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Henry Thornton - Contributors: A discussion of economic, social and political issues Blogs
China slowdown worse than now expected
Date: Tuesday, January 31, 2012
Author: Henry Thornton

One always worries that a totalitarian government might have rigged the numbers.

Could China's rate of consumer inflation be somehow higher than the 4.1 % reported in the year ro December?

Could real GDP growth be lower than the 8.9 % annual rate reported in early January?

Ambrose Evans-Pritchard says that China's slowdown is serious, more serious than the official numbers, swallowed by the global  press, suggest.

'I could not help noticing that China’s imports from Japan fell 16.2pc in December. Imports from Taiwan fell 6.2pc.

'The Shanghai Container Freight Index fell 1.4pc to a record low of 919.44 in November, after sliding relentlessly for several months. It has picked up slightly since.

'The Baltic Dry Index [an old favourite of Henry] measuring freight rates for ores, grains, and bulk goods, has fallen 44pc over the last year. Kasper Moller from Maersk in Beijing said weak Chinese demand for iron ore was the key culprit.

Courtesy TickQuest and

'Cautionary warning. The BDI index also reflects the shipping glut, so it is not a pure indicator.

'However, rail, road, river and air freight volume for the whole of China fell to 31780m tons in November (latest data), from 32340m tons in October. Not a big fall, but still negative. (National Bureau of Statistics of China.)

'Chinese electricity use was flat in over the Autumn, with a sharp fall in the (year-on-year) growth rates from 8.9pc in September, to 8pc in October, and 7.7pc in December.

'Residential investment has been contracting on a monthly basis, and of course property prices are now falling in all but two of China’s 70 largest cities.

'So how did China pull off an economic growth rate of 8.9pc in the fourth quarter?

'Beats me.

'I strongly suspect that the trade and power data reveal the true state of China’s economy'.  Read on here.

Sunday Sanity Break, 23 March 2014
Date: Sunday, March 23, 2014
Author: Henry Thornton

Russia grabs Crimea, someone or something grabs Malaysian Airlines flight 370 and rumour, smear and innuendo grabs Australia's Assistant Treasurer. It been a grabby kind of a week with Russian Grandmaster Vlad (the Impaler) Putin the biggest winner and, apparently, the passengers and crew of Malaysian Flight 370 the biggest losers.  We apologise that Henry's site was unavailable this weekend and that this popular column was therefore delayed.  The reason is mysterious, but got fixed on Monday am when the server was rebooted.

Like the friends and relatives of the possibly hi-jacked aeroplane, we hope at least that the passengers have been released on a military airfield somewhere in the mountain country North of the Indian subcontinent, a theory being propounded on CNN by a retired but supposedly 'well connected' American general.  Seems unlikely to Henry, but the whole lost plane saga has a weirdly strange air about it.

Arthur Sinodinos has certainly been entangled with some unsavoury people, and how could he not know who were the shareholders of the company that he chaired, or the  generous donations from Arthur's company to Arthur's political party?  Henry had a searing learning experience with his first attempt to become a professional director, before he had formed the fully critical approach that is one's best defence in the wilder seas of corporate life.  Mr Sinodisos should not be damned for the rest of his life for what seems to this outsider most likely to be gross naivety, but it is in the hands of ICAC now and its process could go anywhere from here.

The Prime minister is being congratulated by the Australian for an IR policy that is not an IR policy in the normal sense.

'PM vows to bust union stranglehold' is the page one headline.  It is all about the construction industry that seems to be a festering mess of restrictive practices, intimidation and rorts, whose economic effect is to slow down and raise the costs of construction. This rat's nest must be cleaned up and doing so would make a noticable contribution to Australia's economic well-being.

The union movement will of course fight reform like the kilcanny cats it most resembles.  Readers should recall the amazingly bad behaviour during the last great war, brilliantly documented by Hal Colbatch, with an extract from his book available here.

And do not miss Grace Collier's opinion that union membership in Australia might halve overnight if all state governments outlawed patroll deductions of union fees and the Federal government outlawed the forcible unionisation of small business by big business.

China's economy

Analysts everywhere have been worrying themselves silly about a potential hard landing in China's economy. The worries are about corruption, a possibly mismanaged banking sector and the state of China's many government owned corporations.

Fear of retribution for correcption may have accelerated the inflow of wealthy people and capital into safe-haven nations like Australia, Canada and the USA. 

Australia's renascent property boom, especially in Sydney and Melbourne, is attributed in part to increased flow of Chinese money.

Now the inflow is said to include the market for art and rare artifacts, as conveyed to Samantha Hutchinson of the AFR.

The strongest warning that Henry has seen is that by Ambrose Evans-Pritchard, reported here.


Fiona Prior has the rare delight of experiencing Handa's Opera on Sydney Harbour, Madama Butterfly.


Australia's cricketers are in foreign climes fighting to their first T20 World Cup.  We wish them well, but it is a style of cricket no-one, like Henry, raised on the timeless serenity of test or shield cricket, where 4 or five days in the blazing sun often failed to reach a clear result, can easily adapt to.

Instead we turned to the footy, and the curiously crafted first round - split so last week we got a taste and this week we have to sit it out.  Last week we rejoiced when the Giants flogged the Swans, Collingwood got flogged by .... and the Suns dealt with Richmond.  Then on Sunday evening, Caaaarlton! came out fighting and seemed to have Port Adelaide on the ropes.  But the gritty boys from the port fought back and in the final quarter blew the Blues away, seven goals to one.

But there is little interest in the actual footy this weekend.  Instead the AFL has again been alleged to having bullied, in this case the former Essendon golden boy, James Hird.  The alleger (sic? - should that be allegater?) was Mrs Hird, a lawyer who 'takes lots of notes'. The Essendon President said this was disappointing and that James Hird's position would need to be reviewed.  Andrew Demitriou put on his face intended to suggest that margarine would not melt in his mouth and said it  was disappointing and he did not have sex with that women, correction, did not tip off the Essendon Club that charges were to be laid, as Mrs Hird alleges.

