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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.




Sluggish growth - economics or politics?
Date: Monday, January 18, 2016
Author: Henry Thornton

'Income growth lowest in 50 years' screams the front page of the Oz. Today's press, at least at the quality end of the spectrum, expresses and disseminates considerable gloom. This is as it should be, and was warned about in the Oz, and on this site two-and-a-half years ago.  Now the vultures are coming home to roost.


Fortunately, a note of contemporary realism has come from an unlikely source, which we shall come to shortly. Why the government is not spruiking similar sober realism is uncertain to this humble scribe, but I guess that's the nature of modern politics - smile cheerfully, bag the opposition and hope something good turns up.


Sluggish Chinese growth is the main cause for concern, though some also fret about the US economy despite massive (low productivity) jobs growth. The state of the Chinese economy is as enigmatic as usual, with official estimates for 7 % growth in the year just ended widely mistrusted. Overinvestment, heavily indebted State Owned Enterprises, and therefore banks at risk, and an at best slow 'pivot to consumerism' seem to be the major causes.
 
Australian incomes are cut by cost cutting in most sectors, due in turn to still-falling commodity prices and chronic absence of wage flexibility. To the credit of those still employed, as well as worried employers, wage growth is very low. With the government's 'softly, softly' approach to budget correction and IR reform, Australia is effectively trying to maintain an unsustainable lifestyle. 


Henry's advice as to causes of the coming recession was simple: 'Put crudely, Australia has pissed the proceeds of the mining boom up against a wall of gullible voter expectation.  In the process, mining companies allowed their cost bases to expand to unsustainable levels. Cost bases expanded in sympathy in the non-mining parts of the economy in a climate of easier than desirable monetary policy and encouraged by those vainglorious spending programs of the Rudd and Gillard Governments'.


The cure was described also; acceptance of the fragile state of our economy and sober realism in government; leading to budget repair, cost reduction generally and reducing an uncompetitive exchange rate by introducing a tax on capital inflow. The market slowly but surely has got the exchange rate to a level that restores a degree of international competitiveness, but what will never be known is how many businesses went to the wall during the low, slow sinking. The Abbot government failed to sell a soberly realistic outlook and its attempted rapid budget repair in 2014 was rejected by the voters. Mr Turnbull's approach has included cheerful talk about the virtues of being an Australian at this particular time and a policy of 'softly, slowly, sustainably' about budget repair and IR reform and (the third 's') political success.


Henry's theorum is as follows: if fixing economic policy is needed, sell the concept and then move fast. Provided there is a generous welfare system in place, (as in Australia), fast adjustment will create less pain than the long, drawn-out recovery current policy seems to be aiming to produce.


The unlikely source of commonsense comes from Cardinal George Pell in Rome, courtesy of Tess Livingstone in an article headed 'Pell calls on rich to pay debt to future'.  What follows are quotes from Tess Livingstone (with single indicators) or Cardinal Pell himself (with double quotation marks.)


* 'Societies such as Australia were unwilling to admit they were living beyond their means and that immense national debts had to be contained'.
* “Naturally enough, political constituencies do not like sacrifices and this imposes severe ­restrictions on democratic governments, especially when they have to address the irresponsibilities of their predecessors".
* “The willingness to make sacrifices for future generations is even lower, although rarely articulated, and helps to explain the largely unfunded liabilities of many or most government pension funds.".
* 'The future belonged to those with children, he said. “And a final teaser: is there a link between economic stagnation and a declin­ing population, where there are too few taxpayers to finance welfare and pensions?".'
* "It is sobering to realise that someone around the US poverty level of $11,000 a year is in the top 15 per cent of world income distrib­ution and that the bottom 20 per cent of the world’s popul­ation earns less than $550 a year, despite the fact that the World Bank recently stated that the percentage of people across the globe now living in extreme poverty has fallen below 10 per cent for the first time," he said.
* “We no longer make a distinction between the deserving and the undeserving poor, but it might be useful to introduce a category distinction between the deserving and undeserving rich".
* “Big bonuses for executives who have presided over big losses seem incongruous — just as incongruous as having the same marginal tax rate for a doctor on £160,000 ($332,000) a year and a CEO on £5 million a year".


Do read the whole report, dear readers, and the full speech, which we have so far failed to find. (If anyone finds it, please send it to Henry here.)


To answer the question posed at the start: Sluggish growth is inevitable unless and until (1) the budget is on a clear road to surplus; (2) tax, welfare and industrial policies are reformed to encourage growth over complacency; and (3) there is clear articulation of the need for these changes and broad exceptance by the voters. Points 1 and 2 are economics. Point 3 is politics.



 


Saturday Sanity Break, 16 January 2016
Date: Saturday, January 16, 2016
Author: Henry Thornton

The hard-heads are coming out to play on economic reform.  Judy Sloan has pointed out that for all the talk of tax reform, there is no plan to cut the budget deficit. Today the estimable Grace Collier discusses the appearance of schemes to help Australians, especially those of us from minority groups (she includes males), get money to innovate and/or create businesses.


