What about the stock market? Well, what about it? The stock market powers along, day after day, as if everything in the economy were just fine. But what about the economy? Is it nearly as rosy as the stock prices are telling us?
The Australian Bureau of Statistics (ABS) today said the current account deficit was a seasonally adjusted AU$15.381 billion in the first quarter of the year. This is disgraceful Australia, we say with all due respect, as an American whose country routinely spends more on imports than it banks from exports. But really, America became a nation of consumers long-ago. Australia is a nation of resource producers. How can this country possibly be spending more on imports than it takes in through exports?
The answer, although a little technical, is probably what worries the Reserve Bank at night. Despite growing the money supply by 12.2% in the last twelve months, the Reserve Bank is not worried about inflation. But perhaps it should be.
The answer to the current account deficit lies in Australia’s favourable terms of trade. Rising prices for the things Australia exports have increased the purchasing power of the local currency. Or as the Reserve Bank itself put the case a few years ago, “An increase in export prices relative to import prices means that a larger volume of imports can be purchased with a given volume of exports, thus increasing the real purchasing power of domestic production.”
If we read that correctly, it means the same amount of iron ore is buying you a greater amount of flat screen TVs from Sony (although we don’t recommend trying to pay for your TV with iron ore. If you do however, be sure to write us and tell us how it goes.)
Booming exports mean higher profits, taxes, and royalties. All these things should translate in to greater spending…investment spending by businesses, consumer spending by consumers (if only their wages were rising), and government spending by governments who do what governments always do – spend.
If this doesn’t sound like inflation in the pipeline, we are deaf here at the Old Hat Factory. What’s kept things in check so far is relatively low import prices. Hmm. We’ll keep watching.
The Daily Reckoning Australia