Here is the question.  Spouses of businesspersons can be banned from buying or selling shares in the 'closed' period for the bizoids. But can the behaviour of a spouse lead to an employee's position being 'reviewed'? And if the review caused said spouse, James Hird in this case, to be told 'Don't bother to return when your time in the sin bin is over' can this create a legal problem, and requiring large damages paid to the employee?

The ramifications of the the drugs'n'supplements saga have a long way to run yet, and Henry advises the Essendon footy club to tread carefully.  Believe it or not, Mr Little, things would get worse, much worse, if you are fighting with Mrs Hird, or disadvantaging Mr Hird because of allegations made by Mrs Hird. Last time we checked, free speech was still the case in Australia, and women are no longer required to 'obey' dictats from their husbands.

In Henry's view, the fact that Doc Reid refused to buckle to what seemed to this outsider to be unfair roughhouse tactics, and had all the charges dropped, suggests there are already legal problems in this case, and that lack of formal charges from the drug Tsars after more than a year may be telling us something important.

Image of the week

Global interest rates to rise
Date: Thursday, March 20, 2014
Author: Henry Thornton

Monetary policy is rarely out of the news, and today is no exception.  The US Fed is considering its bond buying 'taper' and the future of global interest rates. The general question is how fast to remove the strongly inflationary US monetary policy, and whether the rate of unemployment is a good indicator for forward guidance. The relatively new guv'nor of the Bank of England has revamped his executive team and warned of 'risks to the financial system'. Australian interest rates are set to rise by 1 %,  or possibly 2, over the next year or so, say (well briefed) local economists.

We ask two questions today. Will rising cash rates control goods and services inflation? And will they also contain asset inflation?

To start with the Big Bank, the USA Federal Reserve. 'FEDERAL Reserve chairwoman Janet Yellen said interest-rate increases could begin in the first half of 2015, around six months after the US central bank winds down its bond-buying program.

'The Fed, in its policy statement, said the benchmark federal-funds rate will remain near zero for a “considerable time” after its signature bond-buying program ends. For the first time, Ms Yellen attempted to define that term, saying it is “hard to define” but “probably means something on the order of around six months.”

'The Fed has been reducing its bond-buying program in $US10 billion increments and is on track to wind it down this year.

'The central bank altered its guidance on the likely path of interest rates, putting less weight on the unemployment rate as a signpost for when rate increases will start'.

Do not miss the video of Chair Janet Yellan.  And if you stay on the line you will see a thoughtful contribution about the lost Malaysian aeroplane.

The AFR's website, in an article posted after some thought about what Ms Yellan really meant.  The summary headline is 'Fed sets stage for sharply higher interest rates'.

The Bank of England was the world's Big Bank in the nineteenth century, and for most of the twentieth acted as if it still was. It new boss, Canadian  Mark Carney, has radically changed its structure, which you can read about here.  Mark Carney's crucial point is about so-called 'macroprudential' policy. 

Mr Carney's explanation sends, or should send, a loud message to RBA boss, Glenn Stevens. 'Criticising the BoE’s failure under former governor Lord King to focus on financial stability when it had inflation under control, he said: “It doesn’t take a genius to see similar risks exist today.”

'Mr Carney warned there were risks brewing because of the current long period of ultra-low interest rates, saying this could breed “potential complacency and excessive risk taking” in financial markets.

'With the BoE pledged to keep interest rates low for a long time, he added there was now a “tremendous burden on microprudential supervision and macroprudential management” to preserve financial stability'.   Read on here.

Henry's research points to the tendency for share prices to get out of control when goods and services inflation is under control.  In the 1920s USA, the 1950s/60s USA, the 1980s Japan, and the 1990s USA.  More here, but be warned - this is an article for a stiff whisky and a damp towel around the head.

The implication is that outlined by Milton Friedman, that 'monetary policy cannot serve two masters', discussed here more than a year ago.

Mr Carney's emphasis on 'Macroprudential policy' shows he understands the point, but sadly it appears that Glenn Stevens does not.

As evidence I would quote from an article in today's AFR 'Rates may hit 4.25pc by end of 2015: economists'.

In Australia,it seems to Henry,  'economists' who feed the chooks of the press rarely say anything that is not approved by Glenn Stevens and his merry men.

Note the opening three sentances of Jacob Greber's article, where the emphasis is that added by Henry:  The official Reserve Bank of Australia cash rate may be at least 1 percentage point higher than its record low 2.5 per cent by the fourth quarter of 2015, and as high as 4.25 per cent, economists say.

'That would mean the central bank would have withdrawn almost all of its interest rate stimulus by the end of next year  The official Reserve Bank of Australia cash rate may be at least 1 percentage point higher than its record low 2.5 per cent by the fourth quarter of 2015, and as high as 4.25 per cent, economists say.

'That would mean the central bank would have withdrawn almost all of its interest rate stimulus by the end of next year to prevent an inflation blowout and potential housing market bubbles'.

It is impossible, except by accident, to control both [goods and services] inflation and asset inflation by varying interest rates,  and different types of asset inflation may need to be controlled (to the extent possible) by different macroprudential policies.  In Henry's view, a variable asset ratio for house prices and a variable tax on capital inflow to modify a currency too feisty for the overall health of the economy.

You should ask the RBA for its opinion on this important matter, Mr Greber.  Do not be deflected by reference to comments on its website about 'Macroprudential policy' in general.

Henry's answers

Raising cash rates often comes 'too little too late', so there is a clear danger that goods and services inflation will get away before the stable door is locked.

