I was reading the SMH on Saturday and it was a really interesting statement by Glenn Stevens, the Reserve Bank Governor, that grabbed me. He said that”if the US borrowing authority could come to a solution it could have gone very badly.” The comment was also that the RBA was helpless in the face of the US Government default crisis.
If something could’nt be worked out by the US Government, projections of a cut in spending to 4-5% of Gross Domestic Product. This would have slowed down demand in the US Economy. This could have had an effect on trading partners with the US and countries that have invested in the US.
Does this mean that Australia is helpless to stop a wave of destruction if there was no resolution to this crisis?
More importantly though,could we survive if the US Economy went down??
Well there is some good news.. Well when the global economy heard about the possibility of a rumoured shut down of the US Economy the fallout was that our Australian Dollar rose to US$96.47c. This was at a similar level to the GFC in mid 2008.
This means that Australia from the world’s perspective is in a strong position, as when things aren’t going so good, people want to invest in areas that won’t lose money.
It’s amazing how perceptions are so important to our lives.
How does the rise in the Australian Dollar affect our economy?
A lower currency will help to drive the economy forward. Glenn Stevens has said that the rising dollar is a headache as he is under pressure to lower rates again, and is also mindful of not stroking the fire in a resergent property market.
Treasurer Joe Hockey is quoted in saying that the government is prepared for more volatility in financial markets, despite the US Government Default crisis. He said “Essentially, they are just kicking the can further down the road.”
The RBA must control the inflation, interest rates whilst not stifling demand for the property market. And the government then uses this information to set forecasts and contingencies for changes in the volatility in the global economy as well. A pretty tough job when you think about it.