Port's 'freakish goal-kicking', as invented by Gavin Wanganeen. 'All the great clubs draw on their past, and 10 years ago almost to the week a Power champion won a preliminary final with a freakish goal in the dying seconds.

With the scores locked and the Saints marching home hard, Gavin Wanganeen kicked perhaps the greatest goal of his illustrious career.

Pouncing on a ball that was free for a fraction of a second, Wanganeen ran obliquely towards the right forward pocket, before striking the ball at a slight angle across his boot.

It was a drop punt, but not as we know it.

The 45m kick arced left-right to sail through the goals — that is, it curved the opposite way to a ­normal kick.

It seemed to defy physics, convention and bald logic. It did not compute.

It did, however, win the game. And arguably the premiership, for the next week Power hoisted their first AFL premiership cup to the heavens.

“It was a drop punt with a bit of reverse swing,” Wanganeen said when asked about that goal by The Weekend Australian this week. “It was deliberate.”

A far less happy scenario confronts Essendon, as told by Patrick Smith under the headline of 'For local hero James Hird, there’s no way out of this firestorm'.

Henry wonders if it will be more than Hird's future that is in deep strife.  Essendon faces massive legal bills, having lost totally in court, and many of its best players are likely to cop at least a year's suspension and/or go to another club.

The bombers were Henry's team as a kid and it would be awful to see this great club crashed and on fire.

Image of the week

Courtesy The Oz

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