Today's impressive contribution is from Francesco Guerrera, The Wall Street Journal's financial editor.

'With parts of the markets overheating, due largely to the accommodating policies of central banks around the world, the car race toward the next crisis is on. Speeding on the highways of stock and credit markets feels good, mainly because of the cheap fuel provided by the monetary authorities.

'But, sooner or later, the cliff will appear'.

Trouble is, of course, no-one knows just when the cliff will appear. Until it does, everyone will keep playing in a game of financial chicken.

And in a recently posted article, the WSJ says 'Bernanke Defends Easy-Money Policies'.

The Fed chairman 'came down firmly in favor of continuing the central bank's bond buying while debate advances inside the Fed about whether the efforts threaten to destabilize the financial system'.

In Australia, Plan A - head for the cliff with the others - has been speculated about, by no lesser figure than RBA market chief Guy Debelle,

In a recent speech he said: 'This can leave the countries that are receiving these [excess capital] inflows with a difficult choice. They can decide to offset the effects of the higher exchange rate with expansionary policy too. A number of commentators say this is clearly a good thing for the global economy,[10] and is in stark contrast to the 1930s, where countries responded with tighter policy.[11] The argument is that given a deficiency in global demand, further expansionary policy elsewhere helps to redress the fact that there is no scope in the major economies for lower rates, given they are already at zero.

'But lowering rates to such low levels can cause some problems. It can generate excess credit expansion or asset price inflation or imbalances elsewhere in the economy. The current experience of Canada, Hong Kong and Switzerland is salient in this respect. The next line of argument is that such concerns can be alleviated by the appropriate deployment of ‘macroprudential’ policy tools. But there are large uncertainties about how effective such tools really are.

'To date in Australia, we have been able to counter the effects of the higher Australian dollar with lower interest rates, as my colleague Phil Lowe described recently.[12] We still obviously retain scope to lower interest rates further, should the need arise, including to counterbalance the pressures of an elevated exchange rate'.

When I saw the report (linked here) of Mr. Debelle's talk I wondered if it was time for him to start polishing his CV.  But the full quote shown above surely exonerates him from sinning against the party line.

In any case, Plan A – join the inflationist rush – has been abandoned almost before it was hatched, most obviously by Roger Corbett.

It is time to consider Plan B - impose a tax on capital inflow. Read on here and reflect on the fact that Milton Friedman was a class act as a monetary economist, and also that we have got into economic trouble before now from cutting interest rates in an attempt to tame the dollar.

One of my friendlier critics suggested I should devote all of the paper to discussing the crunch and save the remedy for next month.

I agreed with him but had run out of time.  What I did say was as follows: 'Monetary policy in the major nations is unsustainably easy. The immediate effect of this includes the global stock market boom, which Australians who own shares are celebrating. But there is no easy or painless way out of a combination of near-zero interest rates and ‘quantitative easing’. Exiting from this unsustainable monetary policy will be costly and disruptive, and likely to bring on a major recession with a large drop of commodity prices'.

Now I wish I had had the energy to follow my critic's advice, but at least I can claim powerful support from four US economists, one a former 'right-hand man' to Ben Bernanke, and from my favourite European journo, Ambrose Evans-Pritchard.  His paper is linked here and is leaned upon for this blog.

The paper Evans-Pritchard leans upon is available here.     It will repay careful reading.  It was embargoed until late on 22 February, but one imagines the authors will welcome publicity now.

Evans-Pritchard says: 'A new paper for the US Monetary Policy Forum and published by the Fed warns that the institution's capital base could be wiped out "several times" once borrowing costs start to rise in earnest.

'A mere whiff of inflation or more likely stagflation would cause a bond market rout, leaving the Fed nursing escalating losses on its $2.9 trillion holdings. This portfolio is rising by $85bn each month under QE3. The longer it goes on, the greater the risk. Exit will become much harder by 2014'.

The four amigos say the the Fed is acutely vulnerable because it has stretched the average maturity of its bond holdings to 11 years and, the longer the date, the bigger the losses when yields rise.

