The Buddy Holly Hike

Every day it's a getting closer

Australia's Reserve Bank is preparing to lift interest rates, declaring in its latest board minutes "rates will need to rise" and that it can't "wait indefinitely".

The unusually hard language follows an October board meeting that was "finely balanced" with three of its nine members absent, including the academic Warwick McKibbin who is believed to support pushing up rates.

Increasing the chance of a hike at the next meeting on Melbourne Cup day will be inflation data due out next Wednesday days before the board meets.

The minutes say rates will have to rise "at some point" as inflation climbs as a result of pressures flowing from the mining boom.

But "the timing" is a matter of judgment.

"While the board recognised it could not wait indefinitely... to see whether risks materialised, members judged that they had the flexibility to do so on this occasion," the minutes say. "It would be appropriate to hold the cash rate steady for the time being pending evaluation of further information at the next meeting."

Market analyst Sean Kean from Triple T Consulting said it was clear the decision was "an extraordinarily close call".

"The Bank was very close to hiking rates by a further 0.25 points. The minutes suggest there was a split in the ranks and those who were opposed to the hike won a stay of execution".

Tipping the balance in favour of waiting was unexpectedly weak business borrowing in July and August and the higher Australian dollar which would itself put downward pressure on inflation.

Treasurer Wayne Swan commended the Bank for noting the "beneficial effects" of the high dollar and said Australia had done well from its floating exchange rate.

"It has been an important shock absorber, it is one of the reasons we have had 20 continuous years of economic growth; something no other country can claim," he said.

But the Reserve Bank believes the effect of the high dollar on prices will be only temporary and notes that our currency is fairly steady against a broad basket of currencies, the US dollar being the key exception.

A pre-Christmas interest rate hike of 0.25 points would lift the Reserve Bank's cash rate to 4.75 per cent and Westpac's standard variable mortgage rate to 7.76 per cent, the highest of the Australian banks. If banks such as Westpac took the opportunity to further widen their margins the standard rate would approach 8 per cent for the first time since the onset of the financial crisis in 2008.

Financial markets were late yesterday pricing in a 37 per cent chance of a rate hike at the Melbourne Cup Day meeting and the certainty of 2 rate hikes within the next year.

Two further hikes would lift the monthly cost of servicing a $300,000 mortgage by $96 and the cost a $400,000 mortgage by $128.

Published in today's SMH and Age





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I think Swan mispoke

Here he is in the House today:

"A strong dollar has enjoyed bipartisan political support in this House. That has been a good thing, because that is vital for the confidence of global investors and global financial markets."

He probably meant a floating dollar.

But he had the opportunity to correct the Hansard and didn't.


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Learn to love the higher dollar

Never let anyone tell you the high dollar is a bad thing. Unless you're the kind of person who wouldn't want a pay rise.

The sharp increase in the dollar now underway is boosting the buying power of every dollar we have. If you want proof, go on line and check out US dollar prices. The numbers quoted are now identical to those we would have to pay in Australian dollars (before postage and duties where appropriate). Up until now we have had to pay extra. Our money now literally buys more.

If this is making you feel uneasy because the wealth seems unearned, lighten up. When our dollar would buy less than half of what it does now (US47.75 in 2001) we accepted the impoverishment with grace.

And our new buying power is earned. This year the world iron ore price will be twice what it was last year. The price of coking coal will climb 60 per cent. Our miners are shifting more of the stuff as well, meaning the buyers (often in China) need to swap a lot more of their own currency into our currency to complete the transaction, pushing up the price of our dollar and making even those of us who don't mine better off.

Movements in the value of the dollar are the chief means by which the increased wealth generated by mining is spread throughout the nation.... There are other means, taxation and royalties among them. When the former Prime Minister tired to boost the tax on mining to maintain our share of the bonanza he set off a chain of events which cost him his job. Dividends and share prices are also spreading the wealth, as are the jobs created servicing the mining industry in mining states and in far-flung locations in apparently unrelated industries.

But the main way that a boost in export income spreads throughout the nation is by increasing the value of the dollar. Think of it as automatic socialism if you like - spreading the gains (just as lower dollar helps spread the losses when our export earnings fall).

What about the losers, you are entitled to ask. I have been asked that in every decade since the dollar was floated. And it gets less of a concern as time goes on.

The losers are traditionally said to be Australia's manufacturers, people who compete with imports to sell what they make or try to sell their products overseas. Of course in a direct sense manufacturers benefit from the higher dollar, as we all do. Every dollar a manufacturer earns, every dollar a manufacturer has already saved, buys more. But in the same way as having a higher wage might put a job seeker at a disadvantage when it comes to getting or keeping a job, suddenly charging a higher price when expressed in foreign dollars will make it harder to sell your product. At home you will be competing a against suddenly more affordable imports.

It's less of concern than it was in part because there's less manufacturing than there was. Most of the Australian textile and clothing firms that used to compete with overseas suppliers have shut up shop. Mitsubishi has stopped making Australian cars.

And the manufacturers that are still here are increasingly importers as well as exporters. Holden imports parts for the cars it sells here and exports. Many firms are now so integrated across borders it is hard to tell whether they export, import, or just produce.

In parliament yesterday Treasurer Wayne Swan rattled off the usual list of supposed victims of the higher dollar, "trade exposed industries such as tourism, manufacturing, agriculture and education finding it tougher to compete in global markets".

He can scratch much of agriculture. Official forecasts have the global wheat price up 20 per cent this year. The volume of wheat leaving the country will be up 33 per cent. The global beef price will climb 5 per cent, the global wool price 2 per cent. Agriculture is likely to join mining as one of the causes of the higher dollar in the year ahead rather than languish as one of its victims.

Education will do very badly. But it was set to do badly anyway. Bad providers of education have damaged the brand. The higher dollar will make the poor service the industry provides to overseas customers all the more apparent.

