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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.

Fun in the sun, and related matters
Date: Thursday, December 04, 2014
Author: Henry Thornton

As 2014 winds down, the government is making a major attempt to make progress toward a sustainable budget, with Treasurer Joe Hockey speaking as I am tapping this message.  Slowly the narrative is being progressed, helped by the shock of further falls in commodity prices and the prospect of more to come. As the best commentators are saying, the Labor opposition when in government helped create our current budget mess and yet are zealously blocking the remedies.  'Systematic economic vandalism' is a gentle form of the criticism of this behaviour.  'Economic treason' is a tougher label.

One notes the view expressed by the Treasurer that the loss of revenue is no reason to cut spending further. Of course, that depends on whether commodity prices settle at or below current levels. The implied assumption is that commodity prices rebound, meaning the current economic blowout is temporary and the 'no more cuts strategy' is a form of 'automatic stabiliser'. It is entirely possible that there will be no quick rebound, or even further falls, and in that case budget red ink will become deeply entrenched. It is also important to recall that it is not just the Commonwealth government deficit that matters.  Earlier this year veteran business titan, Don Argus, put together a fuller picture of Australian indebtedness, and it is not a pretty sight.

A feature of Mr Argus' analysis is his focus on total (gross) debt - debt of governments, households and companies. Here is the table, which will repay study. And here are some early reflections of a desirable 'narrative' about Australia's unhappy situation.

We are told that Treasury Secretary, Dr Martin Parkinson, is retiring shortly.  Except for the inspired leak some months ago of the name and qualifications of John Fraser, a great man from the global banking system, we have no further information about his replacement.  Deputy Secretary David Gruen has moved on to run the Statistical Bureau, so the team on duty over the festive season looks like being a bit under-weight.  Hope the new boss, whomever he or she might be, is not a skeptic about allowing 'automatic stabilisers' to work, or there might be some feathers flying in the new year.

We learned yesterday that, despite growing national production, Australia's national income is falling. We are like a shopkeeper, selling stock at  price levels so low that profits are falling. Said shopkeeper is cheerfully and deliberately not cutting his family's spending, because 'she'll be right mate'.

Then there is the stubborn overvaluation of the Aussie dollar.  The dollar is indeed heading down, and at some stage, eg if the deficit and debt outlook begins to look really grim, it is likely to plunge. (US$ 0.70 is Henry's guess.) The RBA will keep on with its open mouth policy and is likely also to cut interest rates still further.  Not a cheep from the chookery at the top end of Martin Place about the idea of modifying the exchange rate with a tax on capital inflow as a form of 'macroprudential' policy designed to keep some predictable stability in the structure of industry.

Next day - As Walter Bagehot once said: 'One of the greatest pains to human nature is the pain of a new idea', quoted by The Economist, digital edition, 5 December 2014.

Immigration Minister Scott Morrison is today presenting a generous 'compromise' on treatment of asylum seekers who came here on Labor's watch.  Kids out of detention, grown-ups freed to work and families able to begin to become integrated into regional communities, with a possible road to eventual permanant residence, What more do the bleeding hearts need? At least if these changes are blocked it will be clear to all fair-minded people, that ideological ratbaggery has blocked reasonable compassion, including the compassion of preventing deaths at sea, including deaths of innocent kids. I say this as someone who took a far softer line on the asylum seeker issue during the Howard-Costello years, including in one long conversation with Peter Costello himself who said at the end that he agreed with my views.

Next day - The Senate approved this reform and there is hope for us all. Well done Scott Morrison.

Soon the silly season will be upon us all, and resting in the sun, or watching the cricket or eating and drinking will become the chief activities of many Australians. We must hope for a renewed focus on economic policy in 2015, led perhaps by Joe Hockey with the advice of a sensible and pragmatic Treasury Secretary.

Saturday Sanity Break, 29 November 2014
Date: Saturday, November 29, 2014
Author: Henry Thornton

We join the family and friends of Australian cricketer Phillip Hughes with profound sorrow for his untimely and freakish death. Cancellation or postponement of cricket competitions everywhere is appropriate and it remains to be seen if anyone has the appetite for an early renewal of gladiatorial test match cricket.

Political economy

The price of iron ore continues to plummet, greatly worsening prospects for the Federal government's budget, growth of jobs in an already weak jobs market and indeed the overall national well-being.  The simple truth is that every Australian must get used to making do with less, and the faster this happens the better it will be for all of us. If remedial action is delayed now the eventual, unavoidable remediation will be far more painful.

The journos say the past week has been the worst week for the Abbott government.

Master Chronicler,  Paul Kelly says today: 'THIS week the accumulating defects of the Abbott government were on graphic display — excessive centralisation around the Prime Minister’s office, lack of proper consultation, flawed judgments and uncertainty about how to address its tactical dilemmas'.

