Tanned, rested, and ready from a week of hiking in the Rocky Mountains, your editor is happy to report that good Mexican food is still cheap in America and prices are still rising in Australia. But did we miss something while we were away?
Lots of data is due out this week in Australia. The big story is still with interest rates. The RBA meets on Tuesday to decide whether to leave the cash rate at its 12-year high of 7.25% or raise it.
What would you do if it were your job to set the price of money? We’d quit. It’s a fool’s errand.
The trouble is, looking at data doesn’t tell you enough to make a wise decision. If were fixing the price for a given thing, you’d look at supply and demand. But demand for what?
The obvious answer is: demand for money! The RBA released data on Friday showing that demand for credit is growing less fast. Housing credit grew by less than a tenth of a percent and business borrowing didn’t grow much either.
Isn’t this a good thing? By raising the price of money (with the cash rate) the RBA has reduced the growth in demand. You can’t spend what you haven’t borrowed. However, keep in mind that overall demand for credit is still growing. Housing credit grew by 9.5% in the last year. And demand for all credit grew by 14.1% since last April.
That is not exactly a slump, is it? So what should the RBA do? It can wait for the GDP figures to come out later this week. Those will probably that the economy is growing at less that 3% a year, while inflation is still running above 4%. How can you still have rising prices with slower economic growth? It reminds us of the old U2 song, running to stand still.
Well, here’s one possible answer: the RBA can influence the demand for credit in Australia, but it cannot influence the demand for Australian resources. It’s careful formula for calculating the price of money is ruined by a variable which is beyond its control. Don’t you hate it when that happens?
A month or so ago, we pointed out that that higher prices for coal, iron ore, and bulk commodities were leading to record favourability in Australia’s terms of trade. That is a problem for the RBA. To read up on what the Terms of Trade are, check out this article: http://www.dailyreckoning.com.au/terms-of-trade/2008/04/18/
When the terms of trade improve (you get more money for what you sell and pay less for what you buy), you have money flooding into corporate and eventually, personal coffers. That money can be accumulated as cash balances by corporations. Or, it can create wage pressure in the economy. And remember, unemployment is at 33-year lows. There is already wage pressure.
It’s not that complex when you break it down. With the resource sector booming, the increase in activity and terms of trade is highly stimulating. Foreign demand for Aussie exports directly influences domestic demand in the form of wage pressures. What can the RBA do about that?
Frankly, we’re not sure it can do anything. We’re even more sure that global central banks are either unable or unwilling to take steps that might lead to a lower oil price. Hiking rates would slash global economic growth, and inevitably lead to lower oil demand. And there’s also the fact that the oil price—like all commodity prices—is closely correlated with money supply growth.
Cut the growth in broad money supply and you knock at least one leg out from commodity prices. But after a week of watching the noxious garbage on CNBC, we find it hard to believe the U.S. Fed will be raising rates any time soon. Wall Street would raise a hue and cry like it did in August of last year. The ECB might raise rates just to show it can. But it’s unlikely.
We’ll keep our eye on the data. But after a week away from the markets, it doesn’t look to us like much has changed while we were breathing the clean air on the Continental Divide. Congress here in the States wants to investigate manipulation in the oil market, while ignoring the government-sponsored manipulation of the currency (managed decline). Morons.
Australia is firmly ensconced in its spacious corner of global prosperity. You know though, after spending a week here in Colorado in our old stomping grounds of Estes Park, America seems cheaper by comparison. Everything is cheaper here….petrol, food, clothes, and even coffee (although American coffee is weak by Australian standards). Hmmn.
Haircuts are up though. Our old barber Carol Dermody has been cutting our hair since we were just five years old. There was more hair then, and in 1980, the old flat top hair cut was just $5.
Carol is a hard money man. He wears a bolo tie with an old silver dollar as the knot. Because he believes in real money with a stable, relatively unchanging value, he hasn’t hiked prices to keep up with inflation. Haircuts are $12 now.
We’re in the States for the rest of this week, but will be reckoning for you each day until we get back to Melbourne on Sunday. Until tomorrow…
Dan Denning
The Daily Reckoning Australia
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
Comment by Ross on 3 June 2008:
I recommend a review of the recent China export shipping container volumes. Then further taking the FOB value of those Chinese exports and comparing the latest months year-on-year by destination region.
Reviewing the aggregate of US imports from China against the intra-Asia or other trades (those you might think will be more insulated from volume declines) may be illuminating. This should give a more sobering assesssment of the likelihood of the current Australian terms of trade being maintained for any significant period.
China is about to go post Olympics and is unlikely to unlock domestic savings quick enough to have enough domestic growth to cover the sharp downturn in their predominantly export driven economy.
The rest of Asia provides no insulation due to it already inflating past the point where it will have to lift interest rates sharply. The figures will also reveal that the intra-Asia & emerging trades merchandise markets are comparatively insignificant for Chinese exports relative to those to the US and EU.
If figures are hard to come by then just look at the slowdown in LA and the laid up container rail wagons parked across the US rail network.