'Belated success in Beijing, but only a start' is Paul Kelly's summary of Julia Gillard's heady few days in the Middle Kingdom.

'The task for Australia is to build a relationship with China of such mutual self-interest and trust that Australia can conduct a tolerably effective hedging strategy against damaging contingencies that also minimises the extent of unpalatable choices we face.

'Our current relations with China are far short of this point. Whether Gillard and Abbott accept this is far from clear. They may not. A hedging strategy means we don't sign on to everything the US wants and we don't collapse in an emotional fit every time Beijing gets upset and issues thunderbolts. That requires a mature prime minister and government.

'This week Gillard opened new opportunities for Australia to rethink and improve its ties with China. That's all. What is beyond dispute is the need for our leaders to bring the public into their confidence and talk in a more honest and intelligent way about relations with China.

'Why don't they? There is a one word answer: politics.

Meanwhile, the Australian dollar rides high, and is likely to go higher, strangling lots of companies, and providing especially hard times for small businesses.

The AFR reports here. 

The debate Henry is trying to foster is being ignored by the powers, but Tony Abbott is a better economist than Julia Gillard and we shall not give up.

Footy'n'stuff

The Thornton family is downcast as it's favourite footy team Caaaarlton! is zip and three after round three, and may be zip and five in two weeks time.

In the last X decades, only three teams have made the finals after such an inauspicious start, but there is no lack of endeavour so we shall keep watching - the heartbreak is losing all three games when a bit of luck could have made those losses wins.

Essendon's travails make for a much worse start, with the famous sword hanging over the head od its previous golden boy James Hird and who is likely to be the fall guy for a culture of pushing the limits. We remember when Caaaarlton! was punished savagely for breaching the salary cap, and much as we feel sorry for Essendon and their fans, equity demands that the AFL treats the bombers with equal toughness.

Image of the week

 Courtesy The Australian

'Economists had expected a 10,000 fall in jobs and for the unemployment [rate] to remain steady. But today they were nevertheless doubtful that the rise in the jobless rate would prompt the Reserve Bank of Australia to cut rates.

“We don’t see today’s labour force data as changing the outlook for monetary policy in any material sense, though if anything, it confirms our view that the labour market remains subdued and the unemployment rate remains under some upward pressure,” said Annette Beacher from TD Securities.

The smart lady on the video - probably an ANU graduate in economics - said this was not much of a surprise given the (apparent) surge of employment last month.  More here.

Henry's latest expose on this matter may bear re-reading.

Economists were surprised by this development, and are scratching various parts of their person. Business leaders have a bit more of an idea about the cause of this situation, and reportedly fear the dollar, which has just hit a 28-year high on a trade-weighted basis, will remain close at or above parity with the US dollar for most of the decade, or maybe even rise further.

'The dollar strengthened on Wednesday to $US1.05 and ¥104.7, a five-year high against the yen which is being driven down by the Bank of Japan’s move to pump ¥7 trillion a month into its stalled economy.

'The Reserve Bank of Australia’s trade-weighted index rose to 79.9, the highest level since 1985, just before a global slump in commodity prices sent the dollar plunging.

'BHP Billiton chief financial officer Graham Kerr said he had told divisional managers to assume the dollar would remain at current highs in their two-year and five-year investment plans.

'The strong dollar has hit revenue at mining companies like BHP Billiton, Rio Tinto and Fortescue Metals Group which market their minerals in US ­dollars. BHP estimates that every US1¢ rise in the exchange rate results in a $US120 million hit to earnings.

A Commonwealth Bank of Australia director, Andrew Mohl [ex RBA, former AMP CEO, and one very smart cookie], warned the dollar would remain high 'because foreign central banks were printing money to keep their currencies low to stimulate exports'.

 Gor Blimey comrades, business understands the problem, but no-one is suggesting a solution, not even Henry's solution - tax capital inflows.

And with the May budget being locked down as we communicate, BHP's Chairman has issued the dire prediction that 'Mining in not a bottomless pit', (though the miners are working on it).

He added the profound point that 'Australia needs to boost its international competitiveness'.  Amen to that, Chairman.

Renters, young people living at home and the homeless apart, that is home owners, will be pleased to hear that 'light is creeping into the housing market'.