Phillip Coorey in the Weekend Fin says the government is 'All at sea'.  It contains a snippet that accurately reflects the views of bizoids known to Henry: 'One executive, still in Canberra after the dinner, complained that asking business for help was all well and good, but it had to cut both ways.

“He wants us to help him and he won’t tell us anything," said the executive, who had grown increasingly frustrated dealing with the government and with its performance.

'Others are complaining about lack of access and not being listened too'.

Outgoing Treasury Secretary, Martin Parkinson makes his best speech in the role. 'Outgoing Treasury Secretary Martin Parkinson, said the AFR, 'slammed corporate leaders, state governments and other ‘vested interests’ for seeking lower taxes or more revenues at the expense of ordinary citizens'.

This thoughtful speech is worth reading and may be found here.

Warnings there have been aplenty, eg early this year, and as recently as Thursday this week (see below).  But it is surely time to shed the overoptimism of the past two decades and face reality.  It's cold, hard and above all strongly competitive out there in the wider world.  Only a people fully on the case and properly alive to reality will prosper in that world.

Best of the Blogs, 2014

'Gor blimy comrades', 20 May 2014

'Who'd of guessed it?  Tony Abbott has taken the axe to every program he can find, even adding to the taxes paid by his rich Liberal mates. He's hit us battlers harder, of course, and the brothers at the local pub have all agreed to vote for Bill Shorten or Clive Palmer.  Gary Morgan says the Libs are buggered, and even the Oz says Abbott and his mates are in their own world of pain.  Dunno why, as all they're sufferin' is a wage freeze plus less free plane trips when they quit politics. Which looks like commin' sooner than they thought.  Even the useless bloody State Premiers are whinging, and most of them are Liberals'.

Henry's roving reporter filed this missive from a battleground of the class war, the front bar of Balmain's most traditional pub.

Read on here


'What I love about Melbourne and Melburnians', reports Fiona Prior, 'is their continual, surprising innovation and open-mindedness. Sydney is still to get the laneway dining-thing right though we have been attempting to for well over five years now, while Melbourne’s outdoor dining never ceases to delight. Walk into a somewhat excessive exhibition of a famous designer in Melbourne that is at times overtly sexy, confronting, and provocative by virtually any definition, and you will see ladies who lunch, art students, girls and boys who love clothes, design junkies of all ages, silver haired couples with walking sticks, school children on excursion, and variously sized and styled little ones accompanying their parents … How wonderful!'

Read on here, especially if you are a Mebournian.

Image of the week

More RBA `glass half-full` economics
Date: Thursday, November 27, 2014
Author: PD Jonson

The RBA's deputy Chief, Dr Philip Lowe, in a recent address at the Australian Business Economists (ABE) Annual Dinner, made some important points about the structural aspects of Australia's economy, in his boss's great 'glass half full' tradition. In accord with that tradition, the points where Australia is not performing well were down-played or ignored. 

In the interests of objectivity I shall summarise Dr Lowe's cheering points and then list some issues where,  prudence (or lack of gritty front-line experience), has lead Dr Lowe to an overall assesment that is too optimistic. 

First let me endorse without reservation Dr Lowe's tribute to a great Australian, MJ (John) Phillips, a colleague with whom this writer worked in great harmony during the 1980s.

Dr Lowe: 'I would like to pay tribute to one of my predecessors who passed away earlier this month – and that, of course, is John Phillips. John served the Reserve Bank of Australia (RBA) (and before that the Commonwealth Bank) for more than four decades, and between 1987 and 1992 sat in the office that I now occupy. John epitomised the first of the RBA's core values – that of serving the public interest. He did this with great dedication during his time at the RBA and in his highly distinguished subsequent career. At the RBA, John worked tirelessly to modernise Australia's financial and monetary system, and to modernise the RBA itself. The institution that I now serve, as well as the broader Australian community, owe him a considerable debt. John will be sorely missed'.

Dr Lowe's obiter dicta - quotes are from Dr Lowe's speech.

Uncertainty is a fact of life, and 'it is important that we guard against the possibility that this uncertainty mutates into chronic pessimism – that is, for it to become normal for us to think that our prospects are limited'.

'The Australian economy does have the foundations for a successful and prosperous future, ... and how well we take advantage of those foundations depends increasingly on investment not in physical capital, but in human capital'.

The sort of economy we should be aspiring to includes: 'a national currency with sustainably high purchasing power; sustainably high real wages; and sustainably high real returns on capital. High purchasing power and high wages mean that for each hour that we work we are able to buy more goods and services. And high returns mean that savers get rewarded when they take a risk or defer their spending and save for the future'.

