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Henry Thornton - Contributors: A discussion of economic, social and political issues Blogs
Australia`s ongoing debt explosion.
Date: Monday, January 16, 2012
Author: Henry Thornton

Holidays over.  The Indian cricket team, indeed the whole Indian cricket apparatus, destroyed. Now only the tennis stands between serious economists and analysis of the state of the Australian economy.

Congratulations to Annabel Hepworth and Christian Kerr for your wake up call on the Australian states' burgeoning debt levels.

'An analysis by the The Australian of the mid-year budget updates finds state and territory net debt is forecast to surge by more than 40 per cent from $129 billion at June this year to $183.7bn in 2015 to fund infrastructure upgrades and spending on health, education and other services, while their net financial liabilities - which also include liabilities from superannuation schemes for public servants - are forecast to rise from $302bn to $352bn over this time'.

Most of us had noticed the massive increase in Commonwealth securities on issue, $ 192 billion at last count.  This comes on top of significent levels of state and Commonwealth pension liabilities and very large private (household and business) debt.  Companies and households are making some progress in deleveraging, and the commonwealth says it intends to do so - ie Treasurer Swan's frequently reiterated 'return to surplus'.  Time will tell, but one is entitled to be skeptical.

But Hepworth and Kerr show that the situation with the states is bad and rapidly getting worse.

Put the states, Commonwealth and private debt together and we see a blowout at least as serious as that which became evident in 1985 and which resulted in severe policy action by the Hawke-Keating government.

The budget deficit was turned into a surplus, real wages were cut and interest rates were raised.

Textbook stuff, really, but note Australia still had a recession which some (eg Mr Keating) thinks we had to have and others (including Henry) think was a result of excessive household spending, aided and abetted by monetary policy initially too lax and later far too tight.

Now we face a similar risk, and one fears that Gillard and Swan - those great spenders of other people's money - have no stomach for stern pre-emptive action.

That this information comes a day or so after France and Austria have lost their AAA rating (and seven other Eurozone nations had their rating downgraded) should ring the alarm bells.

And, for the first time since the Asian financial crisis, China's foreign exchange reserves shrank in the last three months of 2011. 'A $US20.6 billion slip still leaves Beijing with a monumental $US3.18 trillion in reserves -- more than enough for a rainy day'.  But if China looks like a lesser bet, can Australia be far behind?

Australians be warned. Severe policy tightening is necessary and will be delivered by the Abbott government.  The tragedy is that by then (short of an early Federal election) it will be too late to avoid a severe recession, another 'recession we had to have', depending on the view of whomever is writing the history of that recession.

Related article

Andrew Robb on Australia's Icelandic debt, The Oz, 17/1/12

A parable
Date: Thursday, September 18, 2014
Author: Gary Scarrabelotti

… to them that are without, all things are done in parables: that seeing they may see, and not perceive; and hearing they may hear and not understand.” (Mark 4, 11-12)

Being cranky and disputatious is not a good look. Even seeming to be at odds with people wiser and more experienced than oneself, and with those responsible for making high order decisions that will never come one’s way to make, is really quite unattractive.

In this moment of great gravity, when war-and-peace calls are being made (yet again) by our political leaders – and winning the public endorsement of so many of our great and good – it ill behoves a mere bloggist to cast doubt upon some of the key assumptions that underlie Australia’s readiness to enter into another war in Iraq.

Three of those assumptions – not the only ones, but important ones – relate to the nature of Islam, to our social experiment with multiculturalism and to whether the former has a role to play in the latter without derailing the great project.

Now, if I was travelling in India,out of respect to the local culture, I would not wantonly run down a sacred cow, or even utter an unkind word against one, though the dumb holy beast should wander in my way. So, in the same spirit, I will never let a sceptical or irreverent word fly from my lips against any of our own great Aussie sacred cows should one, or a whole herd of them, lumber across my path.

That having been said, I think it would be wholly inhuman to remain silent and to suppress even the twinkle in one’s eye.