Samantha Hutchinson of the AFR reports that all states are set to report higher prices and rental yields over the next two years, reporting National Australia Bank’s quarterly residential property survey.

'The bank’s property index, released on Thursday, surged 8 points to 35 points, following a 0.4 per cent increase in house prices across the country.

'The report showed the outlook for the sector is improving.

'Property professionals surveyed expected house prices to grow faster over the next 12 months, gaining 2.2 per cent.

'Western Australia is expected to appreciate fastest, adding 3.8 per cent, while Victoria is expected to climb 2.4 per cent and New South Wales is predicted to grow by 2.2 per cent.

'Western Australia topped property price and income growth for the quarter, followed by Victoria and New South Wales. Queensland was the only state to slide backwards, with house prices falling by 0.4 per cent.

'Perth is now ranked as Australia’s most popular city in which to build a new house, taking the title from the liquified natural gas capital of Gladstone in Queensland’s north.

'But overall demand for new property remains relatively weak, according to NAB researchers, who blame tight lending conditions and poor affordability as the biggest constraints on housing demand growth'.

It was a a very bad time for once great Britain.  Strikes were endemic, and the great coal strike threatened to shut down London, and to cheer us up the newspapers said if the electricity grid had to be shut down for lack of coal to generate electricity it would take three days to restart the system. It was implied that meant three days, bad enough in itselt, but those with expertise pointed out it meant three days after coal supplies were replenished.

Supermarket shelves were becoming denuded, and there was a great demand for candles and an absolute shortage of sugar and loo paper.  People who could afford to do so went to France for the weekend to enjoy the place but also to bring back supplies of the items missing from the local stores.

Public transport was slow and unreliable, and the fun of hanging off the entry platform of a London bus pales after a while.  People with jobs were working a three day week.  Unemployment was rising, it seemed inexorably. Life was grim and there seemed to be no light on the horizon.

One day I went to the LSE, (where I was enrolled in the Ph.D. program), with a list of ten books, any one of which would have made my day.  One filled in a form, one's request was send to a basement office, and there was a response between one and three hours later.  On that particular day none of the ten books was available. I came home and vowed to stop reading and start writing, a strategy that saw me leave with the blessed degree in my suitcase less than two years later. Most clouds have a silver lining.

The strikes did for the Heath government and ushered in an impotent Labor government. Harold Wilson’s and then Jim Callaghan’s Labour government of 1974-79 picked up where Heath had left off, pursuing austerity, which led to unemployment doubling between 1975 and 1977 to nearly 1.5 million. The series of strikes in 1978-79 known as the Winter of Discontent sealed Labour’s electoral fate, and the Conservative Party, with a leader the Sun had once called ‘The Most Unpopular Woman in Britain’ during her days as education secretary, were the beneficiaries.
 
Margaret Thatcher, once that most unpopular women, remains much demonised (by the loony left) and loved as Britain's saviour by the right, (and most economists, who hate the sort of inefficiency that was running unchecked in 1970s Britain). Tim Black, a senior writer at spiked, describes Thatcher as a pragmatic politician rather than the ideologue she is usually portrayed as.

He says: 'Thatcher’s Tory government did not represent a rupture with the political past. Rather, it merely built upon the efforts of first the Heath and then the Labour administration to sustain capitalism during a period of falling profitability. She merely succeeded where the others had failed. So, austerity measures were once again pursued, unemployment more than doubled from 1.3 million in 1979 to three million by 1983, and the nation slipped into recession. But somehow, with an economic uptick arriving by 1983, plus a tinpot triumph over Argentina in the Falkland Islands, Thatcher managed to win a second term (albeit on an ever-declining percentage of the popular vote). Whereupon, of course, she continued to shake down the economy, bust the unions - with the Miners’ Strike of 1984-5 the defining moment - and ultimately achieve what her predecessors merely aspired to: a break with the traditions of Labourism and the postwar consensus'.

