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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.

Saturday Sanity Break, 3 January 2015
Date: Saturday, January 03, 2015
Author: Henry Thornton

Greetings and best wishes for 2015, gentle readers.  It is hot and very windy on the Mornington Peninsular and in a large swatch of South-Eastern Australia.  Perfect bushfire weather, and doubtless there will be nutters abroad seeking to generate some excitement.  Anyhow, all we can do is keep the grass around the rural hideaway cut and hope for the best.

Henry's favourite journalistic stirrer, Grace Collier has returned to the Oz after what seems to be a long absence. 

Is this another economy measure from Rupert's minions or has Ms Collier been sprogging, travelling overseas or just taking a rest?  'Grace', if I may use such an intimate salutation, please keep up the good work, and if the Oz is reluctant to use your talents, HenryThornton.com stands ready to provide an internship.

Anyway, Ms Grace is onto something with her article today. 'Look after your friends, or at least stop slapping them in the face. Everyone needs friends. The Labor Party is great at looking after its friends; as a result, it has many. The Coalition is hopeless at looking after its friends; as a result, it has hardly any, a fact it constantly bemoans'.

Hopefully, one day the penny will drop. The Coalition should try to keep faith with its base; an obvious rule: never give the enemy of your supporters a job. Two key appointments (to protect the identities of the appointees, they shall be known only as “Natasha X” and “Greg X”) constituted unforgivable insults.

Those who know the real names of "Natasha X" and "Greg X" are invited to contact Henry here. 'Unforgivable insults' need to be recorded, but the general point is more relevant. 'Look after your friends, or at least stop slapping them in the face'.

Of the other suggestions for Tony Abbott and co, Henry most liked the following:
* 'Reverse the high-income earner debt levy and cut income taxes.'
* 'Do the job fearlessly or go home, and get with the times.'
* 'Make serious spending cuts but take from the poorest last.'


The third test ended in a hard fought draw, and Day 5 found Henry glued to the TV. Cap'n Smith again ran the show well, and is making a good start to his time at the top. Interesting to read today's story to the effect the Mitch Johnson has been bowling more than his preferred 3 overs in a spell, which is preventing him from being his fully aggressive best.  Shouldn't take more that a nanosecond for Cap'n Smith to resolve to do something about that.  Personally, Henry thinks Mitch is a bit like Samson, it is the lack of facial hair which is holding him back.  Let that hair grow Mitch, and see if that improves matters.

Still no action from ASADA about alleged drug taking at Essendon. This is a tabloid newspaper approach - trash their reputation, but never present the evidence in a forum in which it can be tested.  Surely there is a law firm willing to sue ASADA for defamation of character on a success fee basis?

Soon we shall be in the Big Bash silly season and Henry can go back to work. Then it will be only 75 sleeps 'til the footy season when Henry and his co-religionists can watch Caaaarlton!'s desperate bid to finish in the top eight.  In between is the Asian Cup of futball, which may provide a distraction or two.

Image of the week

Courtesy The Oz

Economic crises: then and now
Date: Tuesday, December 30, 2014
Author: Henry Thornton

'The present crisis, fortunately, is in no way attributable to unsound banking practices or property speculation. It is a crisis precipitated by catastrophic collapse in the values of [iron ore and coal], but which had its origans in the unsound borrowing pursued by the Australian government from [2009 - 20xx]'.

'... Australia, having got itself into difficulties by inflating its internal prices, cannot get out of difficulties without deflating its prices, which means in this case reducing wages and accepting temporarily a lower standard of living'.

This is not the fulmination of a latter day prophet of doom. It is an edited version of a comment made by the Economist in February 1931. In terms of the editing, in the original the words in the first set of brackets were 'wheat and wool', and the dates in the second set of brackets were '1922 - 1928'.

Australia at the time showed great good sense.  Minimum wages were cut by 10 %  and the exchange rate was devalued by 30 %.  Now wages growth is slow - but without any dramatic cut - and the exchange rate is being devalued in fits and starts.  After the dramatic price cuts of 1931, Australia recovered relatively fast, but there was no avoiding deep depression. Slow wages growth and fits and starts currency depreciation will give us little international advantage, as the dramatic currency and wages cuts did in 1931.

With current policies, our economy will struggle for years.

But do enjoy the fireworks and general festivities. Mrs Thornton sends her best wishes with Henry's for 2015 and beyond.

Remember: forewarned is forearmed.

