America, the ailing, what is to be done?
Date: Thursday, February 16, 2012
Author: Henry Thornton
‘Wall Street’s meltdown in 2007-08 had all the makings of a morality tale, with greedy bankers claiming to be doing “God’s work”, corrupt politicians fawning on Wall Street in search of campaign contributions, and a hapless public left to foot the bill for trillions of dollars of newly added public debt’.
(This is part two of what has become a long review of Jeffrey Sach's The Price of Civilisation. Economics and Ethics after the Fall. Part 1 is here.)
Jeffrey Sachs calls it as he sees it, and many people will agree with him. America is in a deepening crisis, but its economy is still the world’s largest, its dollar is the nearest thing we have to a world currency, and its military is still the world’s most powerful. But, ‘The emerging economies, led by China and India, have by now unlocked the formula of technological advance and economic growth, and will not again be dwarfed by U.S. political and economic power’.
America can find its way back to ‘prosperity and constructive engagement in the world’, and it is the book’s first aim to help it do so. The major requirement for the recovery of America, asserts Sachs, ‘lies in a revitalisation of civic virtue’. Deeply held and widely shared American values must once again be turned into the actions of responsible citizens, business leaders, and politicians. These values remain embedded but have become disconnected from American politics.
Recovery will come in two ways. The first is public awareness of what has gone wrong. The second is reform of America’s malfunctioning political institutions and budget choices.
Readers in other western nations are advised to examine their own national economies in the reflected light of American experience, since the American way is still seen by many politicians as a model to emulate. ‘America’s weaknesses are warning signs for the rest of the world. The society that led the world in financial liberalisation, round-the-clock media saturation, television-based election campaigns, and mass consumerism, is now revealing the downside of a society that has let market institutions run wild over politics and public values’.
These weaknesses are rapidly spreading throughout the world. ‘Even if the American economy is on the skids, the hyper-consumerism invented in America is on the international rise. So too are the attendant ills: inequality, corruption, corporate power, environments threats, and psychological destabilisation’.
This is powerful stuff, and there is more. Globalisation has ‘taken on a unique intensity and social impact in the past quarter of a century’. The financial bubble stoked by the Federal Reserve and Wall Street in the early years of the twenty-first century spread to most other nations. The ensuing financial panic threatened the global banking system following the failure of Lehman Brothers in late 2008.
There is of course a spectrum of approaches by other developed nations. The UK and Ireland are closest to the US model, while the Scandinavian nations of northern Europe are at the other end of the range in the balance of state and market. The balance achieved by the latter nations has ‘worked beautifully in promoting a high quality of life, while the extreme market orientation in the US falls short in delivering economic benefits and a measure of well-being to the population’.
Even in the booming ‘emerging economy’ nations there is much to worry about. While China and India have solved the problem of using cutting edge technology to create rapid growth, many other problems remain. They have rising income inequality, corruption, and rapidly multiplying environmental threats. ‘The glitz, scams, media saturation, and celebrity worship that characterize US society are spreading to the emerging economies, and threaten to destabilise them as well’.
The solution lies firstly with individuals. ‘As individuals, we need to regain the balance of our own lives between work and leisure, saving and consumption, self-interest and compassion’. But society, presumably working through elected governments, need to establish the right relationship between markets, politics and civil society.
The solution must start with the young people, the group called the ‘Millennials’. The baby boomers were a generation raised on television, while the Millenials are the internet generation – socially connected, savvy, multi-tasking, searching for a new model of social involvement and political engagement. Obama was to be their man but is now looking more like a transitional leader than a transformative one. From this distance President Obama seems more like a man hit by a tsunami of problems created by decades of misgovernment, struggling to make sense of it all. And I must say it is hard to take inspiration from the leading Republican contenders.
Jeffrey Sachs reverts to his espousal of the ‘Middle Way as practiced by Budda, Aristotle and more recently Prime Minister Blair (my addition to the list). The Middle Way is challenged by the ‘crude libertarianism’ of the free-market Right. But ‘without accepting social and political responsibilities, the individual cannot actually find fulfillment’. We need to study the sources of our own happiness and that of others’. Paying tax to help others make sense when one realises that money does not buy happiness (as my old Mum used say.) Buy experiences rather than things, what I call ‘consumer landfill’, since experiences provide ‘long memories to savour’. Take your time in buying things, ‘taking time to smell the roses’ (another from my old Mum) and because ‘anticipatory joy’ is often better than actual joy. Save first and buy later rather than creating debt to buy ahead of the wealth to buy with cash. (Mum and Dad were strong on this one also!)
A second thread of advice from Professor Sachs is to unplug from the daily sensory overload’ and meditate. Unplug from TV, the mobile phone and (‘gasp’) the internet.
'Practice virtue and you will build the courage, stamina, and pleasure of virtuous behaviour’.
Meaningful work is one of the best sources of happiness, so get a (meaningful) job. It is easier to say this than achieve it, and one feels that labor markets are often dysfunctional. Governments everywhere are struggling with this problem and Professor Sachs offers no magic bullet, although ‘get a better education’ is implied by his analysis, plus find useful help provided by government agencies.
