U.S. crude rose as much as $2.37 to hit $71.82 a barrel, the highest since July 1. By 1351 GMT, it was trading $1.73 higher at $71.18.

Brent crude gained $1.46 to $73.16.

“We are getting close to the resistance area for crude oil and we need the continued support of equities,” said Olivier Jakob, an analyst at Petromatrix. “As long as this continues, the dips are going to be bought.”

European shares hit a new high for 2009, led by banks. U.S. stocks opened higher.

The latest gain in oil prices brings oil within sight of the 2009 high of $73.38 set in June, where Jakob and other analysts who use past price moves to predict direction see key resistance that prices could struggle to rally beyond.

On Friday, crude rallied almost 4 percent as data showed the U.S. economy shrank at a smaller-than-expected 1 percent annualised pace in the second quarter, raising hopes the recession was easing.

The market climbed about 2 percent last week — the third straight week of gains — which helped to reverse steep losses in the middle of the month and brought July’s monthly decline to a marginal 0.6 percent.

“The U.S. growth number has confirmed that the worst is behind us and the focus now is to find out how quick the recovery will be,” said Ben Westmore, a commodities analyst at the National Bank of Australia.

China’s crude stockpiles in June, including both state strategic and commercial reserves, declined 2.7 percent from a month earlier, the first fall in four months, China OGP, a newsletter run by Xinhua, reported on Monday.

Analysts said a weak dollar, which slid to its lowest point this year on Monday against a basket of currencies amid increased risk appetite, would offer support to oil.

Supply curbs by the Organization of the Petroleum Exporting Countries since last year in response to falling demand have helped crude rally from below $33 in December.

However, output from 11 members from the OPEC rose slightly in July, lowering its compliance rate to its agreed supply curb to 71 percent from 72 percent in June, a Reuters survey showed.

LONDON, Aug 3 (Reuters)

Sterling fell as weak industrial output data reinforced doubts about a UK recovery. The euro dipped against the dollar, but losses were capped by a surprise increase in German factory orders that initially pushed it to a session high above $1.40.

When risk aversion rises, investors often cut holdings of stocks and higher-yield currencies and buy back the yen and dollars that were used to finance the trades.

“We’ve been getting very mixed signals, with some positive data and some very poor data, so it’s extremely difficult to pinpoint direction,” said Fabian Eliasson, vice president of currency sales at Mizuho Corporate Bank in New York.

“As a result, people are backing out of high-yield assets and into the yen and dollar. Now, the focus will turn to corporate earnings as the main driver for the market.”

The dollar was last down 0.4 percent at 94.95 yen while the euro fell 0.6 percent to 132.44 yen and 0.2 percent to $1.3946 , according to Reuters data.

Sterling dipped to the day’s low just above $1.61 after data showed UK manufacturing output fell 0.5 percent in May, confounding expectations of a 0.2 percent rise.  It last traded down 0.8 percent at $1.6148.

“The risk is clearly that the ‘green shoots’ are turning dry,” said Michael Klawitter, senior currency strategist at Dresdner Kleinwort in Frankfurt.

EARNINGS, G8

The Australian dollar was down 0.2 percent at $0.7955 after the Reserve Bank of Australia left interest rates at a record low 3 percent on Tuesday and left the door open to more cuts.

Traders are bracing for second-quarter U.S. corporate earnings, which will be released in coming weeks. Analysts said poor results, especially from financial institutions, would likely crank up dollar demand.

“If bank earnings disappoint in any way or the S&P breaks crucial levels, traders will probably start reducing long positions in (high-risk currencies) and the dollar could be bid more,” said Chris Turner, currency strategist at ING in London.

Analysts were also keeping an eye on this week’s Group of Eight leaders summit that starts in Italy on Wednesday.

China, Russia and Brazil have said they will push their view that the world needs to start seeking a new global reserve currency as an alternative to the dollar, though they admitted such a shift would take time.

U.S. President Barack Obama and Russian Prime Minister Vladimir Putin did not discuss oil prices or the dollar in Moscow on Tuesday, according to a U.S. official.