''Budget crisis? Forget it. That was a figment of someone’s imagination back in 2013, the pre-election Stone Age. It is 2016 now; we are in the post-election glory days. If your New Year’s resolution was to improve your finances, be pleased, because there has never been a more exciting time to be a rent-seeker. Cast your worry about public finances aside and put your personal pride in your back pocket. Get excited and put your hand out.


Our Grace adds: ''This is going to make you rich and save the economy. Happily, we can all do this the Australian way — with a hefty sense of entitlement to everyone else’s money. Various governments have helpfully collected it and are flinging it about with gay abandon. To get some, all anyone has to do is be good at filling out forms'.


Read on here. 


'Bring back Fightback' says Peter Van Onselen. ' Hewson’s package went a lot deeper than tax reform. It included far-reaching industrial relations changes, a complete rewriting of the welfare system and a doubling of the pension by way of compensation for older Australians. Hewson also sought to adjust (I might be being too kind here) Medicare. Universal healthcare got a major shake-up in Fightback. The point is that the document was designed to fundamentally redraw tax, social and industrial policies after a decade of Labor government. It was seeking to do so in a climate of recession, off the back of a period of record interest rates that had shocked the ¬economy.


'The time was right for Fightback, but it was defeated on the politics. Fear trumped hope.'


Pollies are used to heading for the hills whenever the 'F' word is uttered. Peter Van O appeals to the policy ambitions of the young turks in the government. 'With the likes of Christian Porter, Kelly O’Dwyer, Josh Frydenberg and Simon Birmingham moving into cabinet we are soon going to find out whether or not this next generation of Liberals are as good as they claim to be. Scott Ryan, too, as deputy cabinet secretary, gets to sit in on Cabinet.


Plus the odd hardened political warrior. 'And let’s not forget, with Arthur Sinodinos back on the frontbench and in cabinet as Cabinet Secretary, we are going to find out if he’s as good as he’s long been touted to be, from his time working for Howard'.


A colleague recently suggested debates on policy need to go back to Adam Smith.  His approach was to sort out the economics and then analyse the politics - hence policy analysis is always about 'political economy'.


Political ephemera


Take a walk down memory lane. Here is a link to the sayings of Treasurer/Prime minister Paul Keating. 


Not on the list is one from Henry's personal memory banks: 'Old jellyback's halfway between a shit and a shiver on this one'.


Footy'n'cricket'n'tennis'n'stuff


It is the silly season for footy (unless you follow 'futball', caller 'soccer' in this wide brown land). The Essendon 'supplements' saga has been well to the fore, with the banning of 34 players, threats of legal action against the AFL, the Essendon Club and who knows who, and ex-coach Hird writing at length in the Herald-Sun on how unfair it all is and why he personally needs share little or none of the blame - it was 'the system' that seems to have been most at fault, plus several other staff members who failed to follow orders.


The Indians are playing Australia in an ODI series and, despite the permanent loss of Warnie, Mitch, the Rhino,  the temporary loss of other top rated quicks and failure to pick Australia's  ruling off-spin maestro, a GOAT it seems, batting records have been set chasing down the India's two 300 plus totals.


Soon we shall be able to switch our attention to the tennis. Salt is likely to be added by bad behaviour from young potential superstars. Henry's fantasy is that due to a glorious late career flowering, and if necessary earthquake, mysterious injury or lack of normal form by the superstars, little Lleyton takes his third and Grand Slam final. 'Dream on Henry' chorus the younguns, 'He'll be lucky to make it to the second round'.


Kulture


Fiona Prior has been to the movies and reports on Peggy Guggenheim: Art Addict.  Not to be missed, it seems, and we thank Ms Prior for giving readers the opportunity to keep up with the more innovative offerings.


Henry of course is on the side of his seat watching for the Oscars. Mad Max Fury Road has received 10 nominations, a record for an Aussie production.  The Revenant has 12 nominations, but in Henry's view, having seen it, tighter editing to remove hard-to-follow subplots would have turned it from a good movie to a great movie.


Still, most of the voters are Americans, so don't hold your breaths, possums.


Image of the week.


Courtesy The Oz


Supplements: sport, academia and corporate culture
Date: Wednesday, January 13, 2016
Author: Henry Thornton

Very sad really. Thirty-four elite footballers banned for playing for the 2016 season. According to today's press, one senior player protested and a junior player and his Mum checked the relevant supplement on the Internet and believed it was ok. Football, of course, is a TEAM game. Players follow the advice of the coach or get the chop. In this case neither the coach nor the administration of the once great Club accepts any responsibility for the debacle.


