Warnings and forebodings
Date: Monday, December 19, 2011
Author: Henry Thornton
Warnings and forebodings about the global economy are spreading like wildfire or a really nasty virus.
Better to get a realistic view on the table rather than some Panglossian fairytale, like an old geezer delivering gifts down the chimney.
Realism will spoil Christmas for some, perhaps including the two medical scientists Henry dined with last night.
'What is going on' was the question, and the tutorial was intense.
It is hard for well qualified and experienced professionals in fields other than economics to comprehend just how uncertain are some of the big issues of economic policy. Lack of effective action to solve the crisis in Europe, and lack of political agreement about economic policy in the USA, are exhibits one and two in support of this statement. Australia provides exhibit three.
Henry explained to the scientists as well as he could that the Club Med nations of Europe need two things to begin getting back onto their metaphorical feet.
The first is a good dose of debt reduction, and the second is a substantial depreciation of their currencies. The third, unavoidable, remedy is hard and sustained fiscal austerity, which will be part of the solution in any scenario.
Making austerity the whole solution, as seems to be the strategy of the Eurozone leaders so far, would be to impose great misery for at least a decade on the Club Med nations of Europe.
Morally this may satisfy those who ignore the banks and others who so enthusiastically promoted Club Med debt and sold it to investors. But the promoters of Club Med debt and their clients were equally (in Henry's view) morally culpable.
Taking a serious haircut to existing debt levels to allow less misery for the Club Med peoples would seem both fair and economically expedient.
Market forces should enforce the first of these classic remedies, but so far as Henry is aware it has been suggested only for Greece. The second classic remedy is ruled out by the membership of the Eurozone itself and will only become relevant as Club Med nations quit the currency union that is almost literally choking their economies to death.
'What happens when these countries quit the Eurozone?' asked one of the medical scientists. 'No-one knows for sure' I replied. 'There will be a lot of legal argy bargy, as the rules of the Eurozone are apparently silent on this possibility. The big difficulty is the Eurozone banks. The likely outcome would see assets in new Drachma, new Lira, new zloty, etc, etc, and liabilities in Euros, meaning bankruptcy. I doubt there is any body that could rescue all the major Eurozone banks. Widespread bank failure means Great Depression, that is an iron law of economics, or at least of economic history'.
The discussion continued - what happens to US and Chinese exports if there is a Depression in Europe, what does this mean for Australia and its programs to support medical science and other undoubtedly worthwhile causes?
I suspect there will be many such conversations to dampen the festivities this Christmas.
Thanks to The Australian's David Uren we learn today of a fine speech by the Governor of the Bank of Canada, Mark Carney.
'ONE of the world's most respected central bankers has warned the world economy is at a tipping point beyond which forcible debt reduction will bring collapsing asset prices.
'Bank of Canada governor Mark Carney said last week that the "global Minsky moment has arrived", referring to the work of American economist Hyman Minsky, who proposed in the 1960s that financial markets were intrinsically unstable.
'During periods of growth, excess cash generated speculative booms that encouraged people to borrow beyond their ability to repay. When markets turned down they would be forced to sell assets in a falling market to pay down debt'.
"Debt tolerance has decisively turned. The initially well-founded optimism that launched the decades-long credit boom has given way to a belated pessimism that seeks to reverse it," Carney said, in a speech underscoring the great challenge that confronts the world economy, achieving growth while trying to pay down debt. "Current events mark a rupture. Advanced economies have steadily increased leverage for decades. That era is now decisively over."
'The change can be seen clearly in Australia, where households and business have stopped borrowing and are working hard at lowering debt. The key vulnerability is household debt, which remains high'.
I strongly urge you all to take the time to read Mark Carney's sobering speech for for yourself.
His concluding thoughts are as applicable to Australia as they are to Canada.
'When we found ourselves in fiscal trouble in the 1990s, Canadians made tough decisions, so that on the eve of Lehman’s demise, Canada was in the best fiscal shape in the G-7.
'We must be careful, however, not to take too much comfort from these experiences. Past is not always prologue. In the past, demographics and productivity trends were more favourable than they are today. In the past, we deleveraged during times of strong global growth. In the past, our exchange rate acted as a valuable shock absorber, helping to smooth the rebuilding of competitiveness that can only sustainably be attained through productivity growth.
'Today, our demographics have turned, our productivity growth has slowed and the world is undergoing a competitive deleveraging.
'We might appear to prosper for a while by consuming beyond our means. Markets may let us do so for longer than we should. But if we yield to this temptation, eventually we, too, will face painful adjustments.
'It is better to rebalance now from a position of strength; to build the competitiveness and prosperity worthy of our nation'.
Here's to a sober as well as a deeply thoughtful Christmas holiday.
Those interested in a more detailed discussion of Henry's views on the reasons for the current crisis and the lessons for economic policy might find this presentation - with a link to the relevant chapter of Great Crises of Capitalism - of interest.
The Australian Treasury
Date: Thursday, March 13, 2014
Author: Henry Thornton
Former Treasury Secretary Ken Henry has spoken out on the ABC. Naturally this Henry (Thornton, not Ken) watched his interview on the 7.30 report with interest. It contained some highly contentious points, summarised below, with which this Henry begs to differ.
Below is the first three summary points from the ABC report, followed by Henry (Thornton, not Ken)'s comments. But if you missed it, watch the full interview, available at the ABC report that is linked here.