The problems of America, and the world, are complex and leaders need great scientific and technical exercise to help manage this. It is no good suggesting everyone works less to help solve the problem of chronic underemployment. Rather ‘We will have to work hard and fast, and with the best technological tools, to achieve a planet that is prosperous, fair, and sustainable’. This ‘mindfulness of knowledge’ is exemplified by the Dalai Lama, another of Professor Sachs’s heroes.
Poverty cannot be solved by a series of inadequate handouts. Instead, America must spend more to better feed and educate the children of the poor so that they grow up with higher skills and incomes and better able to help their children. This is a wonderful aspiration, but the problem of how to achieve these aims, including persuading the currently poor and poorly educated parents, is a problem with no easy solution, as exemplified by Australia’s attempts to improve the lot of the children of poor (often indigenous) parents.
Then there is the problem of what Professor Sachs calls ‘ecological overshoot’. Rapid development often creates ecological problems, and many experts think the world is currently headed for ecological catastrophe, though this is denied by other experts. Sachs says: ‘the human impacts on nature are for the first time in human history so great that they threaten the planet’s core biophysical functioning’.
The global response has so far been ‘so obtuse, so absurd, so short-sighted that it almost seems that humanity has a death wish’. Americans are the world champion in their adverse impact upon the planet. Some American politicians deny there is a problem while others are ‘knowledgeable but still deeply cynical’. Sachs observes that market forces ‘will never solve these threats’.
Like President Obama’s National Commission on Fiscal Responsibility and Reform, the National Intelligence Council has studied the issues and issued powerful warnings. Climate change is likely to exacerbate resource shortages, demand is likely to outstrip easily available supplies of energy, food and water in the next decade or so, lack of access to stable supplies of water is reaching critical proportions and there is likely to be ‘major discontinuities, shocks and surprises’. These warnings, however, have been ignored. Real care for the future would require policy makers to respond to such issues with real actions.
Professor Sachs also writes of the ‘dead end of corporatocracy’. We must, he asserts, regain a proper balance between the roles of government and the marketplace, and insist that powerful corporations stop their ‘relentless lobbying and propagandising’ to make it easier to consider serious problems on the basis of evidence, ethics and long-term plans.
In a rapidly globalising world, it seems many problems require global solutions, yet there is ‘deep distrust across national and regional borders’. Professor Sachs again appeals to an expert, the ‘great theologian’ Hans Küng, who has developed a global economic ethic based on the world’s leading religions. This leads to respect and tolerance for others, the right to life and its development, sustainable treatment of the natural environment, the rule of law, distributive justice and solidarity, the essential values of truthfulness, honesty and reliability, and the ‘core value of mutual esteem’.
Amen to all this, but how to get there is the question. And whatever becomes the rules of the game among wealthy people and intellectual elite, there is still the temptation to pull the ladder up before others have joined the fun. Not to mention the difficulty of elites in convincing those whose votes they need to govern.
The intractability of such an agenda is best explained by a global prisoner’s dilemma. It may be that practically every human alive would like to live like highly educated, wealthy Americans with an enormous range of lifestyles to choose from, including the option of frugal, healthy, sustainable living of lives dedicated to this or that minority religion or minority pursuit – let us call this ‘global nivana’. Given complete knowledge of all the possibilities and a practical way of choosing among options, ‘global nivana’ is what most people would choose.
There is, perhaps sadly, no global or extraterrestrial agency to elucidate the options and provide for an informed choice among them. So seven billion people strive in suboptimal, in most cases deeply suboptimal, situations to improve their lot, or their children’s lots, or merely to survive. Most of these people have no conception of the hypothetical global nirvana or of how their actions might help to achieve it. The current elites are frustrated by the complexity of the choices facing humankind and lack the ability to impose their will on their peoples either directly or by getting elected.
The net result is that everyone hustles according to the options they do perceive and their abilities. Occasionally seriously deprived children grow up to achieve great things and to provide an example to others. If America could solve its problems and bring everyone up to the nirvana standard, it would be a great exemplar to the rest of us.
I applaud Professor Sachs’s attempts to move the economic debate onto the ground of the world’s great philosophers and ethicists. I would add to the suggestions that he makes the thought that leaders of developed nations advocate a modified ideology of ‘acquisition of knowledge’ and away from current consumerism. But while debate about such matters among elites may be helpful my preference is to find more practical solutions to clearly articulated problems of modern economic life.
In my book Great Crises of Capitalism I suggest systems of incentives that reward philanthropy and long-term business thinking, high (but not punitive) rates of tax for people who earn salaries (net of charitable donations) above some widely agreed multiple of average incomes, loss of accumulated bonuses (and even pensions) for corporate leaders whose companies require bailout by taxpayers and far more sensible rules for monetary, fiscal and bailout policy, designed to moderate the madder episodes of boom and bust. These rules should be widely understood and involve stable, well articulated policies with major automatic stabilising effects. Taxpayers through governments should require shareholding in return for corporate bailouts. There should be separation of commercial banks from investment banks and other risky financial institutions with customer guarantees for deposits in commercial banks and far stronger regulation of these banks but not riskier financial institutions.