There are plenty of equivalent issues in the academic and corporate worlds. Staff at many universities privately protest that academic standards have fallen. Henry receives regular grumbles at the prevalence of overseas students who can apparently barely speak English, and/or have made plaigarism into an art form.  Yet their seniors insist that most of the relevant students receive a passing grade because, you guessed it, the university relies on the full fees that the young people pay for the privilege of gaining an apparently respectable Australian education.  'Easy passes' = Academic addiction.


Of course, this is not the practice everywhere in this wide brown land but anecdotal evidence suggests it is quite widespread. Is there no state or Federal body conducting audits of this matter?  Or do we accept that 'the market will prevail' in this vital area of training and accreditation.


In corporate life, a similar cone of silence is maintained. 'Cut costs by 10 %' orders an incoming CEO. 'I already cut costs in my division by 10 %' says the slightly earlier arrived divisional Managing director. 'Cut them by another 10 %' demands the new CEO.  The clear message is do it or face the sack, so the job is done, no matter at what cost to morale, ability to grow the business or otherwise run an efficient enterprise. 'Mindless cost cutting = corporate addiction.


Neither a university nor a corporation is a democratic institution. Both sorts of enterprises are more like an AFL football club.  The signs have all long been there about the AFL's drug problem. Henry as a 15 year old was regularly given a shot of whisky before the game, and in finals also at three quarter time. There was the young star whose drug of choice was cocaine, which perhaps explained why he could run harder for longer than other players. Now we have the supplement's saga and one presumes a similar approach has been followed at other clubs that employed the now infamous Supplement's Meister.


In 2006, Henry's assistant, Luke Griffith, entered the fray. Here is Luke's final article on the issue, written in March 2007 and headed, 'AFL up a murky Creek'.  The signs were clearly there, and Luke demonstrated just how weak was the AFL's early attempt to address the issue.


As in football clubs, Corporate culture vests great authority in the CEO. Corporations Law has cleaned up much of the wild west corporate culture that one can learn about in histories of corporate life, but within the strict limits of the law much oppressive and often damaging behaviour is sanctioned, even demanded. Indeed, one can ask how the inherently despotic corporate culture can allow diversity to flower, and is it just a matter of allowing short-term profit maximising to sort out good behaviour from stupid corporate behaviour. Like that in the once-great Essendon Football club.


Related articles.


David Kemp, 'Good goverance and Liberalism'


Gary Morgan, 'Truth, democrcy and the Commonwealth'.


Henry Thornton, 'Democracy and global business'.


Saturday Sanity Break, 9 January 2016
Date: Saturday, January 09, 2016
Author: Henry Thornton

The week has raised the thought, by the slower thinkers, that the Chinese economy may be in more trouble than so far expected. As a result, China's share index and exchange rate is taking a beating. Other major share markets have followed, and the silver lining for China must be the evidence that their nation is undoubtedly globally significant. The leadership group will be focussing on the clouds, of course, and all one can say is 'Welcome to Capitalism 101, gentlemen'.


North Korea has made its play to be globally significant and in its case as a pest.  Exploding an H-bomb, or an A-bomb masquerading as an H-bomb, either way it is no way to make friends.  One assumes China may be the best country to sort out the lunatic that runs the joint but what a pity for the loyal subjects.  Like the citizens of East Germany, one hopes when the borders are finally abolished the people of North Korea will realise they have been lied to for decades.


Here we have been affronted by the foolish antics of that cricket player who thinks it is clever to have fun with young female journalists. Kudelka showed us just how lucky we all are.



Of course we have larger problems than Mr Gayle. House prices in Sydney and Melbourne seem to have slowed and may even be falling. Commodity prices are still falling and global asset prices, especially prices of shares, are taking a beating. Australia's income recession will continue and owners of self-managed superannuation funds are getting poorer every day the rout continues.   The silver lining is that there will be less wealth for the lefties to rip out if Labor ever gets to form a government again.


Malcolm Turnbull and the coalition he leads still ride high in the opinion polls.  Good work is being done to foster a debate about tax reform, but there is still no focus on reining in the debt and deficit. Critics are emerging, such as Judith Sloan who earlier this week started a column as follows: 'I’m calling it here: the Turnbull government is a big spending, big taxing government with no real intention to pare back the growth of government spending, let alone cut it.


On the ever-widening debate about inter-gender skirmishing, Bettina Arndt said: 'It was great seeing McLaughlin so clearly able to handle Gayle’s banter — it’s a fine example for younger women to see such a confident professional woman able to bat off this type of flirtatious nonsense.


'Equally, last year many people enjoyed watching Maria Sharapova flirting with a male reporter, telling him: “I was just admiring your form.”


'Such harmless flirtation is not sexual harassment and luckily there are many in our community who resent the constant intrusion into enjoyable male-female interaction by thought police determined to stamp out any hint of what Helen Garner famously described as “Eros — the spark that ignites and connects”.' Read on here.


