US stocks 'soared' overnight as nervous investors were reassured by Ben 'Bubbles' Bernanke's promise to do whatever it takes to revive the shaky economy.

Election update.

The election that stopped a nation is over, and it's still stopped.  At soon we will be able to focus on real things like the footy finals.

Post-election post mortum is the theme of the quality papers today, with just a nod to Caaaarlton! typical near miss last night.

Paul Kelly says: Gillard [and Labor] 'poised at a tipping point'.

The SMAGE does not provide a link to 'Opinion' - perhaps because it has no readers of such material, or writers for that matter.

Phillip Coorey and Lenore Taylor say Coalition refuses to 'tug forelock like Gillard'.

The bonus, if that's what it is, if you can sit through a tooth paste ad, you get a video of Bob 'all hat and no cattle' Katter wittering on about Tony Abbott and the Treasury costings.

Newspoll has pointed out the bleeding obvious that a clear majority in the three Amigos' electorates want a conservative government - expressed here last Tuesday.

Here is another Bob Katter ad that may make you smile.

Here is a Pommie view, 'Ugly Troof' from 'Germs' Greer Herself.

'ONE is a ‘treacherous Jezebel’, the other is called a Mad Monk. As the nation’s election farce continues, its most famous cultural commentator reveals the shameful side of Oz'.

And, last but not least, a Taiwan view, thanks to Melbourne's 3AW.

A winter's tale.

 Illustration: Eric Lobbecke

Luke Slattery's hymn of praise to winter starts with TS Eliot's Journey of the Magi.

A cold coming we had of it,
Just the worst time of the year
For a journey, and such a journey:
The ways deep and the weather sharp,
The very dead of winter.

Read on here - it will cheer your heart.

The Australian electorate is no doubt enjoying the political theatre that is enveloping the nation.  What color government do we get, how long will it last, can sensible government take place with deeply eccentric people holding the balance of power?  Ms Gillard and Mr Abbott are dancing on a knife edge.

How many readers, we wonder, are irritated that the process is made excrutiatingly slow and painful by our pedantic insistence in everyone who is eligible to vote actually doing so, especially when we have been told that a record 6 % of votes were informal?

There is also the conundrum of people not on the electoral role who say they should be, in two catagories - those who had identification on the day and those who did not.

Why in this Age of the Internet we cannot we have electronic voting, where every elector registers to vote over the internet, gets a user name and a password and its off to the races on voting day. (Those who are unable to join the modern world could send a postal vote. If there were a second vote using a given name and password, it could be dismissed for later investigation.) No doubt there would be setup costs, but BPay works well for paying bills and something modelled on that would be quietly effective.

Would such a reform make sense?  As much sense as spending $43 billion dollars on the NBN, I suggest and, while I am at it, why cannot we taxpayers see the government's business case for this massive 'nation building' exercise?  Why are the country independents not demanding that of the PM, just as they are demanding that Tony Abbott submit his policies to an obviously partisan Treasury with the clear chance of a leaked opinion damaging the opposition case to govern?

On the substance of the current political impasse, a highly experienced observer, Sir Wellington Boote, says today:

'Australians like stable unobtrusive and quietly working governments. The minority government we will soon get won't have any of these qualities. The minority government will really wear out its welcome by November 2011. But first, we should let someone form such a government (Abbott in my view although I did not vote for him on August 21) and all these five  members should undertake to make every serious effort to go forward for about 12 months. The five of them should commit to support whoever is commissioned to form a government. The government can then agree to a set of policies and initiatives for the next 12 months that address a respectable slice of the issues which motivate the three bush independents and Wilkie and Bandt and then we go to the polls at the end of 2011'.

Read on here for the thoughts of Sir Wellington, who offers the best possible resolution of Australia's political uncertainty Henry has seen.

Replace the Australian Treasury - or reform it!

On the partisan Australian Treasury, Sinclair Davidson today lays out the case to replace it with an 'independent budget office'.

'But the problem isn't whether public servants are running off with the petty cash. The far greater problem is whether appropriate decisions are being made. For example, an audit of the Reserve Bank could ask why it was raising interest rates in early 2008 as the GFC unfolded. Similarly, why have Treasury revenue forecasts been so poor for such a long time? An independent budget office would undertake a public a cost-benefit analysis of the NBN'.

Henry's views on reform of the public service are summarised here.

'I hope that the next coalition government moves rapidly to depoliticise all the important departments involved in advising on policy on both economics and other important matters.

'Or, if this is too hard, it might be best to move more or less immediately to a US-style system, where a new government immediately begins a process of appointing its own people to key public sector jobs.  All department heads should offer to resign if the Washington system is to be implemented by an incoming Abbott government'.