'Former Treasury secretary Ken Henry says the GST will have to be raised in the future and warns budget cuts will not be enough to fund spending on new social programs.
'Dr Henry also criticised the actions of Prime Minister Tony Abbott and Treasurer Joe Hockey, in a wide-ranging interview on the ABC's 7.30 program.
'In the interview, he expressed dismay at the decision to replace current Treasury boss Martin Parkinson, defended the mining tax, and warned against replacing the carbon pricing scheme'.
GST. Ken Henry is probably correct on this point, but this Henry sees this is a last resort. Helped by the Commission of Audit and the Cabinet Expenditure Review Committee, Treasurer Joe Hockey has to cut spending whereever the case is economically sensible to do so as well as cancelling the Mining tax and the Carbon tax as promised clearly in the Coalition's pledge to the electorate. The government has a massive agenda, including increasing the defence budget - very important after the cuts and bungling of the Labor governments - cutting regulations and implementing the Prime minister's paid parental leave scheme.
Not until the dust has settled on all these changes, in time for the next election, will proposed changes to the GST be announced if it is judged necessary at that time. This Henry believes it will probably be necessary that the base of the GST be broadened and its overall rate increased. This is a 'last approach' to fixing the budget, after the reckless spending of the Rudd'n'Gillard governments has been trimmed and other reforms are bedded down.
Politicising the public service. How dare this government put its own person in charge of the Treasury! This is Ken Henry's severest criticism of the Abbott government. But, like the Labor opposition, Mr Henry finds it outrageous that Australia has elected people from the centre right of Australian politics.
A lifetime of observing politics as it effects the public service convinces this Henry of two things: most people who enter the public service are left-leaning by nature (as was this Henry when he joined the RBA); and Labor in government has been far more systematic than the Coalition in appointing people sympathetic to its cause to key public sector jobs. Left-leaning people also work as a pack in appointing their mates to jobs in the private sector, but this should come as no surprise because the centre left is the domain of collective action for collective outcomes.
One can lament the passing of the so-called 'Westminster system', with independent public officials providing advice that is both courageous and independent, as this Henry found to his cost in the late nineteen-eighties. But Labor has effectively introduced a 'Washminster system' by stealth, and it is time the Coalition responded in kind, or indeed with a more explicit (and honest) move to the Washington system.
This Henry has no personal knowledge of Mr Parkinson's strengths and weaknesses, except to note that Treasury's recent forecasting abilities have been lamentable and the lack of action on the very policy issues Ken Henry now bewails. But the Coalition is entitled to appoint its own man or woman to such a key job, the performance of which may make a significent contribution to its political success or failure. The 'Washington system' in which the party in power appoints its own people to key posts in government works well in the USA, and is more honest than the Washminster system. And those let go by a new government in Washington find interesting jobs in the private sector, often in Washington's many think tanks. This enables them to recharge intellectual batteries for their next stint in public service, and to reflect of the lost opportunities of their previous time in office.
Labor's favourite taxes. The coalition won the last election, as already noted. The coalition's policy to kill the mining and carbon taxes was perfectly clear before the election. Mr Henry is entitled to his opinion about the efficiacy of the carbon tax, but he should also respect the verdict of the Australian people. I did not hear him making that point.
Later discussion - eg 14/3
The debate about the management of Treasury has become a whole lot hotter. After Ken Henry's grave and carefully considered speech on the 7.30 Report, and this Henry (Thornton, not Ken)'s response (above), the bigger beasts have come out to play.
Judith Sloan in the Oz picks on Ken Henry's policy recod and tells him its easy to be wise after the event.
'The Coalition has inherited a budgetary mess from Labor. Commitments were made to large program spending without any planning as to how they would be paid for. There are real weaknesses in the tax and welfare system, which Labor did nothing to remedy. For instance, the interaction of family benefits, childcare subsidies and tax means that it is simply uneconomic for many women to work more than three days a week.
'As for increasing the GST, another gratuitous suggestion of Henry’s, it is Labor which is so bitterly opposed to this. Any hint that the Coalition would even give consideration to changing the rate of, or the exemptions to, the GST is met by a barrage of negative political scaremongering by Labor.
'So thanks, Ken, for your views. You might have been able to make a difference when Labor was in power but, as they say, timing is everything'. More of Ms Sloan here.
Phillip Coorey writes in the AFR: Tony Abbott has all but sealed the fate of Treasury secretary Martin Parkinson by implying he is not a team player and a poor fit for the Coalition's economic agenda'. (No obvious link.)
Tony Abbott has 'let it be known' that Treasury's Dr Parkinson is going to move on, despite Joe Hockey's alleged preference for business as usual. (If this latter point is correct, Joe must have been suborned by the sweet talk, as Treasury's record on both policy and prediction is simply awful). Here is a report on the floating of the dollar, with evidence of Treasury's lack of policy cooperation that goes back into the 1970s - see footnote 3 at the end of the article.
Economic reality check
Date: Tuesday, March 11, 2014
Author: Henry Thornton
The optimists were out to play last week, with better than expected GDP growth based on strong export performance and some revival of retail sales. The economic news this week provide a necessary sobering tendency. US shares have fallen on a slew of worse than expected data there, and China's banking system has also fuelled real anxiety. commodity prices have fallen and the Aussie currency barely twitched. Business confidence here is, predictably enough, failing to join the 'be happy' spend up big' brigade.