To these points one can only offer a hearty 'hear, hear!'

Dr Lowe's bull points

'Exports to Asia are up by around 30 per cent over the past five years. Our three largest export destinations  – China, Japan and South Korea – are all in the Asian region and free trade agreements have been concluded with each of them recently'.

'... around 8 per cent of the Australian population was born in east and south-east Asia or India. This is up from less than 1 per cent of the population around the time that I was born. In comparison, in the United States, only around 3½ per cent of the population was born in Asia and for most European countries the figure is below 2 per cent'.

'There are also large numbers of students from Asia studying in Australia. ... All up, there are more than a quarter of a million Asian students studying here. In time, these students will add to the already vast network of our alumni across the region'.

'The strong people-to-people linkages can also be seen in the broader data on international short-term arrivals. At the moment, more than 250,000 citizens from Asia are travelling to Australia every month, with arrivals from China reaching nearly 80,000 a month'.

'Over the past decade, Australia has had almost the fastest rate of population growth in the OECD and this is expected to continue for some time to come'.

Australia has a 'considerable endowment of natural resources, both in terms of minerals and agricultural land. ... For many years, revenue from resource exports was equivalent to around 5 to 7 per cent of GDP, but recently it has averaged double this, at around 12 per cent of GDP. With a large increase in LNG exports still to take place it is possible that this ratio will increase even further, although this will also depend on how the prices of our exports evolve'.
' ... the jobs have been created over the past couple of decades ... [include] the fact that the largest increase has been in jobs with higher level qualifications. [Also] in terms of industries, the bulk of the new jobs have been in services, with over 3½ million service industry jobs having been created since the early 1990s. These jobs are in health, education, personal services, retailing, finance, engineering, information technology, software design, telecommunications – the list goes on'.

I acknowledge Dr Lowe's comments about general matters required to be done as well as possible in the fast-moving, dynamic modern global economy.  He would like to see a more entrepreneurial business culture, an 'appropriate mix' of sophisticated skills to produce premium goods and services and the need to find ways of 'deepening collaboration between our universities and businesses'.

Again, these aspirations all deserve a hearty 'hear, hear!'

The bear points.

The national mood is gloomy, and expectations of Australians have not yet adjusted to the post GFC, post mining boom reality.

The currency is still too high, but 'the RBA has been saying for a while now that a lower value of the Australian dollar would be helpful from an overall macroeconomic perspective'. But what has been done to create that more competitive currency?

Australia's cost structures are too high, but 'concerns about the overall level of wages in Australia are, to some extent, really concerns about the exchange rate, with the high exchange rate leading to high wages expressed in foreign currency terms. A lower exchange rate would obviously make a difference to these comparisons'. But, again, what is the plan for a lower currency?  In addition, the excessive currency is certainly not the only obstacle to success. Surely Dr Lowe does not believe the regulatory framework for labor and other markets in Australia are optimal?  What about coastal shipping Dr Lowe?

There are many regulatory and cultural barriers and obstacles to expanding Australia's trade exposed industries, as cataloged here.

The debt and deficit position of the Australian government is parlous, arguably out-of-control. Any ideas about this, Dr Lowe?

The political atmosphere is poisonous, and one might assert that 'disunity is death' in football teams and other matters of great importance.

One understands that a central banker concerned to reach the ultimate step on the career ladder must be prudent, but one hopes Dr Lowe at least expresses strong views about these blockages and obstacles in the privacy of his discussions with Australia's Treasurer.

It might be noted that John Phillips was blocked from the ultimate step in his central banking career, as was this writer, and largely for the same reason - excessive frankness in giving advice.

Philip Lowe's speech should be read by all Australians interested in a better future for themselves and their children and their children's children.

But it must be read with a critical eye and a willingness to fill in the blanks.

Time for national belt-tighting
Date: Tuesday, November 25, 2014
Author: Henry Thornton

China's economy is slowing and demand for coal and iron ore is falling.  Both sources of Australia's extreme boost to national wealth in the past several decades are drying up. Yet our national cost structure remains at the exaggerated levels that occurred while we were riding in the ore truck's massive carrying space.  See the successive Raff Reports, or the prophecies of Louis Hissink.

Messrs Raff and Hissink were early to report the massive squeeze on small mining companies.  Now we are told that BHP Billiton and Rio (and presumably other global mining companies) are undergoing rigorous cost cutting and that the era of growth by acquisition is over.  Henry heard this on ABC radio this morning, along with frequent denunciation of the government's 'broken promise' not to cut the budget of the ABC and SBS.  Typically, SBS seems to have copped its share in restoring national prosperity far better than the mighty ABC. But I digress.

