More Wall St Blues. Aussie Dollars Falls. A Lot.

8 October 2008

Australians like to think that they are the finest and best in everything: cricket; rugby; science, swimming, breakfast radio.

So when the Australian Reserve Bank announced that it was taking the huge step of dropping interest rates by a full percentage point yesterday, the Aussie papers all trumpeted that this was a world-leading event. Certainly it will stimulate the economy at a critical time. Australia is not in recession, and may well not slip into one. The Reserve is taking events by the neck and throttling as hard as it can.

The recession neck, however, is a small one here in Australia. The effects of the rate drop will not really be felt around the world, but the decision will be a pointer for other countries. Economies like New Zealand need stimulation. It has been in recession for some weeks now, and the indications are that its period of negative growth will continute for the rest of the year at least.

What is bad news for Australians is that the Australian dollar has dropped a lot in the last few days. In was only a few months ago that the dollar was reaching parity with the US Greenback.

Not now. We’re heading towards the stage where the US dollar is buying one and a HALF Aussie dollars. This means that Australians will have to pay a lot more for imports.

But in times of slowing growth, one would hope that people are not splashing out on imports anyway. The Reserve would be hoping you pay off your house, car and fridge, and put your money away for the more diffficult times that may well be coming.

With the dollar the way it is, the Reserve is hoping people will see restraint as a no-brainer.

It will also hope the rest of the world will take its lead and take strong action. Now.

The British are making a bank bailout announcement within hours of this blog being posted. Maybe it does occasionally look across to what’s happening in its former penal colony.

- Phil