Fiscal policy should be revamped as Jeffrey Sachs suggests, with individual countries and states choosing where along the spectrum of governance by the state or by the market forces that suits their peoples. To the extent possible, business regulations and some aspects of taxation policy should be harmonised to reduce the development of major economic ‘imbalances’, such as those fostered by developed nation consumerism and developing nation focus on growth.
Complex, global problems require global actions. These should be carried out when strictly necessary by organisations joined voluntarily by nations with shareholdings decided by numbers of people in joining nations and funding provided by such nations. Such organisations are currently required to oversee questions of global importance in monetary policy, financial regulation, climate change science and policy, illegal immigration, involuntary immigration after major catastrophes. manmade or natural,, and various major legal matters. There are embryonic examples of such global agencies emerging, and we need in any case a robust ideology of ‘states rights’ to insist on the primacy of individual sovereign states unless particular states are acting in a way clearly incompatible with civilised norms and international law.
The world may be inching in the right direction, but the key issue is whether speed is sufficient to allow the steady march of global civilisation.
Note for readers: a busy week has limited my usual attention to matters economic and political. Friday's economic update will provide solace.
Saturday Sanity Break, 25 May 2013
Date: Saturday, May 25, 2013
Author: Henry Thornton
Apologies, gentle readers, but I have been recovering from a wonderful political evening and turning my notes on 'monetary policy at the end of the mining boom' into a coherent paper.
The political event was a celebration of Peter Costello's career as a politician, and his enrollment as a Life Member of the Liberal Party.
Great speeches, a wonderful video of his most dramatic/amusing/meaningful interventions in the House, and a cheerful meeting old old warriors and their supporters.
For me, it followed a debate with Ross Garnaut at Melbourne University on what turned out to be about the coming economic crisis.
The question I asked, and answered with a resounding 'No' was the following: Can it be helpful for key industries to be discouraged for years by an excessive exchange rate, then encouraged for years by a low exchange rate? The market will ultimately decide these things, but discouraging a clearly over-valued currency, as now, by allowing completely free trade in capital is like a fanatical observance of the Ten Commandments.
Here is a link to the paper, and it provides a link to Ross Garnaut's slides, which above all show what I call Australia's 'double digit disequilibrium'.
The AFR's page one screamer contains a garbled account of Ross Garnaut's conclusions, but naturally omits any mention of my role in the dabate, except on the p 41 spill of the front page story the three (three!) writers solemnly reported that ‘Professor Garnaut also suggested capital controls could be considered to depreciate the Australian dollar’.
It may be, of course, that Ross Garnaut has been persuaded by my plan, but somehow I doubt it. Just another example of sloppy journalism, presumably, and if the AFR could be bothered it should apologise to both of us, to Ross for misquoting him and to me for attributing my plan to Ross. Naturally I now regret again subscribing to the fin after years of declining to do so.
Henry's favourite political economy journo, Paul Kelly, provides his usual wise counsel today, curiously not so different to Henry's view. 'THE bells tolled this week for a tougher politics - Joe Hockey said no new tax cuts until the budget was fixed, Ford's closure exposed the scale of industry policy failure and independent analysis showed achieving a budget surplus was tougher than admitted'.
The Great Gatsby
The American and international (so far) box office seems to be doing well, and not all the critics are spewing bile.
Henry's movie mates reckon there is a negative correlation between critical reviews and the box office, so we anxiously await the local box office.
Sad to see ugly racial abuse of Adam Goodes but at least the lass has apologised. Slowly but surely this racist bullshit will be rooted out, but is it too much to hope it will not take another decade?
Collingwood hit a wall called the Swans last night, and one wonders if Eddie is beginning what a blunder he hs made in backing Buckley and gifting Malthouse to Caaarlton! The boys in Blue face another danger game tomorrow, against Brisbane, so there goes Sunday afternoon, but do seem to be slowly adapting to mighty Mick's demanding approach and tough love.
Another test for Essendon, a team seemingly in the edge of falling apart, and who could blame them, when they play Richmond tonight. Henry will be at a party tonight, but fortunately at a footy-loving household, so the odd glimpse at the screen might be in order.
Image of the week
Courtesy The Oz
(If the bird was a brunette and the bloke had hair, this could be Henry and Mrs Thornton relaxing with some cheap red wine and a Wayne Swan rant.)
All change - economy in strife
Date: Friday, May 24, 2013
Author: Henry Thornton
China slumps, Fed dithers, Ford to exit Oz, the currency question
Three dramatic 'surprises' and one dilemma, at least for those who always look on the bright side, have rocked markets.
China's manufacturing data has continued to slump.
The AFR even has a graph, which shows an 'activity proxy' at the lowest level since the depths achieved in 2008, at the height of the GFC.
