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The RBA follows the financial gospel from on high

By James Cumes - posted Tuesday, 12 February 2008

In Australia last week, the Australian Government announced that the Trade Deficit narrowed for a second consecutive month. They took $1.9 billion off the red side of the ledger in December ... Australia is finally getting some traction on all the exports to China! This news came just in time for the Reserve Bank to make a rate hike at their meeting. Which is exactly what they did.

The Reserve Bank of Australia (RBA) gets a gold star for focusing on their country's inflation and not worrying about a "global slowdown". The RBA raised interest rates ¼ point, or 25 BPS to the highest internal level in 11 years. That marks the third rate increase in the past six months, and they are all tied to inflation pressures.

I love it when a plan comes together, and it has come together for Australia. RBA Governor, Mr Glenn Stevens, said that inflation was likely to remain relatively high in the short-term, but expected it to "moderate somewhat next year".


The Australian and New Zealand currencies and their high yields are really on a tear v the dollar: simply because of their yield differential to the US and for that matter the rest of the industrialised world. The rate differentials are here to stay. If a currency can prove it will retain its rate differential, it has a fighting chance of offsetting the unwinding of the carry trade.

But ... if those two market movers (high rates, and carry trades) cross streams ... lookout! We've even seen the carry trade running circles around stocks which are weaker recently, and the carry trade keeps on going, and going, and going. One of these days, the music is going to stop for these carry trade guys, and there aren't going to be enough chairs for everyone.

The above was first published in Everbank of New York's The Daily Pfennig Letter on February 5, 2008.

Ever since 1969, the Australian Treasury and/or the independent RBA have faithfully increased interest rates whenever an urge or a whim has taken them to "fight inflation".

In 1969, an ounce of gold was worth not much more than $A30. Now (February 5, 2008) the Perth mint puts an ounce of gold at just on $A1,000, as the mean between the buying and selling price. What is the Australian dollar now worth in terms of gold, compared with 1969? Five per cent? Three per cent? Two per cent or in a few weeks' or months' time 1 per cent or even - it’s by no means impossible - 0.5 per cent?

But perhaps you will say, gold doesn't matter.


What about other prices?

If the Australian dollar buys anything for more than a tiny fraction of its cost in 1969, 1979 or even 1989, it will be pretty close to a miracle.That's taking account even of "cheap" imports from Asia. If the thing or service cannot be imported, then the fall in the purchasing power of the Aussie dollar has been even more excruciating.

All this has been happening while the Financial Gospel from on high has been “when inflation arrives or even threatens or even might threaten to threaten, be a good, disciplined central banker and raise interest rates. You'll qualify for the Order of Australia First Class if you do.”

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About the Author

James Cumes is a former Australian ambassador and author of America's Suicidal Statecraft: The Self-Destruction of a Superpower (2006).

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