No need to panic, says RBA

Reserve Bank governor Glenn Stevens says No need to panic.

My ignorant opinion is that we are heading for a depression.

The article says:

While Australia was weathering the turmoil in financial markets since August 2007, local investors and borrowers had not escaped completely unscathed.

'Firms whose business models relied on short term debt funding have been tested - a couple have, for practical purposes, left the scene,' he noted.

'Yet these events have been absorbed thus far with little disruption in the broader economy.

'The availability of credit to sound borrowers has not been impaired.'

Mr Stevens said the direct financial effects of the global turmoil on Australia were likely to be confined mainly to the impact on borrowing costs, which have risen in recent months.

'Taking into account the strength of demand, this increase in borrowing costs does not seem likely to pose a particular problem for the economy as a whole,' he said.

'There is no evidence, moreover, of a 'credit crunch' in the domestic financial sector.'"

Emphasis Mine

There are several structural problems in the Australian economy:

• Inflated housing prices;
• High consumer debt;
• High corporate profits;
• Low infrastructure investment

This indicates to me that the individual would have a high exposure to a collapse in the perception of their own wealth. In other words, falling house prices and rising interest rates will lead people to consider themselves much poorer. Without an increase in real wages, debt servicing will become problematic.

People will see others lose their jobs, then their houses, and, possibly, even their lives through suicide. This would lead to an overcorrection in people's spending patterns (they would save far more than is healthy for the economy). In other words, consumers would withdraw cash from the economy thereby impairing its operation.

This panic would then lead to a depression.

This global depression may lead to a decoupling of the US economy from the world economy. The USA would no longer be the economic powership of the world economy. This loss of status would make the USA very dangerous indeed.