The most exciting point made by BHP's CEO, Andrew MacKenzie, was the plan to crank up output from the great Olympic Dam mine, first developed by Western Mining Corporation.  Henry recalls with great clarity WMC's Managing Director, Hugh Morgan, telling the board of the RBA just how much time and effort was needed to get permission to begin building that mine.  One assumes companies are still being strangled by red tape, despite Josh Frydenberg's valient afforts.

The Oz reports: 'BHP Billiton has outlined new plans to turn the Olympic Dam mine in South Australia into the world’s second-biggest copper mine and potentially the world’s biggest uranium mine, in a big-ticket expansion that could see extra production at the start of next decade'.

But the full interview, introduced by Radio National's Fran Kelly this morning, will repay careful attention. If Australia's global mining leader is cutting costs, and raising productivity, everyone else should do so also, or soon will be.

Is is way past time to tighten national and individual belts, gentle readers. But it is better late than never, so it is time to listen up and act.

Saturday Sanity Break, 22 November 2014
Date: Saturday, November 22, 2014
Author: Henry Thornton

'THE pivotal plays in Tony Abbott’s foreign policy' writes Paul Kelly, 'are with the big Asian powers — China, Japan and India — and not the US, despite Abbott’s pro-US disposition, commitment to Iraq and his effective working ties with President Barack Obama.

'This trend, apparent for some time, was unmistakable this week. Abbott is laying new foundations for our Asian future likely to last for decades. While Australia enjoys a fully developed relationship with the US, there is greater untapped potential in emerging arrangements with China and India and still fresh opportunity with Japan.

'Abbott grasps this and acts on an ancient law of politics — search for the big new breakthroughs. This is Abbott’s instinct and vision. He is not a leader for sophisticated strategic concepts. He is, instead, a man of action who believes in the power of personal relationships, picks the opportunities and has no truck for academic theorising about the contradictions in what he does'.

Read on here.

The waves from the G20 meeting, Andrew Robb's third Free Trade agreement, with the promise of another, and President Obama's shirtfront on climate policy continue to reverberate. Messrs Abbott and Hockey urgently need to  find a way to fix the budget without a whole series of unpopular policies that (even collectively) are unlikely to put the budget into surplus in the foreseeable future.

I remain of the view that the GST, as part of reform of the Federation - removing 'double dipping' administrations - is the best answer. Surely the states could be brought to agree, especially as the reforms would take us back toward the vision of the founding fathers.  In fact, a force of one Federal Minister and one senior minister from  each state government and a team of sherpas from all areas of government could be tasked to produce a White Paper on the savings from a proper federation, with Defence, International Trade and other obviously national matters run from the centre and all other matters run by the State and Territory governments.

It might turn out that thorough-going abolition of administrative 'double dipping' might do most of the budgetary heavy lifting, and the GST could stay more or less as it is at present.

Just a thought, Tony.


Very sad to read about the supposed 'Twilight of an art movement'.

Nicholas Rothwell writes: '“END of an Era,” proclaimed the staccato media statement sent out earlier this month by Melbourne’s Gallery Gabrielle Pizzi, long the starriest and best-known name on the commercial Aboriginal art scene — and for once the hype was right.

'The closure of the gallery after three decades serves as dramatic confirmation that the high-end market for traditional indigenous art has all but evaporated'.

Read on here, gentle readers, and mourn.  But the great Aussie tradition of outback images will be back, dear readers.

In fact, help is at hand, in the form of Henry's hyper-realistic images from Central Australia, coming soon to a gallery near you.


Player trading has more or less finished in the AFL and Caaaarlton! seem to have flown under the radar. Read the SunHerald article at a coffee shop this week that claimed the Blues have quietly picked uo a number of grown-up players, some of whom may become good regular players, while there are stars in the making among the survivers of the culling by Mick the Merciless.  Time will tell.

The young guns have carried Australian one day cricket to a series win over South Efrica, and one more win will restore us to number one. When in doubt, or desperate, always go for yoof is Henry's views about international sport.  Curiously, however, he sees the wisdom of old age as the ideal for business or politics.

The futball (soccer) team had a great first half against Japan but relaxed slightly in the second half, with Tim Cahill's goal helping provide respectability to the 2:1 scoreline.  As the press has said, several other potential goal scorers have to become more confident and learn how to score like young Tim.

The Wallabies tackle the Irish in the wee hours tomorrow, and can expect a tough encounter.  With Mr Beale on the bench, we may be able to give the Irish a touch of the X-factor.  But I will not hold my breath, or get up to watch.  There have been too many disappointments.

Am coming to that view about the Outsiders, but will watch again tomorrow to see if the cartoon spot (easily the best part) uses the gem below.  Will anyone give me good odds?