The budget is in such a mess that former tax'n'spend supremo, Ken Henry has popped his head up to remind us of ... you got it in one, ... tax reform. The subject that Mr Henry got his best ideas on from a fellow drinker in a pub in Northern Queensland. Nothing about Australia's major cost overrun, the double-digit cost disequilibrium that became entrenched on Ken Henry's watch. Nothing useful on national competitiveness from the wombat fancier. We agree there is a fiscal emergency, but we also believe there is a competitiveness crisis. Usually such crises are solved only solved by deep recession, which accurate statistics suggest is already underway.
China's banking crisis is best exposed by the indefatigable Telegraph scribe Ambrose Evans-Pritchard.
'A slew of shockingly weak data from China and Japan has led to a sharp sell-off in Asian stock markets and the biggest one-day crash in iron ore prices since the Lehman crisis, calling into question the strength of the global recovery.
'The Shanghai Composite index of stocks fell below the key level of 2,000 after investors reacted with shock to an 18pc slump in Chinese exports in February and to signs that credit is wilting again. Iron ore fell 8.3pc.
'Fresh loans in China’s shadow banking system evaporated to almost nothing from $160bn in January, suggesting the clampdown on the $8 trillion sector is biting hard'.
And in conclusion: 'China invested $5 trillion last year, as much as the US and Europe combined. There are already signs that the country is trying to export its over-capacity overseas by pushing down the yuan. If this amounts to a competitive devaluation policy, it risks sending a fresh deflationary impulse across the globe'.
On the domestic scene, the apparent revival of SPC Ardmona is a splendid piece of news, and may prompt a comment that the can is half-full. Consumer activists who purchased exceptional stocks of canned fruit and veges are largely responsible, and shows the benefit of governments allowing businesses and their customers to sort out their own problems. But there are still plenty of people losing jobs and many of these leave the workforce. It is no wonder there is a tax receipts crisis.
There have been two dismal business confidence indicators this week.
Roy morgan Research revealed that its business contacts say that confidence in February fell to 117.3, down from 131.5 in January, and back to below the level in August (119.6) 2013 in the month prior to the federal election. This negative result was across all business sizes as well as most states and industries. These February figures are the results of 1,343 interviews with all types of businesses across Australia.
The fall in confidence among business in February was caused by a 'decrease in positive feelings about where the economy is heading in the next 12 months and the next five years'. This has resulted in a decrease in business intentions to invest in expansion over the next year.
Then NAB reported of its business customers that: Business conditions 'back-pedalled sharply' in February reversing around half post election gains. Confidence softened but still remains marginally above trend. Sales and employment 'fell markedly' during the month, with the latter pointing to very weak labour market conditions (nearly all post election gains reversed) - and a jobless recovery. Manufacturing conditions 'deteriorated sharply', as did 'bellwether wholesaling conditions', whatever that means.
Henry spent Monday and most of Tuesday in Perth. One canny man said of the national slowdown 'we're about two years behind the rest of Australia, but we are rapidly catching up'. Of course, with others in Australia's previously wild west he may be over-reacting to the big recent falls in the price of iron ore, perhaps the view of the RBA's liason team. But there were a lot of 'Sale' signs in the Hay Street Mall, and empty shops.
Read on here if you have been inclined to be in the can-half-full school. There are odd currents in both the global and the Australian economy. Forewarned is forearmed.
Saturday Sanity Break, 8 March 2014
Date: Saturday, March 08, 2014
Author: Henry Thornton
US employers added 175,000 jobs to their payrolls last month after creating 129,000 new positions in January, the Labor Department said on Friday. The unemployment rate, however, rose to 6.7 per cent from a five-year low of 6.6 per cent, as Americans flooded into the labour market to search for work.
"This bodes well for the economy since there were massive headwinds," said Adam Sarhan, chief executive at Sarhan Capital in New York. "This report plays perfectly into the Fed's script of tapering."
US shares ended the week rising, making it two weeks of gains after the minor correction at the start of the year. Markets seem to have accepted the Fed's 'taper' despite recurrant bouts of nerves whenever it seemed the taper might begin.
In Australia, the RBA boss, Cap'n Glenn Stevens, gave a cautiously upbeat presentation to the economic committee of the House of Reps. Is that the hint of a smile, gentle readers?
The RBA has kept cash rates on hold and with stronger output and reviving business and household confidence, it seems the next move may be up.
The Aussie dollar remains stubbornly high, over 91 cents Australian for every US dollar. This unresolved issue of economic policy may yet contribute to the next recession but, for the present, 'what doesn't kill ya makes ya stronger' seems to be the RBA's view.
The RBA chief reminded us all that house prices can go down as well as up. More interesting is a suggestion that home buyers may need to demonstrate an ability to cope with mortgage rates four percentage points higher than existing rates before they qualify for a loan from a bank.
So it seems it is on with the show, despite the large number of people unemployed or working less hours than they wish to work. (Check out the graph is particular.)
Andrew Demetriou is retiring from his position as head of the AFL, or as some say he was sacked following his gross mis-handling of the drugs or supplements issue. Good riddance is the view of Henry's sporting department.
Last night Caaarlton! was defeated in a practice match by the Bullies, while Henry and Mrs T were watching 'Tora, Tora, Tora', a gripping golden oldie about Japan's sneak attack on Pearl Harbour. Great presentation of the various cross-currents in both Japanese and American leadership groups. Trailer here.