Tonight on Wall Street

David Llewellyn-Smith says  'Tomorrow [in the USA, meaning overnight in Oz] is THE day...

'The S&P500 tilted at the the key 1040 level again today, the neckline of a scary head-and-shoulders top pattern, and held. The Dow is sitting right at the psychologically potent 10,000 level. Gold is sitting right below all time highs.

'And tomorrow the US head of Fed, Ben Bernanke, gives a speech at the Jackson Hole symposium entitled "The Economic Outlook and the Federal Reserve's Policy Response".

'With US leading indicators clearly signaling impending recession, the markets are set up with remarkable technical precision to make a decisive break one way or the other'.

Another knife edge, and for Australians it is two knife edges to endure.

The world's financial history shows clear evidence of growing volatility.

The Tulip boom in 1636 showed just what can happen when speculators get the bit between their teeth.

The Mississippi Bubble in France and the South Sea Speculation in the UK was a bit less than a century after the Tulip Boom, in 1720.  Massive financial instability had enormous consequences for both nations.

The nineteenth century was a time of regular but lesser fluctuations with the first roaring boom in 1825, again just over a century after the previous big financial dislocation.

The nineteenth century should perhaps be called the Age of Innovation as the industrial revolution developed with quickening intensity. There were major gold discoveries, in California and in Eastern Australia in mid-century, the growing strength of the United States began to influence the global economy and there were many booms and busts, although none with the individual intensity of the bubbles of the seventeenth and eighteenth centuries.

The nineteenth century was the first great age of globalisation, if one excludes the days of Roman dominance. As JM Keynes put it in his passionate book The Economic Consequences of the Peace: ‘What an extraordinary episode in the economic progress of man that age was which came to an end in August  1914. The greater part of the population, it is true, worked hard and lived at a low standard of comfort, yet were to all appearances reasonably contented with this lot. But escape was possible, for any man of capacity or character at all exceeding the average, into the middle and upper classes, for whom life offered at a low cost and with the least trouble, conveniences, comforts, and amenities beyond the compass of the richest and most powerful monarchs of other ages’.

This happy state of affairs was not to last. ‘Moved by insane delusion and reckless self-regard, the German people overturned the foundations on which we all lived and built’.  Germany’s ‘roll of the iron dice’ in 1914 is generally regarded as motivated by an almost religious desire to establish an empire that would rival England’s and contain within its boundaries (including colonies) all the resources Germany would need to sustain itself and to develop its empire into the dominant global superpower.

The first great war of the twentieth century has been seen as a backlash against the first great age of globalisation, which opinion sounds a warning for us now. Whatever its value as a reminder of modern risks, this war imposed great financial and other losses through death, injury, damage and spending on armaments and soldiers.  When the heir to the Austrian throne was assassinated in the Bosnian capital Sarajevo on 28 June 1914, there was no immediate reaction in financial markets, despite plenty of earlier discussion of the mighty costs that would be imposed if the major powers went to war.  It was almost a month before the financial press expressed serious anxiety that the Balkans crisis might become something far more serious.  When investors realised the full-scale war was coming, 'liquidity was sucked out of the world economy as if the bottom had dropped out of a bath’. (Niall Ferguson, Ascent of Money).

The first global war was followed by the Great Depression and then second global war.  By any measure, the first half of the twentieth century was the most volatile in global history.  The second half was in many ways calmer, but the 1960s introduced what has been called the Age of Aquarius, with sex, drugs and rock'n'roll signalling a major social revolution in the western nations.  Far more insidious than these developments was the rise of inflation, which led to the Great Inflation of the 1970s and, in some nations, including Australia, the 1980s.

From the end of the 1970s we see clear evidence of increasing economic and market volatility.

Japan had its Roaring Eighties, when share and land prices experienced a massive bubble followed by an extended but ultimately mighty crash that ended the so-called 'Japanese miracle'. In the rest of the developed world share prices rose sharply and at bubble rates for a while in the mid-eighties, and the Wall Street crash of October 1987 created temporary havoc in financial markets.

Then we saw the Roaring Nineties, reinforced by easy money under Alan 'Bubbles' Greenspan and ending with the bursting of the 'new economy' bubble that was the Techwreck. (Along the way we experienced the Asian crisis of 1997-98, dismissed as mere growing pains by some influential analysts.)

While explicitly declining to lean into the wind of rising share prices, Bubbles Greenspan was quick to reduce cash rates to near zero when the bubble burst, setting in train the events of the Rampaging Noughties.