Henry hastens to present his own credentials in gender politics.  In the 1980s he appointed the first woman to head a section in the RBA's Research Department.  In the 1990s, as CEO of Norwich Union's Australian business, he persuaded the parent entity to appoint the first woman to the local board. As a professional director he has presided over companies with female CEOs, almost always appointing female directors, and in one case blessing the CEO's decision to appoint a majority of female staff.  Most recently as Chair of the Interim board of the Innovative Manufacturing CRC he arranged the nomination of three splendid lady directors but sadly only one (out of seven) was elected by the mostly academic members. (This venerable mob did not elect Henry either, so being socially aware cut no ice with the relevant voters.)


Kulture


Fiona Prior has seen a nice movie called Youth.  She opens her review as follows:  'If you’d enjoy a hypnotically languid and blackly amusing film to begin 2016 you could do a lot worse than director Paolo Sorrentino’s Youth which conjures a similar spell to his Oscar winning film The Great Beauty (2013)'.  Continued here.

Henry greatly enjoyed the new Star Wars blockbuster, reviewed here by Fiona.


A book titled The Unknown Universe, by Stuart Clark provided much food for thought and again demonstrated how much more scientific is Physics and Cosmology than is economics. Here is a YouTube presentation by Mr Clark. https://www.youtube.com/watch?v=zvCWUkARnFA


If you are interested in the likely fate of the Eurozone, here is a summary of a discussion by another Clark, Professor Gordon Clark of Oxford.


With Mrs T Henry has been watching Deadwood, a TV series from the distant past about the even more distant past. If you like to read about gold 'camps' (proto towns) in the Wild West, and do not mind constant use of the 'F' word and the two 'C' words, you will greatly enjoy this series.


And, to prove Henry is not just a cowboy fan, here is an item from the archives, about a visit to (one of) the Getty Museums in LA, dug out to send to an offspring currently visiting that fine, if smoggy, city.


Cricket'n'cricket'n'cricket, etc.


It has been a great summer for cricket tragics, at least until the third test against the Windies was washed out last week, just as the Calypso kids began to show some real grit. Meanwhile the more senior Windies lads were enjoying the big bash, salted for one of the boys by crude attempts to haze female jounos, as already noted.


Now the Indians have arrived though Henry is uncertain if they are to play the long (test match) cricket, the short (T20) or the merely ugly (ODI) form of the game.


Roll on the tennis is Henry's view, and as soon as that is over it will be time for the footy. Caaaarlton! seems to have recruited well enough to begin the long march to top eight, the venerable club's only legitimate aspiration given the quality of stars given away in the time of Mick the Merciless.  It begins to look like Mick's arrival at the club was the first step in a long-planned, deeply considered plot to take the Blues out of the ranks of powerful AFL teams.


Image of the week


 


Courtesy The Oz (both images)


The Year of the Monkey
Date: Monday, January 04, 2016
Author: Henry Thornton

The Year of the Monkey (or is it the snail?) is likely to see volatile markets, low overall growth and continued low goods and services inflation. Tending perhaps to actual deflation, as has been the case for most commodities. We have already seen panic, and there is more to come.



Growth is predicted to increase in the USA, lead by consumers encouraged by strong jobs growth, some post-crisis debt repayment and the steady, apparently predictable, monetary policy followed by the US Fed. The Eurozone is still wrestling with how to create growth, and there is increasing discussion on whether or not the Eurozone currency union represents a serious design flaw. Japan, like the Eurozone, still flooding markets with liquidity, should also register modest growth.


Chinese growth should be higher than the global average (which is likely to have a 3 in front of the number for real GDP growth). India is now growing faster than China, while Brazil and Russia may at least stabilise economies whose production levels fell in 2015.


Optimists see some recovery in commodity prices in 2016. Pessimists, who have been defined as optimists with experience, generally expect further falls in commodity prices, which would further reduce incomes of commodity exporters like Australia, Canada and Brazil.


Excessive levels of debt provide a systematic handicap to growth, a risk that will grow as global interest rates normalise. On current indications the US Fed will take two years to get cash rates to a more normal 5 %. Whether global debt growth  is reined in by the end of 2017 must be doubted. It is possible to envisage a grand global agreement to write off (or write down) debt.  Creditors would resist such actions but with debt reduction improving ,prospects for global growth the debtor nations may have unusual bargaining power.


Australia is an interesting case study, with household debt around 160 % of household income. Despite this, the government's new year message is to hail households as a major engine of growth.  With commodity deflation reducing incomes, increased household spending will only be funded by additional borrowing. 'Que?' as they ask in Barcelona.


The Economist, an optimist about commodity prices, is skeptical about China's economic performance. 'The odds of a genuine crisis in China in 2016, triggered by some combination of soaring loan defaults, bust banks and collapsing investment, are at least one in three, the highest in a generation.  And a crisis for China would mean a crisis for the world'. (Leo Abruzzese, 'Submerging World', The World in 2016, The Economist.)