The Americans were asleep at the wheel while the Japanese navel chief was presented as a reluctant aggressor and predicted that the mighty USA would be stirred into retaliatory action his navy could not withstand. How right he was. If you have not seen this film, or saw it a long while ago, it is well worth the few dollars it will cost to borrow from your local video shop. Or your sub-teen boy may download it for free from some illegal site or other.
Cap'n Clarke has returned victorious from South Efrica after leading his 'pack of dogs' (a South Efrican description) to a surprise series win. Warm congrats to all, but the batting performance of Warner and the bowling of Mitch Johnson and Rhino, especially in SA's last inninings/last over was sublime.
Cap'n Clarke was seriously beaten up while batting, and his defiance and willingness to withstand one of the most brutal attacks Henry has seen (from Mone Morkel) before going on to make a 'big hundred' to put Australia in the driving seat made his place in history secure. 'Pup' no longer, 'Bulldog' henceforth.
Image of the week
Courtesy The Oz
GDP growth, labor market disaster
Date: Thursday, March 06, 2014
Author: Henry Thornton
'Growth spurt lifts hopes' says The Australian. Despite weak business investment, the predictable export surge and stronger household spending together created 0.8 % growth in the December quarter and 2.8 % over 2013. This is the 22nd calendar year of continual economic growth — a brilliant result by the standards of other developed nations. The RBA clearly predicted an outcome close to this when it signalled that interest rates are on hold despite an exchange rate that is uncomfortably high.
There is a great conundrum, however, when one examines the state of the labor market. Full-time jobs and numbers of people seeking work have both declined substantially. Although job ads seem to have reached some sort of low-level plateau, and the official (ABS) measure of unemployment is only 6 % (although rising), the latest Roy Morgan unemployment estimate of 12.3 % is more than double the official estimate.
Gary Morgan says of his, in Henry's view more realistic, estimate: 'Australian unemployment has increased to a record high 1.561 million Australians (12.3%, up 1.0%) in February. This is the highest rate of unemployment in 20 years – since February 1994 (12.3%, 1,075,000). An additional 1.080 million Australians (8.5%, down 0.2%) are under-employed – a total of 2.641 million (20.8%) Australians unemployed or under-employed – a new record high.
'This month’s rise in unemployment was driven by a large fall in full-time employment – down 397,000 to 7,318,000, some of whom transferred to part-time employment – which was up 187,000 in February to 3,786,000 while an additional 121,000 Australians became unemployed.
'Analysing the results by age group also reveals unemployment to be heavily concentrated amongst the young: 18-24 year olds (28.0 %, up 6.8 % in February), have far higher unemployment than any other age group; ahead of 25-34 year olds (12.4 %, up 1.3 %), 50-64 year olds (9.3 %, up 0.1 %), 35-49 year olds (8.9 %, down 0.5 %) and those aged 65+ years old (5.2 %, up 2.7 %). An additional 16.1 % (up 1.4 %) of 18-24 year olds are under-employed – which is also far higher than any other age group. This implies a total of 44.1 % of 18-24 year olds unemployed or under-employed.
'The figures highlight a reality seen repeatedly during economic downturns – younger people are the first to lose their employment or have their hours reduced. The spike in youth unemployment is therefore often a leading indicator of higher unemployment for older age groups. However, it is also worth remembering that many younger people who have been searching for work over the Summer months will return to their studies in March as University recommences. This is an annual trend which decreases youth unemployment each year which we would expect to see next month.
'The continuing rise in unemployment – which has now increased in eight out of the last ten months since hitting a low of 9.3 % in April 2013 – is a huge concern for the Abbott Government as it gets set to deliver its first Federal Budget in two months’ time. In February alone Qantas announced plans to heavily slash costs (an expected 5,000 jobs lost), Toyota announced it was ceasing car manufacturing in Australia (A minimum of 2,500 jobs lost), Alcoa announced it was closing several smelters (1,000 jobs lost), Telstra announced plans to cut its directories division (800 jobs lost) and today IBM has announced it plans to cut a further 500 jobs'.
Qantas has joined the manufacturing industry in being in deep trouble. The common factor is an unsustainable cost problem, which is a far harder problem to deal with that the massive budget black holes that is absorbing most of the government's economic policy thinking. Taken literally, GDP growth and falling employment equals productivity increase. Great news for those people who keep their jobs, bad news for those who lose jobs or, like many young people, have never had one.
The end of the age of entitlement, for both individuals and businesses, is the basic attitude of the Abbott government and is directionally correct. Whether Australia needs a deep recession to underline the fact that the world offers us no easy road to prosperity, and to bust official complacency, is the big economic question we are facing now.
Henry Thornton's True Unemployment & Under-employment: February 2014
RBA `watching carefully`
Date: Tuesday, March 04, 2014
Author: Henry Thornton
Pity the Reserve Bank. Its staffers have interesting and highly paid jobs, cheap home loans and extraordinarily generous pension arrangements. They work in the CBD, with their own underground station outside the front door. The governor gets to sit next to the Treasurer at important events like the 'G20' meetings, and to schmooze with Janet Yellen and other central bank worthies.
Very occasionally their jobs become difficult. Occasionally they face 'dilemmas' which create more heat than light. Back in the 1970s, a prime dilemma was whether to crunch the economy as a contribution to keeping greatly excessive wage deals from wrecking it, sort of like the American airforce in Vietnam. Now they are again facing a serious dilemma. The value of the Australian dollar is too high and key companies are quitting or shedding jobs in an effort to stay afloat, correction, still flying.