NEW YORK, July 7 (Reuters)

The pan-European FTSEurofirst 300 was down around 1 percent, hitting a lifetime low. Earlier, Japan’s Nikkei ended down just shy of a 26-year.

MSCI’s main world stock index was down 0.2 percent on the day, after having tumbled 4.9 percent on Monday, its worst performance since early December.

Global stocks have been pummelled this year by a left-right combination of poor economic news and continuing travails within banks and the global financial system in general.

The MSCI index is down more than 22 percent on the year so far and has lost around 58 percent of its value since hitting an all-time high in late 2007.

The Nikkei ended down 0.7 percent. The benchmark hovered just short of a 26-year low amid worries about the U.S. financial system. The broader Topix slipped 1.1 percent to 726.80, its lowest close since December 1983.

Gargantuan losses on world stock markets, however, are piquing the interest of investors who see value appearing and the potential for at least a short-term reversal.

“Stocks do appear to be oversold at current levels, meaning there is a possibility for a near-term and significant rally,” Bob Doll, chief investment officer for global equities at BlackRock, said in a note.

But he added: “The downside risks remain troubling.”

WAIT AND SEE

The dollar weakened as traders bought the euro and other relatively higher-yielding currencies after the Reserve Bank of Australia unexpectedly left interest rates on hold.

But activity was subdued as investors took a wait-and-see stance over the financial system and deepening global recession.

The dollar index, a gauge of its strength against a basket of six other major currencies, hit a three-year high in overnight trade as investors sought shelter in the world’s most liquid currency. It was down 0.5 percent on Tuesday.

The euro rose 0.4 percent from late U.S. trade to $1.2629 , recovering losses suffered in the wake of European Union leaders’ rejection of a mass bailout for eastern Europe, which weighed on the single currency the previous day. Euro zone government bond yields pushed higher.

The interest rate-sensitive two-year Schatz yield was up 2 basis points at 1.227 percent. It remained within orbit of a euro lifetime low 1.15 percent struck on Feb. 18.

The 10-year Bund yield was up 3 basis points at 3.061 percent. Bond yields move inversely with prices.

REUTERS (March 3, 2009)

Right out of the starters blocks this morning, the Reserve Bank of Australia (RBA) pulled the rug right out from under the “high yield status” of their economy, with another HUGE rate cut overnight… This time, the RBA cut 100 BPS, to an internal cash rate of 4.25%. This brings the total since September to 300 BPS! WOW! Talk about effectively unwinding seven years of tightening! The statement following the rate announcement leads me to believe that the RBA is probably finished cutting rates for now… It will be a wait-n-see what happens globally, before the RBA entertains any talk of further rate cuts… At least that’s my opinion!

Had a long talk with the legal beagles yesterday… The just don’t like what / how I say things. This all stems from complaints we’ve received that claim that, “I give investment advice”. Of course when the currencies were going up, up, up and away, in my beautiful balloon, for 6 years, we didn’t hear of any complaints or claims that I was “giving investment advice”… Any way… It is what it is… I call it “Market Commentary”… And everything I say is “Chuck’s opinion” not that of EverBank’s and the last time I looked… Opinion is: not to provide investment advice or to manage your money – THOSE ARE DECISIONS THAT YOU HAVE TO MAKE.

Well… Now that I’ve said all that… Guess what finally happened yesterday, that I’ve said was the case since January? Yes, the National Bureau of Economic Research (NBER) finally came clean and said that the U.S. has been in a recession since December, 2007. Here’s where I could go totally sophomoric on you and say, “I told you so!” but I won’t, no wait, I already did! But, that’s not my intention. I only carry on about his because recently I’ve had a few people tell me that I have no foresight, and that I merely react to things… Hmmm… I said this was a recession 11 months ago, long before the un-dynamic duo of Paulson and Bernanke would admit it, and long before your friendly neighborhood economist would admit it, and way before the NBER, the official arbiters of this call, admitted it.