Other industries will be hit without just cause. Broadly anyone who sells a service without a significant import component will find their product less attractive. Tourism providers are a good example. (Although not the international airlines. We left the country an extraordinary 600,000 times in August, up 13 per cent on the year before.) Artisans and computer programmers are other examples.

Australians making musical instruments or software for example will find themselves undercut. Unless they cut their prices. I am not being flippant. No-one likes to cut their prices (except smart firms such as Coles and Aldi who have discovered there's money it.)

But quoting a constant US dollar price on a website is one way to do it with dignity. Another way is to do it knowing that although you are charging fewer Australian dollars each is worth more.

Trying to stop the dollar climbing - trying to stop Australians becoming more wealthy in a mining boom - is next to impossible.

But if you want to try, Norway points the way. It imposes a petroleum super profits tax of 50 per cent and stores the loot offshore where it can't push up the currency.

It has succeeded in not giving itself a pay rise.

Published in today's Age


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Andrew Leigh's maiden speech: What is it about education?

It also formed the cornerstone of Maxine McKew's maiden speech.

Highlights of Andrew's speech below.

I sat in the public gallery with two of my children. I wanted them to know that this matters.

Malcolm Turnbull honoured Andrew with his presence. He was the only Coalition frontbencher to do so.

"At 38, I’ve spent more than half my life in formal education. Sitting in Judith Anderson’s high school English class, I learned to treasure the insights into the human condition that come from the great storytellers – the works of William Shakespeare and Jane Austen, George Orwell and Les Murray, Leo Tolstoy and Tim Winton. Studying law, I learned that open government, judicial independence, and equal justice are principles worth fighting for. And picking my way through the snow drifts to attend Harvard seminars with Christopher Jencks, I came to appreciate the importance of rigorously testing your ideas, and the power of tools such as randomised policy trials (a topic about which members can be assured I will speak more during my time in this place)...

First-rate schooling is the best antipoverty vaccine we’ve yet invented. Great teachers can light a spark of vitality in children, a self-belief and passion for hard work, that will burn bright for the rest of their lives...

But my research has also taught me that good intentions aren’t enough. As a professor-turned-politician, one of my role models is the late great US Senator Daniel Patrick Moynihan. Moynihan was innately sceptical about every social policy solution presented to him. Indeed, his starting point was to expect that any given social policy would have no measureable effect. But these high standards didn’t make him any less of an idealist, and Moynihan never lost his optimism and passion. What we need in Australian policy today is not more ideologues, convinced that their prescriptions are the answer, but modest reformers willing to try new solutions, and discover whether they actually deliver results...

This Australian project is not finished. It’s not something that stopped with the end of the First World War or with the death of Ben Chifley. And all of us, as today’s Australians, are the custodians of this project, a project that stretches back over generations and centuries, and binds all Australians, past, present and future, together in this greater cause. It is like the red sand that Gough Whitlam poured into the hands of the great Gurindji elder Vincent Lingiari, who declared ‘we are all mates now’. We have a responsibility to make sure that the Australian project, for the time that it rests in our hands, is advanced and continued...

It starts with respect, and a recognition that we can disagree without being disagreeable. Working as associate to Justice Michael Kirby taught me that intellect and compassion together are a powerful force for change. Admit that most choices are tough. Listen to others. Be flexible. And remember that the fire in your belly doesn’t prevent you from wearing a smile on your face.

Australian politics isn’t a war between good parties and evil parties. At its best, it is a contest of ideas between decent people who are committed to representing their local communities. I am happy to count among my friends people on both sides of this house – and I am sure some of those friends will be happy to know that I don’t plan to name them today.

That said, choosing between the parties has never been an issue for me. I was born in the year that Gough Whitlam won office, and when my mother’s pregnancy reached the nine month mark, she pinned an ‘It’s Time’ badge onto the part of her shirt that covered her belly...

Alfred Deakin was one of the earliest Australian leaders to make the distinction between liberals and conservatives. Deakin argued that liberalism meant the destruction of class privileges, equality of political rights without reference to creed, and equality of legal rights without reference to wealth...

A century on, it is hard to escape the conclusion that if Deakin were in this parliament today, he and his brand of progressive liberalism would find a natural home in the Australian Labor Party. (And given the numbers in today’s parliament, I am sure my colleagues would welcome his vote)...

Let me also acknowledge and express my love for my parents Barbara and Michael, who instilled in my brother Timothy and me the simple values that guide us today: Be curious. Help others. Laugh often....

Finally, to the people who sent me here, the voters of Fraser... to them I make this pledge – to do my utmost always: to represent their interests to the very best of my abilities, to remember always that their support for me is not my entitlement but their precious gift, and to ensure that, in their name, I make Fraser’s contribution to securing a better, fairer, more prosperous and more just future for our great nation."

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Even better value - subscribe to the SMH and pay me

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The Herald have not paid for this ad.

But they pay me.

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Current offers here.



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Log on and get out your card - we touched US$1.0002 overnight

Craig James on our new buying power:

· Parity! Who would have thought it, especially back in April 2001 when the Aussie dollar fell to a record low of US47.75 cents? Back then, Australia was considered an ‘old economy’ – we didn’t have a lot of companies producing the new fangled technology goods. We still don’t. Rather our claim to fame was as an exporter of coal, iron ore, beef and wool. Well the ‘old economy’ is back in vogue as China attempts to hoover up commodities across the globe.

The Chinese-driven Australian economy is in great shape while the tech-intensive United States economy is struggling. The bottom line is that our Australian dollar is relatively strong.

· Two days ago the Aussie dollar didn’t look like hitting parity any time soon as it was struggling to hold US98 cents. But talk of the US Federal Reserve pumping more dollars into its economy, firmer global economic data and greater demand for gold all propelled the Aussie to the fabled parity with the greenback.

· Does parity matter? The simple answer is no. But this is history – no one under 30 has seen this before and those a bit older would still be struggling to remember when the currency was so strong.

