US first in, first out

The US may have created the problems underlying the highly volatile global markets, but it is likely to be the first to find its way out of trouble, according to the chief executive of QIC, Doug McTaggart.

McTaggart has used an address to the Association of Superannuation Funds of Australia national conference to point to the fact that, despite it being the source of the problem, investment flows were already heading back to the US.

“The US created the problem but it is going to be the one least hurt, first out and strongest at the end,” he said.

McTaggart said this was because the financial sector in the US formed a relatively small part of that nation’s gross domestic product (GDP) — just 15 per cent — while the financial sectors of other nations represented a much larger proportion of GDP.

“So when global investors are thinking about where to put their money, where are they going — back to the US,” he said. “Capital flows into the US today are as big as they’ve ever been because no one wants to invest anywhere else.”

McTaggart said the question now confronting Australia was how much of the financial market’s pain would be translated to the real economy.

He said he believed the impact would be felt in the household economy where, after months and months of bad news, households had capitulated and thrown in the towel and were choosing to put their money in the bank and to sit on their hands.

McTaggart said how long Australian households remained sitting on their hands would be directly proportional to the stream of bad news they received.