You'd have to question how we possibly still had such a large current account deficit amidst the greatest commodity boom of all time. We gorged on debt (50% foreign financed) in the good times and used this debt to consume and invest in real estate (both non productive assets).
So what happens when commodities fall out of the sky and credit dries up??
I hate to say it, but unless confidence is restored very quickly we are in for a more severe slow down than the US
The RBA has a noose around their neck considering the amount of debt that was financed off shore. They can not afford to risk significant further falls in the currency, otherwise foreign funding will dry up completely and the banks will have to either re-call loans or the RBA will have to embark on mass money printing. Not sure which is the preferable option.
Would definitely be interesting to see how much of our foreign currency reserves the RBA are using at the moment to defend our currency. I dont think they can afford to slash interest rates too heavily or we risk going down the road of Eastern Europe.
The RBA and the government are on a very thin tightrope, in very blustery conditions. If they can pull us out of this one unscathed, they deserve some serious respect