Rising cash rates may dampen asset inflation but cannot be relied up to do so in any reliable way.  Far better to use independent policies, such variable asset ratios on financial institutions, which rise when lending approaches some historically derived danger zone, or taxes on financial transaction, such as the so-called 'Tobin tax' to put 'sand in the wheels of finance'. In the case of a small open economy like Australia, both approaches may be needed.

'Enough, Henry', I hear you cry, 'She'll be right, mates'.

She`ll be right, mates
Date: Tuesday, March 18, 2014
Author: Henry Thornton

‘It was a year in which industry, on the whole, was exceedingly prosperous, profits good, wages rising rapidly, unemployment reduced to the minimum, and the volume of production and of foreign commerce in excess of all previous records. [2007 Australia? No, 1913 UK.]

'Nevertheless, it was a year in which the tide of prosperity was on the turn, and the general tone was considerably less favourable in the month of December than it had been 12 months before'.

Then came the Great War.  Britain lost many of the finest men of a generation but also spent much of its overseas wealth, accumulated over centuries. Debt was accumulated on a vast scale.

By 1917, Britain and its allies were winning a long, slow-moving grinding war.  An American, Mr C.W. Barron, wrote generously in what The Economist reported of Britain's wartime efforts: ‘This is a gigantic physical power and a trade and war power combined never before dreamed of. It puts in the shade all that the world previously knew of Britain’s financial power. Nobody dreamed two years ago that the war cost to Great Britain was to be beyond five or six billions. It is today more than twice that, and Great Britain is prepared to double it again'.

The postwar collapse was dramatic.  In its review of the year 1921, presented in early 1922, The Economist said: '‘For Great Britain, 1921 has been one of the worst years of depression since the industrial revolution. The rapid fall in prices, in some cases the shrinkage and, in very many places, the complete disappearance of profits, and the unprecedented contraction of production were accompanied by the unemployment of nearly two million of the industrial population and in the last part of the year by a drastic reduction of wages which, in many cases, far outran the fall in the cost of living’.

Over the next few years the story was one of gradual recovery, with hopes early in each year high but then dashed as one bloody thing after another  confounded the optimists.

Indeed, Chauncy Gardner's advice to the US president in the movie 'Being There' could have been invented then: 'The economy will bloom in the spring'.

Then in 1925, in April, another blooming spring was spoiled by the restoration of the gold standard, with sterling pegged at its pre-war level favoured by the bankers. Britain was deeply uncompetitive at the pre-war level of its currency, and the next few years were disappointing for British capitalists, workers and politicians, despite one of America's golden ages of development and prosperity.

The quotes below are all from the relevant annual reviews conducted by The Economist.

1926: ‘We have frequently had the experience in the last few years of hopeful expectations entertained in January being disappointed by one set-back after another in the ensuing few months; but we have never had so disappointing story to record as the year which is just past. ... This economic recovery [in the first four months] was cut short at the beginning of May  by the first General Strike which has occurred in this country, and although this lasted only a week and a-half, the country remained for seven months in the greatest and the bitterest industrial dispute which we have ever experienced'.

1927: 'Judged by any progressive standard of living, we have much leeway to make up as a nation, and the progress of recent months is only a modest advance towards that goal’.  Among the factors holding up recovery was ‘obstinate stagnation’ in our exports as a whole.

1928: This was a year of ‘no small promise about the future ... Quite possibly it will be remembered in history as a year in which the foundations of recovery were laboriously laid. It was a year of realisation and of facing facts’.

1929: ‘Writing of the prospects a year ago, we called attention to certain favourable omens’. The venerable mag was now inclined to see the year as ‘disappointing’.

The main reason was the monetary situation: ‘The phenomenal Stock Exchange boom drew such large amounts of money to New York that Bank Rate and other money market rates were pushed up to a high level and remained there throughout spring and summer; and, though the situation was radically changed by the Stock Exchange collapse in October and November, the reaction was so abrupt and so severe that the immediate advantage of cheaper money was more than outweighed by uncertainty as to the effect of the slump on purchasing power and employment’.

1930: America, Britain and indeed the rest of the developed world, including Australia,  entered the Great Depression.

No historical analogy is exact.  But readers are invited to see the final year of the great nineteenth century boom, 1913, as equivalent to the last year of the great commodity boom of the 2000s and early 2010s.

The Global Financial Crisis is our lucky generation's equivalent of the Great War.  Just as Britain lost its international assets and built massive debt in that war, developed nations lost assets and built unsustainable debt mountains during the GFC.  This is only possible when previous generations have restrained debt levels, and can only be done occasionally.

The GFC has been followed by several years of disappointing recovery, as in the UK's 1920s. The came the American stock market crash, and the plunge of America and the developed world into deep depression.

The effect of Australia's stubbornly high exchange rate is not unlike the effect of Britain's return to the gold standard in 1925. If the analogy holds, and if plunging commodity prices and deep recession do not solve our problem of poor international competitiveness, recovery will be disappointing, as it was for the UK in the second part of the 1920s,

The entire western world, by the end of the 1930s, had again to cope with a costly and damaging global war.

God forbid that this is our fate in the 2020s.  More likely is trade war, and the intial shots in that sort of war have already been fired - including America's massively easy monetary policy and China's 'pivot to consumerism'.

'Enough, Henry', I hear you cry, 'She'll be right, mates'.


Ed: Henry sent a link to this blog to several eminent historians. He said with appropriate modesty that his analogy was not necessarily perfect.

Their comments follow.

#1. What pointed and pithy summaries they are; and your comments enhance them.

