Australia has desperate measures for desperate times

Like many of you, I was up early to get the latest news from the US markets. Suffice to say, I almost went straight back to bed.

The sight of US markets tumbling by as much as 6% was scary enough, but what was really worrying was the sight of President Barack Obama coming out to reassure the nervous markets.

The problem was that all Obama could do is point to the past.

“Markets will rise and fall but this is the United States of America. No matter what some agency may say, we’ve always been and always will be a Triple-A country,” he told reporters.

“In fact, Warren Buffet – who knows a thing or two about good investments – said, ‘If there were a Quadruple-A rating, I’d give the United States that.'”

Usually, quoting Warren Buffett is a sure-fire way to make everyone feel better. But the markets kept falling anyway, partly because panic is difficult to stop and partly because the US “story” is getting harder to believe.

That’s been underlined today in Australia, with the market dropping 4% in the first half hour of trade – another very scary result that shows nothing can hold back the tide of investors desperate to get out of the market.

Today’s slide really confirms that we are headed for a very rough few months. Consumer confidence and business confidence will both take a big hit (both are already very weak) and the spending strike we’ve seen since the start of the year will continue. If anything, customers are likely to become more cautious.

Economic growth will also slow in Australia and in the US, and while recessions remain highly unlikely, things are going to get tough.

Make sure you keep reading SmartCompany for the latest news and advice – today we’ve got 10 things SME operators should do in response to the turmoil and five ways to ensure cash keeps flowing.

Entrepreneurs in Australia should also take heart from the fact that our economy is in a much, much better place than the US to respond to any slowdown.

The reason Obama’s words rang so hollow this morning is that the US Government and central bank have very little ammunition to fire at a possible recession.

With interest rates at zero, the best the Federal Reserve can do is launch another “quantitative easing” program in a bid to get more money flowing through the economy. But it’s launched two of these in the last two years and neither has worked particularly well.

The US Government doesn’t have many levers to pull either. Given its debt problems, it’s just agreed to cut spending at a time when it may well have to increase it. Not a smart move.

Contrast this with Australia, where the RBA has plenty of room to slash rates if necessary – as it was fully prepared to do in the middle of the GFC.

The Federal Government also has a strong budgetary position and plenty of scope to increase spending to stimulate the economy – something Kevin Rudd did a very good job of during the GFC.

If desperate times do call for desperate measures, Australia does have the firepower to stimulate.

The worrying thing is that this time around the US and Europe do not.