Greenspan's successor, at risk of being labelled 'Bubbles' Bernanke in his turn, cut cash interest rates to almost zero, supported a series of massive financial sector bailouts and implemented 'quantitative easing', more clearly described as printing money.

This massive monetary easing was more than matched by fiscal stimulus, yet within two years governments everywhere were wringing their hands at prospective budget deficits 'as far as the eye can see'. Could they not project ahead, one is forced to ask?

John Garnaut recently reported from Shanghai: : 'Commodities markets are entering a new age of volatility that could involve dips as low as those seen during the global financial crisis, says the chief executive of Rio Tinto, Tom Albanese.

'Mr Albanese predicted a sharp slowdown in China's trend GDP growth rate to between 6 and 7 per cent for the next decade, overlaid by "higher amplitude" financial market cycles associated with Western economies unwinding their deep imbalances.

' "We will see higher levels of volatility - higher highs, lower lows - as we saw over the past two years," Mr Albanese said'.

It is good to see that this massive mining company is so on the ball in diagnosing the frankly scary evolution of the second age of globalisation.

My own hypothesis is that the biggest threat to capitalism is the serious possibility of instability caused by policy swings: expansion/recovery/asset inflation/goods inflation/policy-tightens/-economy-falls back, etc. Such outcomes would destabilise the beliefs of the econocrats in major countries, as well as their political masters.

The confidence engendered by the apparent success of the ‘Keynesian’ policies followed so far might evaporate with the results impossible to predict with any certainty.

I am grappling with the questions of the dangers of accelerating economic and financial volatility (and what is to be done about it) in a book called Great Crises of Capitalism being published by Connor Court in early 2011.

Posted today on The Australian's website.  

A far worse than expected US housing market has produced another poor result on Wall Street.  Commodities were also hit, meaning it should be a dismal day in Asia, unless the mad 'decoupling' optimists are right.  With the painful attempt to count votes and form a government expected to take weeks, there is little reason for Australia's 'miracle economy' to create new wealth.

Henry was the person to tag Alan Greenspan as 'Bubbles' Greenspan, and to warn that Ben Bernanke may well morph into 'Bubbles' Bernanke.

Now Four Corners has gotten the message and devoted the whole of Monday night's program to the subject.  Three (American) gurus were featured, including the colorful bloke who warned of the myriad of 'bailout bubbles'.

Even more persuasive was the German economist who bewailed the current state of the world economy, 'with bubbles everywhere'.

Also the former American econocrat who said 'we can do it' [avoid catastrophe] but who also warned that it will be a damned close run thing and our whole approach needs to change.

(If you have Adobe flash Player 10.1 you may be able to see the relevant episode here. Henry's PC says the software is downloaded, but the ABC site says it isn't. Sigh!)

On Australia's extraordinary election outcome, Tiresias of Canberra concludes: 'If the election of 2010 means anything, it is that the Australian people are so frightened of change and so keen to avoid acknowledging that the era of easily-won mass prosperity is over, that aspirants for government have to pretend that we are at peace and face no imminent dangers to our way of life and welfare.  During the campaign there was a general consensus that the Magic Pudding (the minerals of the Pilbara etc) would suffice no matter what.  Neither major party sought any kind of mandate for dealing with the inevitable danger of a second round of the global financial crisis.  No one mentioned trade policy.  No one identified any new industries that they wished to see established.  Discussion of economic reform was almost wholly confined to the question of `the ill-fated Work Choices'.

A good starting point for individuals, corporations or nations in these dangerous times is to reduce leverage, which means repaying debt.  Debt free is the ideal, and Australia is not yet too far from that ideal, at least as far as government debt is concerned. Our banks required the bailout of deposit guarentees and the loan of the government's AAA rating for their extensive overseas borrowings.  Private debt owed by Australians is large and still growing, which puts our banks at risk if there is a second gloval financial freeze.

Most other 'developed' nations, or at least their governments, are heavily indebted and still borrowing.  Therein lies the risk facing all of us, because Australia's mix of low government debt and high private debt will not save us if other nations, more heavily indebted overall, solve their problems by debt default or inflation, which are the traditional methods.

Whether (or when) individuals should reduce exposure to equities is a harder question.  While Four Corners did not say so in explicit terms, that is the next question for those concerned to protect their wealth. 

Rather than selling equities, another approach is to hedge against the possibility of a large negative correction. It seems that Nassim Nicholas Taleb, of Black Swan fame, has been hedging his equity portfolios, and also buying olive groves in his native Lebanon.  In a dangerous and overcrowded world, food (and clean water will be valued highly. The put options that provide downside protection are presumably now very expensive, so we may all have missed our opportunity.