Image of the week

Courtesy The Oz

Dire straits for miners; G20`s theoretical triumph
Date: Thursday, November 20, 2014
Author: Henry Thornton

'Without doubt this is the toughest market for the resource sector that the Raff can remember, since graduating from Macquarie University in 1975. Murdoch’s paper is too long to detail in a Raff Report but his key findings were as expected. Here are just a few points from Murdoch to ponder:

1. The Metals and Mining Index has hugely underperformed BHP (this reflects the dumping of junior metal miners and explorers and the relative safety of BHP which at least pays a dividend).

2. Only 28% of companies have the cash typically needed to mount a robust site programme that may result in a re-rating of the company’s share price (to give readers an idea of drilling cost, a ballpark figure for a drill rig with capability of 1,000 metres capacity is $6,000 per day; for this you might get 90-120 metres open hole or 30 metres of diamond core).

3. 22% of explorers do not have the cash to do any real work on site (the Raff looked at a bunch of Appendix 5Bs recently and one characteristic in common was cash outflow for administration dwarfing expenditures on exploration).

4. On average, energy explorers spent $740,000 on exploration, nearly three times the expenditure of companies exploring for precious and base metals (the Raff thinks the recent hike in the price for uranium will see a swing back to exploration for uranium in 2015, and energy explorers, on average, will outspend precious and base metals in 2015).

The latest Raff Report explains the dire straits our small mining companies find themselves in, a theme first predicted here by Louis Hissink at least 18 months ago.  And Louis weighs in with his own current thoughts on the dire straits of the mining industry.

Here is a BHP Billiton perspective. 'BHP Billiton, the world’s largest miner, is not concerned with the five-year-low iron ore price, saying its West Australian operations are still making a good margin, as it defends its expansion strategy in an oversupplied market'.

G20 triumph

We have, however, noted the new Free Trade Agreement and the visits of the G20 leaders and Finance ministers.  Both events are positive, but only the new FTA goes beyond nice theory.  Politics, as so often happens, is likely to block economic policy, as we observe so painfully here.

Overall, a triumph for Tony Abbott and Joe Hockey, and now we know how to boost global growth;  but we also know this will only happen if the policies listed by the G20 nations are implemented, and we can see just how many have got through Australia's Senate.  This may well be the usual response, leaving the G20 growth boost nice theory, disappointing practice.

How ironic that the Chinese president Xi Jinping spoke so graciously about China's new partner Australia in the parliament while Barak Obama seemed to undermine our policy on climate change at the University of Queensland.  Noone has explained yet how China's and America's climate change policies are different to ours, and how we achieved a better performance on CO2 emissions than the mighty USA.

Funny business politics.

Saturday Sanity Break, 15 November 2014
Date: Saturday, November 15, 2014
Author: Henry Thornton

What a thrill, the leaders of G20 nations arriving in Brisbane, our new 'global city'. The Agenda for their meeting is largely economic, with the Australia-China free trade deal (Step 1) to be announced Monday to provide an exclamation mark. US-China climate change deal puts a big 'Stop Press' sign as a preamble, and it is also good to see the amount of press activity devoted to international tax avoidance.  Why discuss tax hikes here when Google, Amazon and IKEA, and other multinational are playing us for mugs?

The most interesting item in the weekend press, for this writer at least, is Stirling Larkin's 'Steps to avoid a banana republic'. Here are some quotes:
* The RBA's 'money zero maturity' (whatever this is) has 'placed us in the unenviable position of drifting away from the commodities super-cycle and towards the abyss of ... a banana republic'.
* '... real growth comes from technological developments, human ingenuity and the boosting of productivity through innovation, all of which are precepts of free markets and not the state'.
* Australian Industry group Chief Executive Innes Willox believes "the Australian economy is changing gears and big parts are in the slow lane with little prospect for a quick turnaround'.
* 'Willox highlights the need for the Australian economy to be retooled and rebooted to deal with the effects of a high-cost, high-wage economy saddled with a relatively high currency, struggling with the resources boom tapering off, construction struggling to gain traction, traditional manufacturing under pressure and slowing government hitting the services sector'.
* "Like any good business, Australia needs to focus on its competitive strengths, intellectual capital and skills base to value add in resources, agriculture and manufacturing to give us the balanced sustainable economy with a distinctive competitive edge" Willox added.

The whole article is well worth reading.  Mr Larkin's focus is one the investment practices of ultra-high-net-worth -families, who have for several years putting a lot of money offshore. The conclusion of the article links the economic reform program outlined by Innex Willox with a shift back toward investment in Australia.

'Hear, hear' Henry cheers.

A surpising headline today is 'Economist tips recession next year'. Finally this news is breaking through the Australian economic elite's complacency. This is like spotting the second blowfly at the barbeque.  Henry must admit to being the first such annoyance, with 'The recession we did not need to have', published in The Australian in august 2014.