Sat Sanity Break , 27 December 2014
Date: Saturday, December 27, 2014
Author: Henry Thornton

Tony Abbott's reshuffle seems to have been a promising circuit breaker.  Next step is to get a sensible narrative going.  This will be harder, especially after more than a year of mixed messages and confusion, except of course for stop the boats, kill the carbon and mining taxes and sign three Free[r] Trade agreements. 

One would have to say say, 'not a bad year comrades', except for the budget deficit, now 40 billion and still rising, failure to get medical and university reform through the Senate, and failute to carry the people on what has been achieved and what has been blocked by economically illiterate micro-party Senators.

Clearly it was time to Reboot. That done, where is the Paul Keating, with his unparalled ability to charm even class enemies and his suprising ability to grasp essentials of economic reform and to persuade his cabinet colleagues?  Perhaps Mathias Cormann is the man, if he is given a serious chance to become the public face of the Abbott government's economic team.  This team has been strengthened by promotion of two promising young liberals from the so far largely ignored state of Robert Menzies' Victoria, Josh Frydenberg and Kelly O'Dwyer.

So it's on with the show, and we wish the Abbott government every success in 2015.  Vital this, as its success is our success, and its failure is our failure. 

Henry's son Bert, has just returned after three weeks in Tiger country (South-East Asia). Bert was very taken by the cheerful energy of Singapore, Malaysia, Laos, Cambodia and especially Vietnam.  'It's government is communist', Bert advised, 'but as effective capitalists they leave us for dead'.  That judgment, from a young man well educated in economics, history and the law, is worthy of pondering, gentle readers.

We wish all our fellow Australians a wonderful, gradually reforming capitalist success in 2015.


Henry had the great pleasure of sitting through a day of absorbing test cricket yesterday, and will be listening on radio, with the TV screen turned on today, and, one hopes the next four days.  After a catastrophic duck by batting hero, Dave Warner, Chris Rogers and Shane Watson steadied the ship  with useful 50s, but with Mr Watson a chronic failure to go on and 'get a big hundred' he is copping some flack in the press today. 'Joe Burns for number three' is the cry today, after a well made 13 runs ended buy a silly shot. Henry is prepared to bet, smilin' Joe told himself 'This is pretty easy' just before the ever diligent - well almost always diligent Indian attack ended his first up camoe. the Australia's new super-star Captain and chief batter, Steve Smith, steading the boat again, finished the day on 72 not out, carrying the score to 5/259.

The boat was wobbling noticably at the end of the day, with midshipman Haddan ducking, weaving and taking hits for the team in the very cool breeze to offset the hot bowling.

'Lota work to be done yet, boys', Henry wishes to advise our tail-enders.

Speaking of boats, the SydneytoHobart got off to a fast start as some of that decidedly cool Southerly breeze made it to Sydney. Soon we'll be singing auld Lang Syne and hoping our footy team does a bit better, actually a lot better, if you require total honesty, in the 2015 season.  Henry has got to the point that he now hopes for only one more premiership before he goes to a better place, and even that looks like wild hope at this time.  We may be forced to begin to ask the great Architect for a Second Term for the Abbott government instead.  Perhaps more likely than another premiership for Caaaaarlton! anytime soon, but also a more worthy wish as it willl provide more joy for the masses of well-to-do than a mere footy wish.

Image of the week.

Today we break with years of tradition and present an image from Henry's own brush.

The meaning onf this image will be obvious to any thoughtful reader - here is the link.

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

It is time for most of us to down tools and have a break from what are becoming increasingly tough times.  I'd be delighted to present cheerier news, but it is hard to do so when Australia is suffering from three big challenges:
* Double digit cost overhang, encouraging imports and discouraging exports;
* Budget deficit out-of-control, adding $40 billion this year to a rapidly growing international debt;
* Nasty political gridlock, frustrating the government's attempts to grapple with budget catastrophe.

The first point to note is that every boom of the sort we experienced in the 2000s is followed by a bust. We shall be very lucky to escape severe recession, or a long period of below potential growth, following the national party that was our good luck during the late, much lamented, China boom.

With the onset of the global crisis in 2007-08, Australia's government panicked and the head of Treasury, Dr Ken Henry, advised a crude Keynesian remedy - 'Go early, go hard and go households'. This may have saved some jobs, but it fostered all the wrong cultural messages. Spend, not save.  At the first sign of trouble, your government will provide. There is no need to cut consumption and raise productivity in the face of a severe global shock. Item 1 below provides a more appropriate summary of current national imperitives.