The Bailout bubbles will burst just as previous bubbles have burst - maybe this is already happening.  Far better to have sold some equities when the bubbles burst, but timing is the issue.

The federal election has come and gone, Australia now has a hung parliament and I’m still shocked I predicted the result last Thursday.

As of writing this blog on Monday night, Labor has 72 seats, the Coalition has 70 and there are three independents and one Green in the House of Representatives.

The experts are predicting Labor and the Coalition will end up tied with 73 seats and there will be another independent. This would leave the major parties on 73 seats each, four independents and one Green.

So what are my conclusions from the election and what will happen next?

First, the election itself.

I think the election results show that there are now two fundamentally different Australias. We have gone the way of America and now have our own red/blue state divide.

The first Australia, that I’ll call Blue Australia, is concentrated in the south-eastern cities and overwhelmingly votes for the ALP and Greens.

Centralism is the overriding political philosophy in Blue Australia. Blue Australia supports the mining tax because it socialises the wealth from mining in Red Australia (I’ll move onto Red Australia in a minute). Blue Australia also believes in global warming and wants the government to do something about it with other people’s money.

Blue Australia defied a national swing against federal Labor and returned most of its members and elected the first Green to the House of Representatives.

In contrast to Blue Australia, there is Red Australia.

Red Australia comprises Queensland, West Australia and most country seats in Blue Australia. Red Australia is conservative and votes for the Coalition parties and independents. Red Australia opposes the mining tax and is sceptical of global warming hysteria.

The national swing against Labor was greatest in Red Australia and the ALP now only has three seats in all of West Australia.

If you don’t believe my Red/Blue Australia observation, just look at The Australian’s electoral map. It is proof that two fundamentally different Australias emerged from the election.

So my general conclusion is that the election split our country into two different Australias – one Blue and one Red.

Now onto my prediction for who will form the next federal government.

On this question I am fairly confident we will have a Coalition government.

Three of the Independents are former National Party members and I just can’t see them siding with Labor on issues like global warming and the mining tax.

However, the Coalition cannot afford to take the Independents for granted.

The country independents strongly disagree with the Coalition on some crucial issues and will seek some promises before allying with them.

Bob Katter, in particular, has criticised the Nationals for blindly following the Liberal Party’s “economic rationalism”. This “economic rationalism” refers to the federal government’s support of free trade policies that have crippled the economy of country Australia.

Free trade is a nice theory when taught by economics departments at Australian universities (I can testify to this), but it does not apply to the real world where every national government retains barriers to trade.

With minimal tariffs, Australian farmers compete in a world economy where the average agricultural tariff is above 40%.

In light of the real world situation, free trade is nothing short of economic suicide.

I hope Bob Katter secures an agreement from Tony Abbott to end the “economic rationalism” and put the Australian economy, rather than the free trading world economy, first.

The independents also point out the obvious reality that Australia is not suffering from overpopulation.

They correctly argue the population “debate” has been framed from a city perspective to scare swing voters in Brisbane, Sydney and Melbourne. 99% of Australia is uninhabited and yet politicians argue there is overpopulation.

Egypt has a population of 90 million and is a desert country smaller than West Australia.

These two issues – “economic rationalism” and population – show the major parties either don’t grasp or are just ignorant of the major issues in country Australia.

They will have to change their attitudes if they have any hope of governing Australia.

*On a lighter note, click here for a fantastic Bob Katter commercial.*

The people have spoken, but it is not yet clear what they said.

Excuse me for disagreeing, but it seems clear enough to me.

The big swing against Labor in Queensland and WA strongly suggests Australians do not like the big new mining tax.

The bigger swing in Queensland than elsewhere strongly suggests people do not like the axing of Prime Minister Rudd. A second reason is that the Queensland State government is on the nose.

The swing against Labor in Western Sydney is presumably also a vote against a dreadful State government. But the overall neutral result in NSW is the biggest puzzle of this election - perhaps NSW is where all the factors more or less cancelled out.

The swing to Labor in Victoria is partly because Victoria is home to the Labor Prime Minister. The fact that the three most senior leaders of the Liberal Party are from NSW (X2) or WA is another reason for the Liberals doing well in NSW and WA and not so well in Victoria.  The massive transfer of wealth to Victoria discussed by Paul Sheehan below - see final link - is a concrete token of Labor shoring up its heartland. Tasmania, as always, marches to its own drum.

A set of swings big enough to give a clear lead to the Coalition was a bridge too far, and for the Coalition to do as well as it did was a tribute to Labor's self-destructive behaviour as well as Tony Abbott's fine leadership.  Abbott started the campaign widely regarded as unelectable but ended looking distinctly prime ministerial.