This is a predictable part of China's great transformation from world champion exporter to a country driven more by the needs of its own people.
We have opined, or reported the opinings of others, about the possibility of a worse than expected Chinese downturn, since early 2012.
In one of these missives we concluded: 'A hard landing would do immense damage here, with falling GDP, double digit unemployment and a massive shake-out in house prices. Government budgets would be thrown into disarray. Finally there would be real regret that so much government revenue had been spent on inefficient projects during the early stages of the Global Financial Crisis'.
Ben Bernanke dithers and confuses folks.
Ben Potter of the fin provides the best analysis we have seen. It says in part: 'The topsy-turvy market reaction to the Fed’s confusing utterances proves one thing. The central bank’s bond plunge – whatever the benefits – is distorting financial markets in a major way, notwithstanding Bernanke’s assurance they have the risks covered.
'Investors are on tenterhooks at every utterance by top Fed officials, despite concerted efforts to present as united and consistent a front as a disunited board of governors can present. That confirms that the Fed’s eventual exit from its $US3 trillion bond portfolio will either be rocky or so protracted that normal conditions in financial markets will not return for many years. ...
'But the fact that the world’s largest economy and deepest financial markets still require the Fed’s belt and braces nearly five years after the collapse of Lehman Brothers is a big drag on confidence.
'Bernanke made clear that he favours a softly, softly approach to unwinding the Fed’s giant balance sheet, which will take a long time'.
'Swan blames dollar' said one story, and the only surprise is that a seperate story was not headed 'Gillard blames Abbott', but perhaps that is still being canvassed by the PM's spin doctors.
As the proud owner of a Ford Territory, Henry is upset by this development, and even more by the massive subsidies paid to Ford and other Australian car builders to induce them to keep making cars people mostly no longer want. But the most outrageous aspect of this matter is that local managements allegedly agreed rescue plans in return for serious financial help, but, while the help was delivered, 'Detroit' cancelled Ford Australia's part of the deal. Free trade anyone? What about enforcing contracts? (Source: ABC Radio this morning.)
But this is another major step in the dismantling of our mnufacturing industry, with the carbon tax and the high dollar are both implicated. Also lousy procurement policy that discriminates against Australian products, eg check out the Metal Storm story, well worth the time of a seriously investigative journalist.
The pesky dollar
Henry is off to 'the Shop' to debate monetary policy with Ross Garnaut. Ross of course, has the greatest collection of slides in recorded history, with a memory to match,while Henry has a few paragraphs about what monetary policy can and cannot do. We will agree that Oz is in big trouble, and mostly about what is needed to rescue the economy from the hubris and policy mistakes of recent years.
Henry's plan for a tax on capital inflow will no doubt be howled down by devotees of the religion of free trade who are expected to be dominant in the audience, but Mrs Thornton woke up with two further good ideas this morning.
'Why not make it a whole lot easier for Australians to invest offshore?' she asked.
This reminded Henry of his earlier plan to establish a sovereign wealth fund to invest offshore, with a subsidy equal to a franked dividend.
Mrs T's next question was even smarter: 'We have a range for inflation', she tweeted, 'what's wrong with a range for the dollar?'
We agreed this required deep thought and 'more research' (as the boffins always say, reaching for their grant pad), but it certainly is better than simply letting 'market forces' raze most of our economy.
Henry's key question for the seminar today is: 'Can it be helpful for key industries to be discouraged for years by an excessive exchange rate, then encouraged for years by a low exchange rate? The market will ultimately decide these things, but discouraging a clearly over-valued currency, as now, by allowing completely free trade in capital is like a fanatical observance of the Ten Commandments'.
I rest my case, m'lud.
The coming global crunch #2
Date: Thursday, May 23, 2013
Author: Henry Thornton
Like the rerun of a much-loved movie, say The Great Gatsby, serious thinkers are becoming increasingly concerned at the rerun (or continuation) of the Global Financial Crisis. This time Australia will share the pain as easy wasteful spending is no longer an option.
Apart from loss of jobs and downward adjustment to standards of living, when Ben Bernanke stops buying, it will be too late to quit the risky asset markets.
'The latest poll of Morgan Stanley's top clients from across the world says it all' says Ambrose Evans-Pritchard of the Telegraph.
'Chief economist Joachim Fels tells us that not a single investor at the bank's Florence forum thought the world economy would rebound with any strength later this year.
'Just a quarter expect a return to trend growth. Some 57pc think there will be no escape from the "twilight" conditions afflicting the western world, and 20pc expect an full-blown global recession. That is a remarkably bearish set of views. Yet the same investors are overwhelmingly bullish on stocks and property'.
'Four fifths think equities will gallop on upwards over the next year. Complacency is rife. "It became very clear – and many investors were quite explicit about this – that markets are lulled by the lure of liquidity resulting from negative real interest rates and global QE," said Mr Fels'.
