Talking on the phone to the RBA desk in New York, they reported that US Treasuries, the most liquid market in the world, had effectively seized up. It is worth recounting this, just to recall how dislocative and disruptive these developments were. It was really not clear how this was going to end, except badly. The fourth quarter of 2008 was bad.
Global GDP declined by 1.5 per cent. GDP in the US fell by 2.2 per cent. In Australia, GDP contracted by 0.5 per cent (Graph 2). The impact was particularly severe in global trade, which collapsed as trade finance dried up because of extreme counterparty risk aversion (Graph 3).