Lower equity markets in the United States and Australia will be coupled with Australian mortgage interest rate rises, which may approach 10.4% when the banks pass on more than yesterday’s official interest rate increase.
These and other blows will set off wide ranging shock waves. The last time we hit an economy this hard was in 1960.
We will dislodge more of the enormous volume of stock that is still locked into margin accounts. Investors in the US and Australia are now starting to suffer serious losses.
Gearing in a bear sharemarket makes no sense, so big volumes of stock will begin to come on to the market. Market falls usually end in the so called “day of no hope”. Many thought that day was 22 January. Unfortunately the rally that followed 22 January may turn out to be a so called “dead cat” bounce.
In the US, much of the margin stock is actually held internally by bankers and stockbrokers, so there may be a new round of losses.
As I have written before, we still need a rescue package for the monoline insurance disaster. More capital will be required by US banks and control of them will edge closer to the Middle East and perhaps China.
Here in Australia, the crunch was already underway, but the Reserve Bank said it could not determine how real it was. It is about to find out.
We will slow more quickly than the economists are predicting because the economy is being given a five-fold whack – a fall in the sharemarket, a limit to bank credit, a fall in the property market, constrained government spending, and, of course, an interest rate increase that is greater than the Reserve Bank set out.
In the 1987-90 period the blows were staggered. You have to go back to November 1960 to measures introduced by Harold Holt and the consequent slump to have all five factors working at the same time.
The years after 1960 were not pleasant. Let’s hope all concerned dust down the history books.
This story first appeared in Businessspectator.com.au
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