The US economy has been in turmoil for much longer than most actually know. Dating back to the horrific event of 9/11, the US have never really recovered to a feasible level and ever since, has been on a slow downward slide. Financial advisors yelling and screaming about this current time wasn’t enough for people to realise the possible catastrophic effects it will have on the economy, and ultimately on themselves. The US being the strongest economy for decades distilled comfort in most which has made people simply not acceptant of the possibility of a crash. Though, as many still fail to realise, a lot of life events are still connected with physics with the popular saying going, “What goes up, must go down”.

So how does this affect us Aussies? Well, unfortunately it has already effected us very hard but all hidden below the surface. The Reserve Bank of Australia (RBA) firstly cut interest rates by a whole 1% to help inflation, though the banks only declared a 0.8% cut, holding onto their “well earned” money. To non-financial savvy people, this means, they simply don’t wish to get into bad debt. I’ll give you a short explanation:

Firstly, a bank in Australia will borrow money from a large corporation (e.g. US Bank) at a specific interest rate for a particular term, like 5 years. They then loan that money to consumers (us) at a higher rate in order to pay back their loan and make a profit. However, as many know there is good debt and bad debt and unfortunately, much bad debt like Lehman Brothers is floating around. Large corporations with good money surplus don’t wish to loan their money around as it can easily become a liability and turn into bad debt.

If you have recently gone into a bank to apply for a loan, credit card or a new bank account, you would’ve noticed new “restrictions” and the possibility of being declined far greater. This has been put into play to only allow people with the proper financial backing to become eligible. You might have certain assets which are valuable to you, however they could be easily deemed liabilities by your bank, depending on circumstances. A good explanation of assets vs liabilities can be found here.

So in result of the US economy crashing, the biggest economy in the world, other countries will of course follow suit. Our dollar hit a 5 year record low of 0.65 cents (0.6584) to the US dollar.

As you can see above, just before 6AM, it hit the record low and then climbed strongly from thereon, nearly hitting 0.68 before finishing just under 0.67.

Kevin Rudd and 20 finance ministers are working with Washington to provide relief to the Australian economy. More can be read at the Sunday Morning Herald here.

All I can suggest is to be cautious, not frugal. As history repeats itself, especially like in this occasion (1980 recession), we will eventually get through it. We will live and evolve into a bigger and better world…

Stay tuned for more updates.