So much for how we got here.  A massive battle to restore budgetary balance is ahead of us all. Henry would prefer to balance the books with spending cuts, but a well developed sense of entitlement has Australians in its grip. Like the OECD and other expert groups, I believe a GST without exceptions and a top rate of 15 % will eventually be required, as it was in New Zealand.  If Labor was fair dinkum it'd do a deal with the government on spending cuts and the suggested GST reform.

That is the least pain solution, and should include compensation for the most needy Australians for the associated increases in the cost of living.

The double-digit cost overhang is a harder nut to crack. Fortunately Australian people are sensible, as shown by the low recent rate of cost increases, especially wage cost increases. If this discipline can be maintained as the dollar falls the cost overhang will be gradually eroded.  But there is a lot that a government could do to help reduce costs by structural reform. Here are Henry's suggestions.

This year has seen Australia's monetary policy stuck 'easy'. Henry cheered when Rupert Murdoch noted the link between easy money and asset inflation, and the adverse effect of asset inflation on equality of income and wealth.  The article linked here provides the start of an explanation, one that I hope to fill out with serious econometric testing during 2015.

(A reader said 'This would be easier to understand with diagrams.  The painting contains the diagrams, three in fact, and anyone who renews his or her goldmembership will receive an explanation.)

Australia is lucky that its central bank, the RBA, has expanded less aggressively than the major central banks.  During 2014 the US Fed abandoned a long-held policy of allowing asset booms to go on without any response than to clean up after the bust. New Fed Chief Janet Yellen announced use of 'mactoprudential policy' to curb asset booms, leaving monetary policy to provide overall economic control with low goods and services inflation.  This finally helped people to understand the wise saying of Milton Friedman: 'Monetary policy cannot serve two masters'.

I plan to be back in 2015 with updates on  matters economic and also providing a vehicle for our impressive bank of political, investment and lifestyle writers. Our 'SMERSH' section provides the most challenging offerings and we commend it to people who welcome a challenge.  The article by Roger Underwood, with thanks to Quadrant, about the threat of bushfires and Australia's bone-headed failure to apply the right remedies, is a highly relevant example.

We wish all our readers a merry festive season and a safe and happy 2015.


The first test against India was a rip-snorther and the second is shaping to be just as exciting. With Australia on the ropes at 6 for not very much, the Indians abandoned their usually gentlemanly virtue to slede Mitchell Johnston. Mitch responded with one of the best number 8 batting Henry has seen. Day 4 awaits, gentle readers, do not tarry in the shopping marts.

Image of the week

Courtesy Herald Sun

Work hard, innovate and save.
Date: Tuesday, December 16, 2014
Author: Henry Thornton

The Treasurer and Finance minister have provided the current 'best guess' about Australia's budget, and it is an ugly picture.  We are all hostage to the budget mess just as surely as were the unfortunate people held hostage in the coffee shop in Sydney's Martin Place. Fixing the budget will require stern action by the authorities, as in the Martin Place siege, and there will be casualties.

Some people will find this description macabre, even offensive.  But it is a macro statement of the horrible micro-events of yesterday in Sydney.  After living high on the hog - too high it turns out - Australia is facing a difficult and painful readjustment to a new reality.  Never before has Australia (or any other country, it must be noted) enjoyed a massive boom (not of its own making, it should be noted) without an equally tough bust. The development boom of the 1880s was followed by deep depression in the 1890s. The share boom of the 1920s was followed by the deep depression in the 1930s. The resource boom of the early 1970s was exaggerated by the over-spending boom of the Whitlam government and followed by a jobs bust and then the long, dreary government of Malcolm Fraser.

Famously, the Global Financial Crisis (GFC) followed a massive real estate and share boom but the bust, though severe, lead to a long recession but not a great depression, except in the poor and heavily indebted nations of the Eurozone and the hard working nations of Asia.  Southern Europe was forced to adopt savage deflationary policies, and prevented from currency devaluation to restore competitiveness, and these nations are still wallowing in deep depression whose ultimate consequences cannot confidently be predicted.