#2. 'I enjoyed reading your ‘She’ll be right mates’; I don’t think it is necessarily imperfect. The essential point – and you do well to remind us – is  how stupid humankind can be. The First World War takes the cake, I think. Here was a European society/societies that had not experienced ‘total’ war for a hundred years; had enjoyed unsurpassed peace and economic prosperity, etc, and then proceeded to throw it away – for what?

'The spark was the assassination in the Balkans; do we have another, similar event evolving around the corner in Eastern Europe – not too far-fetched when you hear the rantings of Sarah Palin and Co, and not to mention Mr Putin. You’ve done well, Henry, to warn us that things can go terribly wrong with what might seem to be minor incidents - and with monumental consequences'.

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

The world is struggling slowly and painfully from the Great Recession that followed the so-called Global Financial Crisis. Historians and other thoughtful people are beginning to assess the causes and the consequences. Failures of national and international elites are largely responsible, almost by definition.  The consequences include long-lived political and economic instability, and in some cases, election of new elites.

Martin Wolf - linked here - notes the one hundredth anniversary of World War 1.  Notes, not celebrates. He sees the war as leading to three decades of 'savagery and stupidity, destroying most of what was good in European civilisation of the beginning on the twentieth century'.

Europe's political, economic and intellectual elites were responsible for this massively damaging series of catastrophes, of war, depression and war again, accompanied by enormous injury, death and destruction and in some places famine and disease on a massive scale.

The empires and elites of the failed nations, Germany, Austria and Russia were swept away. Failed elites can be swept away quickly in democracies, but in autocratic nations replacing the elites is usually long, bloody and costly.

The same principles apply today.  In the past decade the west has experienced three 'visible failures'.

* 'First, the economic, financial, intellectual and political elites mostly misunderstood the consequences of headlong financial liberalisation. Lulled by fantasies of self-stabilising financial markets, they not only permitted but encouraged a huge and, for the financial sector, profitable bet on the expansion of debt. The policy making elite failed to appreciate the incentives at work and, above all, the risks of a systemic breakdown. When it came, the fruits of that breakdown were disastrous on several dimensions: economies collapsed; unemployment jumped; and public debt exploded. The policy making elite was discredited by its failure to prevent disaster. The financial elite was discredited by needing to be rescued. The political elite was discredited by willingness to finance the rescue. The intellectual elite – the economists – was discredited by its failure to anticipate a crisis or agree on what to do after it had struck. The rescue was necessary. But the belief that the powerful sacrificed taxpayers to the interests of the guilty is correct'.

* 'Second, in the past three decades we have seen the emergence of a globalised economic and financial elite. Its members have become ever more detached from the countries that produced them. In the process, the glue that binds any democracy – the notion of citizenship – has weakened. ... If the mass of the people view their economic elite as richly rewarded for mediocre performance and interested only in themselves, yet expecting rescue when things go badly, the bonds snap. We may be just at the beginning of this long-term decay.

* 'Third, in creating the euro, the Europeans took their project beyond the practical into something far more important to people: the fate of their money'.

These failures, Martin Wolf concludes, do not match the follies of 1914. But the performance of the elites is under scrutiny, and angry populism may be the response.  'Lift your game elites' is the message.

Australia's policy revolution.

Australia came through the travails of the global crisis in better shape than most nations.  Thanks to the strong budgetary position bequeathed by the Howard-Costello government,  the powerful, continued Chinese demand for our resources and perhaps a better than average performance of Australia's elites, an arguable proposition that will only become clear to future historical analysis. 

In my view, our elites of the Rudd/Gillard/Rudd government panicked, provided stimulus that was costly and poorly implemented and left office with the nation massively less competitive that it had been. The massive political shift from centre left governments to a centre right governments in the Federal and State spheres suggests the voters of Australia agree.

Now the rest of the west seems to be experiencing a slow and painful recovery, with greatly increased inequality of wealth and income an undoubted fact of life.  There will be great trouble if this trend is not reversed, as the best writers and thinkers almost universally proclaim.

The Abbott government is grappling with a genuine budgetary crisis.  There is little explicit recognition of our double-digit cost disequilibrium, but in refusing to provide bail-outs to the can manufacturers, food processors, airlines and, we suspect, any other corporate beggers, the Abbot government is throwing the onus on business leaders and their workers - some still in the grip of self-serving union leaders - to sort out the real problems.

The royal commission into the building industry is another more oblique attack on the elites that have made Australian building costs far higher than most.

Friday's AFR contained a long article by editor-in-chief Michael Stutchbury, headed 'Union on notice', that comes warmly endorsed by Henry.


Fiona Prior brings a friend to Dallas Buyers Club and looks at the films presentation of the black market in pharmaceuticals.


The Australian T-20 cricket team has defeated the hapless South Efricans and now reassembles for a world cup. We wish them well, but are cricketed out, especially now the footy has started, albeit with a two week 'round' that means only one game for each team.  Last night Freo flogged Collingwood and the Magpies seen already to be in deep trouble, as will most teams that play Freo this season.

Caaarlton! plays Port Adelaide at the Ethiead (sic?) Stadium tomorrow night in what is sure to be a stern test.

The drugs'n'peptides drama rolls on, and is surely the most damaging crisis in the AFL/VFL's long history. Henry repeats his suggestion that we need three grades of sportspeople in the modern world - amateur, professional and enhanced. In the latter group any drug or supplement can be administered to any player, but clubs have to register its 'enhanced' status at the start of any season, and society would need to accept that the AFL, or equivalent leading authority, the team managements and consultents (such as the mysteriousMr Dank) have no liability for thigs that go wrong.