Another guru said markets seem to think they are in a "no-lose" play: if the economy gains traction, stocks will rise: if it doesn't, central banks will pump in more money.
This thinking 'overlooks a nasty possibility that the Fed will start to wind down QE before the US economy has fully recovered'. As previously reported, 'the minutes of Fed's 19-20 March meeting shows growing worries about a new asset bubble, a worry shared by the BIS and the IMF: "A number of participants remained concerned about the potential for financial stability risks to build".'
Seem familiar, gentle readers?
Evans-Pritchard cites a paper presented earlier this year in which former Fed Governor Frederic Mishkin and three colleagues discussed 'Fiscal Crises and the Role of Monetary Policy', and the coming 'Crunch time'.
This paper shares concerns expressed here in early February, when Henry also wrote of a coming 'global crunch'.
Mishkin et al warned that the Fed could struggle to extract itself from QE from 2014 onwards. The longer it goes on, the more dangerous it becomes.
It argued that rising long rates could lead to a bond market rout, inflicting big losses on its $3 trillion portfolio. This could "wipe out" its capital base several times over.
Mishkin said the Fed is badly exposed 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 compound at an alarming pace by the middle of the decade, with yields spiking up to double-digit rates by the late 2020s.
'By then Fed will be forced to finance federal spending directly to avert the greater evil of default. By then, the US really will be facing the sort of hyperinflationary denouement long-feared by QE sceptics.
'Just to be clear', Evans- Pritchard notes, 'this is the Mishkin concern, not mine. I think exit risks are greatly exaggerated. The Fed extracted itself from Great Depression policies without any losses, and such losses are in any case irrelevant'.
Today the OZ brings us the thoughts of a visiting guru, the OECD's Adrian Blundall-Wignall, under the headline 'Currency war, quantitative easing sowing seeds for new GFC'.
"Australia is in a very unfortunate position," said Mr Blundell-Wignall, speaking at a business forum in Sydney yesterday run by the Institute of Chartered Accountants.
"Having done the right thing, having no capital controls, Australia is now facing the whole avalanche of world investors seeking out Australian assets."
Australia was being forced into the position of having low interest rates otherwise a rising currency would kill the economy, Mr Blundell-Wignall said.
And there is more.
'Quantitative easing had created a gigantic bubble in global bond markets, whose bursting would cause enormous damage, and had pushed equity markets "above fair value", he said.
"The idea we can have free or cheap money forever is ridiculous," he said, suggesting that quantitative easing had helped restore global banks to profitability without fixing serious flaws in the global banking system.
'Mr Blundell-Wignall's prognosis for Europe was dire. "The south (of Europe) is being absolutely cremated," he said, noting that youth unemployment in Spain and Greece, for whom the euro was an economic straitjacket, was now 56 per cent.
'He predicted widespread emigration from southern Europe if the eurozone held together, just as the Irish had left Ireland during the 100-year currency union from 1820 with Britain, then a much richer country'.
Australia's deflating economy
Today's headlines support the gloomster from Paris, and Henry, as it happens.
The problem for investors is when to reduce their bets on risky assets. The large downward correction could come at any time, but this includes more than a year from now. Henry's tactical approach is to choose levels of relevant share prices or indices in which he would be happy to quit said assets, and begin to lighten off progressively and systematically as markets rise toward those levels.
Obviously, this assumes that the correction will not come quickly, but if this is wrong it will be short commons for the Thornton family.
Schooling - more money or better culture?
Date: Tuesday, May 21, 2013
Author: Henry Thornton
'Gonski school cash splash adds up to a problem' says the front page story on cash for schools in the Australian.
'SOME schools will receive so much money under Labor's proposed Gonski school funding reforms they will not know how to spend it and, in other cases, will not be able to buy the resources needed to make the crucial difference in students' education.
'Prominent education experts in two states have called into question how the National Plan for School Improvement will deliver appropriate accountability and oversight for schools, particularly in small and remote institutions where students will receive multiple disadvantage loadings under the scheme'.
Like the previous 'GFC cash splash' for schools, lack of money is not, repeat not, the cause of our schools failing to match best global standards for literacy and numeracy. And not in children acquiring a fierce desire to compete in an increasing global marketplace, either, I suspect.
In Henry's view - fostered by memories of his own schooling in the distant 1950s, plus close attention to his children's schooling in the 1990s and 2000s - there are three reasons for Australian children's suboptimal learning.
The first concerns quality of teachers. When Henry was a lad, most teachers, especially in primary schools, were women. In those distant days, opportunities for women of talent were far fewer that they are now, so Australia had very high quality teachers and nurses, the two professions women were encouraged to join.
Sadly, as a perhaps unexpected implication of women becoming corporate and government leaders, and climbing heirarchies previously denied them, the pool of talented women available to teach others is limited. How to remedy this problem is hard to see, although Henry would if asked suggest that older workers of either gender retrenched in their middle fifties be retrained as teachers should they show appropriate aptitude and willingness. The union might be a problem of course, but where there is a will there would be a way. Worth a try in one state, Mr Naphthine?