· A strong Australian dollar is neither a good or bad thing. It just is strong... And, as always, there are winners and losers. The main winners are consumers, provided with greater choice about where to take their holidays and where to buy their goods. Retailers may win if they are able to pass only some, but not all of the savings, of a stronger currency. The same goes for importers. And businesses win if they are net importers, especially if they need to buy equipment such as computers but don’t have a lot of exports as such.

· The losers include rural producers – they are less competitive on the global stage. Tourism businesses and regions will find it tougher to attract foreign and domestic visitors. Exporters, more generally, find it tougher – manufacturers, film & TV production companies and universities and colleges to name a few.

· In a net sense, the higher Australian dollar acts to slow down the economy. Consumers and businesses buy more imports, exporters find it more difficult to sell goods, while import-competing firms also experience tougher operating conditions.

· When it comes to the sharemarket, it would be nice to neatly wrap up the argument one way or another – is it positive or negative? But in essence it is more complicated. It depends whether companies have insulated (hedged) themselves from currency fluctuations, whether they have ‘natural hedges’ in place, and it depends what else is happening at the same time. BHP Billiton doesn’t protect itself from currency fluctuations, rationalising that if the Australian dollar rises, it is likely to be because commodity prices are rising at the same time. So what it loses on the swings, it gains on the roundabouts.

· A rising Australian dollar is not unambiguously positive or negative for the sharemarket. But it is useful to note that the Australian dollar has tended to rise in line with the US sharemarket in recent years and that, in turn, has positively influenced the Australian sharemarket. But these correlations do change over time.

Is the Australian dollar strong or US dollar weak?

· Well, both answers are right. The Australian economy has the strongest economy of any advanced nation in the world. Australia also has the highest interest rates in the advanced world and close to the lowest level of government debt. Australia is also the biggest beneficiary of China’s industrialisation.

· At the same time, the US economy is emerging from the worst recession since the Great Depression. Interest rates are at zero, but the Federal Reserve is planning to inject even more cash into the economy to prevent the recovery from stalling. Unemployment is near 10 per cent, the budget deficit is near 10 per cent of GDP and an oversupply of homes still exists.

· So in a ‘big picture’, longer-run sense there are grounds to argue that the Australian dollar is fundamentally strong and also good reasons to claim that the US dollar is fundamentally weak. But what about recent trends?

· The Aussie dollar bottomed in early June (June 7) when it fell to US81.50 cents. Since that time the Aussie dollar has risen by around 21 per cent. Clearly these stellar gains in such a short period of time have caused many to question whether the rally is sustainable. That is, how much of the recent gains for the Aussie dollar are due to weakness of the US dollar, and how much reflect fundamentals such as higher commodity prices.

· Unfortunately there is no fool-proof way to work it out. Certainly one of the best ways to assess the changes is to look at commodity prices in both US dollar terms and currency-neutral SDR terms. Since the start of June the Commonwealth Bank commodity index has risen by just over 11 per cent in SDR terms while lifting around 20 per cent in US dollar terms. It’s also worth pointing out that the US dollar index, which broadly measures the strength of the greenback, has lifted by around 13 per cent over the same period.

· These figures suggest that around half of the Aussie dollar gains can be attributed to commodity prices and the other half to US dollar weakness. But when the US dollar is falling, commodities become cheaper in local currency terms for buyers in Europe and Asia. So some of the gain in commodity prices would reflect greater short-term demand for a cheaper product. At the same time, the perception that Aussie interest rates are likely to rise in coming months and our strong economy would also be factors driving the Aussie dollar higher.

· All that we can say with certainty is that while there is indeed a fundamental basis to the Aussie dollar’s more recent gains, a healthy component of the rise reflects a weak US dollar. That point is important when you consider that commodity prices have only risen by 1 per cent over the period since early June.

So where do we go from here?

· Our currency strategists are tipping the Aussie dollar to be at US$1.02 in the March quarter 2011 before easing to US99 cents in June and US92 cents by December 2011.

· Why lower? The thinking is that the US economic recovery will gain momentum in 2011, fuelled by zero interest rates and a mountain of cash. But when the recovery is on a firmer footing, the Federal Reserve will start the process of ‘normalising’ interest rates – that is, getting rates back to more normal levels. As a result the US dollar will gather support.

· But what about the theory that the last 30 years or so have been somewhat of an aberration in the history of the Aussie dollar?. Up until 1982 the Aussie dollar traded above parity, in fact the Aussie pound was above US$2.40 in the late 1920s?

· But we shouldn’t forget the fact Australia is a net debtor to the rest of the world – it maintains a high current account deficit and high external debt. If Australia was to change from a debtor to a creditor nation as a result of industrialisations in China and India then that would be a different question. But Australia’s high external deficit does act as a fundamental barrier to the Australian dollar rising too high against other global currencies.

· The Aussie was last at US$1.01 on July 21 1982; last at US$1.02 on July 1 1982; last at US$1.03 on June 16 1982; and last at US$1.04 on June 9 1982.

What are the implications for investors?

· If the Aussie dollar continues to rise, the Reserve Bank will become more reluctant to lift interest rates. A high Aussie dollar acts to slow the economy so a rate hike would act like a ‘double whammy’ as well as serving to push the currency even higher.

· Investors need to take into account currency influences when assessing prospects for individual companies. But the key point is that the currency it is just another influence. The main driver, as always, for company earnings is what the company does, how it is run and who it competes with. It’s important that investors don’t get too blindsided by focussing on currency changes.

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Broadband in the toilet: Why wait for the NBN?

I had a chat to the head of TransAct the other day. Ivan Slavich is connecting houses to fibre without waiting for the NBN.

As soon as a new suburb springs up on the outskirts of Canberra, he goes to the developer, does a deal and puts the fibre direct into every house as it is built.