The reports of her life show above all a self-confident person, always certain in her judgment and determined to have her way. Tim Black says: 'The idea of 'Thatcherism' always revealed far more about the left than it did about some perpetually elusive right-wing ideology. That is why the concept, first used by academic Stuart Hall in 1979, gained intellectual traction on the left in 1983, the year Labour, under the leadership of Michael Foot, suffered a devastating defeat at the General Election: it shifted the responsibility for failure from the Labour Party, and its complicity with so-called Thatcherite economics, to the working class, a social constituency supposedly seduced away from the Labour Party by Thatcher’s advocacy of social mobility and aspiration. The idea of ‘Thatcherism’ let Labour off the hook'.

You may enjoy Janet Albrechtsen farewell's 'the world's greatest feminist'.  Watch the associated video, especially the wonderfully funny finale.

Here is another view, by Tariq Ali. 

Tim Black's article is available here.

See also Brendan O’Neill in 2008.

Japan's decisive attempt to have a banknote-led recovery seems to be working, at least for now, and Australia's equity market caught up with a rush yesterday.  The already too high Aussie dollar climbed further.

China might be struggling, as Ross 'China' Garnaut reported recently, but if Japan gets some momentum that will be a mighty offset.

Global growth forecasts unchanged according to the nab's economics team. 'Activity still sluggish but set to accelerate in second half of 2013. Financial markets digesting latest Euro-zone crisis (Cyprus) and new Japanese monetary policy. Emerging markets still main contributor to global growth but the big advanced economies should see resumption of moderate upturn later this year.

Australian economic and financial outlook broadly unchanged with room for two rate cuts in 2013 to assist recessed parts of the economy. Timing very fluid – house price increases could delay 'and much depends on unemployment path'.

 Nab said of domestic conditions: 'Business conditions fall to weakest level in almost four years but confidence steady. Previous surge in activity in consumer sectors – retail & manufacturing – unwinds, with signs lower interest rates need more time to fully work through economy. Businesses seemingly unfazed by events in Cyprus or political leadership scuffles at home – at least no more than usual. Forward indicators still poor, not boding well for near-term demand'.

Specific points included:
 
• The business environment remained challenging in March, with business conditions deteriorating to the lowest level since May 2009. The slump in activity reflects a weakening in trading and employment conditions, while profitability was unchanged at a subdued level. While forward orders improved, they remained weak, with the outlook for near-term demand not helped by still low levels of capacity utilisation and capital expenditure. Heavy falls in manufacturing and retail business conditions indicate we are yet to see the upswing in consumer demand that policy makers are searching for; instead, it seems that either lower interest rates need more time, or more stimulus (eg. RBA rate cuts) may be needed to set the economy back on a steady growth path.

• Business confidence was resilient in March, lifting marginally despite reignited worries about a European crisis and political uncertainty at home. It is possible that relatively higher equity prices and lower borrowing rates are keeping firms somewhat optimistic. However, the mood has deteriorated sharply in mining, with confidence falling to its weakest level in four years. This was offset by better confidence in interest sensitive sectors.
 
• Overall, the survey implies underlying demand growth (6-monthly annualised) of around 2¼% in the March quarter. Our wholesale leading indicator suggests little near-term improvement in already weak activity levels.
  
• Labour costs growth was unchanged at a below-average rate, held down by subdued employment conditions. Overall wage cost pressures appear well contained at present. Price deflation was apparent in March, with the poor outcome consistent with the weakness in trading conditions. Combined with modest costs growth, the survey implies further pressure on margins, especially in retail.

Alan Kohler in reporting these results asserted much of the angst is due to the high dollar, but offered no solution.

Certainly the high dollar was a key factor mentioned when Holden's savage downsizing was announced.

'RBA changes tack on currency', says the Wall Street Journal.

'Australia's economy is coping better than had been expected with a persistently strong local currency, mitigating the immediate need for more interest-rate cuts to counter the negative impact on exporters and manufacturers, a central bank board member said.

"I would prefer a lower currency and it does pose some problems for us," John Edwards said in an interview Tuesday. "But I don't think they're at all, at this point, the kinds of issues that require us to make a response."

More on this vital debate here. 

Henry's academic work involves some heavy-weight re-analaysis of the work in Friedman and Schwartz's A Monetary History of the United States. 1867 to 1960.

Friedman famously said 'Inflation is always and everwhere a monetary phenonoman'.

The re-analysis involves adding equity prices to the analysis, formulating new and richer hypotheses and adding data from 1960 to 2012, to retest the hypotheses.