The problem with the excessive dollar, of course, is that the RBA has no way to bring it down except by adopting a dangerously loose monetary policy. Talking the dollar down seemed on some days to bring some response, but the net effect of open mouth policy is usually small, as it proved in this case.
Domestic interest rates have been reduced to the point that inflation, both of goods and services and assets, house prices and shares, are rising. Sydney unit prices exceed Melbourne house prices for the first time and experts are quietly saying 'bubble' as they pocket the large commissions earned by selling both houses and flats in Australia's major cities. How confident is the RBA about its in Henry's view overly optimistic forecasts - with inflation too low and activity too high? This question will be on the RBA's boardroom table today. Here is a contribution its board members, including the Treasury Secretary, should ponder.
Higher than expected inflation is one worrying indicator. Lower than expected business fixed investment is another, where the latest survey points in the opposite direction, activity weaker than expected. Jobs data has for some time also been pointing in a negative direction. Jobs, especially full-time jobs, have been falling, and the widely publicised problems of the vehicle manufacturers, fruit canners, mining companies and the airlines, among others, has worsened the story. At the same time, numbers of people looking for work have been falling. In the official (ABS) data, people looking for work have been falling slightly slower than jobs have been falling, so the ABS rate of unemployment has been inching up. More accurate measures, by Roy Morgan Research, shows a far more alarming number, as explained here, in one of Henry's most read blogs. What is the RBA's massive 'liason' efforts achieving, gentle readers?
Another key indicator is commodity prices, its index a vital statistic for any economy watcher. The RBA, in its latest release, says: 'Preliminary estimates for February indicate that the index declined by 1.3 per cent (on a monthly average basis) in SDR terms, after declining by 1.6 per cent in January (revised). The largest contributors to the fall in February were declines in the prices of iron ore and coking coal, which was partially offset by an increase in the price of gold. The prices of many rural commodities rose, while the base metals subindex fell in the month. In Australian dollar terms, the index declined by 2.2 per cent in February'.
Over the past year, the index has declined by around 12 per cent in SDR terms. The prices of most commodities in the index have fallen over this period. The index has risen by 1.8 per cent in Australian dollar terms over the past year. The graph below puts the longer term picture starkly.
Recent economic news from abroad is more than a bit worrying, though gov'nor Glenn will be sanguine having been assured by the brighest and best international experts that all is well. We learned from 'G20' reports that the US Fed is watching closely the weakness in US economic data, and 'will listen' to international complaints about US monetary policy, presumably as the US airforce listened to complaints from Vietnam in the sixties. China is watching closely the state of its banking system, both those parts in the sun and those in the shade. The Eurozone is struggling along with catastrophic levels of unemployment in most Eurozone countries and the Ukraine to the East looking like a bomb about to go off. Japan is doing its thing, battling deflation with a population rapidly growing old. (Memo Scott Morrison: here is a nation that needs brave young people.)
The general gloomy international news will of course be 'watched carefully' by the relevant analysts in the RBA, and the liason team may be told to dig harder. But it is, or should be, an uneasy time at the Reserve. Their last big snafu was in the late eighties, leading to 'the recession we had to have', despite Henry's editor's efforts to help, which are available here. Ignoring such advice from outsiders is the practice in a sheltered workshop, and we all have to hope today's RBA is telling the Treasurer that current official forecasts may be wrong.
Saturday Sanity Break, 1 March 2014
Date: Saturday, March 01, 2014
Author: Henry Thornton
The likely demise of Qantas as an aussie icon has dominated the local news. Coming on top of Holden, Toyota, SPC Ardmona, Forge, who can doubt that Australia is entering a recession? Certainly a growth recession, but perhaps a real, awful recession where there are massive numbers of lost jobs. Business fixed investment is the latest major economic statistic to 'surprise on the downside' but blind Freddy has been noticing and commenting on the weakness of the local economy when the rest of the world seems to be picking up.
Or is it? US Fed chief, Janet Yellen says US weakness is due to the especially severe winter weather, but perhaps it is worse than that. China is enduring another bout of the colliwobbles, this time with concern about the so-called 'shadow banking system'. Forget that , comrades, the real banking system is in trouble because of its loans to State Owned Enterprises focussed more on job creation than on profitability. The Eurozone is still struggling to regain growth momentum, though some of the real basket cases are showing signs of life despite the powerful austerity imposed upon them.
Australia's Treasurer, Joe Hockey, is supposedly pondering just how tough to be in the forthcoming budget. Fix it fast, Joe, and you can get on with the job of restoring a truly dynamic economy. In the Qantas case, thouhtful commentators are pointing to a long history of working constructively with the unions, but with growing international competition this game is over, as it is over for all companies in Australia.
As we have said for more than a year now, Australia's budget problem is severe, but a grossly excessive cost base is a bigger problem. Tony Abbott and his government seem to recognise this, and Mr Abbott himself is emphasising the responsibility of boards of directors and chief executives to fix up their companies. If we get both a tough budget and continued advice to 'fix your own problems' it will add up to the biggest cold bath since the 1990-91 recession.
Households seem to have recognised the looming problems, and household saving is again positive after decades of being near zero. Companies that act decisively to cut costs will emerge first from the downturn, and the number of half-year 'surprises on the upside' with company profits bodes well for corporate Australia.