Image of the week

Courtesy FT

Jobs growth cheers the optimists
Date: Friday, March 14, 2014
Author: Henry Thornton

Well, gor blimey guv'nor, the ABS says Australian jobs are growing, including full-time jobs. Unemployment is still 6 %, because when jobs grow (or fall) in ABS reckoning, people seeking work increase (decrease).  This is a long-standing quirk of the ABS jobs and workforce data, which adds to Henry's concerns about methodology in the ABS.  But, despite our view that ABS statistics are mis-counting, the clear resurgance in jobs, especially full-time jobs, cannot be ignored.  This is a palpable strike for the optimists.  The RBA forecasting team will be quietly cheering, and good luck to them if they are correct.

The debate about the management of Treasury has become a whole lot hotter. After Ken Henry's grave and carefully considered speech on the 7.30 Report, and this Henry (Thornton, not Ken)'s response, the bigger beasts have come out to play.

Judith Sloan in the Oz picks on Ken Henry's policy recod and tells him its easy to be wise after the event.

'The Coalition has inherited a budgetary mess from Labor. Commitments were made to large program spending without any planning as to how they would be paid for. There are real weaknesses in the tax and welfare system, which Labor did nothing to remedy. For instance, the interaction of family benefits, childcare subsidies and tax means that it is simply uneconomic for many women to work more than three days a week.

'As for increasing the GST, another gratuitous suggestion of Henry’s, it is Labor which is so bitterly opposed to this. Any hint that the Coalition would even give consideration to changing the rate of, or the exemptions to, the GST is met by a barrage of negative political scaremongering by Labor.

'So thanks, Ken, for your views. You might have been able to make a difference when Labor was in power but, as they say, timing is everything'.  More of Ms Sloan here.

Phillip Coorey writes in the AFR: Tony Abbott has all but sealed the fate of Treasury secretary Martin Parkinson by implying he is not a team player and a poor fit for the Coalition's economic agenda'. (No obvious link.)

Tony Abbott has 'let it be known' that Treasury's Dr Parkinson is going to move on, despite Joe Hockey's alleged preference for business as usual. (If this latter point is correct, Joe must have been suborned by the sweet talk, as Treasury's record on both policy and prediction is simply awful).  Here is a report on the floating of the dollar, with evidence of Treasury's lack of policy cooperation that goes back into the 1970s - see footnote 3 at the end of the article.

To remind us of what matters for our personal financial health, 'Equities plunge on rising risks in the Ukraine'.

'Tough talk from Germany and the US on Russia’s move to annex Crimea has renewed concerns about the crisis. German Chancellor Angela Merkel said Russia risks “massive” political and economic damage. US Secretary of State John Kerry is to meet Russian Foreign Minister Sergei Lavrov in London on Friday'.

Chinese data showed factory output rose in January and February from a year earlier by the smallest amount since the global financial crisis, while retail sales grew at the slowest rate for the period since 2004.  The Chinese government has said there will be no stimulus program, so commodity prices are likely to remain soggy to falling.

Just as well the Abbott government is fostering a more self-reliant culture for both business and households. The fiscal mess precludes many handouts if China really does stumble with its pivot to consumerism.

The Australian Treasury
Date: Thursday, March 13, 2014
Author: Henry Thornton

Former Treasury Secretary Ken Henry has spoken out on the ABC.  Naturally this Henry (Thornton, not Ken) watched his interview on the 7.30 report with interest.  It contained some highly contentious points, summarised below, with which this Henry begs to differ.

Below is the first three summary points from the ABC report, followed by Henry (Thornton, not Ken)'s comments.  But if you missed it, watch the full interview, available at the ABC report that is linked here.

'Former Treasury secretary Ken Henry says the GST will have to be raised in the future and warns budget cuts will not be enough to fund spending on new social programs.

'Dr Henry also criticised the actions of Prime Minister Tony Abbott and Treasurer Joe Hockey, in a wide-ranging interview on the ABC's 7.30 program.

'In the interview, he expressed dismay at the decision to replace current Treasury boss Martin Parkinson, defended the mining tax, and warned against replacing the carbon pricing scheme'.

GST. Ken Henry is probably correct on this point, but this Henry sees this is a last resort. Helped by the Commission of Audit and the Cabinet Expenditure Review Committee, Treasurer Joe Hockey has to cut spending whereever the case is economically sensible to do so as well as cancelling the Mining tax and the Carbon tax as promised clearly in the Coalition's pledge to the electorate.  The government has a massive agenda, including increasing the defence budget - very important after the cuts and bungling of the Labor governments - cutting regulations and implementing the Prime minister's paid parental leave scheme.

Not until the dust has settled on all these changes, in time for the next election, will proposed changes to the GST be announced if it is judged necessary at that time.  This Henry believes it will probably be necessary that the base of the GST be broadened and its overall rate increased.  This is a 'last approach' to fixing the budget, after the reckless spending of the Rudd'n'Gillard governments has been trimmed and other reforms are bedded down.

Politicising the public service. How dare this government put its own person in charge of the Treasury!  This is Ken Henry's severest criticism of the Abbott government.  But, like the Labor opposition, Mr Henry finds it outrageous that Australia has elected people from the centre right of Australian politics.

A lifetime of observing politics as it effects the public service convinces this Henry of two things: most people who enter the public service are left-leaning by nature (as was this Henry when he joined the RBA); and Labor in government has been far more systematic than the Coalition in appointing people sympathetic to its cause to key public sector jobs.  Left-leaning people also work as a pack in appointing their mates to jobs in the private sector, but this should come as no surprise because the centre left is the domain of collective action for collective outcomes.

One can lament the passing of the so-called 'Westminster system', with independent public officials providing advice that is both courageous and independent, as this Henry found to his cost in the late nineteen-eighties. But Labor has effectively introduced a 'Washminster system' by stealth, and it is time the Coalition responded in kind, or indeed with a more explicit (and honest) move to the Washington system.

