14 April 2008


For the USA I see a continuum between two results. At one extreme we get near double digit inflation and a growth rate around 5%. At the other extreme, a recession approaching that which started in 1929. In both cases, the US dollar moves lower against the Yuan, which means the "free ride" is over, and US ingenuity will again be required. In both cases, the US banking system needs revision.

The Europeans have extremely inefficient farming, and have exorbitant tariff barriers to protect that and other inefficient industries. That is why the Euro is so high, and until they remedy the situation, the Euro will remain high. The rising price of food worldwide (aka the looming world famine) will only exacerbate that problem.

The Chinese have a large but very thin economy, meaning the margins on their export trade are small. This means that the revaluation of the Yuan will very much hurt Chinese export receipts, and (just incidentally) reduce their mineral imports. Chinese rulers since King Wen have relied on the "mandate of Heaven" to hold power. (It's their form of democratically elected government, and don't knock it, it has worked quite well for a few thousand years). The mandate is typically withdrawn when a major disaster strikes (famine etc).

India has been somewhat trailing China economically, with a GDP growth rate around 9% to China's 10%-11% However India's growth is less reliant on the USA, and India does not seem to attract opprobrium resulting from a harsh policy towards territorial minorities.

The wealthiest family in the world (The Saud family, family income exceeds US$ half a trillion pa) has problems with it's Shia serfs and it's Wahabbi clerics. The Saud family gained power in the breakup of the Turkish empire. The princes of Saud are concerned that some of their peasants are restive because of neighbour Shia Iran.

Russia plays a very careful balancing act along it's extremely long border. Russia is a wealthy plum with poor Muslim neighbours who covet her mineral wealth.

The rest of the world prospers by dealing to the US, China and Europe.

Much depends on the USA If Benanke can minimize recession without exacerbating inflation, then world famine might be averted, the Saudis will have a chance to continue to govern their kingdom and the Chinese to retain the mandate of heaven.


MBF has been in existence for over sixty years, and provides medical insurance for around 20% of privately insured Australians. It funds research health issues.

Now there is a proposal, unanimously recommended by directors, to demutualize and sell MBF, providing voting members with substantial sums of money.

A few years ago I was asked by Nick Whitlam to vote for demutualization of the NRMA. The NRMA was an "on road" repair service, and had branched out to be the largest motorist and general insurance company in Australia. Sure, I got a few thousand dollars, but I lost a cheap on road repair service, and (my subjective impression) it seems that, since then, all insurance has gone up faster than inflation. Nick Whitlam (ex-PM's offspring) traded on his pater's good name and seems to have personally profited thereby. I believe he has degraded the "Whitlam" brand.

So I am quite skeptical when MBF directors recommend this demutualization. I would hope that the DPP (fed & state) and the "truth in advertising" people take a good look at this demutualization. I suppose it will go through. My fellow Australians nearly always seem to prefer a buck in the hand today over a probable future benefit.

1 April 2008

Henry Thornton, Chris Murphy, TPK.

Henry Thornton is a nom-de-blog of a columnist in "The Australian", and is also my reality check on how the Reserve Bank should respond. Whatever he says is invariably wrong. He said last month that rates should have risen 3/4%, they only went up 1/2% and still the economy is crashing. Thank God Reserve didn't put them up 3/4%!. He can't even get his published graphs right. In "The Australian of 1st April, ("The porridge is too hot Goldilocks") he has got the labels on the graphs of CAD (Current Account Deficit) and Debt mixed up. About the sort of sloppy work one would expect from somebody with the grasp of economics that he displays.

Henry seems to think that inflation can always be managed with interest rates. The recession in 1929 was caused by restrictive policies similar to those that Henry advocates. And make no mistake, that recession was orders of magnitude worse than anything since. The Dow Industrials dropped by nearly 90% (from about 380 to about 40) over a period of three years, wiping out the gains made in the previous 25 years. It took a further 25 years to reach 400. (In todays terms, that would be like a fall in S&P/ASX200 to just above 600, which is a level that it might have been circa 1985, if it had existed back then.) The inflation that we are now experiencing, Henry, is mostly imported. We didn't have low inflation because Johnny was a genius, or because Paul put good policies in place, we had low inflation because of the Chinese purchases of US Dollars. That is why Benanke is now lowering US interest rates, thus courting inflation. Admittedly, some of our burgeoning local inflation is because of expectations about the new Rudd government's employment legislation, but most of our inflation is imported, and trying to control that by raising interest rates is like pissing into the wind.

The price of getting it wrong is very bad. My wife was an economist, exposed to Warren Hogan during her training. She had it very firmly impressed upon her (and thus myself) that the one thing that was worse than inflation was deflation. That is what happened in the USA 1929-1933. Once deflation starts, it forms a positive feedback loop (amplifies it's own effect). The result? Think one of our big four banks going belly up. Think our share market dropping by 90% over the next three years. That's how bad it could get if Henry has his way.

Chris Murphy was on the front page of "The Australian" today. I have a lot of sympathy for Chris. He was a suitor to a cousin, and defended me pro bono on one occasion. He was also in the news about a week ago, reported as selling $25million shares in "Challenger", a company that was going nowhere fast. Challenger had TPK as a major shareholder. The latest corporate crash (Opes Prime) was apparently holding a lot of CM's shares, and it is reported that his $100 million portfolio has been "wiped out". I hope that it is not as bad as reported, and wish Chris luck in the future. If it is any consolation, it is my observation that the best predictor of success in this world is past success. I anticipate that when the recovery starts, you will be in the forefront.

TPK is reported as (still) financially sound. It is reported that a projected Las Vegas venture seems to be canceled, and that his Media interests remain sound, if not somewhat overborrowed. It is reported that his Macao investment is booming due to clever marketing.

I am not so sure that all is as well as it is painted. Media barons have influences on the media's perception of themselves which goes very far indeed beyond the obvious, as e.g. David Frost has learned. The venture with Lachlan (buyout of Packer Media) is probably dead due to a lack of business finance. Probably just as well for Lachlan, who I was beginning to think maybe wasn't quite all dumb, since (reading between the lines) he refused to give up Mama's blood won inheritance, which is probably why he is out of favor with Daddy. Actually I do not think any of the Murdoch brood has the smarts of their Da, and expect that Lachlan (like TPK) will do a Warwick Fairfax. As would Kerry if he hadn't been the second son.