Australia was a polar opposite to Greece, Italy, Portugal and the other poor nations of Southern Europe. The China boom was hardly touched by the GFC and our resource boom rolled on.  Australia's government panicked and the head of Treasury, Dr Ken Henry, advised a crude Keynesian remedy - 'Go early, go hard and go households'. This may have saved some jobs, but it fostered all the wrong cultural messages. Spend, not save.  At the first sign of trouble, your government will provide. There is no need to cut consumption and raise productivity in the face of a severe global shock.

This writer much preferred the Icelandic solution when its three banks failed and could not be saved. 'You will have to learn to go fishing again' said the Prime minister.

Many nations are still wallowing in prolonged recession, Japan and Europe in particular.  America is showing signs of recovery, but asset prices are roaring and recovery is likely to be compromised when the US Fed begins to raise interest rates. China's miracle economy is slowing and global commodity prices are being decimated.  Australia's mini-miracle economy is suffering from the end of the investment phase of the mining boom while many other industries have been damaged by the greatly overvalued currency which, thank goodness, is finally and belatedly now sinking.

Australia's governments have since the onset of the GFC suffered a string of surprises that manifests most clearly in Treasurers constantly overestimating receipts and underestimating budget deficits. While the falling exchange rate is mainly due to falling commodity prices, international investors are noticing our inability to control these deficits.

Australia's government debt was negative when Peter Costello handed the keys of the Treasury to Wayne Swan. Now it is rising with successively higher budget deficits and if this is not stopped far sooner than currently predicted Paul Keating's 'Banana Republic' cry will again be heard. It should not be forgotten that household debt and business debt also has to be serviced, and with current trends Australia's total debt will be become a serious limitation on individual economic freedom, even if it does not currently look that way.

Jobs are growing more slowly than population and therefore the rate of unemployment is rising even though many older Australians are dropping out of the workforce. Furthermore, part time jobs are providing most of the jobs growth, and many of the available jobs are low paid and do not use the skills current young people have acquired in universities. There is a glut of graduates in law, for example, but law firms are the latest to send work offshore where, a senior lawyer said at a recent social event, work can be done at 10 % of the Australian rate. Accountancy will follow this trend shortly, while Fly-in, Fly-out work practives sould an ominous warning.

Australia needs policies to fix the budget.  The quality press is beginning to point out that Labor must help fix the mess it did so much to create. Cross-bench Senators have a lot to answer for also, as they have so far blocked several of the more important budget repair efforts and seem to think like Labor 'the budget crisis not belonga me'.  Overall cost levels are far too high and will be even harder to fix than the bloated budget.

'Enough, Henry', Mrs T has cried. 'Dinner is on the table'.  Henry and his family are blessed, but like all Australians subject to the iron laws of economics. Instead of Ken Henry's crude Keynesian dogma, the alternative should be: 'Work hard; innovate; and save. Not so snappy, or populist, but far more likely to produce a real mini-miracle economy.

Saturday Sanity Break, 13 December 2014
Date: Saturday, December 13, 2014
Author: Henry Thornton

'Get real' says RBA Chief Glenn Stevens to the pollies.  Guv'nor Glenn deserves a gold medel in public policy for telling it as it is.  Retiring Treasury Chief, Martin Parkinson, gets the silver medal for his advice in deficits as far as the mind can imagine. Treasurer Joe Hockey is also in the medal-winning frame (as the argot allows) with his forthcoming mini-budget, and for admitting his first budget lacked the careful 'narrative' used by previous governments seeking to inflict tough management on an hedonistic nation.

(Memo Dr Parkinson. Contact Henry here if you wish to become one of Henry's special correspondants.)

So wonderful to read today of 'Coalition axing 175 agencies'. Buy the Oz and ponder the list of bodies, each of whose chairperson was in line for an AM or better, and whose meetings involved overnight stays at good hotels, aeroplane flights in business class and often luxurious hire cars to transport the eminent agency board members to and fro.

The government has reached accomodation with the Senate micro-parties on one or two of its more controversial savings and there is more effective politicking to be done on this front yet.

So the nation is, or should be, ready for some serious budget clipping and patriotic constraint.

History wars.

Hal Colebatch's Australia's Secret War: How Unionists Sabotaged Our Troops in World War II was a co-winner of the Prime minister's Literary Award for History.  This is marked by a nice article by Mr Colebatch in the Weekend Oz today, link to come, but on P 17 in the fish'n'chips version.

The introduction to this fine contribution was posted on this site in October 2013, with permission of Quadrant and the author, and currently has a 'member's rating' of 4.8/5.  The story deserves to be told to all Australians. As the Oz says 'Militant unions held the country to ranson and helped end [Prime minister] Curtin's life'.