In such a world, can equities keep rising? Henry has been raising cash in expectation of a substantial equity market correction. This has involved some opportunity cost. But there is a mantra of the Rothschild dynasty overheard recently. 'Why are you so rich?' asked the interviewer, 'By selling too soon' responded the Rothschild.


References plus an extract on global economic policy from the BIS, available here.


Sunday Sanity Break, 27 December 2015
Date: Sunday, December 27, 2015
Author: Henry Thornton

An Englishman arrives at Sydney International Airport.  The customs officer scans his form and asks, identifing an unticked box: 'Do you have a criminal record?' Englishman responds : 'I didn't know you still needed one'.


A lovely joke delivered deadpan by number one son to an audience of Aussies visiting Oz from their UK home in the town of dreaming spires. This is an annual visit and we were struck by the male's overt move to the right in political comment. Two factors seemed to stand out - The extreme leftie leader of UK Labor and the bumbling inability of the Eurozone leaders in the wake of the economic doldrums and the refugee crisis. We agreed the general economic crisis was in large part due to the design fault of a fixed exchange rate within the Eurozone.  What to do about the flood of refugees is of course far harder but the UK's conservative government still requires a valid passport and so has a chance to protect its borders.


Australia's increasingly intractable budget problem received only passing comment.  More interest focussed on the reason's for Mr Abbott's demise, with our formerly left-of-centre guests explaining just how unbelievable various decisions were, including the then PM's refusal to sack his Chief of Staff and his Treasurer when that was a clear demand of the mob in early 2015.


We approach the start of 2016 with debate on tax policy on the issue of the efficiency of various taxes.  While this is a useful debate to have, surely the Turnbull government has by the time of the election to also focus credibly on how the dangerous, still-growing budget deficit will be eliminated. With an era of slower, low inflation growth now widely seen as the likely future - globally as well as in Australia - natural forces will not fix the problem in the foreseeable future. 


The budget deficit is the main economic issue for 2016, as any net impetus from improving innovation policy can have only a minor positive effect on the next decade, and that may be an optimistic assessment.  The main issue is psychological. 'Innovation policy' cannot succeed while the standard approach of government remains risk averse.


Successful innovation requires a widespread approach that has three parts: have a go; kill apparent failure quickly; and move on rapidly.  Any Australian government policy designed to foster innovation is very likely to fail on all three points.


* 'Have a go': Great idea but help from government will be delivered slowly and include massive application effort and assurance of success.


* 'Kill apparent failure quickly': Any apparent failure will not result in timely withdrawal of assistance.  The natural approach will be to nurse the failing venture until failure is all but certain, and will be sand-bagged even then.


* 'Move on rapidly': Sand-bagging failure will absorb most of the available resource and an attitude of cheery shoulder-shrugging will be powerfully lampooned by the press and other public commentators.


'What would you do Henry?' I hear you cry.  This is a hard question. My starting point is that successful innovative nations are naturally more aggressive - think Israel, Singapore, the USA, Germany, even modern Britain. Do we need to survive some searing natural or man-made crisis to loosen up and energise our institutions and innovative people so that real innovation becomes a clear and cherished part of our natural culture? Here is my collected commentary on this matter, for what it is worth.


Great commiseration to those who have lost homes and possessions in the savage bushfires.  Great thanks to the firefighters who, as always, come to the rescue. Shows there is no basic problem with the Aussie character, just needs a reset in the area of willingness to have a go at turning great new ideas into businesses.


We wish all of our readers a highly successful, and if possible innovative, year in 2016.


The sporting life


Henry attended the 'G' yesterday to take in the opening day of the Boxing Day cricket test. Mr Warner set a new test cricket record for 23 runs in 12 balls - such a pity he came out like a demented banshee as 100 in 50 balls would have satisfied us all even more. The West Indies toiled manfully, especially Captain Holder who knows how to contain an attack, but near flawless batting by Messrs Burns and Khawaja put the match outcome beyond any realistic expectation of a win by the Windies. Today Henry is writing as Messrs Smith and Voges keep nailing the lid on the Windies' coffin, both in this match and one expects future Boxing day tests.


The Sydney to Hobart sailing race started in the usual flurry of tacking and ticking (can that be right?) and we hear that 4 boats had to withdraw due to accidental collision. Then, as predicted, 'Southerly buster causes havoc'.


'Eight-times line honours winner Wild Oats XI is out with a torn mainsail and is returning to Sydney; the US frontrunner Comanche, which had been leading the race, suffered a broken rudder, initially retired but is now trying to effect repairs at sea and continue in the race; Anthony Bell’s Perpetual Loyal, with former Australian cricket captain Michael Clarke aboard, has retired, also with a broken rudder and is returning to Sydney.