(TransAct has wired most of Canberra with "fibre to the curb" which is a way of saying fibre to the node where the nodes are very close to each house. There would be only a few hundred metres of copper between my house and the node, hanging from an ACTEW electricity pole.)

But Slavich figures that these days, why bother with copper.

But surely your fibre to the home is only for new suburbs on the fringes where the developers come up with some cash, I asked him.

"No", he said. "Anyone who is doing a bit of urban infill or building some units can come to us. We'll connect them to fibre."

The point is Ivan is not waiting for the NBN. Fibre to the home is pretty much a commercial proposition for him without waiting for the NBN.

(And the speeds Slavach is about to get from his fibre-to-curb service make replacing it with the NBN a distinctly uncommercial proposition.)

In Brisbane Campbell Newman has the same sort of idea. The biggest local government operation in the nation, the Brisbane City Council owns the company that owns Brisbane's sewer and water lines.

As I mentioned a year or so back sewerage pipes are rather good for carrying fibre into each home, via the toilet.  Japan and the US are already doing it. There is plenty of room within each sewage pipe, and every home already has the sewer connected. The fibre swims in the sewage and a tiny robot clears the pipes to give it lots of room - an added bonus.  It is much cheaper than digging new trenches.

Back then a commenter pointed out that gas pipelines would be even better. They are plentiful in Victoria and they never clog up.

I reckon Brisbane will do it - on a purely commercial basis - ahead of the NBN. As a result the NBN will never be a truly national operation.

As I have been saying, some parts of the country have good broadband, others can get it and will get it soon enough (most likely ahead of the NBN).

Some can not. That's where I would be concentrating limited public resources. Reasonable?

Maybe not. Why don't we examine the question? I reckon that's reasonable.


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Tonight we're gonna party like $20 is $19.99

Great idea, @albertinho




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A cost-benefit analysis for the Snowy Mountains Scheme?

Yes. A public inquiry into the costs and benefits

By way of background:

"The Commonwealth Government, however, being seized with the national implications of these proposals, brought about a meeting in 1946 of Commonwealth and State representatives to discuss the general utilization of Snowy waters, and subsequently a Committee was set up to examine the whole question on the broadest possible basis. This Committee, in a report submitted in November, 1948, suggested consideration of a far greater scheme than any previously put forward. It involved not only the simple question of utilization of the waters of the Snowy, but a general consideration of the possible diversion of a number of rivers in the area, tributaries, not only of the Snowy, but of the Murray and Murrumbidgee. The recommendations of the Committee were generally agreed to by a conference of Ministers representing the Commonwealth and States of New South Wales and Victoria, and it was also agreed that the Committee should continue its investigations. A further report was submitted by the Committee in June, 1949, as a result of which the Commonwealth Parliament passed the Snowy Mountains Hydro-electric Power Act. In the next month the Snowy Mountains Hydro-electric Authority was constituted, and thus was inaugurated the greatest engineering scheme in Australian history."

The Parliamentary Library has come good with a final report dated May 1950:

Proposals to Divert the Snowy River - Final Report




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We're about to hit the shops?

Retailers such as Gerry Harvey might be grumbling, but the strong dollar and booming jobs market appear to have made us our keenest to spend in years.

Raw figures collected for this month's Westpac Melbourne Institute consumer index show an astounding 63.5 per cent of us agreed that now was a good time to buy a major household item - the highest proportion since January 2005.

A mere 17 per cent felt it was a bad time to buy for the house.

Harvey Norman chairman Gerry Harvey and JB Hi-Fi chief Terry Smart said this week lower import prices were hurting their margins making conditions worse than in the global financial crisis.

But buying buying intention figures point to a very strong Christmas season, at least from the point of view of those buying.

At 46.7 percentage points, the gap between those prepared to spend and those not is one of the biggest on record and in excess of that seen in the 2007 spending boom.

The survey shows the confidence of Coalition voters improving in the wake of the election... jumping 7 per cent in October to be 14 per cent behind that Labor voters and well into positive territory.

Conducted in the first week of the month the results may reflect relief at the Reserve Bank's decision to leave interest rates on hold, although there remains evidence of caution with mortgage holders less confident than either tenants or outright owners.

The overall index climbed to 117 points, meaning that across a range of issues pessimists outweighed optimists 17 percentage points.

Westpac economics chief Bill Evans said confidence would "be tested" if, as he expected, the Reserve Bank boosted interest rates at its next meeting on Melbourne Cup Day.

Lending figures released yesterday showed loans for housing down 13 per cent in the year to August, loans for construction down 20 per cent, commercial loans down 7 per cent, and personal loans up 2 per cent.

New home building picked in the June quarter climbing 8 per cent after being flat in both the March and December quarters.

Published in today's SMH


Consumer Sentiment Index October

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"In ways we've only dreamed of"? Do the NBN ads comply with the guidelines?

Here are the government ads.

Here's what the guidelines say:

20. Campaign materials should enable the recipients of the information to distinguish between facts, comment, opinion and analysis.

21. Where information is presented as a fact, it should be accurate and verifiable. When making a factual comparison, the material should not attempt to mislead the recipient about the situation with which the comparison is made and it should state explicitly the basis for the comparison.

Here's what the ads say:

"It will boost our economy"

"It will touch our lives from the way we work to the way we play, and in ways we only dream of."

Here's how they got it past the committee.


Have a go. Try to distinguish between facts, comment, opinion and analysis:









Small beer I suppose, compared to the cost of the project.


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Wednesday Column: Just build the NBN and bugger the expense

I am worried about the state of our roads. But I've got an idea. Bear with me, even if it reminds you of the NBN.

Let's replace the lot - every single road - with brand new state-of-the-art roads. They will be faster, they will unleash new uses for roads not yet dreamed of, and they will boost our productivity in ways that can not yet be quantified; so there's no point in subjecting the idea to a cost-benefit analysis.