Trouble could start by mid-decade and then compound at an alarming pace, with yields spiking up to double-digit rates by the late 2020s. By then Fed will be forced to finance spending to avert the greater evil of default."Sovereign risk remains alive and well in the U.S, and could intensify. Feedback effects of higher rates can lead to a more dramatic deterioration in long-run debt sustainability in the US than is captured in official estimates." The amigos say ECB's purchase of Club Med bond amounts to "monetisation" of public debt in countries shut out of global markets.
]
"We see at least a risk that the eurozone is on a path to become more like Argentina (which of course is why German central bankers are most concerned). The provinces overspend and are always bailed out by the central government. The result is a permanent fiscal imbalance for the central government, which then results in monetization of the debt by the central bank and high inflation".

In America, the Fed would face huge pressure to hold onto its bonds rather than crystalize losses as yields rise -- in other words, to recoil from unwinding QE at the proper moment. The authors argue that it would be tantamount to throwing in the towel on inflation, the start of debt monetisation, or "fiscal dominance". Markets would be merciless. Bond vigilantes would soon price in a very different world.

Investors, including Henry,  have been thinking about the implications of this for some time, as US bond yields rise in fits and starts from the low 1s to almost 2 (These numbers refer to yields on ten year bonds.). 'Scott Minerd from Guggenheim Partners thinks the Fed is already trapped and may have to talk up gold to $10,000 an ounce to ensure that its own bullion reserves cover mounting liabilities'.

Evans-Pritchard says: 'What is new is that these worries are surfacing openly in Fed circles. The Mishkin paper almost certainly reflects a strand of thinking at Constitution Avenue, so there may be more than meets the eye in last week's Fed minutes, which rattled bourses across the world with hints of early exit from QE'.

China is saving and investing at rates never before seen.  Germany's saving rate is high and rising. China and Germany have trade surplusses and almost all other major nations have trade deficits.

This situation is untenable and likely to produce a rising tide of protectionism, as in the 1930s.

Near-zero interest rates and 'quantitative easing' staved off the depression the world faced in 2008. 'The lesson of the 1930s is that the creditors are powerless. Prof Pettis [another recent author] argues that China and Germany risk a nasty surprise'.

Evans-Ptitchard concludes: 'America's shale revolution and manufacturing revival may be enough to head off a US-China clash just in time. But Europe has no recovery strategy beyond demand compression. It is a formula for youth job wastage, a demented policy when youth [is] a scarce resource. The region is doomed to decline until the boil of monetary union is lanced.

'Some will take the Mishkin paper as an admission that QE was a misguided venture. That would be a false conclusion. The West faced a 1931 moment in late 2008. The first round of QE forestalled financial collapse. The second and third rounds of QE have had a diminishing potency, while the risks have risen. It is a shifting calculus.

'The four years of QE have given us a contained depression and prevented the global strategic order from unravelling. That is not a bad outcome, but the time gained has largely been wasted because few wish to face the awful truth that globalisation itself -- in its current deformed structure -- is the root cause of the whole disaster.

'It will be harder from now on if central banks conclude that their arsenal is spent. We can only pray that their help will not be needed'.

This is the lead paragraph of The Economist's latest thoughts on monetary policy.

'Exploring more doveish  strategies' is the subject, and in practice this means tolerating higher inflation, at least temporarily, in pursuit of higher output and job creation.

This means a 'significant shift' given the primacy central banks have in recent decades given to low inflation.

Targeting nominal GDP, or temporarily allowing inflation to rise above the target range, or even restoring the requirement for monetary policy to focus on both unemployment and inflation, are the remedies being canvassed.

But this experiment has already failed.

The US Federal Reserve in the 1920s faced a booming economy and rising share prices. US monetary policy could not both restrain the boom and prevent what became a massive share price bubble whose eventual bursting was an important reason for the onset and severity of the economic downturn we all call the Great Depression. Milton Friedman and Anna J. Schwartz say in their monumental book A Monetary History of the United States 1867 to 1960: ‘... there is no doubt that the desire to curb the stock market boom was a major if not dominating factor in Reserve actions during 1928 and 1929. ... But they did exert steady deflationary pressure on the economy.  ... that episode ... exemplifies the difficulties raised by seeking to make monetary policy serve two masters’. (pp 290 – 291).

Friedman and Schwartz say, curiously given Friedman’s general support of steady, non-inflationary monetary policy, that the US Fed could have broken the market boom with a short sharp shock and then eased monetary policy before it damaged economic conditions generally. But an alternative would have been for the Fed to increase margin requirements on borrowing to buy equities until the market boom was punctured.  Two objectives – economic conditions generally, and avoidance of a market bubble – and two instruments – monetary policy and margin policy.

The labor markets of rich nations should be improved by policies that focus on making companies more competitive and by making it more rewarding for companies to hire workers.

