[DanRath]

Oil weakness and the renewed collapse of the Baltic Freight Index of global container shipping since mid-June means it should come as no surpise that the US trade deficit continues to narrow to the smallest reading in 10 years. The May net deficit of $26.0 bln reflected a steady improvement in exports. Imports rose but only by 0.2% as consumers continue to reduce spending. U. Michigan Confidence numbers reinforce the perception that things are not getting better for the US consumer, dropping in July to 64.6 from 70.8.

The continuing Rio Tinto kerfuffles strike at the heart of the one mechanism that seemed to be pulling the global economy back toward growth, namely Chinese spending on commodities. AUD, NZD and CAD are all weakening to reflect the loss of conviction. Chinese government stimulus has meant bank lending in China by fiat; a useful metric of the impact is the 88% return on the Shenzhen equity index, since the money has not many places to go besides commodity hoarding and equity speculation. This seems to be another exercise in kicking the can down the road, however. Investment spending in China, adding massively to productive capacity, will only exacerbate the central problem in the global economy, which is inadequate demand. Replacing the lost purchasing power of the US consumer is the challenge.

Russian President Medvedev showed up with a proptotype "New World Currency" coin at the G-8 meeting in L'Aquila. He seems to not appreciate that it is he who should be embarrassed by this exercise, since it only underscores the epic failure of the Russian state. Backed by fabulous commodity resources and a powerful military, the Russian government could easily supply the world with a reserve currency, if anyone trusted them as a store of value. Angela Merkel was unmoved. She countered that the EURO will provide a useful diversification to the global money supply. That may happen, but she has to fix the not small problem in the Irish property market first.