To be fair - why, I hear you cry - Julia Gillard also enhanced her leadership credentials by looking calm and competent on top of ruthless, having sacked an elected Prime Minister.  The leaks in week two destroyed her campaign, and showed Labor's deep disunity, but she soldiered on with some style.

One obvious interpretation of the close but not close enough performance of the Coalition is its demonstrated lack of interest in and focus on the economy, which every successful politician in the world believes to be of primary importance.  Labor's enthusiastic adopting of Keynesian stimulus gave it the edge in this vital area, no matter that the stimulus program was too big and bedevilled by waste and mismanagment.  The big swing against Wayne Swan is a puzzle which may indicate Labor's performance on the economy is not so great as relevant polls suggest.  Perhaps also he is regarded as the plotter-in-chief against Mr. Rudd, action especially unacceptable as it was against a fellow banana bender.

Australia is in for a period of political uncertainty after which one of the major parties will form a minority government.  With the equity, commodity and currency markets already struggling with fears of global slowdown, the fresh political instability will make matters worse.

There are two big policy areas that are likely to reward whichever major party grasps the necessary nettles - the economy and defence, including defence against queue-jumping immigrants.  The Coalition has the better chance of prevailing, in part because it will not be torn asunder by anger and recrimination.

To improve its economic reputation, Labor must take a deep breath and promise to eliminate waste and mismanagement. It needs to put someone of unimpeachable integrity in charge of finding and expunging unnecessary spending so that the need to run up more debt is minimised.  Why not create a deficit busting post and fill it with someone of integrity and tough anti-waste credentials?  Lindsay Tanner's name springs to mind.

In seeking to improve their reputations in defence, both major parties need to overcome a certain naivety, real or confected.  Australia is alone and ultimately friendless in a volatile and dangerous world.  A far more focussed evaluation of threats and how best to deal with them is needed.  Our model for how to do this should be Israel - any potential aggressor needs to know we will inflict great damage on them before we surrender any ground.

If Labor forms a government one hopes that John Faulkner could be convinced to remain as Minister for Defence as there is no obvious alternative.  The Coalition needs to appoint someone of substance and I will confess I did not know the shadow minister's name until I looked it up.

On the economy, the Coalition has established that it is against waste and mismanagement in spending and government borrowing in debt management. It needs a more positive message and what could be better than a commitment to serious tax reform.  It should promise to reform income tax as soon as Labor's debt is paid off with an initial target of a top rate of income tax of 40 %, and ultimately 30 %. A really brave Coalition would commit to a broader GST, with no exemptions, and to consider a higher rate.  If New Zealand can do it, why not Australia?

I am unsure that Joe Hockey has sufficient gravitas and real interest in economic policy to be a great Treasurer. Of elected Liberals, Malcolm Turnbull would be my choice, with Joe Hockey given Industrial Relations with a mandate to find reforms that most union and business leaders would agree to.  Andrew Robb has the mindset and ability to do a good deficit busting job for the Coalition as Finance Minister.

Both major parties would be wise to spend a lot of time and effort on the economy and defence of the realm.

The global economic crisis is far from over, and the world could still experience great economic disruption. Australia is a small, wealthy nation with no natural allies in its corner of the world. The key to both challenges is higher productivity, and this requires serious economic reform.

Posted today on The Australian's website.  

Here is a Sydney view of why Victoria supported Labor so fervently.

Let God decide - if He cares.  We refer, of course, to the game between Geelong and Caaaarlton! in which the Supreme Being helped the Cats to an impressive victory, with son of booting four goals.  At least Caaaarlton! had a red hot go, as they say..

But to get back to the main game - Abbott verses Gillard.

It is, or should be, a no brainer - an atheist verses a true believer.

But from all accounts, except that of Tiresais of Canberra - it is far too close to call.

So why not let the Master of the Universe have the casting vote?

Surely, GOD would support God-fearing Tony Abbott over the atheistic Julia Gillard.

We'll have a fair idea by 9 PM tonight!

Then again, if Gary Morgan's poll-providers are on the ball, we know already - too close to call!

Last night the Roy Morgan recontacted 187 ‘undecided’ and Green voters from the 7News Morgan Poll of 1,872 electors conducted on the evenings of Wednesday and Thursday August 18/19, 2010. Just over half the ‘undecided’ voters gave a preference marginally favouring the L-NP on a Two-Party preferred basis. Of Green voters, more than 80% confirmed their intention to vote Green, the others split 2:1 in favour of the L-NP on a Two-Party preferred basis. Taking these factors into account the primary voting intention is recalculated as ALP 39%, L-NP 42.5%; Greens 11.5% and Independents/ Others 7%. However the Two-Party preferred vote is unchanged at 51% cf. 49% according to the Morgan Poll update conducted last night (August 20, 2010).

