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The money torrent

By Kris Sayce - posted Tuesday, 9 November 2010


But if consumers are less willing to buy goods and services because other costs have also risen - such as mortgage repayments and food - then businesses are going to find themselves battling price inflation on the cost of doing business and price deflation from a lack of consumer demand.

You see, this goes to show that the Australian economy isn't as strong as many would have you believe. It only looks like it's strong.

The share prices of Aussie mining companies are going through the roof but just because share prices are going up, it doesn't mean the economy generally, and you specifically, are benefiting from it.

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What I'm trying to say - in a round the houses kind of way - is that with interest rates increasing on debt, and higher input costs feeding through to higher prices, the opportunity for companies to increase their profits and for consumers to increase or even maintain their consumption is actually much more limited than many would have you think.

Businesses and consumers are being squeezed. Squeezed by rising interest rates on the one hand, and squeezed by rising costs and rising prices on the other.

And that's only set to get worse. Based on the most recent statement from the Reserve Bank of Australia they seem to have gotten the message that price inflation is out of control and likely to get worse… and based on the noises coming from the US, it seems more money printing is on the way when the Fed has finished its current programme.

It's all mixing up for a stagflationary environment of higher prices than there otherwise would be thanks to inflation, higher costs for businesses thanks to higher commodity prices, and higher interest rates due to the previous two points.

Remember that consumer prices don't necessarily have to rise for it to have a negative impact on the consumer. If monetary inflation is keeping prices higher than they otherwise would be then that's just as bad for the consumer, especially if they are being crippled by higher debt costs.

Companies won't stay around for long if they're selling goods below cost price. But if they can't get commodity prices down because of monetary inflation, their only alternative is to reduce supply and sell goods at a higher price to those that can afford it.

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That means the potential for higher unemployment as companies look to cut costs and increase margins any way they can.

But look, to be honest it's anyone's guess what's going to happen next. The whole thing is a mess. And trying to figure out exactly what will happen is nothing more than pure guesswork.

Everything we've described above could be entirely wrong if just one of the scenarios is different to the picture we've painted. However, that's the point we're trying to make.

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A fuller version of this article was published on Money Morning Australia on November 5, 2010.



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About the Author

Kris Sayce is editor of Money Morning. He began his financial career in the City of London as a broker specializing in small cap stocks listed on London’s Alternative Investment Market (AIM). At one of Australia’s leading wealth management firms, Kris was a fully accredited adviser in Shares, Options and Warrants, and Foreign Exchange. Kris was instrumental in helping to establish the Australian version of the Daily Reckoning e-newsletter in 2005. In late 2006, he joined the Melbourne team of the leading CFD provider in Australia.

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Creative Commons LicenseThis work is licensed under a Creative Commons License.

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