Will our economy be saved by the G20?  Andrew Robb says says China free trade agreement could ‘set us up for years’, reports Paul Kelly.

If the 2 % hike in global growth really happens, and if the free trade agreement with China happens as advertised, these developments will undoubtedly help.  But to take maximum advantage the domestic reforms outlined by Innox Willox are needed. My fingers are crossed.


ASADA is said to have finally issued 'show cause' notices to 34 former and current Essendon players.  Stephen Dank is still smirking for the press, and looks like escaping from penalty for his alleged part in the supplements saga. This issue is becoming a bigger 'clusterf**k by the week, and can only end badly for the AFL. 

Meanwhile, Australian 'Futball' goes from strength to strength with its advantages if being a global game far friendlier to children, and therefore modern parents. Henry recalls at age 15 being given a shot of whisky before going out to play the hard men of Scorsby in an EDFL grand final.  Nunawading played an honorable but losing game, and the young Henry was delighted no-one was killed or crippled.

Mitch Johnson is cricketer of the year for the second time,  still scaring the cr*p out of batsmen and cheering local audiences.  Pakistan was a catastrophe, the One Day series against South Efrica has started well, and the test series against India looms.


Fiona Prior survived Java and now reports from, no, not from that comet but from a cinema showing the film called 'Interstellar'. Interstellar 'is a grandly enjoyable movie'.

Henry's sources reveal that a number of excellent movies will hit the screens this summer, so readers can find entertainment plus refuge from the heat if the cricket is boring.

Image of the week

  Courtesy The Oz

Saturday Sanity Break, 8 November 2014
Date: Saturday, November 08, 2014
Author: Henry Thornton

Big international companies evading tax.  Who'd have thunk it?  The BCA opposed to fixing this. Well, what a surprise!  Clearly there neeeds to be some international accord that companies will play fair on tax or be outed, or worse. What happens after outing remains to be seen, but individuals can make their views known in the most obvious of ways - stop buying their stuff.

Free trade agreement with China looking likely. Chalk this up as another bold move by the Abbott government, and will provide much opportunity to farmers and agriculturists. And it is a very welcome move strategically, which could be compared with pre-world war II decision by western powers to starve Japan of raw materials.

Jobs growth about half growth of the workforce, leading to inexorable increase in unemployment, loss of productive workers (dropping out of the workforce) and further upward pressure on welfare payments. Who cares? The government must and anyone else concerned at growing inequality should.

Imposing a modest real wage hike on the defence forces and others on the national payroll. In reality, if Australians all took a 20 % cut in money wages, our economy would be competitive again and our jobs growth would surge. Who cares? The government does and anyone else concerned at growing inequality should. 

The exchange rate sinking, not yet quite like a stone, but that could be the next issue people worry about, or take advantage of by moving assets offshore and generally tightening their belts. Provided wage costs are contained - see previous comment - a lower exchange rate will help restore competitiveness. A lower exchange rate is a graphic signal of our nation giving up the fruits of the mining boom, reality bites.  Ergo, we are poorer and can afford less welfare and lower incomes generally.

Points like these should be part of the Australian 'hymnbook'. Henry has been working to see that a 'hymnbook' is agreed by all participants in two significent industrial ventures.  That is difficult enough for one enterprise, imagine the challenge for the Prime minister? Even the cabinet is said to be in need of more solidarity.

Hope these notes might be useful at festive season bbqs.  Spread the news, folks. Global economic competition is ruthless, and Australia's current lack of competitiveness will impose costs on us all.  As dear old Frank Cream said way back when: 'One man's wage rise is another man's job loss'.

We wish the Prime minister, his ministers and every one battling to improve Australia's competitiveness, thereby allowing more compassion, all their best with their endeavours, so look out boys and lady, disunity is death. This is why we need a compelling national 'narrative'.

Here is the latest RBA prognosis - their glasses now well below half full - indeed 'grim' as one newspaper summarised. 

Do not panic, gentle readers - the G20 (sans shirtfronts) will sort it all out. Is it 2 % of GDP or 2 % pa Growth of GDP that is being added?  Henry suspects we are all equally confused about this but either outcome will be welcome.


Our recently victorious cricket team has been given a salutory lesson in the duust of the Middle East.  Overnight it drew level in a T20 contest, whatever that is.  Bring back the five day tests meandering to a meaningless draw is Henry's views. 'G20' is apparently the economy's version od T20, Henry has been told. Helter skelter for a short time, then its on to the next talkfest.  One assumes it is better than fighting.

Rugby team started well under its new coach but faces severe tests in Europe.