So I will content myself with a parable – this one drawn from real life – and one I have told before; but, like all good parables, it bears retelling.

The scene was a winding narrow street in Xauen in Spanish Morocco, during the Rif Wars.  The year is 1925 and a unit of the Spanish colonial army was preparing to evacuate the town. As he waited for his men to complete their appointed tasks, the senior Spanish officer on the spot fell into conversation with an elderly Moslem gentlemen.

The old fellow went onto the attack.  He upbraided the immaculately turned out officer for going to war with the Riffians and then abandoning the local people. The Spaniard – a man of slight build and almost inhuman fearlessness - returned fire, but in the form of a lecture on the benefits western civilisation.  In response, the canny Moroccan gent made reply:

You don’t understand. Don’t blame the natives for everything that goes wrong. You look at the Moors, but all you can see is their robes. You don’t know the inner reasons of our behaviour: you will never know them. When the Mujahiddin [holy warriors] come – that’s the reason you can’t understand: every good Moslem must help the Mujahiddin always. There isn’t a village that does not succour or shelter them, directly or indirectly, some with arms, others with gifts, the most timid ones with their silence. This is the Mujahiddin’s right of asylum.”

(Brian Crozier, Franco: A Biographical History; London, Eyre &Spottiswoode, 1967; p. 81.)

Enough said.

*Gary Scarrabelotti is Managing Director of the Canberra-based consulting firm Aequum: Political & Business Strategies.

It this the big correction?
Date: Wednesday, September 17, 2014
Author: Henry Thornton

Just about everyone Henry knows expects a big correction in global equity markets. Of course, no-one wants to bail out (or go short) a year or two early, and miss all the luverly upside that they would otherwise gain. Equally, staying fully invested will be very painful if reduction of one's equity investments is left too late and it takes a few weeks or even days to decide to reduce's one's equity holdings. It is the time in the semi-regular waxing and waning that greed and fear contend so obviously.

And it is not just the global scene that one needs to take a view on.  The American economy now seems to be picking up some momentum.  Australia's may be losing momentum. China's economy looks like it has hit some heavy weather and the price of coal and iron ore has been falling and may fall further.  As previously noted, even Mrs Thornton has recommended moving money from Australian equities to American equities, and did this before the latest drop in the Australian dollar.

At the weekend Henry chimed in on the implications the further fall in the Aussie dollar that now seems - finally - to be underway. Henry's favourite fund manager has taken some of Henry's bank exposure off the table, for reasons explained last Saturday (see blog immediately below.). With previous reduction of equity exposure and reallocation offshore the Thornton portfolio is considerable more defensive than it was, but we shall be watching the news with more than the usual degree of interest.

The Australian seems to be still relatively optimistic about the Australian economy and markets, but has been feeding us a steady diet of gloomy geopolitical news. Australia's contribution to decimating the baddies of ISIS will almost certainly bring the geopolitical nastiness closer to home, and the liklihood of the next phase of baddie destruction, or losses of the goodies' troops and kit, is likely to produce further downward pressure on equity markets.

It is also looking as if the Fed may be seeing the same economic news as the Thornton family and may be opreparing to raise interest rates faster than so far expected.  Janet Yellen, previously seem as a dove, is looking sterner every time she talks. The reality of having the final say usually brings out the best in the best people. 'US rate hikes could cause chaos' screamed the AFR yesterday. But the risks of raising rates too little too late - as so often has been the case - are greater, in Henry's view.

Claudio Borio of the Bank for International Settlements, with Henry one of the most consistent worriers about asset inflation, features in another worrying AFR headline - 'markets have pre-GFC feel'. He reportedly points out that low volatility of markets - often seen as an indicator of market confidence - is in fact currently indicating "Muted uncertainty". 'The last time markets were so uncertain about the macroeconomic outlook was in 2007 - just before one of the largest forecasting errors the economics profession has ever made'.

