Wednesday, September 17, 2008

The Collapsing House Of Cards

We know that things are in a pretty bad way when Alan Greenspan, the former head of the United States Federal Reserve tells us that the current financial crisis is a once in a century event. The evidence is plain to see when three of the biggest investment banks on Wall Street have been decimated, despite having survived such previous events as the Great Depression and the Tech Bubble Bust. But the big question for most Australians is “How does this affect me?”

Well it remains to be seen just how much worse the situation might become before it starts to get better. Even so, it is already obvious that one of the first casualties is the value of our superannuation. Once upon a time, only the wealthy invested in shares, but new, thanks to compulsory superannuation we are all share market investors. Already the value of our super funds has declined over the past year, and now it is likely that they will decline further, although it’s hard to say how far or for how long.

For those who are close to retirement, this is a setback from which it is very hard, if not impossible to recover. Sadly, many people will have to reassess their plans for retirement. For others who have longer to go the chances are that the super funds will recover over time and all will eventually be alright.

There is another impact which will also be felt by all of us. It has been revealed that many New South Wales Local Councils have invested ratepayers’ money into products which are now virtually worthless. Hundreds of millions of dollars have already disappeared, and it could get worse. The end result of course will be that council services will be under threat, and there will be increased pressure for rate rises. In fact, it has been the New South Wales Government's imposition of rate pegging which has contributed to the situation where councils were chasing higher rates of return by investing in what have now turned out to be dodgy instruments.

Sadly, there could be worse to come if the expected United States recession becomes truly global. Already the credit crunch has produced a sharp economic slowdown. If that begins to erode the growth of China and India significantly, then the much vaunted resources boom will no longer sustain us. That’s when we will confront the prospect of rising unemployment and increasing hardship.

Just how bad it will get is hard to say, but given the huge amount of debt still in the global financial system it is likely to get worse before it gets better. As for ordinary everyday Australians, it seems that the advice we got from our Grandparents, to only buy what we can afford to pay for, remains sound.

No comments: