The Australian economy is still booming, but the shadow of the global credit crisis is growing longer every day. Some items
* Most observers now agree the US is in recession
* With negative real interest rates in the US for terms up to five years (you can actually buy negative-rate inflation-protected bonds) commodity price inflation seems bound to continue. This is good for the Oz economy while it lasts
* It now seems clear that someting like half of all subprime mortgages will eventually go into default (many have already been foreclosed and 20 per cent are currently delinquent
Much the same is true for Alt-A and other limited-doc loans. The big question now is whether mortgages guaranteed by the quasi-public Fannie Mae and Freddie Mac are in fact secure. As with all implicit guarantees, the assumption that the Federal government stands behind these corporations is marvellously effective until it is actually tested.
Can we keep on growing while all these processes and more work themselves out? I don’t know and I doubt that the Reserve Bank does either. But if I were setting monetary policy, I’d be very cautious about any further increase in interest rates.