In particular, the years of "unusually accomodative" monetary policy has convinced investors that low interest rates will continue or be raised only gradually, implying the music of rising share prices can continue.

Then there is the 'storm alert for investors', also reported by the AFR, this time by one James Aitken, who is especially concerned about the Chinese banking system.

Is this the big correction? All Henry can say about this is that nothing goes up forever, and loose money has always produced tears. Except for the chronically timid, we have all had a great run from financial markets. If you have not taken some risk off the table, it may well be the time to do so, gentle readers. Especially if you are close to the time you will rely on a pension generated by your accumulated nest eggs.

And then there are housing prices to be worried about.

The RBA minutes express concerns, but Treasurer Smikin' Joe Hockey says bubble talk is lazy thinking.  Henry does not think Australian house prices are in bubble territory either, but they sure are in a space that is making it harder and harder for our young people to get set, just as it is already very hard to get a job.

And Joe, we agree there is more demand than supply, but that would change if negative gearing was reformed so it no longer was the most regressive one way bet going.

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

The price of iron ore continues to fall, and high cost producers are already in trouble.  Also in strife are suppliers to the mining industry and just about every other business in Australia whose costs blew out during the long, massive mining boom. Plus all those Australians who surfed the powerful wave of the mining boom to far higher incomes, now that the boom is receding.

The Aussie dollar is also showing signs of falling, as logically it should.  Falling commodity prices have finally made their mark, as have suggestions that US interest rates may begin to rise far sooner than hitherto expected.  As this happens, Australia will no longer be seen as a relatively high return-low risk place to park capital, some of which is adding to Australia's house inflation, giving the RBA a distinct headache. A canny investor yesterday pointed out that Australia's banks still rely heavily on overseas borrowing, and a severe fall in the Aussie dollar would make this borrowing far more expensive, likely to do serious damage to the value of bank shares and 'hybrid' securities. The RBA will be pleased, as finally (through no effort of theirs) the dollar sinks.

Forewarned is forearmed, gentle readers. More here. 

Meanwhile, the mad terrorists of ISIS have been tasting a little of their own medicine. Henry is pleased to see that ten Arab nations are joining the coalition of the willing to help behead ISIS, with airpower carrying out its historic vision to 'Kill bad guys and wreck their stuff'. This is widely charactised as a war, and even distant Australia is on a war footing as threat level is raised to 'high'.

Henry's sadly passed foreign correspondant, Sir Wellington Boote, left a large cache of great good sense on the jihad business. His final column, posted in January 2011, was headed 'Get serious about Fundamentalist Islam' . Sir Wellington's proposal was to cut off all transactions with Muslim society, as the West is progressively doing to Russia, it might be noted, in order to encourage sensible Muslins to deal the the problem of fundamentalist fanatics and corrupt leaders.

He conceded: 'This all sounds very harsh, I know. But until we stop pandering to them and pretending to respect them and agreeing to whatever they want us to agree to (except Israel and few other important matters) they will never even try and face their issues of backwardness and wallowing in delusions. We cannot do anything about their backwardness and delusions ... only they can take effective action on these fronts. At the moment, due to our pandering to them, they are disinclined to do anything that remotely involves looking at themselves and their situations with any degree of honesty and accuracy. It is time we forced the issue by closing ourselves off to them and forcing a very major crisis onto them'.


The North Melbourne Kangaroos held on to win a thrilling final against Geelong last night.  Henry saw only the final three minutes of what was a stirring game which the underdogs won in thrilling style.  The Kangas have taken to role of possible fairy-tale premiers from hapless Richmond, belted badly by Port Adelaide last sunday.

The Wallabies. thrashed by the All Blacks a few weeks ago began the long process of returning from the abyss by beating the Springboks by one point last week. Now they face the Argentinians, possibly the world's second-most brutal team in the world.