A second factor is culture within the schools. After a good performance in year five, Henry's first spelling test in year six was a disaster, with twelve mistakes. Henry was given the strap and sent into his previous classroom to tell his year five teacher, who dismissed his by saying 'get back to your hutch, rabbit'. Henry's performance at the next spelling test was much improved.
A second act of what now would be called brutality came in year twelve. 'Hands up those who want to apply for a Commonwealth scholarship' said the class teacher. Henry's hand went up, even though he had no great knowledge of what said scholarship might involve. "You, Henry!' exclaimed the teacher, 'don't waste our time'. Naturally, a challenge like that could not be resisted, so the young Thornton insisted on applying, and surprised everyone by winning one, which he declined as by then he had a job.
Nowdays, of course, kids cannot be given the strap, nor one assumes can they be ridiculed in front of their class, although in the case of Henry's eldest child, he was given a pretty vigerous serve in the presence of his parents by one feisty teacher at his private school. Again, Henry does not propose turning back the clock to again allow beatings or ridicule to enter the curriculum, but it is undeniable that the classroom is a far softer and gentler place than it once was, perhaps past the optimal line for gentleness.
Third is the culture of parents. Now many parents strive to be 'friends' of their children, allowing a lot of time playing computer games, texting friends and generally promoting 'sensible work-life balance', rather than insisting on home-work (and supervising this at the kitchen table) and limiting the amount of happy relaxed leisure time. Schooling, like work, is an important part of a person's life, and should be treated as such from the get-go.
Henry has not studied this matter closely, but has somehow absorbed from friends, including recent immigrants from Asia, and from exchange students from China living with the family, some important impressions. In summary, in all three catagories discussed above, those Asian nations that lead Australia in numeracy and literacy, and in will to win, schools and parents take an altogether more serious approach. Despite larger classes, supposed more rote learning and generally tougher regimes at home and schools, Asian kids outperform their Australian counterparts. This of course shows up here too. Simply look at the names on the lists of the highest-achieving students in each state's year twelve exams.
Markets - Don`t worry, be happy. Que?
Date: Monday, May 20, 2013
Author: Henry Thornton
'Don't worry, be happy', says the Economist, which also asks why global share prices are booming.
It is not an economic boom, because growth is tepid.
Supporting this conclusion are the facts that emerging stock markets are flat and commodity prices are low - in fact the dreaded 'D' for deflation word is being bandied about.
Nor is it due to a surge in profits. First quarter results for S&P companies exceeded expectations because of careful management of expectations - Mr Swan, Australian Treasury, please take note.
But, compared with the first quarter of 2012, S&P profits are up by only 5 %, clearly not boom time results.
The Bank of Japan's deflation busting monetary policy is 'perhaps the most popular explanation' and, supporting this explanation, Japan's Topix share mrket index is leading the global share boom - see graph.
The BoJ's expansive monetary policy is just the last in the line of extreme developed country monetary expansionn. and 'Such programs push down bond yields and encourage investors to buy risky assets'.
Courtesy The Economist
Henry's research into monetary policy and asset inflation - using 145 years of US data - shows that expansionary monetary policy is strongly related to asset inflation and that this effect is at its strongest when goods and services inflation is held down, as it is now by the weakness of global growth and subdued goods and services inflation expectations. (The paper reporting this research is still being reviewed but is now available at SSRN.com.)
The Economist concludes on an optimistic note.
'... because of the unappealing nature of likely bond and cash returns, it would probably take a shock to derail the equity rally in the near term. Such a shock could be economic (a sudden surge in inflation that prompted a change in monetary policy, say) or geopolitical (a wider war in the Middle East, for example). But for now, the bulls see no need to worry'. Read on here.
A more worried view comes from the Financial Times, via the AFR. The headline is 'Those partying with US Fed's easy money will wake with a hangover'.
'The adage “don’t chase a rally” is a core principle of investing, but such advice counts for little at the moment as equities advance further into record territory in a year that has already generated a gain of more than 16 per cent for the US S&P 500'.
This market shrugs off poor data and 'partying like its 1999, while flirting with the danger that when the music stops the consequences of having brought anyway near the top are likely to be brutal and swift'.
So, feel free to choose your strategy, gentle readers. Henry's money is (still) on current momentum, but this week will include sincere efforts to test this proposition, as the FT's conclusion is surely correct.
And Ben Bernanke is speaking again this week, as he attempts to bring the excessive monetary expansion to an end without a bloodbath in the markets.
Saturday Sanity Break, 18 May 2013
Date: Saturday, May 18, 2013
Author: Henry Thornton
Budget week has come and gone, though it marks the real beginning of the near four month election campaign.
While budgets in the Howard-Costello government were uniformly conservative - ie underpredicting revenues - the Rudd-Gillard-Swan governments have suffered the opposite affliction, which is to overpredict revenues.
Over-optimism about revenues leads quite directly to overambitious spending plans. Plus, of course, a genetic disposition to spend other people's money on do-good schemes, which is fine if the budget allows that.