This Henry has no personal knowledge of Mr Parkinson's strengths and weaknesses, except to note that Treasury's recent forecasting abilities have been lamentable and the lack of action on the very policy issues Ken Henry now bewails. But the Coalition is entitled to appoint its own man or woman to such a key job, the performance of which may make a significent contribution to its political success or failure.  The 'Washington system' in which the party in power appoints its own people to key posts in government works well in the USA, and is more honest than the Washminster system. And those let go by a new government in Washington find interesting jobs in the private sector, often in Washington's many think tanks. This enables them to recharge intellectual batteries for their next stint in public service, and to reflect of the lost opportunities of their previous time in office.

Labor's favourite taxes.  The coalition won the last election, as already noted. The coalition's policy to kill the mining and carbon taxes was perfectly clear before the election.  Mr Henry is entitled to his opinion about the efficiacy of the carbon tax, but he should also respect the verdict of the Australian people.  I did not hear him making that point.

Later discussion - eg 14/3

The debate about the management of Treasury has become a whole lot hotter. After Ken Henry's grave and carefully considered speech on the 7.30 Report, and this Henry (Thornton, not Ken)'s response (above), the bigger beasts have come out to play.

Judith Sloan in the Oz picks on Ken Henry's policy recod and tells him its easy to be wise after the event.

'The Coalition has inherited a budgetary mess from Labor. Commitments were made to large program spending without any planning as to how they would be paid for. There are real weaknesses in the tax and welfare system, which Labor did nothing to remedy. For instance, the interaction of family benefits, childcare subsidies and tax means that it is simply uneconomic for many women to work more than three days a week.

'As for increasing the GST, another gratuitous suggestion of Henry’s, it is Labor which is so bitterly opposed to this. Any hint that the Coalition would even give consideration to changing the rate of, or the exemptions to, the GST is met by a barrage of negative political scaremongering by Labor.

'So thanks, Ken, for your views. You might have been able to make a difference when Labor was in power but, as they say, timing is everything'.  More of Ms Sloan here.

Phillip Coorey writes in the AFR: Tony Abbott has all but sealed the fate of Treasury secretary Martin Parkinson by implying he is not a team player and a poor fit for the Coalition's economic agenda'. (No obvious link.)

Tony Abbott has 'let it be known' that Treasury's Dr Parkinson is going to move on, despite Joe Hockey's alleged preference for business as usual. (If this latter point is correct, Joe must have been suborned by the sweet talk, as Treasury's record on both policy and prediction is simply awful).  Here is a report on the floating of the dollar, with evidence of Treasury's lack of policy cooperation that goes back into the 1970s - see footnote 3 at the end of the article.

Economic reality check
Date: Tuesday, March 11, 2014
Author: Henry Thornton

The optimists were out to play last week, with better than expected GDP growth based on strong export performance and some revival of retail sales. The economic news this week provide a necessary sobering tendency.  US shares have fallen on a slew of worse than expected data there, and China's banking system has also fuelled real anxiety.  commodity prices have fallen and the Aussie currency barely twitched. Business confidence here is, predictably enough, failing to join the 'be happy' spend up big' brigade.

The budget is in such a mess that former tax'n'spend supremo, Ken Henry has popped his head up to remind us of ... you got it in one, ... tax reform. The subject that Mr Henry got his best ideas on from a fellow drinker in a pub in Northern Queensland.  Nothing about Australia's major cost overrun, the double-digit cost disequilibrium that became entrenched on Ken Henry's watch.  Nothing useful on national competitiveness from the wombat fancier. We agree there is a fiscal emergency, but we also believe there is a competitiveness crisis. Usually such crises are solved only solved by deep recession, which accurate statistics suggest is already underway.

China's banking crisis is best exposed by the indefatigable Telegraph scribe Ambrose Evans-Pritchard.

'A slew of shockingly weak data from China and Japan has led to a sharp sell-off in Asian stock markets and the biggest one-day crash in iron ore prices since the Lehman crisis, calling into question the strength of the global recovery.

'The Shanghai Composite index of stocks fell below the key level of 2,000 after investors reacted with shock to an 18pc slump in Chinese exports in February and to signs that credit is wilting again. Iron ore fell 8.3pc.

'Fresh loans in China’s shadow banking system evaporated to almost nothing from $160bn in January, suggesting the clampdown on the $8 trillion sector is biting hard'.

And in conclusion: 'China invested $5 trillion last year, as much as the US and Europe combined. There are already signs that the country is trying to export its over-capacity overseas by pushing down the yuan. If this amounts to a competitive devaluation policy, it risks sending a fresh deflationary impulse across the globe'.

Read on here.

On the domestic scene, the apparent revival of SPC Ardmona is a splendid piece of news, and may prompt a comment that the can is half-full.  Consumer activists who purchased exceptional stocks of canned fruit and veges are largely responsible, and shows the benefit of governments allowing businesses and their customers to sort out their own problems. But there are still plenty of people losing jobs and many of these leave the workforce.  It is no wonder there is a tax receipts crisis.

There have been two dismal business confidence indicators this week.

Roy morgan Research revealed that its business contacts say that  confidence in February fell to 117.3, down from 131.5 in January, and back to below the level in August (119.6) 2013 in the month prior to the federal election. This negative result was across all business sizes as well as most states and industries. These February figures are the results of 1,343 interviews with all types of businesses across Australia.

The fall in confidence among business in February was caused by a 'decrease in positive feelings about where the economy is heading in the next 12 months and the next five years'. This has resulted in a decrease in business intentions to invest in expansion over the next year.

Then NAB reported of its business customers that: Business conditions 'back-pedalled sharply' in February reversing around half post election gains.  Confidence softened but still remains marginally above trend. Sales and employment 'fell markedly' during the month, with the latter pointing to very weak labour market conditions (nearly all post election gains reversed) - and a jobless recovery. Manufacturing conditions 'deteriorated sharply', as did 'bellwether wholesaling conditions', whatever that means.