Sure it will cost tens of billions, tie up our construction workforce for years and destroy existing fully-functioning infrastructure on a never-before imagined scale, but it'll be nation-building.

And let's do it without even considering alternative uses of the money, because... well that's where I lose my way.

I've been deluged with this sort of stuff ever since I had the temerity a few weeks back to suggest we should look before we leap on Australia's biggest infrastructure project, subject the planned National Broadband Network to the same sort of cost-benefit analysis as is required for lesser projects and was required for the Snowy Mountains scheme to which it is compared.

But apparently there's no point in conducting a cost-benefit analysis because you can not "talk about the benefits of an NBN with meaningful quantification of these benefits".

Which to me, sounds like a weak selling point... I can think of all sorts of projects (replacing every road in Australia, putting solar panels on every roof in Australia) for which unquantifiable benefits would normally be regarded as a poor reason for letting the tractors roll.

I am sure that faster, more widespread broadband would be nice. But I keep being told it's essential ("physics doesn't allow faster copper") and essential now ("the problem is that most people don't understand the advantages we will have if we do this now") in an inversion of the usual injunction against being an early adopter.

The selling points are unclear, which may be why "most people don't understand" them. Much of Australia already has good access to high speed broadband, so good that when offered the opportunity to switch (Optus Vision and Foxtel have slung coaxial cables down suburb after suburb) most passed.

It would be a bold planner that ignored actual market intelligence about what consumers are prepared to pay for. The NBN's cables will be slung alongside the lightly-used Otpus Vision and Foxtel cables cables, but it is not completely stupid. It has done a deal with Telstra to disconnect our existing lines after it puts up its cables but also reportedly a deal with Optus Vision to turn off its service and a deal with Foxtel to prevent its service carrying voice and data.

Whereas normally Australia's competition tsar Graeme Samuel might be expected to raise an eyebrow at such a wanton destruction of competition, those who have spoken to the ACCC chief say he's relaxed about the idea and excited as a tech-head. In any event special legislation is planned that will exempt the literal destruction of competition from the provisions of the Trade Practices Act.

Many Australians are denied good access to broadband. For them government action along the lines proposed is a good idea and would pay social dividends. The cost-benefit studies that have been done overseas find that it's the ubiquity of broadband rather than its speed that brings the benefits. That's why neither the US nor the UK - two countries to which we normally compare ourselves, are planning to rip out their existing wires and replace them with faster ones.

If asked, Australia's Productivity Commission would most likely find the same thing. And it would explain the meaning of the term "opportunity cost".

Spending tens of billions of dollars one thing means it can't be spent on another. Some say it's the only important concept in economics. Tying up tens of thousands of construction workers ripping out and replacing what we have necessarily means they won't be available to build wind farms or desalination plants or something else we might regard as more important.

The reason the Productivity Commission isn't being asked is that promoters of the NBN are afraid of the answer.

They tell me things that make me want to weep: "I used to work in a mechanics shop. We frequently had people telephone and describe their problem then try to order the correct parts. Imagine if, instead of dialing in, the customer could 'screen in' and show us exactly the motor and their problem." Gee they could do that now, with a webcam and access to even rudimentary broadband.

How about telemedicine, which can happen and is happening now through hospitals connected directly to fibre, without the need to put a fibre into almost every house. Electronic health records don't even need the NBN, yet our government is happy to parade around reports pretending they would be one of the benefits of the NBN.

Many Australian businesses are already connected to fibre. Many more could be if they paid for it, or moved down the street. Households - quite rightly - often can't see the need, even in Tasmania where the introductory wholesale price is close to zero, making the retail price unrealistically competitive.

I am not saying that fast internet is bad, just as I would never say fast air travel is bad. But there's a museum in Britain where tourists can sit inside and touch the last Concorde. The fastest passenger plane ever was a massive government project conceived in the absence a cost-benefit study. Its benefits never approached its costs.

In a sane world we would ask questions before jumping to answers. It is what Labor promised when it said its decisions would be evidence-based. Instead our Communications Minister is behaving like a shark moving in for the kill. His eyes are clouding over.

As his Shadow Malcolm Turnbull plaintively asked yesterday, "if the NBN is the answer, what was the question?"

Published in today's SMH and Age

Peter Costello today: "You might think someone would look at whether it would work before spending $43 billion. You might even wonder what else could work with $43 billion."

Malcolm Turnbull today: "Governments deal with scarce resources – your taxes – and they owe it to us to rigorously prioritise and analyse the projects on which those taxes are spent."

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Whoops. Economics Nobel Prize winner blocked from joining Federal Reserve. "Not ready"

Only in America:

"For months now, Sen. Richard Shelby has been blocking the nomination of economist Peter Diamond to join the board of the Federal Reserve. "I do not believe he’s ready to be a member of the Federal Reserve Board," Shelby said, "I do not believe that the current environment of uncertainty would benefit from monetary policy decisions made by board members who are learning on the job.”

Today, Diamond won the Nobel Prize in economics. Of course, Shelby never said he wasn't a "skilled economist." He said he didn't know monetary economics...."


Here's the announcement:

Markets with search costs

Why are so many people unemployed at the same time that there are a large number of job openings? How can economic policy affect unemployment? This year's Laureates have developed a theory which can be used to answer these questions. This theory is also applicable to markets other than the labor market.

On many markets, buyers and sellers do not always make contact with one another immediately. This concerns, for example, employers who are looking for employees and workers who are trying to find jobs. Since the search process requires time and resources, it creates frictions in the market. On such search markets, the demands of some buyers will not be met, while some sellers cannot sell as much as they would wish. Simultaneously, there are both job vacancies and unemployment on the labor market.