No news of footy, except the non-news that ASADA has again failed to pounce.  Obviously Asada feels its case is not sufficiently backed by evidence, and surely someone should insist there be an end to this farce.  And it was good to read this week that Caaaaaarlton! believes is has recruited wisely. Time will tell.

So sad to see two horse died after the running of the Melbourne Cup. Not much to be done about it except, perhaps, to enforce rules apparently in place about use of the whip.

Terry Maher has again presented all the news that's worth reading in his views of the Spring Carnival.

Image of the week - from the archives


Saturday Sanity Break, 1 November 2014
Date: Saturday, November 01, 2014
Author: Henry Thornton

Inequality in Australia is rising, but only gradually from not-too-obscene levels.  This is one of the conclusions as Adam Creighton continues to fan the blaze after his boss Rupert Murdoch lit the flames in a major presentation to G20 finance ministers.  Henry has been trying to get a copy of the presentation so he can check it for himself, but so far, no luck. Anyway, inequality has risen far faster elsewhere and it is plausibly due in part to the massive monetary expansionary that is 'Quanitative Easing' (QE). Do not miss the nice video featuring Alan Kohler.

Another economist has joined the discussion. Henry Ergas sees QE as dangerous and must be welcomed to the 'old ratbag club' (orc) otherwise known as the 'economic elite'. As clear evidence of his status, Mr Ergas quotes Keynes and Milton Friedman: 'While very sparingly used until then, that approach had a long pedigree. Before he turned to government spending as his instrument of choice, John Maynard Keynes had proposed QE as a key element in responding to the ­Depression.  Mr Ergas speaks here. (Apologies if the link is not working, gentle readers, The Oz has done something different.)

“We cannot hope,” Keynes wrote in 1930, “for a complete or lasting recovery until there has been a very great fall in the long-term rate of interest throughout the world.” The problem, however, was that left to its own devices, achieving that fall was likely to prove “a long and a tedious process”. The answer was for central banks to “reduce the rate of interest to a very low figure”, while buying “long-dated securities either against an expansion of central bank money or against the sale of short-dated securities until the short-term market is saturated”.

'The Fed did just that two years later, with Milton Friedman, in the monumental monetary history of the US he co-authored with Anna Schwartz, crediting the policy with an important role in stabilising the American economy'. And, in conclusion, governments, and presumably, central banks, should be cautious, 'all too often, however, they have failed to heed Friedman’s admonition against “assigning to monetary policy a larger role than it can ­perform, asking it to achieve tasks it cannot achieve, and, as a result, preventing it from making the contribution it is capable of ­making”.  Or, as Friedman used say more pithily: 'Monetary policy cannot serve two masters'.

To return to Mr Ergas; 'the “unconventional” measures the Fed is bringing to an end may become an object lesson in the costs ignoring that warning can impose'.  More here. 

Henry's collected recent advice on  Monetary policy is available here.


Henry's Kultural Komissar, Fiona Prior, has travelled to Java.

I have not been to Indonesia for almost a decade ... definitely not since the Bali bombings and I was looking forward to discovering Java, an island I knew very little about except that it housed an ancient Buddhist temple of which my school art teacher had enthusiastically spoken.

Transporter God Garuda

A whiff of a clove cigarette at Denpasar airport accompanied the transition to my Yogyakarta flight. On arrival I sadly noted the rituals of post-terrorism Indonesia, as each time my driver pulled up at our hotel or any major public/tourist destination a long stick with a mirror attached to its end was walked round the car to detect attached explosives.

Read on here.

Footy'n'cricket'n stuff

What a catastrophe.  On a dead pitch, even Mitch Johnson can't put a batter, or preferable two, out of the game.  The formerly hapless Pakistani team is putting Australia to the sword. After scoring almost 600 for 6, the Pakistanis declared and snared the wicket of nightwatchman Nathan Lyon.  Personally, I blame australia's mothers. Don (Bradman), Jeff (Thompson), Dennis (Lillee), Ricky (Ponting), the list of good old aussie scrappers goes on. 'Nathan, move a few inches to the left, if you don't mind', is unlikely to scare the batter as much as 'Rip into the bas**rd, your b**tard', once would have unsettled the nice lads from Karachi.

Shane (Warne) set the new trend of Superstars with, in his case, only slightly sus first name. But 'Nathan'?  Mrs Lyon has a lot to answer for, as do Mothers who call their kids Trent, Jeremy, Fortesque, ... and other 'modern' names. Fill in your favourite first name.

In Footy, ASADA is still poised to pounce, but seem to lack the guts, or evidence, to do so.  Here is a modest suggestion. The Napthine government should pass a law, or promulgate a regulation, that asserts if ASADA fails to pounce by November 1 its all over.  Oooops, I meant November 4, by which time every one will be focussed on the Cup.  While they are at it, Mr Nahthine might ban foreign horses from The Cup. Either new policy would put the state Libs back in the election race.  Both would make an election win a dead cert.