The currencies remained in a very tight range yesterday with a bias to buy dollars, with the Huge stock sell off… The stock jockeys didn’t fall all over themselves on this news, and that surprised me… Here’s why… You see, most times, in the past, by the time the NBER gets around to calling a recession, the recession is either over or about to be over. So, knowing this, I figured the stock jockeys would be falling all over themselves, calling out that the light at the end of the tunnel could be seen…

The problem with that mentality is that not all recession calls by the NBER have signaled the end of the recession. Take… The recession that started in July 1981, which was announced in January 1982, and that recession ended 10 months later in November 1982. That’s the scenario I’m afraid that we are going to revisit this time. I’ve already said that I believe 4th QTR GDP will show a negative -5% figure, so that’s right now, and there’s no way, the economy rebounds from a negative -5% drop in a heartbeat… This is going to be a long, protracted recession, but then, the song remains the same here for me… I’ve said that for a long time now!

We heard from Federal Reserve Chairman Big Ben Bernanke yesterday… Big Ben said “further interest-rate cuts are “certainly feasible,” but he warned there are limits to how much such action would revive an economy likely to stay weak well into next year.”

Mr. Bernanke also said the “Fed’s powers don’t end with the federal funds rate, and its ability to inject liquidity into markets through its balance sheets “remains effective.”

I guess, that was the wink and nod that interest rates are going lower, and that… The Fed is going to continue to take in toxic securities on their balance sheet…

OK… There’s a story on the news wires this morning that according to the charts at the Bank of Tokyo, yen could push to 79.75 VS the dollar. WOW! I think these chartists should go back and check their angles again, because that’s a phenomenal move in yen, and I can’t believe the Bank of Japan (BOJ) wouldn’t be in the markets intervening (selling yen) to keep that from happening… But for what its worth… There you go!

Today, we’ll see U.S. Treasury Sec. Paulson speaking about the U.S. / China economic strategy… Hmmm… I wonder if old Hank, will ruffle a few Chinese feathers with his speech, or will he go quietly? I think that after yesterday’s .75% drop in renminbi, followed by a “regular” .30% drop last night, which puts renminbi at a 5-month low, that Paulson will be in a feather ruffling mood, especially, given the thought that he only has about a month left on his Treasury Sec. watch…

Remember about a month ago, I told you all about the early part of this decade, when the global economies were all fighting with recessions, and that the currencies were getting rewarded whenever a Central Bank cut rates to promote growth? I said then, that we could very well relive that scenario, and each time the RBA gives us one of those “mega rate cuts” I notice the A$ rallies… I guess, after we get through the next two weeks of Central Bank rate cuts, we’ll have a better idea if this is going to play out again, but for now, it sure is beginning to look like it will…

Looks like the airlines are “hurtin’ for certain” as I saw two different ads in the weekend paper for $49 flights… Southwest and American Airlines were promoting those discount flights… Of course there were tons of “terms and conditions” but the key here is the offer of discount flights…

I see from the U.K. Telegraph that AIG is beginning to sell off assets in an attempt to pay back the $153 Billion “loan” the Gov’t gave them. And I see where JP Morgan Chase is going to lay off 9,000 employees. And that there are rumors that Britain is entertaining thoughts about joining the euro again… They can forget about that! The people of Britain are NOT going to vote for that to happen… At least that’s how I see it from the cheap seats.

And yesterday… The piece of data that “told me” we were in a recession, the ISM (manufacturing) Index printed… And the index number fell by a greater margin than the “experts” forecast, and brought it to the lowest level (36.2) since 1982! Again, folks, this is a very “telling” piece of data, and confirms my belief that we’re in for a long, protracted recession, as this looks like the early 80’s recession and not those willy nilly ones of the 90’s and 2000’s!

The only data we’ll see today, is the vehicle sales, which is expected to fall again… I see where Ford is going to announce that they are going to change their focus to small, fuel efficient cars instead of Trucks and SUV’s, hoping that will “win over” Congress to give them a loan… I also see where Ford is offering “employee prices” plus a rebate for a select group of their cars… (that “employee pricing” is a bunch of bunk if my opinion any way!)