Yesterday Lleyton Hewitt and Nick Kyrgios both won Davis Cup singles rubbers against players from Uzbekistan. Should they win one of three more games this weekend we shall return to 'elite levels' in 2015. Kyrgios of course has earned the title of latest real good thing and we wish him well, and look forward to Australian tennis once more ascending the elite mountain.

Extreme sports

If one of your much loved offspring says he is going snow-boarding, watch this and try to persuade him not to get too hooked.

Image of the week

Courtesy The Oz

Business council gets it
Date: Thursday, September 11, 2014
Author: Henry Thornton

Just a quick note today, gentle readers. New BCA Chief Catherine Livingstone has marked new standards of business savvy about policy matters in an interview with the AFR.

Themes include: Reform is urgent; big business demands simpler taxes for jobs; urgent need to deal with Australia's declining competitiveness; 'huge urgency' for the Prime minister to provide a vision for Australia's future, including policies for innovation; etc, etc.

The lead AFR article is available here (if you can figure out how to login), but today's editorial is also vital, as are various recent articles, some of which are referred to here.

Global house prices looking frothy
Date: Wednesday, September 10, 2014
Author: Henry Thornton

Sensible central banks have accepted, following the lead of New Zealand, Canada (and therefore the Grand Old Lady of Threadneedle Street) and the US Fed, that monetary policy is to be used for maintaining overall economic stability and low goods and services inflation. Attempting to control house prices depends on what is called 'macroprudential policy', which some people of limited vision have lampooned as the revival of direct controls on the banks.

With global house prices, including Australia's, looking frothy, this is more than an academic matter. We do not know the RBA's attitude to this matter, except the Governor seems to think monetary (interest rate) policy will do the task, while the Deputy-governor is more likely (given his academic writing) to be sympathetic. (If pressed I can find evidence to support these statements)

But first to the facts, provided by The Economist. 'In June', says the venerable mag, 'the IMF called on policymakers to do more to curb housing prices around the world, pointing out that valuations looked high in many countries (see article, and note in particular the degree of Australian froth). In May the European Central Bank singled out sky-high prices in Belgium, Finland and France; in July Moody’s, a ratings agency, said that Britain showed signs of a new property bubble. The trend is all the more remarkable given that many of those economies have not fully recovered from the financial crisis and are growing feebly if at all'.

The classic Greenspan/Bernanke approach was to say 'We cannot tell if it is a bubble, so all we can do is wait for the crash and clean up afterwards' (and after the two last share crashes this involved near zero interest rates that set up the next share boom.)

Now a more sensible approach is being used. The Economist quotes an expert: “You cannot know you’re in a bubble, but you can know that debt has moved too far,” says Urban Backstrom, a former governor of the Riksbank, Sweden’s central bank. However, expectations that borrowing will stay cheap and not enough new homes will be built continue to push prices higher.

Then we come to the critique of those, like the RBA, who have said that their approach is to use higher interest rates than needed for economic stability and low goods and services inflation to 'lean into' asset inflation. (Henry has already confessed that until early 2013 this was his recommended approach also.) The Economist again: 'Central bankers cannot use interest rates to deflate the housing bubbles since, asset values aside, the economies of the countries concerned remain so sickly. Sweden’s attempt to cool the market with an increase in rates in 2010 backfired: unemployment stopped falling and the country headed towards deflation, forcing the Riksbank start reducing rates again in 2011. If anything, monetary policy is likely to provide a further spur to house prices in the euro zone, since the ECB is toying with the idea of buying bonds in an effort to bring borrowing costs down yet further'.

There's more: 'Macroprudential tools, to discipline both banks and borrowers, are a subtler set of instruments. Setting stricter limits on the amount people can borrow relative to the purchase price (the “loan-to-value” ratio, or LTV) or to their household income (loan-to-income ratio) helps to curb buyers’ irrational exuberance; increasing the amount of capital that banks must hold against mortgages checks theirs.