The Wall Street Journal overnight said polls showed a dead heat and also that Julia Gillard was fighting and dodging demons.

  courtesy Wall Street Journal

US labor market.

Yesterday we reported the disappointing US jobless claims.

This moving picture shows deterioration of the US jobs market and just how bad is the current situation.

15 million unemployed and probably the same number underemployed makes this recession one of the great crises of capitalism - and it ain't over yet.

Wall Street fell again overnight, and Asia should follow the gloomy lead on Monday.

Herding cats

Former CSIRO Chief, Geoff Garrett, has produced a fine book about Research Leadership.

Here is a link.

Cartoon of the month.

Australia must return to the economic policy reform agenda of Prime ministers Hawke, Keating and Howard.

Paul Krugman, America's most 'Keynesian' economist, at the start of this month said in the New York Times: 'I’m starting to have a sick feeling about prospects for American workers ...'. 
 
With growth slowing, Krugman said the odds are that unemployment will rise, not fall, in the months ahead. 'That’s bad. But what’s worse is the growing evidence that our governing elite just doesn’t care — that a once-unthinkable level of economic distress is in the process of becoming the new normal.
 
'And I worry that those in power, rather than taking responsibility for job creation, will soon declare that high unemployment is “structural,” a permanent part of the economic landscape — and that by condemning large numbers of Americans to long-term joblessness, they’ll turn that excuse into dismal reality.
 
'Not long ago, anyone predicting that one in six American workers would soon be unemployed or underemployed, and that the average unemployed worker would have been jobless for 35 weeks, would have been dismissed as outlandishly pessimistic — in part because if anything like that happened, policy makers would surely be pulling out all the stops on behalf of job creation'.

US stocks closed sharply lower overnight as recessionary fears returned with a weaker jobs picture. Suddenly it seems, a wide range of economists and other commentators are seeing the rate of unemployment stalled just below double digit levels.

'An unexpected surge in jobless claims startled investors, eclipsing excitement over Intel's announcement that it will acquire McAfee.

'The latest jobs report, as well as a report from the Philadelphia Fed, confirms that "we're only halfway through a secular bear market right now," said Doug Roberts, chief investment strategist at Channel Capital Research.

Mr Roberts predicted joblessness would continue for some time as companies outsource work and invest in technology that will ultimately obviate the need for workers. The danger, Mr Roberts added, was that "we're at 10 per cent unemployment, with plenty of capacity out there".'

With China slowing, Henry was interrogated overnight by friends concerned that Australia's 'miracle economy' status might not survive a 'double dip' recession in the USA and a new stumble by China.

This possibility is why Henry has been emphasising the need for Australians to save more, work harder and shake off the shackles of the Rudd-Gillard 'big government-small Australia' mindset.

Recently Henry's newest stirrer Tiresias of Canberra suggested, not for the first time, that 10,000 places per annum in Australia's immigration intake be reserved for US ex-military families with heads of families under 50.  Huge number of bets retire each year in America, with 30 or so more years left in the workforce.  We could get all manner of technical skills that way from a culturally and politically compatible country.  Most Australians would rather take American ex-military as immigrants than veterans of the Taliban or the Tamil Tigers – it would be easy to sell to the public.

Sir Wellington Boote responds to the new pessimism in the USA with enthusiasm.  This is wonderful news!!!! For those of us who are starting to see the good old USA as a goldmine for Australian migration this news is heaven sent. Americans faced with permanent unemployment and a ruling group that couldn't give a rats arse about them, their families or their future (until some war emerges) will leap at the opportunity to move to a first world, English speaking, democratic nation with a proper public health system, regular elections, potable water and 'no race issue' (ye gods doesn't THAT song and dance make you sick!!).
 
A hundred thousand Americans a year spread across WA, the Territory and Queensland will have a great impact on our need for skilled workers, assimilated migrants and a super 'get and go' work ethic.
 
Hurrah for the American ruling class!!! May they ever be greedy self centred pigs and disinterested in the suffering of their own fellow tribesmen and women ... their loss is very much our gain!!!

The Aussie election.

Henry's writers have variously predicted Julia by a nose, a hung parliament, and the Coalition by 'a minimum of 10 votes'.

Only the latter outcomer would be inconsistent with the final opinion polls.