Best blogs of 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.


What a blinder of a test match, with wonderful batting from Warner, Captain Courageous and future Captain Smith. Great bowling by Lyon, who looked more like Warnie than ever before as he showed the Indians that they are not necessarily the world's best players of spin.  Day five looks like being just as much fun so stay tuned to the ABC if travelling or to Channel Nine if enjoying a nice couch potato day at home.

STOP PRESS: A glorious end to a great test match. India looking like winners until Lyon produced a day for the ages as he bowled them put with not many runs to spare. On to the Gabba, where the pitch should be green, the temperature will be hot and the beer will be cold, but there will be no Captain Courageous.

ASADA has lost a battle to have a court insist that the guys who really know the truth give evidence.  Henry is no lawyer, but this seems likely to cruel the chances of cleaning up the great sport of footy. With 4 tests to come, Henry will now focus footy talk on the 2015 season, which in his always optimistic brain flits the ideas of Caaarlton! finishing ... in the top eight.

Meanwhile the hockey players seem to have done well, with the girls' teams in all sports doing exceptionally well. Regular readers will agree this is evidence for Henry's theory that women in Australia are given a better 'go' than just about anywhere else, but try telling that to Julia or Peta if you want a bop on your noggin.

Henry is exhausted after six months in which at any one time two out of the three start-up entities he chairs have been in crisis.  Fortunately - touch wood - all three entities have emerged into sunlit uplands as the year draws to a close. Aplogies at sparsity of blogging during recent times, but regular transmission should resume in the new year.

Image of the week

 Courtesy Herald Sun

BHP Billiton and the Australian economy
Date: Thursday, December 11, 2014
Author: Henry Thornton

The Chinese economy is in trouble, resource (and other) shares are being smashed and most Australians will find 2015 even tougher than 2014.  The Labor opposition (and micro-party Senators) is (are) mulishly ignoring the crisis, and opposes every attempt by the government to solve the long-term budget catastrophe.  Business confidence is at best neutral and household confidence has plunged.

Henry's author of the much read Raff Report has visited one of the more reliable indicators of economic health, a shopping centre in a leafy suburb to the north of Sydney. 'Last Saturday the Raff and his youngest daughter visited the Westfield Shopping Centre at Hornsby, which for readers unfamiliar with Sydney is about 21km northwest of the CBD. It might have something to do with the fact that Hornsby has a very high Chinese population, but at 10.30 AM there was only one visitor (daughter) to Supre in 15 minutes. Adjacent four clothes shops had combined five shoppers. The food hall was busy, but most of the rest were probably not covering wages. Myers and DJs were near deserted. This ties in with a news item broadcast on the radio minutes ago, saying that shoppers were the most bearish in three years'.  Read on here.

But this is not the whole story.  Global confidence is low, and only the USA seems to be, finally, and slowly, recovering from the Global Financial Crisis.  When the crisis erupted, Australia's strong fiscal position and sensible central bank were able to act to minimise the downside. Yet we always need to pay the piper.  Now our budgetary resources are far less and monetary policy has only a small amount of room to move.

Apart from the long-term fiscal crisis, Australia's cost base is currently far too high. Low wage growth aside - the result of effective dialogue between struggling businesses and prudent wage-earners - nothing has been done to improve the problem of bloated costs.  As international investors lose confidence in Australia's economic prospects the Aussie dollar is falling, perhaps to 70 cents to the US$, and this will help, provided households and businesses remain cautious about further increases in labor costs and prices in the shops.

Regular readers will be surprised by none of this, but sadly we shall all suffer from the complacent approach of most public officials and the current political gridlock.  More fundamentally, we shall pay the price of accepting uncritically the riches from the mining boom, supporting the costly and wasteful fiscal stimulus of the Rudd'n'Gillard'n'Rudd government and voting for, and accepting the antics of, eight micro-party Senators.

Sorry folks, them's the facts.

Saturday Sanity Break, 6 December 2014
Date: Saturday, December 06, 2014
Author: Henry Thornton

Shiver me timbers, gentle readers, Australia is experiencing an income recession, and very likely soon a production recession.  (The warning was given some time ago.) The Treasurer is facing criticism from all quarters except from his boss, and a new Treasury Secretary will soon be providing advice peppered by half-a-lifetime in the real world of business. Those of us who have toiled in that particular olive orchard know that his focus will be on decisive, effective action to fix an under-performing business.