Structural reforms should include setting the pension age asap to at least 70. But someone should work out the average number of years between becoming an age pensioner and death the nation can afford, and determine the age of 'retirement' in that way. There is a lot of evidence that physical and mental health are promoted by people keeping active during an effective 'retirement' from full-time, full-on jobs. There is a lot that older Australian's can do to promote society welfare as volunteers, or as members of local councils, superannuation boards and even, for suitably trained oldsters, teaching or child-minding.
Perhaps the pension should only be provided if people apply for it including their plan to 'give back' to the general community.
The global warming debate
An interesting report has crossed Henry's desk this week. In short it says: * The main source of heat on planet earth comes from the sun - and the strength of energy reaching earth depends on varying activity of the sun. This varying energy source accounts for the long term changes in the average temperature on planet earth. * The oceans are vast energy resevoirs. In colder times the oceans absorb CO2 and in warmer times they give it up, hence the positive correlation between average temperature and atmospheric CO2. Persumably, there are 'long and variable lags' in this process. No doubt also that industrial activity is adding to the atmospheric CO2, and if not checked this process might make the swings in atmospheric CO2 larger and faster, making smooth 'accomodation' to a hotter planet harder. * CO2 promotes plant growth, so its levels are not a disaster (if accomodation is smooth) but a help. Currently it seems some seaside cities will have to be abandoned, and the sooner we begin planning for this, the easier will be the transition. However; * Recently sunspot activity has been very low, which accounts for the flattening in the warming trend that is so embarrassing to the more zealous warmists, and which may signal a cooling period such as those clearly visible in the historical data.
The Aussies have been belted in the second test just as thoroughly as in we belted the South Efricans in the first test. Brave (but foolish) Mr Warner has been fined for alleging that the South Efrican bowlers engaged in ball tampering to allow 'reverse swing' which allegedly makes the sort of balls bowled by Mr Styen literally impossible to see. Australia's Cap'n Clarke says Australia must join the 'reverse swing' movement, implying fielders will be trying to keep one side of the ball smooth and the other side roughed up, which is the illegal approach Mr Warner alleges the South Efricans did in the second test.
What an irony if the Aussies got pinged by the umpires for crude attempts to emulate the South Efrican's apparently subtle afforts to groom the ball. (I say 'subtle' because no South Efrican fielder was pinged by an umpire for ball tampering, which is illegal, as surely would have happened if South Efrican efforts to groom the ball were obvious.)
Anyway, the bowl-off at Cape Town begins tonight, and we have to hope the pitch (and their recovery from the monster bowl-off in the Second test) allows Mitch and his mates again to terrorise the South Efrican batters, or that Mr Steyn and his pals fail to get reverse swing into their repertoire, or that our batters out-bat their batters. Then we can focus on the footy, with the nab cup over for another year and the real stuff underway.
We learn shortly how the film industry has voted for the plethora of Academy awards. We hear from an insider: that 'best film' is between 'Twelve Years a Slave' and 'Gravity'; that 'best actor' is likely to feature Christian Bale (American Hustle) or Leonardo DiCaprio (The Wolf of Wall Street); and 'best actress is a toss-up between Cate Blanchett (Blue Jasmine) and Henry's favourite Judi Dench (Philomena). Sandra Bullock (Gravity) must have a shot also, for sustained single actor performance in outer space after the Russians destroyed an aging satellite/space station, thereby infesting Bullock's orbit with space junk. How do they film this stuff?
Fiona Prior has ignored all the blockbusters mentioned above, and recently viewed 'The Great Beauty', which, she says, mysteriously, is 'even better if you are a catholic'.
The Pope has made a wonderful appointment of George Pell as the Vatican's CFO. Cardinal Pell is sure to fix up the finances and to be a general force for good in the Catholic high command. We wish him well.
Image of the week
Academic hanky panky
Date: Thursday, February 27, 2014
Author: Henry Thornton
Fakery is an issue rarely in polite academic company. Surely modern academics would not think of such a thing, or if they did the so-called 'peer review' would capture the occasional fakery well before publication. On the other hand, as economists like to say, with promotion based on numbers of articles published, with only minimal checking of quality, the rewards from fakery can be large. Simple economic theory says high rewards from any activity will attract people willing to fake it, especially if the chances of getting caught are low.
Even in science, where fakery might be thought to be harder than in the social sciences to get away with, there are some infamous examples. There is even a website dedicated to retractions, which are quite frequent, if the existance of this site is any guide.
Mrs Thornton came home yesterday with a deliciously sad story about some bigshots in the analysis of management styles who has been caught. Said bigshot had supposedly found evidence that what is variously called 'servant leadership', 'authentic leadership', 'spiritual leadership or indeed 'ethical leadership' works better than traditional authoritarian leadership, the sort that Henry used to practice.
Henry had never believed that modern touchy-feely, 'how's the wife/husband/kids, aunt?' style of leadership could possibly be better than 'just get the job done, quickly' leadership, but the weight of research had sowed seeds of doubt in Henry's aging brain.
Here is an extract from the editor of an interesting website called 'Retraction Watch'.
'In a letter to board members of the journal obtained by Retraction Watch, Leanne Atwater, senior editor of the LQ, tiptoed around the reason for the pending retractions:
Dear LQ board members
'It is with great distress on many levels that I must report that a decision has been made to retract 5 published papers from The Leadership Quarterly. This decision comes after a thorough investigation of complaints, responses from the authors to the concerns and thorough follow up on the authors’ responses. A formal retraction will be published in an upcoming issue.