'The other US entry, George David’s 88 foot Rambler now leads the race, ahead of Comanche and Syd Fischer’s Ragamuffin 100.


'A dark horse in the race is Maserati, Giovanni Soldini’s V70 that is well out to sea and clearly gambling on skirting the treacherous southerly that is taking this toll on the fleet'.


Read on here.


Soon we shall be entertained by the Australian Open, and then footy will again be in the news. It is reported that Jarrod Hayne has been recalled for a serious game in US footy.  We wish him luck and a blinding game to show the Americans just how flexible our footy stars can be.


Image of the week


Courtesy The Oz


Saturday Sanity Break, 19 December, 2015
Date: Saturday, December 19, 2015
Author: Henry Thornton

The economic debate being fostered by Messrs Turnbull and Morrison is reaching heights achieved only by Messrs Hawke and Keating.  Now we are all being tutored on the subject of who in Australia pays income tax.  Net of pensions and other welfare items the answer is ‘just over half of us’ and if current trends continue this will be ‘less than half of us’. 


There are three key questions. Is this fair?  Is this sustainable? Is the great reliance on income tax efficient?  Australia’s international debt is rising inexorably and the pain of servicing will rise disproportionately as global interest rates rise, as inevitably they must.


Unless government spending is cut, and substantially, either the GST must be widened and its rate hiked or income taxes must be allowed to rise via income growth and bracket creep, increasing the burden on the one-half (soon to be less than one-half) of net taxpayers.  A switch from income tax to consumption tax is clearly efficient as it would encourage saving rather than spending, and also fairer, as government spending would be spread over a wider tax base.


The world has survived the first tiny step to the return of a neutral monetary policy in the USA and eventually the world. Here of course there is still the potential for further rate cuts though Henry believes Gov'not Glenn will be reluctant to use the available margin.


Politics


As the first 100 days of the Turnbull government approaches, the verdict (of the polls and the pundits) is ‘great job so far’.  Some say that nothing has so far actually been done to fix the debt and deficit disaster, but Henry believes constructive debate is a real contribution that is vital if budget balance and then surplus is to be achieved.


Others say all will be well so long as Malcolm’s ego/temper is kept under control.  Henry observes that, so far, the PM has given every sign of having learned from the harrowing experience of being dumped as opposition leader.


Kulture.


Fiona Prior braves the cinematic event Star Wars: The Force Awakens and sits in a cinema that erupts in rapture each time a character from the 1977 original appears. Her verdict? A great way to spend a summer holiday afternoon. Read her insights here. http://henrythornton.com/article.asp?article_id=6865


The sporting life.


Last weekend’s Age had several stories about the transition among footballers.  The story (by Peter Hanlon) of the shoulder tapping of Jonathan Simpkin at Hawthorn  showed just how smart Coach Clarkson is: ‘We [Simpkin and Clarkson]  sat down, had a beer, a casual chat ... it wasn’t an easy chat but it all went pretty well’.


‘Clarkson told Simpkin that he didn’t want to put him through another year of playing for Box Hill when he deserved better.  It warmed him to be told he’d always be welcome at Hawthorn, forever part of its history, a premiership player. “That’s something I walked away feeling pretty special about”.’


The heat in Melbourne has been so intense that even the horse races are cancelled, though we have not yet seen birds dropping dead from the sky. Footballers doing pre-season training will really suffer, and the Calipso Cricketers will hardly be too cheered by their almost meaningless 2 day game. We await Boxing Day when we can visit the ‘G’ to queue outside the new and experimental security fence.


Season’s Greetings


The team at Henry Thornton.com wish dear readers all the best for the festive season and 2016. Drive carefully and watch out for wildfires and other hazards, natural and man-made.


Image of the week


Courtesy the Oz


The Force Awakens
Date: Thursday, December 17, 2015
Author: Henry Thornton

What a time to be alive. Star Wars makes its return and from all accounts has achieved something close to the original impact – trailer here.  A new potentially inhabitable (for humans) planet has been discovered a mere 16 light years away.  And the US Fed has blinked and raised cash rates by 25 basis points from near zero.  And US stocks have taken a jump in valuethe Force Awakens.


US Fed Chief, whose role as sheep herder-in-chief was cruelly lampooned here earlier this week, used ‘cautious’ and ‘prudent’ in announcing the beginning of the end to near-zero interest rates overnight.  Experts expect three or four 25 basis points in 2016, underlining the slow and measured tread of Ms Yellen and the mob.


The Washington Post said: ‘For the nation’s economic stewards, it has all finally added up to convincing evidence that the country is no longer in crisis and the recovery has taken root’.


This is the basic rationale for a rate hike causing stock prices to rise. One of Henry’s favourite fund managers holds that investors do not need to worry until the third rate hike. Henry argued that stopping QE amounted to the first two rate hikes, but that bold hypothesis seems to have been blown away by the sheep-herder-in-chief.