'The Netherlands has applied strict limits of this sort, with striking results. In 2011, with the euro crisis in full swing, the average new mortgage in the Netherlands was 112% of the property’s value, putting Dutch household debt among the highest in Europe. The authorities hastily introduced a host of restrictions: LTV was capped at 106% in 2012 and is due to fall to 100% by 2018; capital requirements for banks were raised immediately. The government is also gradually reducing the tax break for interest payments on mortgages. These changes, along with the economic downturn, were enough to push prices down 20% in three years in real terms (after accounting for inflation, that is)'.

So there you have it gentle readers. To make matters worse, Australia has another 'macroprudential' issue, the excessively high Aussie dollar.  While the economy needed monetary (ie interest rate) stimulus, the RBA could comfort themselves that cutting interest rates would also encourage a lower exchange rate. But now that house prices are getting frothier, 'leaning in' to house inflation is only possible if maintaining overall economic stability and low goods and services inflation requires higher interest rates, and at present this is not obviously the case.

So the RBA needs 'macroprudential policy', in fact two such policies.  The first is to help contain house prices, though the government could help by appropriate reform of rules for negative gearing. The second it to help reduce the overvalued dollar, which requires a tax on capital inflow, and, incidentally, a subsidy if the rate falls too low.

No doubt Messrs Stevens and Lowe discuss this matter over their elegant morning tea at least once a week. Get on with it chaps or you will be battling on three fronts with only one weapon. Not smart, comrades.

More here for masochists. 

The Australian says 'Wildly imbalanced housing market poses danger'.

Stimulating innovation
Date: Monday, September 08, 2014
Author: Tony Peacock, CRC Association

The British public has voted for antibiotic resistance research to be the subject of the 'first' Longitude Prize. The Longitude Prize 2014 is a prize fund of £10 million to tackle one of the biggest issues facing humanity, with the British public voting for antibiotic resistance over the field that also included flight, food, paralysis, water and dementia. The Longitude Prize 2014 commemorates the 300th anniversary of the Longitude Act of 1714, which was eventually awarded in 1765 to John Harrison for his chronometer (as well as sparking many other innovations).
The announcement of the public vote was made live on the BBC by British Prime Minister, David Cameron last month. The award is administered by the innovation charity Nesta, with the prize fund being put up by the UK's Technology Strategy Board. Lord Rees, the English Astronomer Royal, chairs the Longitude Committee, which is still working out final rules for awarding the prize.
What a magnificent way to capture the public's imagination and highlight the importance of innovation. Terry Cutler recommended Australia explore this approach in his 2009 report on the innovation system. To my knowledge, nothing came of that recommendation. But it remains a valid approach: kind of the ultimate in terms of priority setting.

Australia has an interesting history in science prizes. Henry Parkes offered £25,000 in an international competition in 1887 for a microbiological 'fix' to the rabbit plague. Louis Pasteur was one of the 1,500 entrants and sent his nephew to Sydney to try and secure the prize. Even though the rabbit prize was never awarded, you can draw a line from Pasteur's work to Dame Jean McNamara's proposal for myxoma virus to be applied in 1908 through to when it was eventually applied by CSIRO in 1951 (and still knocks off half of the rabbits born in Australia today). You can even argue that Australia's historic science strength in microbiology which persists today dates from the rabbit prize.
You never know where innovations might occur. Pasteur's nephew, Adrien Loir, spent two weeks at the Victoria Brewery, teaching Pasteur’s yeast cultivation techniques. Victorian Bitter continues to be brewed in the same method today.
Science prizes can open up an area to real innovation. John Harrison was a completely self-taught Yorkshireman. Then unknown Charles Lindbergh won the Ortieg Prize in 1927 for the first successful Atlantic air crossing. Lindbergh continued to be an innovator, adding hundreds of miles of range to US fighters in the Pacific War. The Virgin Earth Challenge has named 11 finalists vying for a $25 million prize for whoever can demonstrate a commercially viable design which results in the permanent removal of greenhouse gases.