The great unanswered question is the extent to which the various predictions of revenues were provided by Treasury and the extent to which they were 'influenced' by the Treasurer. Henry heard one gruff oldtimer on ABC radio saying, with apparent authority, that the only estimates that are pure Treasury are those produced immediately before Federal elections.
Judith Sloan has tackled this matter at length in the Weekend Oz, and allocates blame mostly to the Treasurer, though Treasury has not enhanced its dwindling reputation either.
Henry's contribution from earlier this week is here - take pains to consider 'realistic worst case', comrades.
'Thank goodness for the funds put into the US market' Henry tells Mrs Thornton.
'You're only as good as your latest play', Mrs T replies. 'That gold bar is not doing so well'.
'That was insurance, and the global crisis is not over yet'.
Treat of the week
It started as follows: 'In the commercial world that I have grown up in, eight elements of leadership must exist if you are to be part of a high performance team. Intellect and skill are a pre-requisite, but these two characteristics alone will not achieve your objective.
'Leaders must have a set of principles which recognise that people are your most important asset. These principles are not exclusive but they have certainly helped me, and enabled me to test my principles against others’ actions.
VISION – do you paint a picture of your objectives and are they shared? TRUST – you will only be trusted if you trust others INTEGRITY – do you show courage and promote courage in others? PARTICIPATION – are you building adult relationships? LEARNING – are you tapping into people’s discretionary effort? DIVERSITY – have you confronted your own biases and prejudices? CREATIVITY – do you know where the pockets of creativity lie? COMMUNITY – have you created a healthy environment?
'The other characteristic which must be present is a clear understanding of how to manage the capital of an enterprise which, for a time, you are the steward. That means that you must understand the time value of money, so that a dollar you have to invest today is worth more than a dollar a year from now or at least equal in value.
'In business you must earn above your weighted average cost of capital, that is, debt plus equity. If that cost is competitive and realistic, then your enterprise will generate a cash flow which can be discounted to determine today’s value of future cash flows and the economy as a whole is the beneficiary.
'I have a strong belief that economies that incentivise business to generate consistent added value through profitable endeavours will grow, jobs will be created, and the tax revenues will increase for the community as a whole'.
The three legged stool of debt.
Date: Friday, May 17, 2013
Author: Henry Thornton
Another budget has come and gone, and Tony Abbott's reply has acknowledged the dire budget situation and outlined his 'road to surplus'.
Mr. Abbott's speech has been well received, and his approach of keeping Labor 'saves' to help with the immediate budget crisis is good politics. Also, by avoiding a sudden lurch in fiscal policy, sensible economics.
The glum looks on the Labor frontbench showed the extent to which they are well aware of the trouble they are in.
The biggest news of the day, however, was the 'debt warning' expose by Don Argus, AC, arguably one of Australia's greatest business leaders.
The Don, as he is called in Henry's circle of friends, has taken the trouble to assemble information on debt owed by government, households and business - the three legged stool of debt. Data for both the USA and Australia is assembled, and naturally it is not a pretty picture.
Incurring debt is borrowing from the future, and repaying debt, as any honest enterprise or individual must do, imposes slower growth as repayments are made, unless the debt is used productively.
Rather than trying to summarise the Don's argumants, I invite readers to look for themselves.
Budget projections - what were they smoking?
Date: Thursday, May 16, 2013
Author: Henry Thornton
This year's promised surplus has long ago evaporated, and we learned last night that the detioration is of the order of $20 billion. Blimey, comrades, what were they smoking?
In what is possibly his final performance as Treasurer, Wayne Swan showed a greater degree of sober realism than ever before, though many economists believe the risks to current forecasts are still biassed to the downside, and that current 'realism' is still not total.
One assumes there is some hard thinking going on within Treasury. In Henry's day as a forecaster, it seemed logical to consider what we called 'realistic worst cases' as well as 'best guesses'. Even a modest application of such an approach might have prevented the fiasco of Labor's entire time in office. While budgets in the Howard-Costello government were uniformly conservative - ie underpredicting revenues - the Rudd-Gillard-Swan governments have suffered the opposite affliction, which is to overpredict revenues.
Over-optimism about revenues leads quite directly to overambitious spending plans. Now the overspending has been encouraged by desire to make life as difficult as possible for Tony Abbott's government, or at least that is one plausible theory going about.
The great unanswered question is the extent to which the various predictions of revenues were provided by Treasury and the extent to which they were 'influenced' by the Treasurer. Henry heard one gruff oldtimer on ABC radio this morning (he missed his name) saying, with apparent authority, that the only estimates that are pure Treasury are those produced immediately before Federal elections.
If the one lesson from this experience is that 'realistic worst cases' should be built into forecasting exercises, it will be useful.
But of course, the deficient revenue projections and overambitious spending plans will have far larger consequences - a major set-back to Labor's reputation as economic managers, unnecessary pain when the consequences of overspending has to be unwound, confusion and unhappiness all round.