While Henry hopes for a win by Mr Abbott, he fears Ms Gillard may fall over the line, or worse, that the Greens hold the balance of power in a hung parliament.

While the Coalition is weak on economics, Henry is confident that Treasury and the Reserve Bank will provide a crash course in economics and that Mr Abbott's ministers would listen and learn quickly.

The big issue is the necessity to return to the economic policy reform agenda of Prime ministers Hawke, Keating and Howard.

Second in Henry's priorities is development of a serious defence capability, and Tiresias' suggestion that we recruit unemployed American vets would be a useful part of this plan.

Australia's aspiration should be to cement its place as a mid-level power in the western Pacific, a power with a seriously dynamic economy and real teeth, sufficient that no other power can hope to take control of our nation without a very costly campaign indeed.

Posted today on The Australian's website.

In two days, Australia will have voted for a new government.

Either the Labor Party will be returned for a second term in office, or the Coalition will kick it out in humiliating fashion.

However, there is one other possibility.

My own prediction, and hope, is that the election ends in a hung parliament.

"Why would you ever want a hung parliament?" I hear you say. "Hung parliaments are obstructive and don't get anything done."

But this is exactly why I want a hung parliament, because it is obstructive and limits the government's ability to do anything.

Divided government is the best kind of government, and I think recent American political history supports this argument. It's better to have a Democratic President and Republican Congress than one party controlling both.

George Bush and the Republicans lost any conservative principles they may have had when they won the 2004 election. Similarly, Barack Obama and the Democrats have done irreparable damage to America since winning power in 2008. In fact, they've done a worse job than Bush and the Republican majority - and that really says something.

If I have learnt one thing from the election it is this: I don't want either party in control of the federal government.

This election really is a smoke and mirrors contest between two sides of the same coin. Let's just look at one issue to prove this proposition - economic policy.

Both parties have promised new taxes, spending and an unbelievably fast return to surplus. Labor wants to siphon the wealth from West Australia through its mining profits to buy marginal votes in the socialist regimes of New South Wales and Victoria. Similarly, the Liberals will tax business to subsidise people who can't afford to have children themselves. In both cases, these taxes are unconstitutional and unnecessary.

Now let's consider their new spending promises. On top of the $1000 handouts, Building the Education Revolution and home insulation disaster, Labor will federalize health care and build a $42 billion broadband network. It says it can meet these promises and return the budget to surplus by 2013. Of course, those smart people at Treasury have checked this and it's okay. They know what they're talking about, don't they?

On the other hand, the Libs will make maternity leave an extremely expensive right and spend several billion dollars on a problem Tony Abbott doesn't believe exists (and neither do I). Like Labor, it says this feat can be done without forcing Australia deeper into debt.

Neither party has specified any spending cuts to balance the budget - and why would they? "Spending cuts" sounds mean, conservative and not-so-progressive. Australia "needs" to pay for foreign wars, foreign aid and federal bureaucracies that add another level of government to state responsibilities.

Federal Independents Bob Katter and Tony Windsor summed up this election for what it is on Monday night Lateline. Both parties are controlled by lawyers who want to scare us into voting for them just so they can centralize more power in Canberra.

So forget Labor, the Liberals and Greens. I'm voting for the Shooters Party.

Ed: While this is a bit extreme, perhaps satiric, The Oz today presents the thinking person's version of the same thought bubble.

'A government's ability to address a debacle like the global financial crisis is important, but so, too, is a willingness to risk political capital in making structural changes to shore up the economy against future shocks. Both our leaders need a lesson in courage, as well as economics'.

And here are the views of Henry's readers. 

The global debate on economic policy is surreal.

Two years ago, 'fiscal stimulus' was all the rage.

Every national finance minister was being egged by his Prime minister or President to spend up big to minimise recession.

National finance ministers were being supported by the alphabet soup of international economic agencies, especially the OECD and the IMF. As Henry remembers it, only the BIS showed any prudent restraint.  (If any reader remembers it differently, please contact Henry here to put him right.)

No the headless chooks are running around spurting if not squarking about debt burdens and the need to cut budget deficits, in the worst cases from double digits as ratios to GDP.

The UK has a new Conservative- Lib Dem government and the surprise is that it is doing something decisie about it.  As The Economist puts it, 'Britain has embarked on a great gamble. Sooner or later, many other rich-world countries will have to take it too '.

The Conservative-Lib Dem coalition was widely expected to be wimpy on economic policy.  Yet within 100 days it has emerged as a radical force.

'For the first time since Margaret Thatcher handbagged the world in 1979, Britain looks like the West’s test-tube. It is daring again—not always in a good way but in one that is likely to be instructive to more timid souls, not least Mr Obama and his Republican foes'.