Henry spent Monday and most of Tuesday in Perth. One canny man said of the national slowdown 'we're about two years behind the rest of Australia, but we are rapidly catching up'. Of course, with others in Australia's previously wild west he may be over-reacting to the big recent falls in the price of iron ore, perhaps the view of the RBA's liason team.  But there were a lot of 'Sale' signs in the Hay Street Mall, and empty shops.

Read on here if you have been inclined to be in the can-half-full school. There are odd currents in both the global and the Australian economy. Forewarned is forearmed.

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

US employers added 175,000 jobs to their payrolls last month after creating 129,000 new positions in January, the Labor Department said on Friday. The unemployment rate, however, rose to 6.7 per cent from a five-year low of 6.6 per cent, as Americans flooded into the labour market to search for work.

"This bodes well for the economy since there were massive headwinds," said Adam Sarhan, chief executive at Sarhan Capital in New York. "This report plays perfectly into the Fed's script of tapering."

US shares ended the week rising, making it two weeks of gains after the minor correction at the start of the year.  Markets seem to have accepted the Fed's 'taper' despite recurrant bouts of nerves whenever it seemed the taper might begin.

In Australia, the RBA boss, Cap'n Glenn Stevens, gave a cautiously upbeat presentation to the economic committee of the House of Reps.  Is that the hint of a smile, gentle readers?

The RBA has kept cash rates on hold and with stronger output and reviving business and household confidence, it seems the next move may be up.

The Aussie dollar remains stubbornly high, over 91 cents Australian for every US dollar.  This unresolved issue of economic policy may yet contribute to the next recession but, for the present, 'what doesn't kill ya makes ya stronger' seems to be the RBA's view.

The RBA chief reminded us all that house prices can go down as well as up.  More interesting is a suggestion that home buyers may need to demonstrate an ability to cope with mortgage rates four percentage points higher than existing rates before they qualify for a loan from a bank.

So it seems it is on with the show, despite the large number of people unemployed or working less hours than they wish to work. (Check out the graph is particular.)


Fiona Prior takes us on a movie marathon.


Andrew Demetriou is retiring from his position as head of the AFL, or as some say he was sacked following his gross mis-handling of the drugs or supplements issue.  Good riddance is the view of Henry's sporting department.

Last night Caaarlton! was defeated in a practice match by the Bullies, while Henry and Mrs T were watching 'Tora, Tora, Tora', a gripping golden oldie about Japan's sneak attack on Pearl Harbour.  Great presentation of the various cross-currents in both Japanese and American leadership groups. Trailer here.

The Americans were asleep at the wheel while the Japanese navel chief was presented as a reluctant aggressor and predicted that the mighty USA would be stirred into retaliatory action his navy could not withstand. How right he was.  If you have not seen this film, or saw it a long while ago, it is well worth the few dollars it will cost to borrow from your local video shop. Or your sub-teen boy may download it for free from some illegal site or other.

Cap'n Clarke has returned victorious from South Efrica after leading his 'pack of dogs' (a South Efrican description) to a surprise series win.  Warm congrats to all, but the batting performance of Warner and the bowling of Mitch Johnson and Rhino, especially in SA's last inninings/last over was sublime.

Cap'n Clarke was seriously beaten up while batting, and his defiance and willingness to withstand one of the most brutal attacks Henry has seen (from Mone Morkel) before going on to make a 'big hundred' to put Australia in the driving seat made his place in history secure.  'Pup' no longer, 'Bulldog' henceforth.

Image of the week

Courtesy The Oz

GDP growth, labor market disaster
Date: Thursday, March 06, 2014
Author: Henry Thornton

'Growth spurt lifts hopes' says The Australian. Despite weak business investment, the predictable export surge and stronger household spending together created 0.8 % growth in the December quarter and 2.8 % over 2013.  This is the 22nd calendar year of continual economic growth — a brilliant result by the standards of other developed nations. The RBA clearly predicted an outcome close to this when it signalled that interest rates are on hold despite an exchange rate that is uncomfortably high.

There is a great conundrum, however, when one examines the state of the labor market. Full-time jobs and numbers of people seeking work have both declined substantially.  Although job ads seem to have reached some sort of low-level plateau, and the official (ABS) measure of unemployment is only 6 % (although rising), the latest Roy Morgan unemployment estimate of 12.3 % is more than double the official estimate.

Gary Morgan says of his, in Henry's view more realistic, estimate: 'Australian unemployment has increased to a record high 1.561 million Australians (12.3%, up 1.0%) in February. This is the highest rate of unemployment in 20 years – since February 1994 (12.3%, 1,075,000). An additional 1.080 million Australians (8.5%, down 0.2%) are under-employed – a total of 2.641 million (20.8%) Australians unemployed or under-employed – a new record high.

'This month’s rise in unemployment was driven by a large fall in full-time employment – down 397,000 to 7,318,000, some of whom transferred to part-time employment – which was up 187,000 in February to 3,786,000 while an additional 121,000 Australians became unemployed.

'Analysing the results by age group also reveals unemployment to be heavily concentrated amongst the young: 18-24 year olds (28.0 %, up 6.8 % in February), have far higher unemployment than any other age group; ahead of 25-34 year olds (12.4 %, up 1.3 %), 50-64 year olds (9.3 %, up 0.1 %), 35-49 year olds (8.9 %, down 0.5 %) and those aged 65+ years old (5.2 %, up 2.7 %). An additional 16.1 % (up 1.4 %) of 18-24 year olds are under-employed – which is also far higher than any other age group. This implies a total of 44.1 % of 18-24 year olds unemployed or under-employed.

