The savage end to the mining boom
Date: Friday, September 14, 2012
Author: Henry Thornton
'It is the beginning of the end of the mining boom, and the downturn may be savage'.
That was the summary of a presentation by Professor R.G. (Bob) Gregory yesterday at the Melbourne Institute, largely supported by the assembled academics and visitors, young and old.
As Bob Gregory is the author of the 'Gregory thesis', about the effects of mining booms, and a senior economist of note, one needs to sit up and take notice.
As always, Bob Gregory began his work with some facts.
Exhibit one was a graph showing GDP measures, with five or six lines that started in the year 2000, if I read them right. There were several lines at the bottom, showing a marked reduction during the GFC and a sluggish recovery since then. These were GDP lines for the USA, UK, Japan and possibly one or two Eurozone nations.
There was one line that rose faster and hardly blinked during the GFC, ending 10 % or so above the set at the bottom. This, we learned was Australian GDP, a result that Gregory described as 'extraordinary'.
There was an even higher line, another 10 % or so above the Australian GDP line, called GDPI, where I stands for 'Income'. This is a recalculation of Australian GDP that accounts for the doubling of Australian export prices, thanks to the China boom.
The gap between the two Australian lines is best thought of as a 'free gift', courtesy of China.
Compared to the sluggish economies at the bottom, Australian incomes are up an 'extraordinary' 25 % over the decade of the mining boom. Professor Gregory asked if such a dramatic increase in wealth can be permanant - prima facie, Henry adds, one must be skeptical - 'easy come, easy go'
Suppose, Gregory asked, we were to lose all of these extraordinary gains. The nice way would see our sluggish friends catching up. The nasty way would be with us losing as the terms of trade fell back to previous levels.
The downward adjustment to Australian incomes if we lost all of the gains would be of the order of 25 %, far larger than the adjustment during previous times of lost gains, in the 1890s, in the 1930s and during the oil crises of the 1970s.
There was considerable discussion of technical matters. Gregory has been engaging with the ABS on the appropriate measures to be used in the GDPI line, attempting to allow in particular for the fact that a high proportion of shareholders of the largest mining companies come from overseas. If 80 % are foreigners, does that mean the additional income is only 20 % of the gap between the Australian GDP line and the Australian GDPI line? This is a matter for further research.
Professor Gregory discussed the 'three phases' of the China boom. Phase one is all about the 'free gift' - prices of exports rise but not export volumes. This phase seems now to be over.
Phase two is beginning now and will last 2 to 4 years, when investment rises. Actual investment will be less than that planned at the height of the boom in commodity prices, but will still be considerable. An expert on R&D said there is a similar boom in R&D, another fact in search of a theory.
Phase three will begin in three years from now, when export volumes begin to rise. The strong supply response from other commodity producing nations, however, means increased exports may earn far lower prices.
What is the role of the flexible exchange rate? Its rise is obviously part of the way in which stronger terms of trade makes ordinary Australians, even if not shareholders in mining companies, share the gains of China's largesse.
If the terms of trade were to continue the alarming fall of recent months, the exchange rate would eventually fall, making overseas travel, Chinese shirts and shoes and other consumables more expensive. This is one way that the extraordinary gains of the boom would be eroded. Like other people, Australians dislike losing goodies like cheap overseas travel and very cheap clothes, and will be looking for heads to kick.
Henry made the point that the boom phase had not been conspicuously strong, as illustrated by the labor market remaining in approximate balance and the lack of economy-wide wage hikes. Perhaps the foreign leakages were considerable in the boom and there would be equally important downside leakages.
The discussion moved to implications for economic policy.
What can policy do when the inevitable downward adjustment begins? The trouble is we failed to save a high proportion of the free gifts from China, so there is no great fund to draw on, as in countries like Norway with its massive sovereign wealth fund.
The theory says loosen monetary policy by cutting interest rates. Professor Gregory, a former RBA board member, said he expected interest rates to be close to zero by then, leaving little room to move.
Theory also says loosen fiscal policy, but that may be 'politically difficult' given the current state of politics and the debt accumulation with the current Federal government.