Monetary policy cannot serve two masters.

The trouble with monetary policy seeking to do two things with one instrument is that it's attempt confuses people about real solutions to the multiplicity of economic problems.

In any case, current global monetary policy is like 'pushing on a string', ie impotent, and this is telling us something important. Continued monetary ease is more likely to boost asset prices than fix the economic problems of developed nations.

And a third problem that exiting from current hyper-easy monetary policy will be hard, with a major risk of a global crunch. 

The Economist says, in conclusion: 'There is also a question-mark over what this wave of central-bank experimentation can achieve: since bond yields are already so low, the marginal return to coaxing them even lower may be scant. For now, though, buoyant stockmarkets are giving the activists the thumbs-up'.

This is the engaging message from 'business elder' Don Argus.

He concludes a thorough study of the economic numbers as follows: 'History has taught us that there are two ways to increase gross domestic product: you can increase your population or workforce participation, and you can increase productivity.

'We must continue to offer incentives for business to provide opportunities for our own youth, but we should also be encouraging young, educated immigrants who are willing to work, which will assist productivity growth in outputs generated through efficiency, rather than adding more inputs.

'If we fail to pursue sensible tax, spending and microeconomic reform to remain competitive then we will have missed the opportunity to prosper from the development of the Asian region'.

This is a 'must read' for our political masters, including 'Finance Minister of the year' Wayne 'Swannie' Swan, but they will probably snort with derision - 'Argie was the man who conned us with the MRRT!' may be their excuse.

Our Dear Leaders, of course, have more on their minds than a 'business elder's' economic analysis.

The new is full of Gillard's last stand, Rudd's possible return to the lodge, Shorten's key role, and much, much more.  We are looking at the demise of a once-great political party, or a split into 'Union Labor' and 'Rationalist Labor'.

Paul Kelly, as usual, has the most incisive analysis.

'WITH polls showing a potential election wipe-out, the Labor Party remains in denial about the causes of its malaise. It suffers not just a crisis of leadership but a crisis of identity as a political institution'.

And in conclusion: 'Sooner or later Labor must confront two epic reforms.

'First, it needs to reduce union guaranteed voting power within the party from 50 per cent to no more than 20 per cent to match union coverage in the workforce.

'It also needs to empower democracy in the election of the leader whereby the caucus has half the votes and an electoral college of the rank and file has the other half, a proposal advocated by Rudd backer Chris Bowen last year.

'In short, the Gillard-Rudd agony is conspicuous for a debate that overlooks the underlying crisis facing the Labor Party'.

More here. 

Cricket'n'footy'n'swimmin'n'stuff.

The Australian test team is already facing humiliation on a dusty track like that around Uluru, spinning like a top from the eighth over after the Indian 'quicks' had been cheerfully hit around the ground.

One suspects the three-and-two-half Aussie 'quicks' (I include Watson, who is on notice to bowl or be overlooked as a top 6 batter) will face a similar fate, and then our one-and-two-half spinners (the halflings being Warner and Clark) will labor mightily despite the increasing wear and tear on the dusty excuse for a cricket wicket at Chennai.

Still, the argument that India faces a pitch in Perth that favours chin music, so in India the Australians face ankle biters, is hard to overlook.

Footy's horrible start to the season with (largely unsupported) drugs'n'shit allegations got worse as the mighty AFL said Melbourne was NOT GULITY of tanking but nevertheless had to cop a half-million fine and have the men most responsible for its non-tanking tactics, now working elsewhere, suspended from duty. Excuse me, Mr Demetreiou (please excuse sir if this is dud spelling), but this does not look like natural justice to me.

Then we learn that the Australia's 6 by 50 metre swimming team indulged in some foolish, indeed offensive, hankypanky (or intended hankypanky) in Munchester.  What is Aussie sport coming to?

'Tony Abbott is the cause of all this' Ms Gillard was heard to mutter as she went to face her cabinet.

Scam of the week

Henry this week received the following message.

'We have communicate with a company whom are customers of ours in your state regards merging, we like to merge with the company to increased revenue, market share, and cross-selling opportunities.
We would like to retain you to help us in the process to review proposed transactions for acquisitions or purchase of businesses and creation of contracts for acquisition (merger), if you are interested

'Please advice us on your initial retainer fee and agreement and we shall forward you the company information and letter of intent.