The Washington Post provides the best coverage Henry has found. Read on here.


The coverage includes a video. Janet Yellen is far more measured than Harrison Ford, but her bold first rate hike undoubtedly will have a far bigger impact even than the return of Star Wars and the hope of a new planet with a new set of plants and animals to displace.


What does it mean for Australia? The Aussie dollar rose slightly, like the rise in US stocks a move that confused market analysts. Far more important for us will be the government’s ability to rein in the massive official debt. While other nations have far larger debts – both absolutely and in relation to GDP - Australia’s households are world leaders in the debt to income stakes.


Imagine the mayhen if debt keeps growing and global interest rates double.


Janet and the mob
Date: Monday, December 14, 2015
Author: Henry Thornton

Finally, it seems, the US Fed is about to begin normalising interest rates. Since we seem to be living in an age of deflation, this is not so simple as might ordinarily be the case. Deflation means the 'normal' cash rate will be lower that the case in which commodity and goods prices generally are rising. Today I shall mainly draw your attention to fine contributions in The Australian and The Economist but also the work of Henry's virtual artist. We shall know the outcome, and the Fed's reasoning, on Thursday morning.


'Research conducted by the US Federal Reserve ahead of this week’s crucial meeting of its rate-setting committee shows it may have little scope to lift rates before they become contractionary'.


'The findings that the neutral interest rate — the level which is neither expansionary nor contractionary — has fallen sharply since the global financial crisis has implications for the Reserve Bank as it acknowledges that Australia’s growth path has shifted permanently lower'.


These are the opening paragraphs of David Uren's fine contribution in today's Oz. 



The Economist has a clutch of articles. The relevant leader concludes: 'This newspaper would not raise interest rates yet. America’s jobless rate, at 5%, is close to what economists consider to be full employment. And there are tentative signs that wage growth is finally picking up. Since monetary policy operates with a lag, central bankers must be forward-looking. But inflation on the price index for personal-consumption expenditure, the Fed’s preferred measure, is just 0.2%. The core measure, which excludes food and energy prices, is 1.3%. Although the headline rate will jump in the coming months, as the sharp fall in energy prices at the turn of 2014 drops out of the annual rate, there is little sign that underlying inflation is about to accelerate sharply, or exceed the 2% target'. Read on here.


A key issue concerns 'asymmetric risks'. While rates are close to zero, there is limited scope to reduce them should the economy weaken - as Henry's Raff Report sees as possible, indeed likely.


But if the economy roars and goods and services inflation again begins to build, then the Fed has 'unlimited capacity to raise rates to tame it'.


Buttonwood discusses likely impact on markets. 'Sentiment is bound to change once the Fed starts to tighten. Good news on the economy might not be positive for markets, since it could signal further rate rises. The first rate increase may be baked into asset prices; what matters from here is the pace of further tightening. Futures prices imply only two further quarter-point hikes in 2016. When the Fed raised rates more quickly than the markets expected in 1994, it instigated a rout in government bonds.


'The impact on markets makes it all the more likely that the Fed will proceed cautiously. The best analogy is with a parent teaching a child to ride a bicycle: the prudent approach is to stand close enough to catch the falling tot, and only remove the training wheels later on'.


Finally, effects on markets in developing economies are considered, possibly of special interest to countries that export commodities. 'The fear is that a golden era of growth, fuelled by China’s ravenous appetite for commodities, has come to a close, exposing deep cracks in their economic foundations. David Lubin of Citigroup, a bank, talks of a “broken growth model”. Governments cannot stimulate their economies because their creditors will not tolerate big deficits. Companies are also unable or unwilling to invest more because they have built up big debts. Exports are of little help because many of these economies are now overly reliant on commodities.


'The feeble state of manufacturing across emerging markets, with the exception of parts of Asia, means that many will miss out on the one big upside to lift-off. The Fed is set to raise rates because of America’s relative economic strength. America, in turn, should provide a boost to countries that make the things it wants to buy. But emerging markets such as Indonesia and South Africa that specialise in commodities have not just been hit hardest by China’s slowdown; they are also the least likely to benefit from America’s growth. To them, lift-off will sound like a cruel joke. They will stay pinned to the ground'.


Janet and the mob



(As these fine articles show, Janet's 'mob' include financiers (and normal people) in many nations - look for the sheep with the Salvador Dali moustache.)


Saturday Sanity Break 12 Dec 2015
Date: Saturday, December 12, 2015
Author: Henry Thornton

Stunning apparent rise in jobs is widely regarded as misleadingly positive, reminding some of us of the time when a large pile of forms was discovered behind the filing cabinet. But the 'trend' results are strong enough that we cannot ignore a message of strong overall jobs growth. The exception is youth unemployment, especially in the  poorer parts of state capitals, in regional cities and in remote areas of the nation where adult unemployment is also a sad and intractable problem. 'What can be done to promote youth unemployment?' a distinguished elderly economist asked this week. Henry advises young people to find chances to work if necessary as unpaid 'interns' to strengthen their cvs, but lower rates of pay are the economist's standard answer to such a question.