For a really difficult challenge, I think the Michelson Prize is the best designed. Spinal surgeon, Gary Michelson and his wife Alya have made $75 million available with $25 million for an innovator who can come up with a single-dose, nonsurgical sterilant for male and female cats and dogs.  Recognising the difficulty, Michelson has made up to $50 million available in grants to make progress towards the prize. To date, the charity Found Animals has committed over $14 million in Michelson Grants to more than 30 approved projects worldwide, including to 2012 NSW Scientist of the Year Professor John Aitken at the University of Newcastle.

Perhaps it is worth revisiting Terry Cutler's 2009 recommendation and include an element of public involvement and grant funding? Of course, that option is open to anyone, not just governments.


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

National income is falling due to the fall in the terms of trade, and further falls are likely.  It is the anniversary of the Abbott government and business and household confidence is subdued by international turmoil and the government's failure to get all of its budget repair job done. While the RBA's plea for us all to focus on the half-full part of the glass has been taken up by government leaders, the economic water level is falling and people do not like that. More here.

It looks as if Australia is becoming embroiled in the madly diverse cultural and tribal conflicts in the Middle East. No choice really. People who oppose educating girls, and rule by intimidation and atrocities, including murder by sawing off the heads of hostages on videos released for the world need to be controlled. And did I really hear the raddled leader of the Greens say we should not describe those people as 'terrorists'. Glory be, madam, what are you smoking?

National debt is predicted to grow until the end of the decade in a best case. The falling national income level will limit vast spending schemes by governments and make reforms harder rather than easier to get approved by the unprecedented bunch of eccentric cross-bench senators. For the battlers, it is a case of batten down the hatches and hope things improve before our glasses are dry.

We can be a great nation. To avoid being a mediocre one, we much get our act together on monetary policy, fix the budget, find ways to greatly upgrade infrastructure, including defence spending, and devote much time and effort to freeing up the national regulatory systems. The tax and welfare system has to be rejigged to encourage saving, working and innovation far more consistently. Greatness will come only when we regain our reputation as an economic power to back up our newly rediscovered brave and confident foreign policy.


What is shaping as one of the best rounds of footy seen for years is unfolding. Hawthorn and Geelong played a corker last night. Sydney against Freo will answer questions about both teams. North Melbourne vrs Essendon should be a goodun, and Richmond agin Port Adelaide may be a game for the ages. Many Melbourne-based fans will be cheering for the Tiges, and if they can continue their form of the last half of the regular season there is a possible fairy-tale ending for the season to cheer all but the supporters of the Super-clubs.

The sad case is Essendon. They have coped brilliantly with the pressure of the ASADA investigation, at least on the playing field. But now players are considering sueing the club and/or using an obscure rule that will allow key players an easy escape to another club because of proven lack of care for the player group.

The Rugger bu**ers face the Springboks this weekend, still suffering from the severe beating handed out by the All Blacks. Still, we wish them well for a happier outcome.


Henry's editor has posted two new paintings, linked here.

The tree-line on the top of the Waterfall looks a bit faint and some remedial work may be indicated.

The Lost Boy was painted to offer a specific challenge at the Melbourne Savage Club's annual art show, but missed being included due to the artist's failure to note the date by which entries had to be presented. Ah, well, as they are saying at Caaaarlton!, there's always next year.

Image of the week

Reality breaks in
Date: Friday, September 05, 2014
Author: Henry Thornton

Shiver me timbers, comrades, the AFR has awoken to the fact that the Australian economy is in strife.  'National income pie shrinks' was yesterday's headline, with supporting articles by Chris Richardson (Golden age of living standards is now passing) and Maximillan Walsh (History ... has returned with a vengence).  Ross Garnaut ('who foreshadowed the hit to incomes in his 2013 book Dog Days') said , correctly, that this state of affairs was 'no surprise'.