'Yours Sincerely,

'Wang Lee CEO/CFO
Japan General Appliance Co.,Ltd.
11th Fl., TT-1 Bldg. 14-8, Nihonbashi
Ningyo-cho 1-chome, Chuo-ku, Tokyo'.

Readers are invited to send examples of similar scams, or suspected scams.  Should we collect enough we shall run a weekly scam ,and perhaps award 'Scam of the year' to the most beguiling.

Contact Henry here. 

Image of the week

Courtesy AFR.

All this is caused, so we are told, by the US Fed merely having a conversation about how to exit from the easiest monetary policy in living memory.

Regular readers will know Henry wrote earlier this month about 'Coping with the coming Global Crunch' that is likely to be the consequence of such tightening.

Equity market participents, of course, spend a disproportionate amount of their lives speculating about the future, so this anticipatory selling pressure should come as no surprise, except perhaps for timing. Given Ben Bernanke's promise not to raise interest rates until the US rate of unemployment is 6.5 %, there would appear to be time on the side of bull market investors.

I remain moderately confident that the current sell-off is not The END of the market rally, though not sufficiently confident to bet the house on continued equity revival.

In the endless search for hints and clues about the impenetrable future, Henry discovered that the mighty RBA's research unit has issued a discussion paper about the mining boom's effects on the rest of the economy.

The second part of the abstract says: 'We estimate that the resource economy accounted for around 18 per cent of gross value added (GVA) in 2011/12, which is double its share of the economy in 2003/04. Of this, the resource extraction sector – which we define to include the mining industry and resource-specific manufacturing – directly accounted for 11½ per cent of GVA. The remaining 6½ per cent of GVA can be attributed to the value added of industries that provide inputs to resource extraction and investment, such as business services, construction, transport and manufacturing. This ‘resource-related’ activity is significantly more labour intensive than resource extraction, accounting for an estimated 6¾ per cent of total employment in 2011/12, compared with 3¼ per cent for the resource extraction sector'.

This is translated into English (just joking, Glenn) by the anonymous editorialist for The Australian. 'THE archetype of the greedy miner and his bulging pockets has become so established in political folklore that this week's RBA report into the resource industry reads like the script for an episode of MythBusters.

'Putting the farce of the mining tax to one side, the rewards of the mining boom are being spread more widely than is commonly imagined. Rising exports are estimated to have created 500,000 jobs right across the economy, including business services, transport, warehousing and construction. There has even been a spin-off for manufacturing, the very sector we were assured would struggle against a high dollar. All up, the multiple sectors of the resource economy accounted for almost a fifth of national gross added value last financial year, twice the contribution they were making eight years ago'

There you have it, Henry.  Stop fretting about the loss of competitiveness due to an excessive currency value and remember that what doesn't kill you makes you stronger. 

However, we hasten to add, we would not like to be identified with 'dollar-shop Keynesians, who appear from nowhere at the first hint of a downturn', or 'mining-hating Greens' or even as a friend of the Treasurer - all people lambasted by the anonymous editorialist.

We do however agree with the editorialist's powerful final sentance: 'We'll say it one more time for the hard of hearing: private enterprise creates jobs and wealth; governments spend it'.

For those of an inquiring mind, there is a lovely game that can be played by readers of the Economist.  This venerable mag in 1986 developed the 'Big Mac' index which compares prices of the famed hamburgers throughout the world.

This data it converts into measures of over- or under-valuations of currencies.

The map (available here) is interactive.  One can place one's cursor on a country and find information about the state of its currency valuation.  Australia is colored light blue, so (according to the map's key) we know our currency is between 10 and 25 % overvalued.

In 2011, Australia's Big Macs were almost 25 % overvalued. The good news is that this is overvaluation is now nearer 12 %.

It is important to recall that the estimates are relative to the US Big Mac, which might be called the gold standard of burgers.

If the USA dollar is overvalued relative to the booming Asian economies, as the price of a Chinese Big Mac says it is (by almost 40 %), Australia is an additional 12 % overvalued.

Enjoy your Big Burger, today, gentle readers, and I'll have fries and a coke with mine.

(Incidentally I wouldn’t call it arrogance but crass economic stupidity).

And on the questions you asked yesterday, about capital gains and losses, and effective tax rates for miners, here goes.

First, it's interesting to learn that a super-profit could be defined as any profit greater than the risk free rate. Perhaps our readers could define the risk-free rate for us? (H/T Sinclair Davidson).
 