So, there’s a collection of some of the items that’s will drag on the U.S. economy… And eventually the dollar, once we get past this credit crisis…

Next on the rate cut block is the Reserve Bank of New Zealand, (RBNZ) who meets tonight… I think the RBNZ will play a game of poker with the RBA, and say…”I’ll see your 100 BPS, and raise you 50 BPS”… That’s right, I think we’ll see 150 BPS rate cut from the RBNZ… Like I’ve said a few times now, rates are going lower all over the world folks, we should all get ready for this!

I sure ruffled a few feathers yesterday when I printed a comment from someone else about the Energy Dept… Folks… The point was simply that we don’t need the Gov’t operating private businesses, like banking… That’s all it was…

The Retail folks are “happy” with the sales figures from the first weekend of Christmas sales… But, “happy” isn’t “giddy”… And that’s going to be a problem for the retailers this Christmas… They’ll see sales… But they won’t be “giddy”… And wasn’t that a shame in NY where a Wal-Mart worker lost his life in a store opening stampede? That’s a shame, it really is… It’s not like Wal-Mart was giving stuff away free! I’ll stop there, the story is sad enough…

Time to head to the Big Finish…

Currencies today 12/2/08: A$ .6480, kiwi .5345, C$ .8040, euro 1.2670, sterling 1.4940, Swiss .8290, ISK 230, rand 10.38, krone 7.0875, SEK 8.3175, forint 206.35, zloty 3.0160, koruna 20.2860, yen 92.20, baht 35.50, sing 1.5285, HKD 7.75, INR 50.14, China 6.8875, pesos 13.55, BRL 2.30, dollar index 86.85, Oil $49.23 ( I paid $1.84 for premium gas this morning, YAHOO!), Silver $9.44, and Gold… $778

That’s it for today… My little buddy, Alex, was writing a paper on the Revolutionary War last night, and we were talking about “taxation without representation”, and thought for a moment before going to bed, that, I kind of feel like that’s what we’re receiving now, today!

Source: The NBER Finally Says So!

Another rally day in the currencies yesterday… One that wasn’t as pronounced as Monday’s 3-cent rally… But a rally just the same, and at one point, the euro was trading above 1.30… Hadn’t seen that level in a while, so welcome back to the 1.30 level, Mr. euro…

Someone sent me a note the other day, and said, why don’t you talk about Australia, Canada, and Swiss more? Hmmmm… Maybe they don’t read the Pfennig “every day”… But those currencies are in my notes most days, and if they are not, they are a part of the overall direction in currencies that are being pushed down by the Trading Theme… But in the spirit of the season…

Aussie dollars have rebounded nicely the last three days, but this is really putting a band-aid on a bullet wound, for the A$ has suffered a shot to the heart, and you’re to blame, no wait! They’ve gotten bashed, beaten and left for dead, by the unwinding Carry Trades, and Commodities price collapse. Large interest rate cuts by the Reserve Bank of Australia (RBA) haven’t helped the A$… And so… Until risk is back in the markets, driving commodities higher and bringing the battered Carry Traders back, the A$ will not be on the short list of currencies that can mount a rally VS the dollar… Should those two items come back with vengeance? Now that’s a horse of a different color!

The Canadian dollar is getting tarred with the same brush as the A$, only the main commodity pushing the C$ down is the price of oil… Now, this is a case of: Torn between two lovers, feeling like a fool… I would love to see the C$ rebound, but it needs a higher oil price to do so, and I’m not about to turn my back on lower oil prices! I love less than $2 gas!

Now there are those that would tell you that this current level of the price of oil is just a fleeting moment price, and that we’re still in store for $8 gas down the road… OK, I’m not sure I can get my arms around that, unless… We as a country do what we’ve done about gas driven automobiles for the last 35 years… Nothing, absolutely nothing! Then $8 gas is probably in our future… But it’s not now, and won’t be next week or next month, or even next year… Let’s all hope it’s not in our future at all!