This year's three Laureates have formulated a theoretical framework for search markets. Peter Diamond has analyzed the foundations of search markets. Dale Mortensen and Christopher Pissarides have expanded the theory and have applied it to the labor market. The Laureates' models help us understand the ways in which unemployment, job vacancies, and wages are affected by regulation and economic policy. This may refer to benefit levels in unemployment insurance or rules in regard to hiring and firing. One conclusion is that more generous unemployment benefits give rise to higher unemployment and longer search times.

Search theory has been applied to many other areas in addition to the labor market. This includes, in particular, the housing market. The number of homes for sale varies over time, as does the time it takes for a house to find a buyer and the parties to agree on the price. Search theory has also been used to study questions related to monetary theory, public economics, financial economics, regional economics, and family economics.

Peter A. Diamond, US citizen. Born 1940 in New York City, NY, USA. Ph.D. 1963, Institute Professor and Professor of Economics, all at Massachusetts Institute of Technology (MIT), Cambridge, MA, USA.

Dale T. Mortensen, US citizen. Born 1939 in Enterprise, OR, USA. Ph.D. 1967 from Carnegie Mellon University, Pittsburgh, PA, USA. Ida C. Cook Professor of Economics at Northwestern University, Evanston, IL, USA.

Christopher A. Pissarides, British and Cypriot citizen. Born 1948 in Nicosia, Cyprus. Ph.D. 1973, Professor of Economics and Norman Sosnow Chair in Economics, all at London School of Economics and Political Science, UK.

Keynes is back. He said friction stopped markets from clearing.

This year's winners are telling us how.

Created by Russ Roberts - resources here, MP3 here

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Economics Nobel to Peter Diamond, Dale Mortenson, and Christopher Pissarides

Friction in markets. It is real and it explains unemployment and much more.

Keynes is back.

Read more >>

The Nobel Prize in Economics - from 10.00 pm AEDT tonight

It'll be announced here.

In the mean time...

Here are this year's IgNobel winners:

ENGINEERING PRIZE: Karina Acevedo-Whitehouse and Agnes Rocha-Gosselin of the Zoological Society of London, UK, and Diane Gendron of Instituto Politecnico Nacional, Baja California Sur, Mexico, for perfecting a method to collect whale snot using a remote-control helicopter.

REFERENCE: "A Novel Non-Invasive Tool for Disease Surveillance of Free-Ranging Whales and Its Relevance to Conservation Programs," Karina Acevedo-Whitehouse, Agnes Rocha-Gosselin and Diane Gendron, Animal Conservation, vol. 13, no. 2, April 2010, pp. 217-25.

MEDICINE PRIZE: Simon Rietveld of the University of Amsterdam, The Netherlands, and Ilja van Beest of Tilburg University, The Netherlands, for discovering that symptoms of asthma can be treated with a roller-coaster ride.

REFERENCE: "Rollercoaster Asthma: When Positive Emotional Stress Interferes with Dyspnea Perception," Simon Rietveld and Ilja van Beest, Behaviour Research and Therapy, vol. 45, 2006, pp. 977–87.

TRANSPORTATION PLANNING PRIZE: Toshiyuki Nakagaki, Atsushi Tero, Seiji Takagi, Tetsu Saigusa, Kentaro Ito, Kenji Yumiki, Ryo Kobayashi of Japan, and Dan Bebber, Mark Fricker of the UK, for using slime mold to determine the optimal routes for railroad tracks.

REFERENCE: "Rules for Biologically Inspired Adaptive Network Design," Atsushi Tero, Seiji Takagi, Tetsu Saigusa, Kentaro Ito, Dan P. Bebber, Mark D. Fricker, Kenji Yumiki, Ryo Kobayashi, Toshiyuki Nakagaki, Science, Vol. 327. no. 5964, January 22, 2010, pp. 439-42.

PHYSICS PRIZE: Lianne Parkin, Sheila Williams, and Patricia Priest of the University of Otago, New Zealand, for demonstrating that, on icy footpaths in wintertime, people slip and fall less often if they wear socks on the outside of their shoes.

REFERENCE: "Preventing Winter Falls: A Randomised Controlled Trial of a Novel Intervention," Lianne Parkin, Sheila Williams, and Patricia Priest, New Zealand Medical Journal. vol. 122, no, 1298, July 3, 2009, pp. 31-8.

PEACE PRIZE: Richard Stephens, John Atkins, and Andrew Kingston of Keele University, UK, for confirming the widely held belief that swearing relieves pain.

REFERENCE: "Swearing as a Response to Pain," Richard Stephens, John Atkins, and Andrew Kingston, Neuroreport, vol. 20 , no. 12, 2009, pp. 1056-60.

PUBLIC HEALTH PRIZE: Manuel Barbeito, Charles Mathews, and Larry Taylor of the Industrial Health and Safety Office, Fort Detrick, Maryland, USA, for determining by experiment that microbes cling to bearded scientists.

REFERENCE: "Microbiological Laboratory Hazard of Bearded Men," Manuel S. Barbeito, Charles T. Mathews, and Larry A. Taylor, Applied Microbiology, vol. 15, no. 4, July 1967, pp. 899–906.

ECONOMICS PRIZE: The executives and directors of Goldman Sachs, AIG, Lehman Brothers, Bear Stearns, Merrill Lynch, and Magnetar for creating and promoting new ways to invest money — ways that maximize financial gain and minimize financial risk for the world economy, or for a portion thereof.

CHEMISTRY PRIZE: Eric Adams of MIT, Scott Socolofsky of Texas A&M University, Stephen Masutani of the University of Hawaii, and BP [British Petroleum], for disproving the old belief that oil and water don't mix.

REFERENCE: "Review of Deep Oil Spill Modeling Activity Supported by the Deep Spill JIP and Offshore Operator’s Committee. Final Report," Eric Adams and Scott Socolofsky, 2005.

MANAGEMENT PRIZE: Alessandro Pluchino, Andrea Rapisarda, and Cesare Garofalo of the University of Catania, Italy, for demonstrating mathematically that organizations would become more efficient if they promoted people at random.

