The money torrent

Think about what the majority of Australians, Americans and Europeans are being told right now. They're being told that the global economy is on the ropes - which it is - and that only the government can solve the problem - which it can't - and that if we're not really, really careful then deflation will strike the economy and ruin everything.

Well, considering that consumers and businesses make most of their decisions based on whether they're optimistic or pessimistic about the outlook, you'd hardly say that those were messages that would encourage a consumer to go out and treat themselves, or for a business to invest in capital goods in expectation of an increase in consumer demand.

In fact, it's such an environment where a business or consumer would be more likely to save their money for a rainy day.

Which, considering the higher interest rates in the Australian market is something worth doing. Saving money and paying down debt makes a lot of sense when interest rates are higher and set to move even higher.

But there's the problem for Australia in particular. The monetary inflation from the US is pushing up asset prices and pushing up input costs for businesses and consumers. And because Australia is a resources based economy, consumers aren't seeing the full advantage of higher commodities prices because the Aussie dollar is rising too.

Take copper. Below is a chart from the London Metal Exchange showing how copper has performed this year:

Source: London Metal Exchange

Since January, the price of copper has gained from around USD$7,500 to about USD$8,400 today, or over 12%. Yet when you take the movement of the Australian dollar into account, in Aussie dollar terms the price has only moved from AUD$8,220 to AUD$8,275.

A better gain has been achieved in Aussie dollar terms since July where the gain is around 9%, but the point is the net gain to the Australian commodity prices isn't as great as the rising US dollar price of commodities would have you think.

In addition to that, because commodity prices have risen, the benefit of a strong Aussie dollar to importers is less as well.

If producers of goods have to pay higher prices for commodities that's something they're going to have to try to pass on to consumers.