The Swiss franc… Oh, where to start? The Swiss National Bank (SNB) shot an arrow into the heart of the franc last week, when they cut interest rates 100 BPS… Who would have thought that the SNB had 100 BPS of rate cut arrows in their quiver? But they did, and now francs are back on the block…. The “block” I’m talking about is the selling short block to fund Carry Trades, where they held court with Japanese yen, until the SNB began raising rates in 2007… Then the U.S. dollar took over, and that’s where we are now… Good thing for francs that the Carry Trade and risk Aversion is hanging over the markets like the Sword of Damocles right now…

You know… We’ve been stuck in this Trading Theme of investors buying dollars whenever the economic Tsunami looks deeper, darker and more dangerous, for so long now, I had to sit back and examine this current currency rally further for what it was… At first, I thought this was simply a case of the currencies rallying because the “light at the end of the tunnel was brighter” as witnessed by the large rallies in stocks, caused by the bailout of Citicorp… But, then if that was the “true case” we would have seen the yen get sold along with the dollar… And guess what? Japanese yen was rallying too, while the dollar got sold!

In short- it seems like the market is starting to realize that all the various stimulus packages and bailouts our “leaders are throwing at the problems our economy faces and recognizing that while they may or may not lead us to the promised land of no deep, dark, dangerous recession, one thing that is a certainty is they will need to be financed. And isn’t this the Big Problem for the dollar that I’ve talked about for over a year now? In the end, the reality will be that this is all negative for the dollar… And well, in the end, our fiscal well being.

Yes, I completely understand that Europe faces a similar challenge, but let’s face the facts here, Europe has a surplus, right now at least, and does not have the funding requirements that the U.S. does…

And finally, there’s the “other” thought… The dollar has gone a long way in a very short time erasing 5 years of gains from some currencies… It was about time that it paused for the cause…

So… In keeping with the thought about the stimulus packages and bailouts… The Fed and Treasury announced another round yesterday… You might want to sit down, and reach for your wallet, just to make sure it’s still there!

Here’s how the Wall Street Journal reported the news… “The U.S. on Tuesday stepped up its efforts to support strained credit markets through new programs aimed at boosting consumer credit and the market for mortgage-backed securities.

Under the Term Asset-Backed Securities Loan Facility, or TALF, the Federal Reserve will extend up to $200 billion in non-recourse loans to holders of asset-backed securities backed by consumer and small-business loans.

The Fed also said it will purchase up to $100 billion in GSE debt through a series of competitive auctions starting next week. It will also purchase up to $500 billion in mortgage-backed securities backed by GSEs, with the goal of starting that program by the end of the year.”

For those of you that didn’t experience “new math”… (HAHAHAHAHAHA 2+2 is still 4!) the tote board shows us that yesterday’s announcement totals $800 Billion in addition to what they already have in the hopper! Geez Louise, when will this all stop? The Fed’s balance sheet has grown by over $1.3 Trillion so far this year and could very well be turning Japanese once again! What am I talking about here? Well… You all know how I’ve been saying that the U.S. if following Japan’s model of the 90’s? Well… The Japanese added debt on to debt creating stimulus packages and bailouts too, and then lowered interest rates to zero, and the only thing left was targeting the quantity of money rather than its price. By that I’m trying to say that they didn’t care what happened to the yen’s value, they printed and printed… Oh brother! Here we go again! Are we doomed to experience a decade of deflation like the Japanese did?

I don’t think so… I think our deflationary period will be much shorter, and then on the other side of that, we’ll see inflation that will cause you to reach for your wallet again to see if it’s still there! This inflation will push commodities back into the limelight, and once again the dollar will be punished…

That’s my story, and I’m sticking to it!

OK… The data yesterday was more of the same-o, same-o, awful looking stuff… U.S. preliminary 3rd QTR GDP printed at negative -.5%, and Personal Consumption (which the Fed used to look at closely, but doubt they do any longer) fell to negative -3.7% from -3.2% in the 3rd QTR. And, the S&P/CaseShiller House Price Index fell another 17.4% in September from a year ago. The rot on the Housing price vine still has some additional deterioration to go, unfortunately…

The Data Cupboard continues to yield plenty for us to look at each day with a heaping helping of Personal Income and Spending for October today. In addition, we’ll see Durable Goods Orders for October, the Weekly Initial Jobless Claims, Chicago Purchasing Managers Index (manufacturing for that region), U of Michigan Consumer Confidence, and New Home Sales for October… Whew! My fingers are worn out after all that! HA!