A friend in Canada, now a Professor Emeritus, kindly read the manuscript and suggested I read an article by a heavy-duty British econometrician and a colleague, who criticised Friedman and Schwartz for their relatively simple methods of obtaining equations for the UK and USA demand for money.

(My own earlier work on a long-run model of the UK economy suggested a different approach to the problem using even more advanced econometrics than Henry & Ericsson, calculations on the UK Atomic Energy computer at Didcot, but that is another story.)

Here are some extracts from the reply of Friedman and Schwartz to the technocratic attack on their work - 'simply delicious' in my view.

Extracts from Friedman and Schwartz, AER, Dec 1991

‘After years of experiments, HE’s [Hendry and Ericsson's] econometric techniques produced a series of models that confirm some of our principal results, contradict none, and are less successful than our equations in terms of their own criteria of variance-dominance.’

But ... ‘As already indicated, the real proof of their pudding is whether it produces a satisfactory explanation of data not used in baking it – data for subsequent or earlier years, for other countries, or for other variables.’

(This point, though unknown to me in this formulation, is why we break our data into two sets – pre- and post-F&S - while also suggesting the hypotheses be retested in 2050.)

Friedman’s coup de grace is to recount his wartime work evaluating results of experiments seeking better alloys for 'airplane turbo-superchargers'.

Having collated all the data, he needed to calculate a multiple variable regression equation – a task that then would have taken 3 months by 'electric' (not 'electronic') desk calculator, and 40 hours on the Harvard supercomputer of its time actually used to perform the calculation. (A task that in 1991 Friedman said he could do in 30 seconds on his then desk top computer.)

‘I was delighted with the calculated regression. It had a high multiple correlation, low standard error of estimate, and high t values for  all of the coefficients, and it satisfied every other test stastic that I knew of more than 40 years ago.

‘I immediately set to work to create new and better alloys. ...

‘I ended up constructing two new alloys (which with hope combined with caution, I named F-1 and F-2.)

The equation predicted these alloys would last ‘a sizable multiple’ of the best recorded time for any previous alloy. ...

A few days later the testing lab called: ‘my two alloys had ruptured in something like 1-4 hours, a much poorer outcome than for many prior alloys. F-1 and F-2 were never heard of again.'

‘Ever since, I have been extremely skeptical of relying on projections from multiple regression, however well it performs on the body of data from which it was derived; and the more complex the regression, the more skeptical I am.’

Amen to that point. We shall report the results our our wrestling to extract signal from the noise of economic history in due course. For now, we need to enter the lions' dens in Australia's leading universities to see if we can convince the lions of our signal extraction process.

What these important questions have in common is that professional economists can’t answer them. To be more precise, economists can offer plenty of answers about government deficits, printing money, inequality, environmental issues and so on; but none of these answers is authoritative enough any longer to persuade other economists, and never the world at large.

Take two examples. On whether government borrowing aggravates recessions or promotes recoveries, the world’s most eminent economists fall into one of two violently conflicting schools. The world’s most important central banks, the U.S. Federal Reserve and the European Central Bank, hold diametrically opposing views about the effects of quantitative easing. If economics were a genuinely scientific discipline, such disputes over fundamental issues would have been settled decades ago. They are equivalent to astronomers still arguing about whether the sun revolves around the earth or earth around the sun.

How should politicians and voters who look to economists for guidance respond to this cacophony? Economics is ultimately a study of politics, psychology and social behavior. It is therefore as close to philosophy or even theology, as to physics, biology or engineering. Just as philosophers and theologians still argue about the same issues that preoccupied Plato, Kant and Descartes, economists see no shame in continuing the debates over budget deficits, monetary policy and full employment launched by Keynes, Wicksell or Walras.

This political and moral aspect of economics suggests a reason for the subject’s remarkable prestige and power, despite its obvious failings. Economists have become a secular priesthood, turning the political orthodoxies of their times into comprehensible narratives, thereby promoting social stability and democratic consensus.

In the 40 years since the mid-1970s, the dominant schools of academic economics have preached the virtues of free markets, competition and small government, helping to legitimize widening disparities of wealth and income as economic necessities, dictated by natural laws of market competition that were impervious to political interference or social control.