'The figures highlight a reality seen repeatedly during economic downturns – younger people are the first to lose their employment or have their hours reduced. The spike in youth unemployment is therefore often a leading indicator of higher unemployment for older age groups. However, it is also worth remembering that many younger people who have been searching for work over the Summer months will return to their studies in March as University recommences. This is an annual trend which decreases youth unemployment each year which we would expect to see next month.

'The continuing rise in unemployment – which has now increased in eight out of the last ten months since hitting a low of 9.3 % in April 2013 – is a huge concern for the Abbott Government as it gets set to deliver its first Federal Budget in two months’ time. In February alone Qantas announced plans to heavily slash costs (an expected 5,000 jobs lost), Toyota announced it was ceasing car manufacturing in Australia (A minimum of 2,500 jobs lost), Alcoa announced it was closing several smelters (1,000 jobs lost), Telstra announced plans to cut its directories division (800 jobs lost) and today IBM has announced it plans to cut a further 500 jobs'.

Qantas has joined the manufacturing industry in being in deep trouble.  The common factor is an unsustainable cost problem, which is a far harder problem to deal with that the massive budget black holes that is absorbing most of the government's economic policy thinking.  Taken literally, GDP growth and falling employment equals productivity increase.  Great news for those people who keep their jobs, bad news for those who lose jobs or, like many young people, have never had one.

The end of the age of entitlement, for both individuals and businesses, is the basic attitude of the Abbott government and is directionally correct.  Whether Australia needs a deep recession to underline the fact that the world offers us no easy road to prosperity, and to bust official complacency, is the big economic question we are facing now.

Henry Thornton's True Unemployment & Under-employment: February 2014

RBA `watching carefully`
Date: Tuesday, March 04, 2014
Author: Henry Thornton

Pity the Reserve Bank. Its staffers have interesting and highly paid jobs, cheap home loans and extraordinarily generous pension arrangements. They work in the CBD, with their own underground station outside the front door. The governor gets to sit next to the Treasurer at important events like the 'G20' meetings, and to schmooze with Janet Yellen and other central bank worthies.

Very occasionally their jobs become difficult.  Occasionally they face 'dilemmas' which create more heat than light. Back in the 1970s, a prime dilemma was whether to crunch the economy as a contribution to keeping greatly excessive wage deals from wrecking it, sort of like the American airforce in Vietnam.  Now they are again facing a serious dilemma.  The value of the Australian dollar is too high and key companies are quitting or shedding jobs in an effort to stay afloat, correction, still flying.

The problem with the excessive dollar, of course, is that the RBA has no way to bring it down except by adopting a dangerously loose monetary policy.  Talking the dollar down seemed on some days to bring some response, but the net effect of open mouth policy is usually small, as it proved in this case. 

Domestic interest rates have been reduced to the point that inflation, both of goods and services and assets, house prices and shares, are rising. Sydney unit prices exceed Melbourne house prices for the first time and experts are quietly saying 'bubble' as they pocket the large commissions earned by selling both houses and flats in Australia's major cities.  How confident is the RBA about its in Henry's view overly optimistic forecasts - with inflation too low and activity too high?  This question will be on the RBA's boardroom table today. Here is a contribution its board members, including the Treasury Secretary, should ponder.

Higher than expected inflation is one worrying indicator. Lower than expected business fixed investment is another, where the latest survey points in the opposite direction, activity weaker than expected.  Jobs data has for some time also been pointing in a negative direction.  Jobs, especially full-time jobs, have been falling, and the widely publicised problems of the vehicle manufacturers, fruit canners, mining companies and the airlines, among others, has worsened the story.  At the same time, numbers of people looking for work have been falling.  In the official (ABS) data, people looking for work have been falling slightly slower than jobs have been falling, so the ABS rate of unemployment has been inching up. More accurate measures, by Roy Morgan Research, shows a far more alarming number, as explained here, in one of Henry's most read blogs.  What is the RBA's massive 'liason' efforts achieving, gentle readers?

Another key indicator is commodity prices, its index a vital statistic for any economy watcher. The RBA, in its latest release, says: 'Preliminary estimates for February indicate that the index declined by 1.3 per cent (on a monthly average basis) in SDR terms, after declining by 1.6 per cent in January (revised). The largest contributors to the fall in February were declines in the prices of iron ore and coking coal, which was partially offset by an increase in the price of gold. The prices of many rural commodities rose, while the base metals subindex fell in the month. In Australian dollar terms, the index declined by 2.2 per cent in February'.

Over the past year, the index has declined by around 12 per cent in SDR terms. The prices of most commodities in the index have fallen over this period. The index has risen by 1.8 per cent in Australian dollar terms over the past year. The graph below puts the longer term picture starkly.

Recent economic news from abroad is more than a bit worrying, though gov'nor Glenn will be sanguine having been assured by the brighest and best international experts that all is well. We learned from 'G20' reports that the US Fed is watching closely the weakness in US economic data, and 'will listen' to international complaints about US monetary policy, presumably as the US airforce listened to complaints from Vietnam in the sixties.  China is watching closely the state of its banking system, both those parts in the sun and those in the shade. The Eurozone is struggling along with catastrophic levels of unemployment in most Eurozone countries and the Ukraine to the East looking like a bomb about to go off.  Japan is doing its thing, battling deflation with a population rapidly growing old. (Memo Scott Morrison: here is a nation that needs brave young people.)

The general gloomy international news will of course be 'watched carefully' by the relevant analysts in the RBA, and the liason team may be told to dig harder. But it is, or should be, an uneasy time at the Reserve. Their last big snafu was in the late eighties, leading to 'the recession we had to have', despite Henry's editor's efforts to help, which are available here. Ignoring such advice from outsiders is the practice in a sheltered workshop, and we all have to hope today's RBA is telling the Treasurer that current official forecasts may be wrong.

Courtesy RBA

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