But there’s more… I’ve been wanting to have a brief discussion about this for some time now, and each day I experience a loss of memory and forget to do so! What am I talking about, I hear you asking? Well… It’s Gold… And not just the price of Gold in dollars, which has rebounded nicely this past week… But to point out that Gold has been rising VS all the currencies. Which makes sense right? The dollar has pounded the currencies for 4 months, and Gold gets stronger in those currencies… It’s an interesting situation… So, Gold hasn’t sunk VS the other currencies like it has VS the dollar.

OK… Here’s the dilemma for the currency traders today… We’ve got all this data to deal with, and everyone is going to be trying to leave early today to get a head start on getting home for Thanksgiving… Will the lack of volume this afternoon cause wild swings? It has a history of doing so…

China has cut their internal interest rate to help stimulate their economy, which the OED lowered their forecast for China’s economic growth from 9% to 7.5%… Well… 7.5% still sounds pretty darn good, doesn’t it? Especially, when you consider that by the time the 4th QTR U.S. GDP numbers are printed (not until probably Fed 2009), they will show U.S. GDP to be a negative -5.0%!!!!!!

OK… Now that was a lot for the day before Thanksgiving, eh? I had better stop here, as I don’t want to get you stuffed before your Thanksgiving meal!

Currencies today 11/26/08: A$ .6480, kiwi .55, C$ .8175, euro 1.2960, sterling 1.5340, Swiss .8375, ISK 235 (really, this is the quote we received Monday!) rand 9.8880, krone 6.9530, SEK 7.9260, forint 201.30, zloty 2.9180, koruna 19.48, yen 95.40, baht 35.20, sing 1.5080, HKD 7.7550, INR 49.43, China 6.8285, pesos 13.37, BRL 2.3370, dollar index 85.38, Oil $51.60, Silver $10.29, and Gold… $816.84

Source: Maybe It’s Time For A Change?

The bank cited a variety of reasons for the cut, including turbulent financial markets, falling commodity prices, slowing economic growth China, and the recent rash of rate cuts issued by other central banks around the world.

Specifically, Australia joins the United States, China, India, Japan and South Korea, all of which lowered borrowing costs in the past week. The European Union and United Kingdom are expected to follow suit this week.

“International economic data have continued to point to significant weakness in the major industrial economies, and there have been further signs that China and other parts of the developing world are slowing as well,” Reserve Bank Governor Glenn Stevens said in a news release. “These conditions have contributed to further falls in world commodity prices.”

Also in the bank’s release, Stevens said the rate cut could hamper the central bank’s goal of reigning inflation to 2% to 3%. CPI inflation in year‑ended terms picked up to 5%, while underlying measures were just over 4.5%.

But Stevens said he expects inflation to cool by the end of the year.

“Global disinflationary forces will assist in this regard, though the depreciation of the exchange rate means that the decline of the inflation rate to the target could take longer than would otherwise be the case,” he said

Possible Recession

Last month, Australia’s All Ordinaries stock index plummeted 14%. And that’s on top of falling home prices and retail sales.

The Reserve Bank hasn’t been this aggressive in cutting rates since Australia’s last recession in 1991, Bloomberg reports.

And more cuts could still be in store.

“We think the cash rate will bottom at 4% by early next year,” Stephen Halmarick, co-head market economics at Citigroup Inc. (C), told Reuters. “They are obviously very concerned about the outlook for global growth, I think that is warranted.”

The caution is warranted given the carnage around the world, but Australia’s economy could be one of the few to emerge relatively unscathed.

Housing prices haven’t fallen nearly as bad as those in the United States. Australia’s government budget is in surplus – a likely effect of soaring commodity prices earlier this year.

And by Christmas, $8.7 billion of a $10.4 billion stimulus package will arrive in mailboxes around the country – which may be the life preserver the economy needs to keep GDP from sinking into the red.