It is (again) time to  come clean with the voting public, this time without attempts to gild the lily or protect us out here in voter land from reality.  Here is Henry's dot point attempt at an effective narrative and policies.

* After living high on the hog through the global crisis thanks to the China boom (and the economic reforms of the Hawke, Keating and Howard governments), Australia is struggling badly.  Australia has become seriously uncompetitive.

* Overall cost levels are too high, and the budget is literally out-of-control with unsustainable spending levels due to the manifest unwillingness of voters to finance unlimited cheap tertiary education, limitless spending on health and generous welfare spending.  Cross bench Senators, please note especially carefully.

* Hard decisions must be made and implemented. It is the opinion of most sensible economists that the remedy must include people paying a higher proportion of education and health spending. A serious attempt to make the Federation more efficient - by eliminating overlaps and 'double regulation' - would help greatly, and can be justified as a basic contribution to accountability and efficiency.

* It is the opinion of many economists that the only lasting solution is to broaden the GST and raise its rate to, say, 15 %. (Think New Zealand.) This should, however, be presented as a last resort.  The government should state this is its approach and invite Labor to propose its list of savings to add to the Coalition's current suggestions and others that may be devised.

* The exchange rate must be tamed so that industries have greater certainty.  There are only two viable possibilities.  Make Australian monetary policy just as easy as that of other countries, including near-zero interest rates and 'quantitative easing', almost certainly creating massive asset inflation. Or introduce a variable tax and subsidy plan for capital flows. We must remember Milton Friedman's obiter dictum that 'monetary policy cannot serve two masters'.

* Government should lead by example in efforts to cut Australia's bloated cost base.  Henry remains of the view that a temporary and voluntary cut of government salaries, with the opposition invited to join, would show all the right intent. Business leaders should be invited to accept equivalent (temporary) cuts and ask the Fair Work Commission  to impose equivalent (temporary) cuts on workers. To incentivise people in a wholly voluntary scheme, donations to relevant charities, such as the proposed new medical research fund, could attract tax relief certificates to provide future tax cuts at a higher rate than normal to be used when the budget is again in surplus.

Clearly this is a radical set of suggestions. Yet it has the potential to fix Australia's economic woes by rapidly restoring international competitiveness and fixing the budget. 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.

Best of the blogs, 2014

Financial stability-monetary policy breakthrough, 4 July, 2014

Regular readers will be aware of my attempts to persuade the RBA to sort out policies to control asset inflation, so far as this is possible, distinct from monetary policy, which involves keeping the overall economy on an even keel with low goods and services inflation. This week, Janet Yellen, US Fed Chairwomen, joined the crusade, which is all over save the shouting.

Read on here.  And for those interested to delve further into issues for monetary policy, here is a link to holiday browsing.


After two weeks of incredibly moving response to the unexpected and freakish death of Phillip Hughes, it is back to business for the cricket would.

Preparion has commenced for the delayed first test against India, and bouncers were reported to be flying in both camps.

How fiercely the contest is joined is hard to predict, but the whole episode has revealed the souls of leading cricketers like nothing one can recall.  One hopes at least that sledging will be eliminated, or at least only genuinely funny sledges are used in future.

ASADA's legal case seems in danger of falling apart due to the reluctance of key witnesses to give evidence.

Henry is no lawyer, but surely the court has the power to insist that these blokes give evidence?

In the absence of this, presumably footy goes on as it did, with teams that seem fitter, faster and stronger than their rivals attracting murmurings to the effect 'how could this be?'.

Henry this week enjoyed lunch with a former AFL Commissioner and one of Australia's finest historians. 'How come there is no AFL team in Tasmania?  Was it just reluctance to disturb the native flora and fauna? were the questions. 'Actually no', was the reply. 'It was Tasmania's inability to agree on where the team would be located, Hobart or Launceston, or somewhere in between. The latter might have been just doable politically, but that would have disturbed the plants and animals, not least because of the roads, carparks and the stadium itself required to accomodate the game every second weekend'.

Henry commends the e-book, available free here, which tells the tale of a genuine hero, a former star Tasmanian footballer, and his rise to prominance as a global investment-banking guru. Good holiday reading at a time when the big thinkers are again comparing Australia to a Banana Republic.

Image of the week

Courtesy AFR

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

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