In the 40 years before that - from the Great Depression and Keynesian revolution to the Great Inflation and monetarist counterrevolution - economists played the opposite political role. Their job was to persuade conservative business interests that active government, fine-tuning of economic cycles, welfare safety nets and redistributive tax systems were indispensable to the success and even survival of capitalist free-market societies.

If we look back to the 19th century, to the origins of the modern capitalist system, we can see economists playing other politically legitimizing roles – establishing respect for private property, competition, free trade and voluntary contracts for mutual beneficial exchange, in a world that was still largely feudal, with wealth distribution justified by heredity, violence or military conquest.

As Keynes famously said, “The ideas of economists, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”

What makes Keynes’s comment so relevant today is that the economic system is again in a process of transformation. It is now fairly clear, as suggested in my book Capitalism 4.0, that a new model of global capitalism is evolving out of the 2008 crisis, just as it did out of the crises of the 1970s, the 1930s and out of the collapse of feudalism in the early 19th century. We are still waiting for the parallel transformation in economic thinking, but some of its features can be discerned.

The first is a recognition that the world is too complex and uncertain to be analyzed with models that assume a natural equilibrium of a future that is predictable, at least in a probabilistic sense. The second is that even competitive and perfect markets can make disastrous mistakes. The third is that a world economy that is highly unpredictable must be managed with fairy broad and flexible tolerance ranges for indicators such as inflation, government borrowing or unemployment, instead of the precise inflation targets of the pre-crisis period.

Ed: Mr Kaletsky is asking important questions, questions that deserve answers.  In coming weeks, Henry will seek to solicit, or provide answers.

Volunteers may contact Henry here.

Simon Crean described himself overnight as 'a contributor' to this plan, grossly unfair as it is to 16,000 'fabulously wealthy' Australians, already grossly over-represented in the income tax statistics. The lost sheep is back in the fold, it seems, awaiting the death by millions of votes.

'Easy money won't guarantee growth' says Stephen Koukoulas.

'SOME of the worst-performing economies - the eurozone, Britain and Japan - had central bank meetings in the last 24 hours.

'All three central banks kept monetary policy settings firmly positioned at super stimulatory levels as they struggle to kick-start a decent pace of economic growth and reflate their depressed economies'.

Read on here - Henry (in Bordertown) cannot do so as the Oz's login does not work here.

Henry's column earlier this week was thumping the same drum. 'Japan has responded to new and more decisive political leadership and its central bank is now being run by a man committed to joining the global push for easy monetary policy. Moving forward will replace moving backward, at least for a time'.

Ditto USA, UK and ECB - all this money printing may help for a while but the experiment will end in tears.

Shock, horror - an honest government, says Tiresias of Canberra.

Henry,

Just when you felt like giving up on politicians the world over, they surprise you with something like this! The only honest people to be put out will be the tailors of Saville Row and the shopkeepers of the Rue du Faubourg Saint-Honoré.

How many years will it take till DFAT and AUSAID to face up to the fact that our aid-hungry ‘friends’ in Indonesia and comparable locales not only have no shortage of millionaires,  but that said millionaires enjoy taxation regimes that our ‘fabulously wealthy’ superannuants wouldn’t dare dream of?

'Pakistani elite must pay more in tax to justify UK aid spending, say British MPs' reported The Commentator on April 4.

'In an effort to boost tax revenues for the Pakistani government and broaden the tax base, British MPs have insisted that the UK should not donate more in aid money to Pakistan until the country's own wealthy elite pay more.

'Pakistan is set to become the largest recipient of UK aid next year and MPs remarked that although there is a "powerful case" for continuing aid to the nation, British taxpayers must not be left to foot the growing bill unless Pakistan's wealthy are made to pay their fair share.

'The House of Commons International Development Select Committee said in a new report: "Any increase in the UK's official development assistance to Pakistan must be conditional on Pakistan increasing its tax collection and widening the tax base.

"We cannot expect the people in the UK to pay taxes to improve education and health in Pakistan if the Pakistan elite is not paying income tax.

"We cannot advocate that the British people finance, through taxation, the proposed substantial increase in development assistance to Pakistan unless there is clear evidence that the newly elected Pakistan government is also willing to make the necessary changes so as to contribute more to improving the livelihood of its people.