Source: Sensing Recession, Australia’s Central Bank Cuts Interest Rate 75 Basis Points

The RBA was pretty clear in its Statement of Monetary policy that it would like to cut rates. The Aussie dollar fell in response. So why bother making the point as directly as he did yesterday? Because he knows the banks have no intention of passing on lower borrowing costs to Australians and like the Treasurer he wants to put “maximum downward pressure on inflation.” Good luck with that.

Do you think the Reserve Bank is a tad premature and a tad triumphant in declaring victory over inflation? After all, the Bank has conceded recently that it’s the tidal wave of cash coming onshore from the favourable terms of trade that it fears the most. All that coal and iron ore money has to turn into someone’s wages or profits, doesn’t it? Has that changed?

Probably not. But everywhere the mainstream economists look, they find an excuse to lower the price of money and encourage people into taking on more debt. It’s not a coincidence most of these economists work for banks, which make money when people owe money.

And perhaps these bank economists-and the folks at the RBA-can see further into the future than the rest of us mere mortals. We don’t even know what we’re having for lunch today, much less whether consumer prices will moderate in the next quarter. But the RBA apparently DOES know, and thinks it’s safe to cut rates now, even as wages and prices rise.

“We cannot wait to see a fall in inflation before we start cutting rates, because by then it would be too late,” Battelino said yesterday. He did admit that at 4.5%, inflation was high and likely go higher. But he also insisted it was going to come down later this year, thanks largely to the Bank’s heroic efforts.

“Things have worked out, broadly speaking, the way we intended them to,” he modestly told a parliamentary committee. “As well as costs going up, businesses were widening their margins, so there was a pronounced increase in inflationary pressure. The danger was that if that continued, it would cause severe difficulties for the economy in the years ahead.”

“We’ve asked households to cut back on spending and we’ve given them the inducement to do so (with higher interest rates). Households have responded favourably. Households have been prudent in cutting back on spending and lifting savings. That is why the Reserve Bank can talk about cutting interest rates.”

If we had more time today we would provide you with an amusing vignette from Kafka or Dostoevsky in which something patently absurd is taken at face value by most people because they are too polite (or scared) to point out the absurdity. After all, everyone else seems to take it seriously. It must be serious!

But blaming household spending for inflation is grotesquely absurd. Have households cut back spending in a careful and thoughtful response to the RBA’s policy? Or is the price of petrol and food and health care going up while property and shares go down? Does the Reserve Bank really insist that inflation is caused by consumer spending and not an increase in the money supply?

As we’ve said before, prices can rise naturally for many good reasons. Demand exceeds supply, or a good or service is relatively scarce are just two examples. But inflation is always and everywhere a monetary phenomenon, as Milton Friedman said.

Pretending that consumers are responsible for inflation and have to be punished by higher rates is what makes central bankers so nauseating…that and the conceit that they manage a complex economy the way you might pilot a remote control boat on Albert Park lake. It’s the height of arrogance.

Meanwhile, beneath the summit of Mt. Olympus, Aussie purchasing power looks like it’s in decline. This is the end result of all central banking, which as Bill mentioned earlier this week, is an inherently inflationary enterprise (since it assumes a regular increase in the money supply and a tolerable 3% annual increase in prices).

According to figures published by the Australian Bureau of Statistics yesterday, wages are rising at about 4%, half a point less than the rate of inflation reported at the end of July. Why is the Reserve Bank worried about wage inflation when the opposite is clearly the case? Wages aren’t even keeping up with inflation in consumer prices.

By cutting rates, does the RBA assume that consumer price inflation will come down in coming months because consumer demand has moderated or because food and petrol places are permanently lower? People are spending less money on discretionary goods for a simple reason: they have less money to spend. Petrol and food prices have made sure of that. Aussies are “binging on debt” as an article at News.com.au reports today to keep up with the Joneses.

A word to the wise: the battle against inflation isn’t won. At best, it’s a cease fire or a truce. But you know how those things go. They can blow apart at any second. July inflation in the U.S. came in at a 17-yearh high of 5.6%. While you can expect to see debt-deflation (falling financial asset values), we’d expect the global central bank response to this to be what it always is: money-printing leading to inflation.

Dan Denning
The Daily Reckoning Australia

Source: RBA Declares ‘Victory’ Over Inflation in Australia