Indeed, it must be noted that Professor Garnaut has been talking and writing about Australia's 'Great Complacency' for years now, and finally the chickens are coming home to roost. We have to hope the next step is that the vultures that are international currency speculators do not abandon Australian investments in a flock, or a seriously overvalued Aussie dollar will be replaced by a greatly undervalued dollar. This would hand out a far larger cut to Australia's living standards than yesterday's complacency-busting articles were about.

Today's screaming headline is 'economy enters danger zone'. Australia's 'former top resources forecaster' says the economy faces a 'painful downturn' as a property crisis in China accelerates and produces 'the biggest hit to Australia's export income in more than two decades'.  The RBA, having failed to jawbone the currency down is now trying the same trick with the housing boom. The RBA's unofficial spokesperson, John Edwards, has conceded that, as a last resort, a home loan cap might be needed, preparing the way for another policy backflip. Yet the Bank of England and the mighty US Fed have both conceded this case, and New Zealand and Canada have inplemented such 'macroprudential policy'.

With appropriate modesty, Henry admits to have :

* in January 2013 explained why  monetary policy cannot both help maintain overall economic stability with low (goods and services) inflation and contain asset inflation or a more suitable exchange rate; 

* in May 2013 debated the issues with Professor Garnaut at Melbourne University under the heading of 'Monetary policy at the end of the mining boom'.

* in August 2013 warned of the 'Recession we did not have to have';

* in July of this year, explained the US Fed's change of approach to dealing with asset inflation. 

Henry is no genius, just an independent voice who over a long career has maintained a keen interest in economic management with an open mind that is no longer constrained by blind loyalty to RBA dogma or even his own wrong previous policy advice. (Eg in advising using monetary policy to 'lean into' asset inflation.)

In the May 2013 debate I asked the following question: 'Can it be helpful for key industries to be discouraged for years by an excessive exchange rate, then encouraged for years by a low exchange rate? The market will ultimately decide these things, but discouraging a clearly over-valued currency, as now, by allowing completely free trade in capital is like a fanatical observance of the Ten Commandments'.

There is also a more technical matter that deserves to be mentioned. As implied in the above question, at some stage the dollar will plunge. The continued fall of the price of iron ore brings that day ever closer. This will present the RBA with a serious dilemma.

As I said in May 2013: A large fall in the dollar could be triggered by the spread of information about Australia's worse-than-expected fiscal position, or by further weakening of the Chinese economy, with further falls in commodity prices, or expectations that the Reserve Bank has gone soft on inflation, or by a wage break-out by unions attempting to improve their members' wages before the arrival of a new government expected to take a tougher line on matters industrial.

Whatever the precise cause, or mix of causes, a large fall in the dollar would create fresh dilemmas for the Reserve Bank.

In recent times, the strong dollar and low global inflation has kept traded goods inflation low. Low traded goods inflation has coexisted with non-traded goods inflation of around 4 per cent. The net result has been overall goods and services inflation comfortably within the RBA's target zone.

But a large fall in the dollar would mean traded goods inflation would jump, and non-traded goods inflation would also rise more quickly. The RBA might well find that its target 'inflation zone' was unable to be achieved by modest increases of interest rates under official control.  A generally weakening economy would sharpen the dilemma.

The Reserve Bank struggled to find a good answer when the effects of financial deregulation destroyed its ability to achieve the 'money growth projections' imposed by government from the mid-1970s to the mid-1980s.

The Bank now, following a large fall in the value of the dollar, would have to at least suspend the inflation target, or exclude traded goods (assuming non-traded inflation was not too high for policy to reduce it quickly), risking red faces or worse.

The remainder of the May 2013 article offered some more general policy advice. The main point then was to abolish complacency.  That has been achieved almost 18 months after it should have been achieved. Better late than never, no doubt. But, as various eminent people have been warning, the longer it takes for corrective action the worse the coming downturn will be.

Australia`s housing boom.
Date: Wednesday, September 03, 2014
Author: Henry Thornton

Is it a boom or a bubble?  Who cares, comrades, it has made many Australians rich - at least on paper, and will cause grief to those people who have purchased houses, especially as investments, in the recent past and currently.