Which raises the issue of investment risk - how many of us would invest in treasuries or blue-chip stocks if the potential for losing all of our capital exists? After all, investing in a mining stock can, and frequently does, mean a significant loss of capital. Expect to lose your principal in a bank term deposit? Government bond?

On capital gains and losses, our readers should be aware that prior to finding a mine, mineral exploration has to be done and years ago, whilst studying  postgraduate, I learnt that there was a rule-of-thumb that exploration success rate seemed to hinge on the number 13 - spend $13 million before finding a mine, or spend capital over 13 years before finding a winner.  The whole idea is to repay the invested capital from the mine profits and that's why mining companies look for high rates of return. That's why the return on equity is what it is, to balance the initial losses when a mine is found. Of course if you don't find a mine you have lost the lot.

How many of our readers would be prepared to start up a business and never ever make a profit, and go bankrupt?  Remember it's all the same principle whether you borrow from the bank or the individual investors, both the banks and individuals expect a very high rate of return for the funds to cover the frequent catastrophic losses mineral exploration produces. That's why banks generally never lend money for mineral exploration projects, they only lend when you have finished a bankable feasibility study and shown the bank that your business plan will generate a cash-flow to pay back the loan. Same for the shareholders.
 
On effective tax rates.  This rate is defined as net tax paid as a percentage of taxable income  and Sinclair Davidson plotted this number from 2000 to 2010 (see first link above). It seems to hover around 28% (visually). Now that rate is an average so some will be above and some will be below, and most will be clustered around the mean rate. For 2012 BHP published its results and stated that its underlying EBIT decreased by 15 per cent to US$27.2 billion and payments to governments included US$12.1 billion in company taxes, royalties and indirect taxes.  This makes the effective tax rate for BHP-Billiton at 44.5%, significantly above the mean of 28% for Australian miners.
 
So how our politicians come up with the idea we in the mining industry are not paying our fair share of tax is puzzling - are they that stupid or are their economic advisors stupid. If not, then they are clearly misusing the numbers to support a political point, and we should not be too surprised because the same tactic is being used in the Climate Debate and the creation of the CO2 tax. But it's more likely that our politicians and their camp followers don't understand the economics; they are Keynesians after all.
 
Louis Hissink
Henry's Wandering Geologist

The most successful wars, however, have been on their own citizens - especially political dissidents and uppity billionaires.

Now they have hosted a G20 meeting that has  grappled with the so-called 'currency wars'.  (Here and here are two of Henry's earlier forays into this murky business.

Australia's own Wayne Swan - 'Comrade Swannie' in Moscow - has been nodding wisely and interjecting comments about his brilliant leadership back home.

A report from the Russion front says: 'Japan dodges G20 censure over yen'.  Japan has suffered defeat before, notably in August 1945, but on this occasion was let off with a warning.

Meanwhile back home, in Moscow on the Molongo, Labor has suffered a massive new slump in the opinion polls. (Comrade Swan was heard to mutter 'bloody democracy' as he ascended to the front of the plane for his return home.)  Prime minister Julia 'Red' Gillard is now contemplating her future as a smiling Comrade Kevin marshals his rapidly growing forces.  As he stacks on the weight, Comrade Kevin looks increasingly like the young comrade Kim running North Korea.

Returning to economics, Adam Creighton says 'competitive devaluation is a recipe for disaster'.

He also makes a profoundly important point.  It is that 'When [the Bretton Woods system] finally broke down in 1971, nothing really replaced it. For over 50 years, national governments have been freewheeling with their monetary affairs, unbound by any formal link with gold or the volume of economic activity'.

Regular readers will know that Henry has been an advocate of a modern version of the gold standard to provide a global anchor for a non-inflationary monetary system.  It seems at least one of Australia's most promising journos understands the issue.

Those interested to delve further into this matter may find this Blog of interest.

Also The Economist's 'Phony Currency Wars'. 

'Surplus turns to ten billion deficit' by David Crowe and Adam Creighton.

'Mining levy debacle puts Wayne Swan's future in doubt', by Dennis Shanahan.

'Wayne Swan may be Treasurer but he's certainly no treasure', by 'contributing economics editor' Judith Sloan.

'PM in check, now Shorten must move', by Peter van Onselen.