Wanted; a plan to fix Australia`s busted budget
Date: Wednesday, May 15, 2013
Author: Henry Thornton
Readers will already be sick of the budget chatter, and Henry will highlight only a few key points.
* A deficit of almost $20 billion, and not much lower next year.
* Economy forecast to resume trend growth (3 %) in fiscal 14-15, with unemployment reversing current uptick. (What if commodity prices fall further than now expected, comrades, or growth slows further?)
* Key 'Labor' spending initiatives announced but virtually unfunded, leaving the next government to cancel the programs or implement Labor's excessively ambitious policies.
* Spending increasing at Banana Republic rate, despite revenue dropping like a stone, (relative to inflated forecasts).
* Revenue fall, 'completely unforseeable' says the Treasurer.
Blaming Treasury, naturally. Has no-one told the Treasurer about risk management?
Sid Maher, Political correspondent concludes: 'WAYNE Swan has moved to entrench Labor's stamp on the nation beyond a predicted election defeat and set a political timebomb for Tony Abbott'. Read on here, but Bill Leake's cartoon tells this story.
courtesy The Oz
'Targeting Tony the last shot in [Labor's] locker' is Paul Kelly's verdict.
He maintain's the 'bomb' analogy and offers the likely next PM a warning: 'If Abbott merely channels Labor, then he forfeits his flexibility as prime minister. But by rejecting much of the Gillard-Swan spend-and-save edifice, Abbott puts immense pre-election pressure on himself to reveal his own tough savings agenda.
'Beneath its Abbott trap, this budget runs a huge economic risk. Faced with revenue shortfalls, a budget blowout and a hazardous transition to non-resources growth, Labor has pressed the button on big and iconic spending initiatives out to 2020, designed to warm ALP hearts in the coming wilderness. It is a dangerous step. Swan assumes the economy stays buoyant, unemployment lifts only gently, revenue growth is firm (forecast at 7.3 per cent for next year) and the budget returns to surplus in just three years during 2015-16.
'Such optimism is heroic, and mocked by Labor's record, but the party is unlikely to be in office to be held accountable for another round of false optimism'.
You will access a nice video discussion when you hit the link to Paul Kelly's piece. Will save you lots of reading.
And Henry recommends Laura Tingle's stirring summary: 'Wayne Swan’s sixth budget owes much to the scorched-earth tactics used over the centuries by the Russians retreating to Moscow in the face of a numerically superior enemy.
'At considerable cost, the Russians would systematically destroy their own land as they lured the enemy to follow them into country devoid of sustenance.
'In what is without doubt a courageous and highly unorthodox election-year budget, Labor has opted to look beyond election defeat, removing “easy” savings from the Coalition’s armoury and giving the government the best chance of reducing another deficit: its deficit on economic credibility in the race to September 14. At the same time, it is a strategy that locks in its legacy reforms in education and disability'.
Only four months to go, then we get to express our opinion in the most emphatic way possible.
China update, Australia`s budget, Australia`s culture
Date: Tuesday, May 14, 2013
Author: Henry Thornton
Partial economic indicators for Chinese economic activity were largely in line with expectations during April reports the economics team at nab. 'However, we are yet to see signs that real activity is picking up significantly, although monetary expansion has been much more rapid. Nevertheless, we have left our growth expectations for 2013 unchanged at 8 %, although we continue to view the risks as skewed to the downside – sub-8 % growth this year is looking increasingly likely.
'But even with the growth outlook turning more moderate, expectations for the Chinese economy – and the currency – have encouraged capital inflow since late last year (spurred on by quantitative easing by major central banks). These factors are creating a quandary for policy makers who have become increasingly concerned over building inflationary pressures and (arguably unsustainable) expansion in system credit. Consequently, this has added to the uncertainty surrounding the likely path of macro economic policy in China'.
The journos and talking heads are just about locked up by now, it being 4 PM. The lock-up is a quaint but totally unnecessary custom when all the key features have been comprehensively leaked already.
'Plotting a path to surplus' seems to be the predominant theme, but 'restoring surplus without mindless austerity' seems to be the sub-theme. Also '[try to] re-establish some credibility with the voters', while 'leaving landmines for Tony Abbott'.
What fun it all is, and such a waste of the time of high quality thinkers. (Who they might be I leave to the readers.)
The Lucky Culture and the Rise of an Australian Ruling Class
Last night Henry had the good fortune to hear Geoffrey Blainey launch Nick Cater's new book with the catchy title, and implied homage to Donald Horne.
The large hall at the Rendevous Hotel in Flinders Street was packed to overflowing by members and friends of the IPA and the Liberal book club.
This book will be a best seller, and may even be influential.
Henry will review it when time permits, but you can be sure it will be reviewed by the Australian, where Nick Cater is a 'senior editor', currently shaping the paper's opinions.
Lovely quote on the back page: 'The secret to Australia's good fortune is not found in its geography or history. The key to its success is the Australian character, the nation's greatest renewable resource'.