ANNOUNCEMENT OF ARTICLE RETRACTIONS*
'There is no editor oath of office to preserve, protect, and defend the academic integrity of The Leadership Quarterly(LQ), or of any other scientific journal of which I am aware. However, the advancement of scientific leadership knowledge requires exactly such stewardship. The health of our collective endeavor does likewise, as two of the hallmarks of a profession are that it engages in self-monitoring to insure the integrity of its contributions and that it places societal service and the public good above personal or institutional benefit.
'In recent weeks serious allegations have been raised about the scientific value and contribution of a number of papers published in recent years in our discipline, five of which were articles published in LQ. As a result of these a lengthy investigation was launched into the veracity of the allegations. This inquiry process has been intensive and exceptionally time-consuming for me and many others looking into these issues. It has also been incredibly stressful and unpleasant to conduct such an inquiry into the work of authors who are colleagues, acquaintances, and, in some cases, friends.
'However, despite all the negatives associated with conducting such an inquiry, safeguarding the academic integrity ofLQ and of the knowledge published within its pages has required that it an inquiry be undertaken.
'The inquiry process was lengthy and thorough and included a request from authors to demonstrate the accuracy and authenticity of their results and reporting.
'As a result of the inquiry, myself and the two previous senior LQ editors, along with three independent statistical and methodological consultants, have concluded that, while intentional wrong doing should not be inferred, assertions of seriously compromised scientific value and contribution are supported with respect to five LQ articles'.
Read on here if you are so inclined, to see the list of authors and articles whose 'scholarship' has been retracted. Shows just how off-course some social scientists have gotten.
Australia gets it
Date: Tuesday, February 25, 2014
Author: Henry Thornton
Australia is getting it, if the daily newsfeeds are accurate. The budget, and its spending and tax assumptions, is unsustainable. Our cost base is too high. In quick succession Holden, Toyota, Alcoa's smelter, one of our last oil refineries and a multitude of smaller businesses have shut down or are shutting down. Qantas will soon be gone, or changed so that only the logo is recognisable. Our infrastructure is old and outdated, and bringing it into the twenty-first century will require vast sums of money or tax breaks that governments cannot afford.
The world has embraced (partial) free trade and our domestic markets can support only industries and companies that are globally competitive. The big miners are safe but can hardly be labelled 'Australian' nowadays. The big banks are supercompetitive as a group of four oligarchs but gouge domestic customers unmercifully, as do the utilities. Owners of toll roads do not face international competition, but soon their rich pickings will be taken by a foreign buyer and their taxes will pass to overseas owners. This is just one of the many issues limiting Australia's ability to levy taxes on the businesses that make a living off Australian consumers and other businesses.
Increasingly our children are unemployed, or employed in jobs for which they are overqualified. The best of them will find better jobs elsewhere and visit their elderly relatives in Australia only occasionally. Small businesses are burdened by penalty rates that limit their ability to employ people. To add insult to injury. they also suffer the effects of onerous over-regulation.
I could go on, but I might become depressed. Someone once said that Crisis equals Opportunity. What an opportunity for reform is faced by the Abbott government. Rather than running around like headless chooks, Messrs Abbott, Hockey and their team of non-wimps are battling on many fronts to achieve viable plans to reform Australia's outdated economic infrastructure, and this includes industrial relations policies, tax policies and spending priorities as well as train lines, roads, ports and other more conventional infrastructure.
The key to success in any reform program is effective communication. It is of course vital to convince 52 % of the people (to be on the safe side) that what you are proposing is (a) necessary; and (b) as fair as possible given all the circumstances. The endorsement by the G20 of Mr Hockey's Go4Growth policy was a good start but we all need to be reminded daily of the interrelated weaknesses in all existing Australian economic policies. And the plan to fix things.
Saturday Sanity break, 22 February 2014
Date: Saturday, February 22, 2014
Author: Henry Thornton
'Big growth the answer' says business chief. 'THE head of one of the nation's largest employers has declared Australia needs to go for growth to spur "real job creation", instead of lifting taxes or creating big government.
'Backing Joe Hockey's call for the world's 20 biggest economies to set a global growth target, Wesfarmers chief executive and B20 Australia chairman Richard Goyder said Australia needed growth above 2.5 per cent.
"To get real job creation we are going to have to grow faster than that . . . There's no doubt (that growth should be higher)," Mr Goyder said in an exclusive interview with The Australian.
"Business is the key part of that. You don't get GDP growth through high taxes. You don't get GDP growth in the long run through growth in governments. You get it through letting the private sector take risks and invest. That's how you get jobs." More here.
And in another surprise, it seems the Productivity Commission is to help with IR reform.
In one of the most exciting bits of economic news since, ... Moses was a boy (just joking): 'THE Productivity Commission will be given wide-ranging powers to recommend sweeping workplace changes, including giving employers greater rights to try to remove conditions from enterprise agreements, under the terms of reference that cabinet is finalising for its inquiry.
'Employment Minister Eric Abetz will announce the terms of reference next week when he introduces a bill into parliament to allow workers to trade off more easily key entitlements, including penalty rates, for more flexible working hours.
'The bill will also impose fresh restrictions on unions entering workplaces and limit their ability to get pay deals on new resource projects'.