REFERENCE: “The Peter Principle Revisited: A Computational Study,” Alessandro Pluchino, Andrea Rapisarda, and Cesare Garofalo, Physica A, vol. 389, no. 3, February 2010, pp. 467-72.

BIOLOGY PRIZE: Libiao Zhang, Min Tan, Guangjian Zhu, Jianping Ye, Tiyu Hong, Shanyi Zhou, and Shuyi Zhang of China, and Gareth Jones of the University of Bristol, UK, for scientifically documenting fellatio in fruit bats.

REFERENCE: "Fellatio by Fruit Bats Prolongs Copulation Time," Min Tan, Gareth Jones, Guangjian Zhu, Jianping Ye, Tiyu Hong, Shanyi Zhou, Shuyi Zhang and Libiao Zhang, PLoS ONE, vol. 4, no. 10, e7595.

Yes. "Fellatio by Fruit Bats Prolongs Copulation Time"


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Costings aftermath: Joe Hockey is to truth as....

He is the would-be Treasurer

Shadow Treasurer Joe Hockey was not telling the truth when he claimed days ahead of the election the Coalition's costings had been "audited" by a big Australian accountancy firm.

His claim that "we have the fifth-biggest accounting firm in Australia auditing our books and certifying in law that our numbers are accurate" helped shield the Coalition from criticism about its decision not to submit costings to Treasury.

Documents seen by The Herald show the federal directors of both the Liberal Party and National Party would have known the claim to be untrue.

Brian Loughnane and Brad Henderson signed a letter on the day the costings were released addressed to the Perth accountancy firm WHK Horwath confirming that its work for the Coalition was primarily "not of an audit nature".

Loughnane also countersigned a letter from two of the firm's principals which reminded the Coalition their work would "not constitute an audit in accordance with Australian auditing standards or a review in accordance with Australian auditing standards".

Within hours of the release of the work Hockey inflated it to a legally watertight endorsement telling ABC TV "they have certified our numbers based on all the information we have provided them, they have legal obligations and legal risks"...

Challenged as to whether the Coalition's numbers made sense he told ABC radio, "you know what, if the fifth-biggest accounting firm in Australia signs off on our numbers it is a brave person to start saying there are accounting tricks. I tell you it is audited. This is an audited statement.’’

Opposition finance spokesman Andrew Robb backed up Mr Hockey saying if Horwath made "a mistake with the auditing of accounts for companies or prospectuses or mislead, they are at risk of being punished and going to jail".

In fact the letter from Horwath principals Geoff Kidd and Cyrus Patell dated 13 July and countersigned by Loughnane makes clear that the work was little more than a spreadsheet exercise designed to "review the arithmetic accuracy of the Liberal Party of Australia's costing estimates".

Asked to explain the discrepancy between the letters he had signed and the claims made by his Treasury spokesman, Mr Loughnane said yesterday "you'll have to ask Joe why he said what he said".

Through a spokesman Mr Hockey said he had used the word 'audited' "as would be understood in laymen's terms".

"A technical audit would have obviously been impossible as there are no mandated standards for audits of election costings," the statement read. The costings had been "independently reviewed and verified".

A Treasury analysis conducted at the request of the independents found the costings out by $11 billion as a result of errors including double counting and failing to account for the loss of dividends following a privatisation.

Horwath is the second organisation to have distanced itself from the Coalition over costings. The National Centre for Economic Modelling said it had never worked for the Coalition although might have indirectly through the Parliamentary Library despite claims by Mr Robb that Coalition policies had been "carefully modelled by NATSEM".

Published in today's SMH and Age

Statement from the Institute of Chartered Accountants in Australia

26 August 2010

The Institute of Chartered Accountants in Australia (the Institute) has received a complaint about a matter that involves publicly raised allegations regarding the conduct of two members with accountancy firm, WHK Horwath, Perth.

The Institute has commenced an investigation which involves an opportunity for the members to respond to the allegations.


Professional Conduct Process

As a professional organisation, membership of the Institute is based on meeting the highest standards of professional conduct and performance. The Institute treats matters that bring the profession into disrepute very seriously.

Issues arising from members’ conduct are investigated under the Institute’s By-laws and relevant cases are referred to the Professional Conduct Tribunal for determination.

Based on legal advice, specific commentary cannot be provided while matters are considered for investigation or for the duration of any subsequent Tribunal hearings. All information relating to complaints lodged with the Institute and produced during the investigation process is confidential.

To ensure the privilege of professional membership is upheld the Professional Conduct Tribunal has the power to impose sanctions on individual members who act inappropriately.

The ultimate sanction that can be imposed is exclusion from membership and withdrawal of the right to use the Chartered Accountants designation. Other sanctions include suspension, reprimand, fines or the requirement to undertake additional professional training.

For further information about the Institute's disciplinary process please visit http://www.charteredaccountants.com.au/A116936841

APES 110 Code of Ethics for Professional Accountants

Section 130.6: Where appropriate, a Member should make Clients, employers or other users of their services aware of limitations inherent in the services to avoid the misinterpretation of an expression of opinion as an assertion of fact.



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The Australian does not follow a party line

Want proof?

A fortnight ago The Australian decided to unmask blogger Grog's Gamut, making a campaign of it.

His blog post that day was his last. (So far)

His final tweet was a retweet from James Massola, the just-hired journalist at The Australian's Canberra bureau who outed him:

RT jamesmassola @GrogsGamut should keep blogging - http://bit.ly/93topu

Sadly ironic, hey?

James and his employer knew it would get Grogs in trouble with his employer - the public service. They as good as boasted about it.

Here's Massola in courageous mode:

"So why did I out Grog if I thought he should keep blogging?

As a prolific blogger and tweeter, Jericho was putting information in the public domain to provoke discussion and debate. It might have been a hobby, but by engaging directly via Twitter with dozens of journalists, Jericho and his views became part of the public debate - and in an age in which the dissemination of information has been democratised, his scribblings had an influence.