The current tax system is in a 'big mess'. Could a clever politician both improve the current tax system by expanding the GST and raising the rate, reordering the GST take of the states in the process? This is the most promising line of action but clearly also politically difficult.
A newly minted professor from another university (gasp!), pointed out that real (inflation adjusted) bond yields were now so low that building needed infrastructure with long-term debt at rock bottom prices made great sense.
In private conversation with after the seminar, one of Australia's leading tax experts agreed that state bonds issued for specific infrastructure projects - such as the very fast train from Melbourne to Brisbane via Canberra and Sydney - might catch the imagination of the investing public.
The standard political answer of 'why can't the private sector fund such projects' ignored the massive price advantage of using the Federal government's triple A credit rating in current (highly unusual) conditions.
Clearly this debate has some way to run. The senior economists in the room, including Henry, mostly felt that the downward adjustment would be very serious - eg 'squared or cubed' compared to current expectations - and a wise government would have a massive amount of explaining to do.
Next week Professor Gregory will be developing his thesis at an IMF-RBA meeting to which Henry has not (of course) been invited.
But one suspects the conversation will be no more elevated than yesterday's discussion at the Melbourne Institute.
Now, eight days later, we have the 'official' version of this story, courtesy of David Uren.
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'.
Hurculean task ahead; Gatsby flies in US
Date: Monday, May 13, 2013
Author: Henry Thornton
The Howard-Costello government turned a budget deficit into a surplus in a year, then run nine more budget surpluses, reduced income tax five years in a row, paid off Labor's $96 billion in debt and accumulated assets, with net debt becoming minus $44bn.
This summary is provided by Henry Ergas, who goes on to point out that: 'Average real male earnings in 1995-96 were only 2 per cent higher than in 1982. In John Howard's period as PM, they rose 47 per cent. That didn't stop jobs growth, however, with unemployment falling to its lowest level since 1974.
'Middle-income earners were great winners, with Australia recording the highest growth rate of median income in the advanced economies after Ireland (which started from a much lower base and whose success was illusory). And strong employment growth, underpinned by increased labour market flexibility, not only spread prosperity but also proved the best form of welfare.
'In the early 1970s, fewer than 5 per cent of the working-age population received social security benefits. That proportion rose steadily to 26 per cent in 1996. Under John's government, however, it fell to 16 per cent, while the share of households mainly dependent on government benefits nearly halved to 12 per cent'.
Read on here, and if you can put up with David Koch spruiking a safe car website, you will get a fine pre-budget video to set you up for tomorrow night's econothon, Mr Swan's likely swansong.
The AFR presents a photo of five leaders of business groups grinning like very happy folk whilst complaining about 'budget chaos'.
Michael Smith reports: 'Australia’s four [there were two from the BCA] peak business groups have come together to demand an end to budget “chaos”, calling for a credible return to surplus and an overhaul of tax, carbon and workplace policies.
'In a rare united front, the business groups warned that the Gillard government had misread the post-global financial crisis challenges confronting the country and expressed concern that Tuesday’s federal budget would slug industry with higher taxes to fund election promises.
'Business Council of Australia chief executive Jennifer Westacott told an unprecedented round table discussion with The Australian Financial Review that Labor’s budget strategy was in “disarray’’ and called for an audit on the size, scope and efficiency of government'.
Business is 'concerned and alarmed', says the nation has become 'complacent', wants faster progress on IR reform and expects a mini-budget if the Coalition wins government.
Trouble with this otherwise exemplary plan, is that a new government will need a new narrative if people are going to cop the pain of a serious reform process.
This will take time, and the pre-election jostling and name-calling will contribute only marginally to the establishment of a more frugal, pro-growth agenda.
Fixing the budget will be a hurculean task, and is likely to take at least a year of hard grind. When the budget is again on an even keel, with a path to meaningful surplusses clearly established, people may be ready for further reform.
'Business conditions remain very difficult', reports NAB, 'and confidence stumbles after showing signs of recovery earlier this year. Despite less negativity in retail & manufacturing, activity still very poor and labour market showing new signs of weakness. Also no sign of upward momentum – with forward orders, capacity utilisation and employment all very subdued and weaker. Tomorrow’s Budget to show lower growth forecasts and a fiscal position still retarding growth. We still expect one more cut (November) but could come earlier'.