Read on here and wonder, you Pharoahs of Australia's union movement. Your glory days are over and the royal commission will bust your monopolies open just as surely as police action is putting the bikie gangs into their proper place as harmless groups of petrol heads enjoying a ride in the sun.
The South Efricans had apparently prepared a greentop to suit previous beliefs that their side had the best fast bowling attack in the world. This was until Mitch Johnson and friends tore the heart out of the South Efrican batting not once but twice, and accounted for Cap'n Smith both times in quick order.
Late orders from the high command made the hapless curator shave the pitch so it turned into a slow, non-turning dried mudpatch. Brown with no bounce, slow as Henry in his largely inglorious athletic career, so did Mitch and his mates give up? Certainly not, instead used their noggins to construct swinging and cutting near sandshoe crushers that quickly accounted for Cap'n Smith and Henry's favoured bearded man, the imperturbable Amla. Cap'n Clarke made smart field changes, while Mr Harris got into the act and even Messr Lyon and Smith, tempting the wily South Efrican batters into twice hitting one six too many, and Mr Doolan took another fine catch at silly square leg to help Mr Lyon's rapidly growing reputation.
Sadly, Day 2 was a different story. Our bowlers labored on the unhelpful pitch, with AB de Villiers and JP Duminy making centuries. The increasingly confident Nathan Lyon captured 5 wickets after bowling Shane Watson's overs as well as his own, and then late in the day was required to come in a night watchman after four of Australia's recognised batters fell quickly.
Looks like the second test is all but over, and there will be changes for the third test. Possibly a faster pitch, though Cap'n Smith may order another sun dried mud wicket in an attempt to replicate test two dominence.
Henry is beginning the difficult task of evaluating Caaaarlton's! chances of a successful season. He turned on the nab Cup game against North Melbourne, previously known as the Kangaroos and before that the shinboners (til other teams learned to fight back), and saw, much against the pundits' predictions, that the Blues were comfortably ahead. There was a highly skilled man from the Swans, a promising ruckman from Collingwood and, gor blimey, many of the Blue boys have become stronger and more assured over the summer, with Cachia, Buckley and Bell standing out.
There has been little competition in the Thornton household for the TV as only the youngest ankle-biter is interested in the Sochi snow-games, as it seems our competitors were well off the pace in most events. Very sad, really, but unsurprising for a small country, mainly hot and dry except in the North where is is sometimes hot and VERY wet, with no snow. (Snow in Kakadu would make Lord Monckton's already bulging eyes pop right out, one imagines.)
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Courtesy The Australian
G20 and US interest rates
Date: Friday, February 21, 2014
Author: Henry Thornton and Nick Raffan
Economic headlines today are mostly about the G20 meeting in (gasp!) Sydney and Australia's opportunity again to lead the world. Last time this was tried it was the brainchild of K Rudd, and he left us with the world's most extreme policy to fight global climate change.
This approach included a damaging carbon tax and a high required use of 'renewable energy', both policies that have helped to make Australian industry deeply uncompetitive. The current Treasurer plans to lead the way on a growth target when we have no official idea about how best to boost Australian growth from currently predicted sub-3 % performance. Is it to be 'fixing the budget emergency', slashing business regulation or reforming industrial relations by stealth? Or some of all three reforms?
The US Fed is supposedly beginning to consider (gasp!) raising interest rates. The complaints of Turkey and similar inflationist nations will, of course, be brushed aside, along with advice from deflationist Eurozone nations. Like previous hyper-powers, the mighty USA has no need to run its policies to help out lesser nations whether mad developers or ossified bureaucratic hellholes.
Just how strong is the US recovery is a subject tackled today by Henry's favourite analyst, Nick Raffan. The remainder of this blog presents the relevant part of the Raff Report for February.
'Any analyst who bothers to review the trends of US Installed Production Capacity and Utilization will see the effect on US industry caused by the emergence of China as a manufacturing powerhouse. In itself, just printing money cannot make US manufacturers competitive with China or any other emerging economy.
Now for some charts: Figure 1 shows US New Orders for Manufacturing Excluding Defense. This picture shows the dilemma facing the Federal Reserve. Growth in manufacturing keeps disappointing many mainstream commentators, seemingly these are people whom have probably never heard of, or whom do not have access to, Thomson Financial Datastream.
Figure 2 depicts new orders for computers and electronic products that are gapping down and surely reflect import replacement; this just but one example.
There seems to be a fixation on housing starts but these are only one facet of US construction. Figure 3 shows new orders for construction supplies and so covers residential and commercial construction. Note that the 12 month moving average looks set to top-out. The recovery has been slow relative to the last up cycle and we might ponder what would happen if the Fed pulled the rug from under its money printing programme.
Over recent years the US auto industry has done well as was shown in Figure 4. Henry’s readers will notice that the recovery from the depths of 2009 was very sharp and this same trend is obviously reflected in new orders for consumer goods. The pace of recovery has slowed a tad but when looked at from a historical perspective it seems likely that auto sales are set to peak, probably this year.
The fact that the Federal Reserve and the Bank of England have foreshadowed record low interest rates for the foreseeable future is relished by stock markets. The reality is of course different. It’s bad news; business is terrible and does not want the cash. We have seen this many times when bad news is good news and to hell with what is really happening in the world.
The story goes like this: low interest rates keep the discount rate low on future cash flows. The value of cashflows increases and this allows the expansion of price earnings multiples because the value of the business rises. But one day the King rides by in all his finery until someone points out he is wearing no clothes.