Image of the week

Courtesy The Oz


Easy money and inequality
Date: Wednesday, October 29, 2014
Author: Henry Thornton

Rupert Murdoch has greatly contributed to the debate on the world's currently uncontrollable asset inflation. In a recent speech to the G20 finance ministers, he blamed asset inflation on money printing in the guise of 'quantitative easing'. He noted, according to Paul Kelly's report in The Australian, that this was the cause of widespread asset inflation. Most importantly, he noted that the net effect of this was to make rich people much richer, and therefore made income disparity far greater.

This is a consequence of overly easy money that is vital for the stability of modern capitalism. Zero interest rates and massive 'quantitative easing' has greatly inflated asset prices. This has made rich people richer, and has little benefit for ordinary people. The great thinkers, including Keynes and Marx, have seen excessive inequality as likely to damage, even destroy, capitalism. So, even without factoring in the likely (serious) economic consequences of withdrawing excessive monetary stimulus, there is a serious issue awaiting resolution.

This is an issue that should provoke widespread interest in the question about the causes and consequences of asset inflation that is not generally even debated in academic circles.(Macoeconomics is a largely overlooked subject in academic circles, being too hard for most economists.)  However, Mr Murdoch's speech is likely to have wide ramifications in the real world.

Today The Australian has continued the debate, courtesy Adam Creighton, who asserts that 'Economic elite back Rupert Murdoch’s inequality fears'. Henry acknowledges his editor's appearance in Adam's list of local economic gurus but believes concern at growing inequality within the rich nations is, or should be, a concern to economic thinkers everywhere. For the academic end of this debate, you need go no further than the much discussed work of Thomas Piketty.

But now for Adam's contribution: 'VETERAN Reserve Bank economist Peter Jonson cheered yesterday when he read Rupert Murdoch had warned G20 ¬finance ministers that money printing by central banks had exacerbated inequality and fanned discontent with the global economic system.

'Mr Jonson, a Reserve Bank economist for 16 years and the former Henry Thornton columnist for The Australian, said he had been worried for years that so-called quantitative easing (QE) had benefited the rich by artificially boosting share and property prices. {NB - two typos corrected.}

' “Mr Murdoch has made the absolutely valid point that QE has done really nothing or very little for ordinary people,” said Mr Jonson, the bank’s head of research for seven years in the 1980s'.  ...

'Bob Gregory, professor of economics at ANU and a former Reserve Bank board member, said Mr Murdoch was “completely right: QE is causing rising asset prices and growing inequality, but the harder question is what should central banks do now, and what should they have done then after the financial crisis”.

' “The intellectual underpinning of QE is a kind of ‘trickle down’ economics whereby the rich feel richer and spend more,” he said, suggesting the policies would eventually stoke inflation in consumer prices as well as asset prices'.

The answer to Bob Gregory’s question – what to do about it – is that we never should have gotten into the situation we are in.

Having got there, we must take our medicine.  Ending QE will presumably remove some of the excess asset fiz, and raising interest rates will remove some more.

If the beneficiaries of the great asset boom are lucky, they will end up net net better than they would have been but not nearly so rich as they are now.  (If the smart, or merely lucky, ones bail out at the right time, they will remain rich.)

This will be what it will be.  The real lesson to not let it happen again. That's where macroprudential policies fit in.

But I am reminded of a comment John Howard once made: ‘No-one complains to me that the price of his house has gone up’.

Continuing with Adam Creighton: 'A new study by the US-based National Bureau of Economic Research written by eminent tax economist Emmanuel Saez, released on Monday, found the rise in wealth inequality in the US is “almost entirely due to the rise of the top 0.1 per cent wealth share”, noting that share had grown from 7 per cent in 1979 to 22 per cent in 2012 — a level almost as high as in 1929. “The bottom 90 per cent wealth share first increased up to the mid-1980s and then steadily declined.

' “The increase in wealth concentration is due to the surge of top incomes,” the authors said' .  ...

'Joe Hockey agreed that “loose monetary policy has helped people who own a lot of assets to become richer, and that is why loose monetary policy needs to be reversed over time and will get back to normal levels of monetary policy.”

'Labor Treasury spokesman Chris Bowen welcomed Mr Murdoch’s remarks, especially for their contribution to a growing debate about rising global inequality'.

Alan Kohler has also weighed in with some analysis of the  history of inequality. His headline is 'Roots of imbalance sown in the Reagan era', and he asks 'Are we seeing a return to the time when middle classes didn't exist?'

Henry is keen to foster debate on this vital issue. If you wish to contribute, contact Henry here.


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