The Great Gatsby
The US opening at the weekend was strong, with revenues a bit over US$ 50 million.
Saturday Sanity Break, 11 May 2013
Date: Saturday, May 11, 2013
Author: Henry Thornton
It was a big week for economy watchers and policy makers, with more to come. Another rate cut, taking cash rates below what during the GFC was described as 'emergency levels'.The RBA issues its detailed economic overview, 'warning of "considerable uncertainty" over government spending, while acknowledging that its own interest rate cuts could spark a destabilising jump in housing prices'. Budget frenzy reaches its seasonal crescendo, with those confident about the outcome of the forthcoming election are calling the Treasurer's swansong.
In recent weeks first the Treasurer revealed tax receipts were $7 billion below forecasts, then the PM said the number was $12.5 billion and two days later the Finance Minister said the number was $17 billion.
What the **** is going on comrades? Is Treasury so incompetent that they have issued three new forecasts in three weeks, and two in two days?
Or is the government's tin ear that is responsible? Or is it the frenzied 'new day, new policy' that has reduced budget preparation to a sick joke?
All will be revealed - possibly, because even Swannie is probably not fully up to speed on all this - next Tuesday and it will not be a pretty sight. Readers should brace themselves for deficits as far as the eye can see, putting Australia into the same class as other developed nations. With rate cuts into the danger zone, and more expected, we are in danger of joining the inflationist party of the major central banks.
It has become the rule in Australian politics not to leave anything in the cookie jar for one's opponants. The Gillard guv'mint has set new standards, imposing a massive debt as well as an empty cookie jar. Here is a slightly satiric account of those at the top contributing personally to the process, from May Day 2013.
Here is a link to the RBA's sober report, which should only be read with a bottle of one's favourite tipple at one's side.
On the politics of the budget, Dennis Shanahan says 'Despite Julia Gillard's successful spiking of ambitions to restore Kevin Rudd to the leadership in March, there are Labor MPs who believe a resentful reaction to the budget and a steady diet of internal polling showing wipeouts will turn cold panic into an active hot panic.
'The Liberal Party is factoring in the possibility, albeit remote, that Tony Abbott could be facing someone else at the election - and not necessarily Rudd'.
Geelong easily won the battle for the top spot in last night's shootout against Essendon at the oddly named stadium with the roof. Hawthorn vrs the Swans (no relation to the Treasurer one is quick to note) should be another ripper game and Henry sadly has to wait until Monday night to see Caaarlton! take on the Saints. This looms as a danger game and one hopes not to be so exhausted from barracking that one is weakened for the budget presentation.
The Great Gatsby - coming soon
'Few will be shocked to learn that Luhrmann’s version of Fitzgerald’s short, spare, near-perfect novel is long, gaudy and flawed' says Tim Walker of the Independent. 'If you don’t care for his previous films, you’ll find little in the way of pleasant surprises here. But if you can abide the Australian’s lurid, hyperactive style, then there is much to admire nonetheless'.
Tim later refers to 'Luhrmann’s stonking lack of subtlety', which must be retained for all Australians abroad, and in Australia for Prime ministers and Treasurers.
A high Treasury official once told a meeting in Paris, the OECD as I recall: 'Let me, in my blunt Australian way, call a spade a bloody shovel'.
His successor with be able to improve on this with: 'Let me, with my native "stonking lack of subtlety" tell it like it is'.
'If you haven’t seen No and you enjoyed Ben Affleck’s Argo then do make the effort. Similar to Argo, No presents such an unlikely history-driven tale you will delight at the richness of reality’s twists and turns. No celebrates yet another victory of the against-all-odds, slightly insane long shot over what appear to be the most controlled of situations – the political strong-hold of Pinochet’s brutal, right-wing dictatorship in Chile, 1988'.
Image of the week - Prudent budgeter
A reader suggests tht Mr Swan be reminded of Mr Micawber's famous recipe for happiness:
"Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."