"In the past, donor money has not been spent effectively in Pakistan for a variety of reasons. Corruption is rife in a social order based on patronage and kinship networks. Pakistan's rich do not pay taxes and exhibit little interest in improving conditions and opportunities for Pakistan's poor."

Image of the week

Courtesy The Oz

The trip to Adelaide was mainly to take in the Turner exhibition, which was good but not not so much fun as the Hans Heysen house, gardens and studio at Hahndorf.

Two features of the Turner exhihibition stand out. First is the fact that Turner's retreat into abstraction was so complete that Henry (and other elderly males whose comments we overheard) could not detect all of the the supposed images. For example, in one especially gruesome, but also very abstract, painting of a sinking transport ship whose captain famously said he was only authorised to land the convicts (all women and kids) in NSW, the women and children were all drowning while the perfidious captain and crew were supposedly escaping in a life boat, it was impossible to spot the alleged escapees.

The second stand-out story was that Turner waited til his paintings were hung before tarting them up so they stood out even more. Great idea, Mr Turner, one we may use ourselves.

Hans Heysen was a genuine Aussie genius, and his house, garden and studio are located only minutes from Hahndorf's main street. Nice ladies take one's tiny fee to wander the gardens, and for a small additional fee one may visit Heysen's studio.

Henry's eye was immediatly caught by a painting he had not previously seen, called The way home. But there are many other sketches and paintings to see, plus old brushes, pencils and pastels in a beautiful architect-designed studio,

Here is a nice discussion of what you can see and do if you visit his home near Hahndorf.

This morning we farewelled Julia Gillard and several ministers who left for China, waving to the TV, where she may well be installed as the boss of the Great Southern Province. This seems to us to be the only way that she can avoid being fired by the Australian voters whenever (and if) we have the chance to express an opinion with some legal weight.

The feisty (female) Prime minister left Messrs Swan and Shorten to face the press on superannuation. After much pollie speech and obsfucation, it seems the net result is another fiasco - a new tax that irritates people (especially those whose superannuation fund  earns more than $100,000 per annum) but which will raise almost no money, from only 16,000 'fabulously wealthy' superannuants. Apart from the small (to the Gillard government) matter of legalised theft, everyone thinks this is just the thin edge of a large wedge that, if Labor ever governs again, will be a precedent that will be extended to less wealthy, confirming superannuation as yet another fair target for double taxation of savers.  Not something Paul Keating would have done, but then he was a fine Treasurer with an economically literate Prime Minister.

Still, there is a potential ray of sunshine, Somehow, we have been told, the new tax will be applied to pollies, perhaps following Henry's suggestion from Wednesday's blog.  But then we were told - actually promised, and more than once, by Herself - that superannuation withdrawals by people over 60 would not be touched. No caveats about fabulous wealth, it was unequivocal. Liar, liar, pants on fire!

China of course has form on the matter of ripping off its people and will be able to advise the newly crowned governor Gillard on how best to proceed. In a wonderful book called Mao's Great Famine we learn: 'In the most radical communes, private plots, heavy tools and livestock had to be turned over to the collective. ... As Li Jingquan, the leader of Sichuan, put it: "Even shit has to be collectivised". In response villages tried to salvage as much of their property as possible.  They slaughtered livestock, hid grain and sold assets. ... A common saying in Guangdon was "What you eat is yours, what you don't is anyones".' (P 52.)

This supposed 'reform' will ruin 'Labor's creature' and it will ruin Labor's electoral chances, if the ruination was not already complete. 

Henry and Mrs T arrived safely in Bordertown.  We secured a double room at the local hotel-motel for $100 per night and dinner for $15.50 each, plus an inexpensive bottle of Jamisons Run red The cheap dinner was because it was 'steak night', presumably because it is desirable to sell the surplus steak before it passes its use by date.  But it was cooked to a 'T' and the chips were to die for, although not all were eaten. 

Mrs T insisted on a photo to illustrate for Governor Julia how people like us have superannuation balances worth stealing from.  We earn a fair bit, by working hard and well past the normal 'retirement' age, and we live frugally. If she could be bothered to comment, Ms Gillard would presumably say: 'Idiots. The peasants of Sichuan were far smarter'.