Here is an extract: 'By their own key performance indicators, Gillard and Swan have failed. They rolled Rudd to fix the mining tax, slow asylum-seeker arrivals and solve carbon-pricing worries. Instead, they have served up a politically painful mining tax that doesn't collect revenue, failed to stem the flow of boats and delivered a carbon tax they pledged would not be enacted before the election (and that now looks set to be repealed by an incoming Abbott government).

'Throw in the broken surplus commitment, and rewarding Gillard (and Swan in particular) with staying in power would be to reward mediocrity.

'A significant benefit of changing prime minister is that doing so would also elicit a change of deputy PM and treasurer.

'Even if Shorten can't (or won't) see the obvious electoral benefits of switching to Rudd, surely he can see how doing so is in his personal interests. ...'  Read on here.

And what about the Perth accountant who told Swannie that his mining tax sums were holelessly wrong, in effect a whistle blower, who was persecuted by Swan, aided and abetted by Treasury?

Shame Dr Parkinson and shame Wayne Swan.

Labor looks after its own.

This is a long-standing tradition, and it has  strength and a weakness.  The strength is that it keeps Labor people loyal but the weakness is that it foster nepotism in all its guises, and means that the best that Australia has to offer is widely under-utilised while Labor is in office..

As an occasional writer for Quadrant, I was upset to hear that its grant from the Australia Council has been 'slashed'.

Here is a lovely expose, by Senator Abetz.  

Art world welcomes return of optimism

Expansionary global monetary policy has boosted share prices. Now it is the turn of art.

The Wall Street Journal reports: 'London auction house Christie's International sold $127.7 million worth of contemporary art on Wednesday, thanks to an influx of newcomers eager for trophy art alongside veteran buyers who were willing to mop up the rest. Among the works buoyed by first-time bidders were a $14.6 million Jean-Michel Basquiat and an $11.9 million Peter Doig".

Read on here if you are a subscriber.

Image of the week.

 Courtesy Oz

The latest trial balloon suggests that self-managed funds will be especially targetted.

Ms Gillard and Mr Swan will find that this continued class warfare in the name of 'equality' (but in reality a desperate grab for revenue) will turn out to be the final nail in their political coffins.

'Go for it, Swannie. It will be galling to see you ride off into political limbo with your sack of pension money untouched, but a relief overall'.

The much derided mining tax is in the news again, mainly because it has so far delivered diddley squat, and its masters, the aforementioned Gillard'n'Swan, are looking increasingly like desperados swimming naked.

Now the Treasury Secretary, Dr Parkinson, has told us all that Treasury's dud forecasting was because it was not told all the facts.

'A spokeswoman for Mr Swan said there was nothing unusual in Dr Parkinson's admission that Treasury did not know what values the mining companies would be using for their assets in calculating the tax.

"Treasury does not have access to the full financial details of individual taxpayers, but bases its forecasts on the best available data," she said.

'Broking analysts and mining companies suspected, from the beginning, that companies' ability to put a market value on their assets would have a big impact.

'A week after the tax was agreed, the then Coalition industry spokesman Ian Macfarlane suggested no tax would be paid: "The companies involved in the negotiations will be paying no more tax than they are now. We're starting to think the whole thing is a sham".'

David Uren has delved into the history of  'fiscal consolidation' which until the recent budget surplus promise was junked was Swannie's proudest boast.

'Even on the most recent and now obsolete published budget numbers, Swan relied much more on revenue growth than on spending restraint than did the consolidations of his predecessors. Had Swan achieved the return to surplus this year, it would, indeed, have been the fastest improvement since the "horror budget" of the Menzies government, under treasurer Artie Fadden, in 1951.

'From the peak 2009-10 deficit to surplus in three years would have been a consolidation equivalent to 4.3 per cent of GDP.

'This would have compared with Mr Costello's budget turnaround of 4.1 per cent of GDP across four years following the Coalition's election in 1996. He took the budget from a $6bn deficit to a $13bn surplus.

'The Hawke government, which gained power in 1983 as a two-year recession was abating, ran a big deficit of 3.3 per cent of GDP in its first year, but under treasurer Paul Keating devoted the next five years to returning the budget to surplus.
'
'That was a turnaround of 4.8 per cent of GDP.

'The consolidations achieved by Costello and Keating were striking for their spending restraint. During Keating's five tight budgets, spending fell as a share of GDP by 3.5 percentage points, while revenue rose by only 1.3 points'.

This is about a Treasurer who talks big but delivers ...  just more spending.

