Kohler: A slap for hysterical markets The US is defaulting by stealth
Right now the world is at a crossroad because Federal Reserve governor Ben Bernanke and Treasury secretary Hank Paulson have put on the table their inner-most secrets. If Congress fails to pass the bank rescue package – or mauls it to the extent that it won’t work – then we will see an enormous collapse in the US and global stock markets. That will lead us to a severe global recession.
Already the global inter-bank market is freezing up because banks don’t trust each other. In turn the interbank interest rates are skyrocketing. Australian banks trying to access overseas money are finding the going tough. For a few days the world can muddle through, but now that all the cards are on the table, if there is no rescue package the stock market fall and will be followed by a nasty credit squeeze.
If the package is passed virtually intact then I think we will see a very strong rise in the stock market and while there will probably still be a recession in the US and a downturn in Australia, it will be manageable.
However the package requires China, Japan, other Asian nations and the Middle East to step up their lending to America.It’s always hard to predict, but my guess is that the US dollar will fall and the Australian dollar will rise on news of the rescue package being successfully passed.
Right now the Australian economy is slowing very rapidly. I think that without the US rescue package there is a risk of a recession because of the strain on oversees borrowing and its cost. The succession of economic events culminating in the recent stock market fall has really taken a toll.
Every Australian needs to be on the edge of the chair watching what’s happening in the Congress. My prediction is that the Congress will make the right decision and pass the package because the cost of not passing it is too high.
LNC Price at posting:
$4.85 Sentiment: LT Buy Disclosure: Held