Sadly Henry cannot report on the news, as the 'wireless Broadband' in this distant outpost allows newspaper websites to open only very slowly and The Oz does not even allow a subscriber to log in.

But wait, we have just had the benefit of an interview with Dear Leader 'Tough' Julia on Channel 24. With respect to Superannuation 'reform', a brave interviewer asked: 'What is "fabulously wealthy" Dear Leader?  You earn $500,000, are you "fabulously wealthy"? After some inconclusive bluster, Dear Leader asserted that the changes 'should flow through' to her.

'How is this possible Dear Leader', the interviewer should have asked, 'given your fabulously generous defined benefit plan?'

Henry suggests a rough way to adjust the pensions of fabulously well-pensioned pollies and public servants. Their defined benefit pensions should be reduced by the extent of any additional tax on superannuation earnings of allegedly "fabulously wealthy" Australians.  If this tax rate goes from 15 % to 30 %, or from 30 % to 45 %, for example, then pollies' pensions should be cut by 15 %.

(Given that superannuations earnings used to be free of tax, there is a case to cut pensions by 30 %, or even 45 % (depending on policy for 'fabulously wealthy superannuants) so you are getting off lightly, Dear Leader.  Cop it sweet, or it will cost you another few seats at the coming election.)

Then there is the Union boss with three staff members on 457 Visas - what hyprocisy.

Henry shall sign off for today, Dear Readers, but we shall be thinking of you as we continue our drive to Adelaide, where Mr. Turner's exhibition and a faster Internet awaits.

Further reading.

Paul Kelly on the alternative Prime Minister.

Judith Sloan on the arrogance of the government's approach to the people's money.

Tony Sheldon's use of 457 visas.

The modern equivalent of the debacle in the US economy - which produced a global depression - is the US Fed keeping US monetary policy super-easy, with zero cash interest rates, quantitative easing and promises to continue doing this for the forseeable future.  The Bank of Japan, the Bank of England and the European Central Bank have joined the game.  China is suffering a resurgance of inflation.

So far, and despite continued advice from many sources to keep easing monetary policy, the Reserve Bank has not joined the global rush to provide a highly easy monetary policy. This column has argued that easy money globally combined with responsible firm monetary policy here has kept the Australian dollar high despite lower (but still high) commodity prices. But the high dollar is strangling various industries. The Deputy-Governor of the Reserve, Philip Lowe, perhaps influenced by his boss’s tendency to look on the bright side, has recently pointed out that the high dollar is encouraging (or forcing) companies to increase productivity. No doubt there is some truth in this point, but this is not an outcome available to every enterprise.

Despite Mr Lowe’s attempt to look on the bright side, I fear that, if the Australian dollar remains at current levels, or rises further (as it has been doing lately), the balance of help and hindrance to prosperity will worsen. Cutting interest rates further is not the right answer, just as tightening monetary policy gradually was not the right answer to the asset boom in the roaring twenties USA.

‘Monetary policy cannot serve two masters’ is a rule that cannot be ignored. The US Fed and other leading central banks are attempting to promote global economic recovery when they should be contributing to this task by keeping monetary policy firm and steady to provide a stable environment for households and businesses, rather than promoting boom and (inevitable) bust in asset markets.

The Reserve Bank needs to maintain a firm and stable monetary policy, while the problem of an excessively high currency needs to be handled in another way. My proposal is to introduce a broad-based tax on capital inflow, applied to all inflows of capital so as to reduce the currently excessive and damaging currency to more sensible levels.

But evidence, rather than the feelings of senior RBA officials, or even of this writer, is urgently needed. If Mr Lowe’s view that industry can handle current levels of the exchange rate is correct than the tax may not be needed, or the rate can initially be low.  But if the evidence is that a lower level of the Australian dollar would be helpful to enterprises in industries including manufacturing, tourism and education, indeed is urgently needed, then a moderate tax will be indicated.

Such a tax may prevent, or ameliorate, serious damage to much Australian businesses and derivatively to many Australians.

Do we need such a tax, gentle readers?  Is the high dollar really hurting Australian industry? Let us have you views - contact Henry here.