To balance the books, Chancellor of the Exchecker, George Osborne, raised some taxes, notably VAT, but three-quarters of the savings will come from spending cuts. Most government departments will shrink by a quarter, that's right, one quarter, though Mr Osborne excluded the National Health Service from his slashing.

Keynesian economists, who worry that a weak world economy needs more government spending, are having conniptions.

Fiscal fiends (who believe deficits must be tackled now to stave off Grecian disaster), say 'Britain is the prime exhibit for tough love'.

Britain has become one of the world's great nanny states, thanks especially to Gordon Brown.  On OECD figures, public spending made up 51% of GDP in 2009, 'putting Britain into the same league as continental countries that deplore Anglo-Saxon (alleged) laissez-faire'.

More of its public spending now comes from central government than in any OECD country bar New Zealand says The Economist - a nice blow that. Its local government is weaker than nearly any comparable country, including France. The state finances and provides most health care - a warning for Australia there. It bossily decrees where schools can be opened, and how they must be run.

Britain intends to cut spending faster than anyone expected and to make sure that whatever government activity that is left is more local, flexible and responsive to the people who pay for it.

Britain's recession was deeper than most, and on top of Gordon Brown's 'Great Society' spending, drove the budget deficit to an unsustainable 11 % of GDP.

Labor planned to return the cyclically-adjusted current budget to balance in 2016-17. Labour’s fiscal consolidation would have amounted to 4% of GDP by 2014-15; Mr Osborne is aiming at 6.3 %.

This fiscal retrenchment is far faster also than planned in the USA or Japan.

The other part of the coalition's plans involves decentralisation.  Britain centralised when it was fighting for survival in World War II, and successive governments, including even the Thatcher government, continued the process.

'Mr Cameron was able to forge a coalition with the Lib Dems precisely because both parties saw the state as overcentralised and overbearing. When they hammered out a joint programme for government, the main theme other than austerity was decentralisation'.

There are three main areas for this bold action. The government aims to provide parents more choice in their children’s education. Existing schools are encouraged to switch to academy status, and newly created “free schools”, set up and run by not-for-profit businesses, charities, faith groups, universities, private schools or parents themselves, will be in operation. These will be able to set pay and conditions for staff, deviate from the national curriculum, decide the length of school days and terms, and so forth. The state will pay for premises and provide funding per pupil; poorer children will attract more, so that schools are keen to take them on.

The police are heavily centralised and, long suffering taxpayers say, unresponsive to the public who pays their salaries. The government plans directly elected “police and crime commissioners” for every constabulary in England and Wales (bar London, where an elected mayor effectively exercises democratic oversight already). Starting in 2012 they will determine priorities for their local force, appoint and remove chief constables and set the budget.

Then there is health, with aging populations and vast progress in medical science, a big money sink everywhere. Mr Cameron promised obliquely to “trust the professionals”. 'This has turned out to mean something profound'. General practitioners (GPs), grouped in consortia, are to commission most secondary care. Strategic health authorities and primary-care trusts, which currently do that job, will be ditched, and patients will have greater freedom to choose their GP. The aim is efficiency as well as flexibility: GPs will be given incentives to keep their patients away from costly and unnecessary hospital care.

Welfare reform is also on the agenda, if less well articulated at this early time. Paying firms and charities to help the unemployed into work will continue, and a fundamental benefits reform is mooted. There will be more elected mayors, fewer MPs and more citizen initiatives. The government will help to train and fund community organisers. 'And, in a glasnost to complement the perestroika of decentralisation, more data is being put online'.

In conclusion, the venerable mag says: '... the new government’s vision of a looser state, and its determination to reform virtually all the public services at once, is boldly outlined. Add in the even more daring plan to cut the fiscal deficit, and Britain is in for a breathless and convulsive few years. Now and then, British elections are epochal, setting the tone for other countries, too. One such took place in 1945, when the modern welfare state got going. Another, in 1979, loosed Margaret Thatcher on a waiting world. By producing a ruling coalition that is as radical in redefining government as it is in cutting it, the election of 2010 may prove another turning point'.

How will it all work out?

The best predictions we can offer are contained in the early chapters of Henry's virtual novel, Banana Republic.  Try Chapter one here.

Peter Wilson presents a longer and more philosophical account of the Coalition government.

'WHOEVER emerges from this weekend as Australia's prime minister can learn one powerful lesson from their British counterpart, David Cameron.

'The first 100 days of Cameron's government should encourage any new government leader to get stuck straight into the big challenges and to do it quickly'.