But there is a catch to this democratisation. With political influence comes responsibility and the need for accountability, in the same way that journalists are accountable for what they write, tweet and broadcast.

Jericho was anonymous, and public interest in his identity was growing parallel to his influence. In my view - and in the view of this newspaper - the fact he had a partisan point of view, worked in the public service and wrote about his department was a matter of public interest."

What was that James?

"With political influence comes responsibility and the need for accountability, in the same way that journalists are accountable for what they write, tweet and broadcast."

But never accuse The Australian of groupthink.

Because come Monday a week ago there was Henry Thornton, "the nom-de-plume of an eminent independent economist" writing his usual column, a day ahead of the monthly Reserve Bank board meeting.

Look at the snapshot above, click on the link. He gets to keep his identity blurred and gets to keep his day job.

Thornton tries to influence the Reserve Bank board for heavens sake! For all I know he is a director of a public company beholden to banks. As James would say, "his scribblings have an influence".

I do not think he should be outed, but you would think The Australian would if it took itself seriously.

It squashed Grogs because it could. I think it is protecting Henry Thornton precisely because it knows he is actually a person of influence, who it needs.

Oh, and he is conservative as well. Maybe that makes a difference.

In fact the Australian has a long history of using pseudonames, as Restless Capital outlines.

Martin Collins, for years unidentified, took his first name from Martin Place in Sydney and his second name from Collins Street in Melbourne.

Julie Posetti reports that some of The Australian's staff members are phoning the employers of pseudonymous bloggers in an apparent at intimidation.

Hope not. At least Thornton's safe.

The last word - for now - goes to the perceptive Sceptic Lawyer, who herself has a history of pseudonames:

"I dislike the cut-rate conservatism The Australian offers as representative of my side of politics"

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The Aussie since the float - our wild ride

Craig James at CommSec has prepared the most wonderful graph.

It brings back memories.

Like this Prior cartoon:

The Aussie Since the Float


A bit like this "graph" of US real estate prices - before the plunge:

If only someone could make a roller coaster graphic for us, perhaps with the same sound effects.



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What David told Penny. The Finance Department Red Book

For the record:

Finance Incoming Goverrnent Brief
"The role of the Finance Minister is challenging and interesting..."







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Parity with the US dollar? Don't bet on it.

The Aussie dollar is within spitting distance of one US dollar for the first time in decades after an extraordinary surge in hiring pushed an extra 56,000 Australians into full-time jobs in September on top of 57,000 in August -- a two month recruitment spree bettered only once in Australian history.

The news pushed the Aussie to a post-float high of 99.20 US in early European trade and has investment bank Goldman Sachs predicting an Aussie worth US$1.06.

"We are destined to have a crack at parity," said National Australia Bank research chief Peter Jolly. "On Tuesday the Reserve Bank surprised by not moving rates and the currency came off. But Thursday's strong employment report made the market price back in a much greater chance of a hike in November."

Some 50,000 previously out-of-work Australians found full-time work in September and 6300 previously part-time workers moved full-time.

In the past six months an average of 32,000 Australians per month have found jobs - well in excess of the 21,000 per month growth in the working age population.

"Employment is now growing faster than before the global downturn," said Westpac economist Bill Evans. "An unemployment rate below 5 per cent is likely by Christmas."

Holding steady at 5.1 per cent, Australia's unemployment rate is now just a fraction above the psychologically important benchmark, with the unemployment rate among men looking for full-time work well below it at 4.6 per cent.

Western Australia has the tightest labour with an overall unemployment rate of 4.6 per cent and just two unemployment people for each vacant job. In NSW there are three unemployed for each vacant job and in Victoria four... NSW has created the bulk of the new jobs since January hiring an extra 66,400 workers, well in excess of Victoria’s 51,600 and Western Australia’s 38,800. The NSW unemployment rate stands at 5.2 per cent and Victoria’s 5.3 per cent.

Jobs Minister Chris Evans welcomed what he said was a “very strong result and tribute to economic management and the stimulus program.”

But he said the jobs surge would put upward pressure on interest rates and further pressure on the dollar.

"Obviously, there are impacts on the value of the dollar and interest rates which will be governed by the Reserve Bank," he said. "What we are seeing is the stimulus plan bringing home for Australians job opportunities and that's to be celebrated."

In unusual bipartisan agreement Shadow Treasurer Joe Hockey said he had “always been forthright in attributing some merit to the government’s stimulus package.”

“There can be no doubt that throwing huge amounts of money at the economy did boost demand,” he told a Melbourne business audience delivering a speech entitled “Managing success”.

However the government’s budget settings were “no longer appropriate."

"They were put in place during a time when the economy faced potential downside risks. Now the economy is running close to Treasury’s definition of full employment, the government’s settings must be recalibrated,” he said.

The high dollar is set to hurt export industries such as tourism and education as their products become more expensive for foreigners attempting to buy them with local currencies.

Foreign continue to get cheaper for Australians further harming domestic tourism with an increase of 10 per cent in the number of Australians holiday’s abroad in the year to August.

Although prompted by an expectation that the Reserve e Bank will lift interest rates the higher dollar will take some pressure off the bank by pushing down the price of imported goods, containing inflation.

Nevertheless late yesterday the money market was pricing in a 68 per cent chance of a Melbourne Cup Day rate hike, up from 40 per cent before the jobs news.

Published in today's SMH and Age

PILING ON THE JOBS

Extra jobs since January (current unemployment rate)

NSW + 66,400 (5.2%)
Victoria + 51,600 (5.3%)
Queensland + 44,500 (5.3%)
Western Australia + 38,800 (4.6%)
South Australia + 7,100 (5.5%)
Tasmania down 3,400 (5.4%)

ABS 6202.0 seasonally adjusted



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