"We are all subprime"

U.S. economic troubles will have a ripple effect around the world, and this column from Down Under sums up the big picture. From the column by Scott Pape in the Herald Sun:

Former Federal Reserve chairman Alan Greenspan reckons it's a "once-in-a-century financial crisis".

Nice work, Al.

You'll scare the grey nomads out of their Pajeros.

Rather than statements that cause us to choke on our cornflakes, let's look at what this all means.

Specifically, is the world going to end just because some bonus-hungry brokers borrowed a little too much?

Just how will this affect the rest of us?

To understand where things are heading, we need to understand how we got here in the first place.

Most people understand that the US has just experienced the biggest housing bubble of all time.

Towards the end of the boom, even poor people were encouraged to buy houses they couldn't afford, using NINJA loans ("No Income No Job No Assets").

These loans have now come back to karate kick the banks that were silly enough to get involved.

Bear Stearns was the first billion-dollar casualty.

Then Freddie Mac and Fannie Mae, who collectively control $5 trillion in mortgages, had to be bailed out by the long-suffering US taxpayer.

Then over the weekend Lehman Brothers and Merrill Lynch became the next high-profile scalps, which caused carnage on Wall Street when it opened on Monday, and ripples around world markets. Experts suggest that the debt hangover could be upwards of a trillion dollars.

You know what they say, a couple of hundred billion here, a trillion there, and pretty soon you're talking about real money.

Maybe even your money.

So, instead of trying to focus on figures that read like an international telephone number, let's look at what this means for you and your plans.

Specifically, the No. 1 question how long will it last?

No one knows.

The only thing we can be sure of is that from a US perspective things are only getting worse.

House prices are declining for the first time since the (not so) Great Depression.

One in every 416 US households was in some form of foreclosure in August (an increase of 27 per cent from last year), according to RealtyTrac.

The Standard & Poor's Case-Shiller home price index shows that housing prices declined by 15.4 per cent in the quarter ending in June, the largest annual rate of decline the index has ever measured.

And they're still falling.

So how does the fact that a bloke in Minnesota can't make his mortgage repayments affect you?

Well, faced with falling asset prices and increasing food and fuel costs, Minnesota Mike (and 300 million of his patriotic pals) starts slowing down his spending.

This sets off an economic domino effect that reaches all the way to our sunny shores. US consumers spend less and therefore demand fewer Chinese-manufactured goods, which causes the Chinese to (temporarily) slow their demand for our resources.

In the coming weeks you'll get your superannuation returns in the mail.

You'll see lots of red ink, perhaps for the first time in years (which is why your fund will probably quote its much more attractive 20-year returns).

Most Australians have their super invested in a balanced investment option, which generally has, well, a balanced mixture of assets: shares, fixed interest, property and cash.

While this asset mix will provide some protection to weather the current economic storm, we may well be in for more negative returns in the next financial year.

Just remember, though, that superannuation is a long-term investment.

Things may look bad now, but I reckon that 20 years from now you'll be glad you stayed the course, especially if you own shares in the banks.

Yet the economic canary in the coal mine is our large level of household debt as a percentage of income.

In 1988 it stood at 30 per cent - now it averages 160 per cent.

This leaves us wide open to economic shocks.

This crisis didn't start with Lehman Brothers, and it certainly won't end with it.

We've just witnessed the biggest debt-funded consumption bubble ever, and the US economy will be dealing with the resulting indigestion for the foreseeable future.

With economists predicting that Japan, Europe and the US will all soon be in recession, one thing's for certain, like it or not, we're all sub-prime now