The good news for the Coalition is that it is Labor which now has a big unfunded hole in their budget - Gonski and NDIS, even assuming there are no fresh revenue shortfalls yet to emerge.

Henry earlier this month outlined a process guaranteed to restore the budget to substantial surplus, but so far has had no call from Mr Swan or Dr Parkinson to discuss ways and means.

Other economic news this week included Roy Morgan's report of dramatic improvements in both business and household confidence, supported (albeit less dramatically) by surveys by Westpac and NAB.

If Swannie is really interested in tax reform, he could do worse than consult The Economist, which has been running a campaign to wipe out tax evasion for several decades.

Here is the latest contribution.

'The world has 50-60 active tax havens, mostly clustered in the Caribbean, parts of the United States (such as Delaware), Europe, South-East Asia and the Indian and Pacific oceans. They serve as domicile for more than 2m paper companies, thousands of banks, funds and insurers and at least half of all registered ships above 100 tonnes. The amount of money booked in those havens is unknowable, and so is the proportion that is illicit. The data gaps are “daunting”, says Gian Maria Milesi-Ferretti of the IMF. The Boston Consulting Group reckons that on paper roughly $8 trillion of private financial wealth out of a global total of $123 trillion sits offshore, but this excludes property, yachts and other fixed assets'.

Although most Industries showed improved confidence in January, it was mining that increased the most and so returning it to the position as the most confident industry. Western Australia has obviously benefited by this and is now clearly the most confident state. A number of key sectors all remain below the average confidence level and as such pose a major problem for economic recovery. The Agricultural sector has the lowest confidence rating, followed by Construction, Manufacturing and Retail.

More here. 

And the equivalent survey of households reports a corresponding increase in virtually all catagories, and overall.

The weekly Roy Morgan Consumer Confidence Rating shows Consumer Confidence rising to 121.4pts (up 2.9 pts since February 2/3, 2013) after the RBA left Australian interest rates unchanged at a record low of 3%. Consumer Confidence is now 5.7pts higher than at the same time a year ago, February 11/12, 2012 — 115.7.

The rise in Consumer Confidence has been driven by an increase in confidence about buying major household items and increasing confidence about personal finances over both the last and the next 12 months.

Now a much larger majority of 60% (up 6%) of Australians say now is a ‘good time to buy’ major household items compared to just 16% (unchanged) that say now is a ‘bad time to buy’.

More here.

Gary Morgan said: “Roy Morgan Consumer Confidence has risen to 121.4 (up 2.9pts) after the Reserve Bank of Australia left interest rates unchanged at a record low of 3%. Driving the rise were strong increases in Australians saying ‘now is a good time to buy’ major household items (60%, up 6%) and also that families are ‘better off financially’ than this time last year (34%, up 6%).

“Interestingly, a clear difference emerged between supporters of the two major parties when it came to looking at the next 12 months as increasing numbers of ALP supporters expect to be ‘better off financially’ in 12 months time (42%, up 4%) and the Australian economy to perform better over the next 12 months (42%, up 6%) while L-NP supporters became less confident on both counts with 37% (down 1%) expecting to be ‘worse off financially’ in 12 months time and 27% (down 1%) expecting ‘bad times’ for the Australian economy over the next 12 months.

“Despite the decision by the RBA to leave interest rates unchanged, the latest Roy Morgan January unemployment figure released last week showed Australian unemployment at 10.9% (1,327,000) and under-employment at 8.8% (1,068,000). This is a record high total of 2.4 million Australians (19.7%) looking for work or looking for more work.

“The high, and growing, level of unemployment and under-employment in the Australian economy means the RBA needs to re-commence making interest rate cuts as soon as possible to stimulate the Australian economy while the Government must look seriously at undertaking workplace reforms to encourage employers to begin hiring again.”

Henry adds: 'The rise in the overall unemployment and underemployment measure is somewhat at odds with the general rise in the various indicators of household confidence'.

Those who saw the Four Corners program earlier this week will wonder if Australia, like the USA, is developing an underclass whose views are not polled as they either out hustling for jobs when the interviewer knocks, or living in friends or relatives' spare rooms, or (God forbid) in cars and vans.

These missing workers are largely ignored by the government, and go unmentioned by the Reserve Bank.  So it is a fair bet that improved business and household confidence will keep interest rates on hold.  If these trends persist, that brave bloke who said the next move in rates might be up may be on a winner.  He should have a bet with Westpac's Bill Evans before it is too late.