Crude oil has managed to make its way back up to $US72 per barrel on expectations that global economic recovery will be faster than expected.

Of course, actual recovery may disappoint, but if there is any bellwether measure of real economic upturn, it will be oil, which economists generally agree functions like an international tax.

There is no reason for anyone bar speculators – whose power in the markets is only short-lived over the medium to longer term – to bid up the price of oil at this time, hiking the “tax” to be paid, unless they expect there will be increased future real demand for the commodity.

Some inkling of the return not merely of demand, but also of inflation which favours rising commodity prices, was given in the very recent decision of the Reserve Bank of Australia (RBA) to break ranks with other developed countries and start increasing official interest rates.

For many New Zealanders focused on the domestic reportage of our own country, the RBA decision might not have seemed like a largish blip on the global investment markets radar screen.

But a very large blip it is – the radar screen equivalent of a huge meteorite strike on our atmosphere.

Indeed, the decision is the opening shot in a battle ahead – and possibly a war – by central banks worldwide to shut down the inflationary potential of massive money supply increase resorted to as the core strategy to ward off a global depression.

As an example of what the RBA decision means globally, some comments from foreign hedge fund managers are relevant, because they are the kinds of people always on the lookout for changes that will make them money.

This from Andrew Green, investment adviser for hedge fund manager GAM:

“It is also interesting that the first interest rate rise we have had – in Australia – signalled an increase in the price of gold.”

“In fact, most asset prices are rising at the moment and the big question investors face is what to do with their cash.”

“Our view is that this is another positive for markets: we are not convinced that many people have participated in the market rally so far and expect there to be buyers of equities on any signs of weakness.”

By Mr Green’s reckoning there is good reason to chase assets that enjoy inflation benefits: equities and commodities.

The losers would be fixed interest investments like government bonds, where yields would have to rise to compensate for increasing inflation expectations and interest rate hikes, meaning falls in capital value.

Another GAM hedge fund manger, Michael Lai, has started second guessing which will be the next central banks to lift interest rates.

His bet is central banks in the Asia Pacific region.

“This week’s key event in the region has been the Reserve Bank of Australia’s (RBA) decision to raise interest rates by a quarter of a percentage point to 3.25%,” he said, “which has had a positive impact on some of the more dollar-sensitive markets such as Hong Kong and China.”

“Although we expected Australia to raise rates before the end of the year, the increase came sooner than anticipated as we felt the 25% appreciation of the Australian dollar should have alleviated inflationary pressures.”

“However, the RBA appears to have been motivated by the 8% rise in house prices this year, a less severe unemployment problem than those of other Anglo-
Saxon economies, strong Chinese demand and the fact that Australia has a fully functioning banking system.”

Mr Lai’s tip on the next economy to hike interest rates is South Korea, with possibly Taiwan and Singapore to follow.

New Zealand is situated within a potential regional hotbed of rising interest rates and so it will be interesting what comes next for us.

The US Federal Reserve has started making noises about an exit strategy from low interest rates, but the brutal truth with the Yankees is that national interest rules OK.

Absolutely what suits the Americans with their burdensome deficit accounts and resort to extreme measures to avert domestic financial collapse is a weak dollar and rising inflation, despite all the official talk by US government officials about supporting a strong dollar.

The US can bilk its creditors with a combination of dollar down, inflation up.

The Reserve Bank of New Zealand (RBNZ) is having its options constrained by the determination of the Americans to export their financial crisis recovery by tanking the exchange rate value of the greenback and laying the conditions for an inflationary explosion, whereas in the Asia Pacific region, central banks are heading towards higher interest rates as a counter-defensive measure.

To cover up the fact that New Zealand is a price taker and not a price maker in both interest rates and currency exchange rates we can expect the RBNZ and the National-led government to assure us they are managing things and in full control.

Sounds like they deserve to win the rumored new Nobel Prize for Wishful Thinking, now that the Obama Nobel has dropped the standard to a fashion parade for popular convictions.