Christopher Joye provides some useful historical data spanning other house-bedazzled nations, linked here. We are the global champions - gold medal performers in the 'Housing' sport at the Economic Olympics.

Nice video available here, focussing in potential 'macroprudential policies' to help contain the housing boom. The speaker says the RBA is not in favour of such policies, used by Canada and New Zealand, and now part of the US Fed's box of tricks. Que?

ANZ Chairman, David Gonski has warned Australia’s booming housing prices cannot go on forever and the market will eventually impose a correction. But when will the boom be gonski?, David.  And how bad will it be?

Henry has to rush and will provide his answer later in the day. Meanwhile, if you own a copy of Great Crises of Capitalism, you can find his fearless prediction in the chapter on Marvellous Melbourne's great housing boom of the 1880s and its horrible aftermath. RBA says 'let it rip, colleagues'. Que?

Extract from Great Crises of Capitalism

'It may be that Australia does well in the second decade of the twenty-first century.  The correct comparison may be one that equates 1980 with 1850, meaning that 2010 is the modern equivalent of 1880.  If this analogy holds, modern Australia is now entering the last, maddest decade of a forty-year boom. Despite the global trauma of the past two years, Marvellous Melbourne, with the mining areas of Northern and Western Australia, is growing quickly, working well (despite infrastructure bottlenecks) and playing hard.' (P 166)

Mixed results = turning point
Date: Monday, September 01, 2014
Author: Henry Thornton

The economy pot continues to bubble, sending vastly mixed messages.  In my time as a forecaster, confusing, mixed messages were regarded as indicating a turning point.  The question is whether the economy is rising or falling.

The Brotherhood of St Laurence reports that Australia's youth under-employment is above 15pc, highest level in almost four decades.

This confirms Henry's reports of youth under-employment even in middle class Melbourne.

Roy Morgan Research reports that its (more accurate) measure of unemployment fell to to 8.7% in August. This is the net result of 39,000 more jobs but a much larger 162,000 Australians have stopped looking.

More here.

David Uren asserts that economy is doing better than GDP numbers suggest.  Also nab's business survey shows that business confidence is 'very strong'. Business investment is falling sharply in mining and mining-related supply chain companies (think shovels and picks) but improving in non-mining construction. 'Manufacturing is still a disaster zone. with planned investment over the next 12 months representing a 20-year low'.

A warm start to winter (think Al Gore) and the poor response to the budget (think Joe Hockey) depressed retail spending, but there was some revival in June.

RBA Chief Glenn Stevens told the relevant parliamentary committee, that low interest rates were 'simply leading to a rise in asset values ... but were not encouraging businesses to invest.' While Mr Uren does not ask it 'Why is this so?' should be the question du jour.

Elsewhere is seems the banks are still protesting at APRA's demand for higher asset ratios. But the way to prevent, or at least inhibit, excessive asset inflation is to require 'prudential ratios' to rise when asset inflation, or overall credit ratios. are rising, and vice versa. You can call this 'dynamic macroprudential policy', Glenn, and you will be a hero, as is Mr Abbott in confronting the Russians.

While I am at it, 'dynamic macroprudential policy' applied to capital inflow would also do a lot to help the trade exposed industries. If you cannot see the point, phone or email and I can offer help.

[On 2 Sept, the RBA anmnounced that interest rates are on hold. Note that the currency is far too high but also house prices, especially in Melbourne and Sydney have kept rising (approx 6 % in the winter months), This is a major dilemma for the RBA, but there is no analysis or even mention of this that Henry can find in the RBA hymn sheet. Such is Life, as Ned Kelly said just before he was hanged from the nect until dead.]

Australia's monetary policy will face unhelpful stasis unless and until our chronically overvalued exchange rate is tamed and we have 'dynamic macroprudential policies' in place.

And Henry's money (literally) is on the economy turning down from here.  The recession we did not need to have, as foretold in August 2013.


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