Combined with slow GDP growth, strong overall employment growth suggests low productivity growth. But strong jobs/low productivity growth is nevertheless welcome while we await the effects of a more innovative culture to emerge. And makes it likely that the next interest rate move will be up, despite the RBA's 'stand easy' bias.


There are two big global debates about economic growth. The first is 'why is overall economic growth low and falling?' The damage done to 'Animal Spirits' by the Global Financial Crisis plus the overhang of debt explains a prolonged period of slow growth. China's growth has slowed to an extent that sees commodity prices still falling, sufficient to create a bias to deflation of goods and services prices, an especially unhappy situation for Australia. Last night's plunge in key commodity prices and stocks listed on the New York Exchange point to further carnage in Australian stocks on Monday.


The second global debate concerns the US Fed's widely anticipated start of a return of super easy US monetary policy to more normal monetary policy cause disruption or even carnage in financial markets. Given the Fed's constant reiteration that rising rates will be gradual, and the length of time this message has been reiterated, Henry will be suprised if disruption is too great.  But there are skeptics about the strength of the US economy, notably Henry's Raff Report, whose latest report is linked here. 


In particular: 'Dear readers the truth is that the US stock market is supported by several handfuls of names, and supporting the market at a robust level. When the gamblers finally see the king riding by has no clothes the US market will contract sharply. Few people forecast October 1987 accurately but many including the Raff could see it coming and so it did, and so too will history repeat'.


Henry is happy holding on to the 'best 15 international stocks' provided by Australia's most dynamic fund management company. But Henry continues to reduce holding of Aussie equities.  The idea is that any international financial instability will punish Australian stocks disproptionately.  Also that there will be further falls in the Aussie dollar, possibly to 60 cents in the (US) dollar. As the AFR reported last night: 'The ASX slumped over 2 per cent for the week due to the ongoing commodities rout and as investors took stock ahead of next week's crucial Fed Reserve meeting'.


We must applaude Prime minister Turnbull's constructive optimism about global and Australian growth and his attempts to make Australia a more entrepreneurial nation. A cheery approach and a larger honeypot for academics will not, however, fix the budgetary crisis or reduce Australia's still growing debt.


The stellar US float of Atlassian, as well as the source of Mr Turnbull's wealth shows what can be done by people willing to have a go.  There are over a million Aussies living and working overseas, supposedly 20 K in Silicon Valley alone.  Silly to hope to get more than a handful returning to Oz, but realistic to work with Australia's entrepreneurial diaspora.  More here.


Tax reform


Treasurer Scott Morrison is leading a debate in which the end points seems likely to be a 'grand bargain' to raise the GST and possibly broaden its base, give the states a share of income tax to fund health and social benefits and remove inefficiencies throughout the tax system and compensate battlers but without reducing the overall tax take.  Henry doubts such an approach will fix the Federal Budget's enormous prospective deficits, but perhaps there is a fiendish puddin' being cooked in Treasurey that will square the circle and allow the Turnbull government to survive an increased GST tax collection.


This is like turning a magic puddin' into a stale bread roll on the kitchen bench, but may be a clever way to slip a well crafted pair of loafers into a slightly open door in the hope of selling said stale rolls to Mr and Missus Australia.


Kulture


Fiona Prior sees the Belvoir production Mortido and warns that if you found the Coen brothers’ film No Country for Old Men frightening, Mortido will bring the violence of the drug trade even closer to home.


......................................................


Encouraged by their son Bert, Henry and Mrs T recently attended the Nova theatre in trendy Caaaarlton! to watch a move called The Lobster.  This was about a dystopian future when singles are incarcerated in hotels with other single people and are encouraged to find a mate.  Those who do so are returned to civilisation, while those who fail are euthenised and somehow turned into an animal of their choice.  The hero determines he will become a lobster as these animals live a long life and are fertile throughout. But there is some sort of resistence group, where the hero finds true love and in the final scene asks for a steak knife to (we are led to believe) poke out his eyes so he will share the blindless inflicted on his true love.  We walked out before this climax to a nutty film that Nova staff all said is 'great', and sure to capture the attention of those who make awards in the film world.


Perhaps also relevant to note the critical success of Mad Max, Fury Road, whose time in cinemas was short, brutal and uncompelling.


Footy'n'cricket'n'stuff.


The Windies are in a freezing Hobart early summer heading to a well planned first 'test'.  If this is a 'test' every Windies player failed except potential centurian Mr Bravo and one bowler whose name I have forgotten.  Sad contrast to the 1960-61 series that Henry listened to every ball of due to a nasty medical problem that meant no other activity was possible.


Image of the week


Courtesy AFR


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