CENTRAL BANKS UNPLUG THE JUKEBOX
Reading through the financial media online will give you an insight into the headlines of next week, next month, sometimes even next year. But it can also do your head in, trying to comprehend the complexities of world finance and wading through all the moneytalk lingo.
Peter Hartcher, in the Sydney Morning Herald, spells out in simple language why Australians, and Americans, have been living too high for too long on easy credit. He also punches some big holes through some of the illusions of Australia being a financial powerhouse.
"The world has been swimming in super-cheap liquidity for the past five years," writes Hartcher.
"The worst deals, the lousiest companies and the least credit-worthy countries have had no trouble raising cheap finance. And countries which spend far beyond their means - Australia and the US each consume 106 per cent of their income every year, borrowing ever larger sums to close the gap - have had plenty of investors keen to finance their overconsumption.
"But central banks around the world have decided that the days of super-easy money are over. They have started to take money out of circulation, pushing interest rates up.
"The big price falls on Wall Street in the past week, quickly mimicked in markets everywhere else, are a clear signal that a sharper appreciation of risk has returned.
"The tide has started to turn....The sudden new fear is most visible in the US. It finds its expression in an acute concentration on the intentions of the man who sets the price of money, the new chairman of the US Federal Reserve, Dr Ben Bernanke, who replaced the long-serving Alan Greenspan in February.
"The European Central Bank has raised rates after years of inaction, China has tightened its money supply, Canada has raised its interest rates and, of course, so has Australia.
"As this great ebb tide of global liquidity begins to gather pace, it is time to move away from risk. That's exactly what is driving Wall Street's sharp sell-off; investors are selling shares to take their cash and retreat into safety.
"It's also a bad time to be heavily dependent on borrowings. In the US, the current account deficit, long dismissed as hopelessly outmoded, is suddenly back as a big concern."Australia, whose current account deficit is proportionately the same size as that of the US, may abruptly be faced with the same question."Australian Treasurer Claims He Will Crack Down On "Unbelievably Profitable" Banks...HA!
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