Right now, we have a distant but comfortable view of the global debt crisis. It affects the stock market and your retirement savings. Apart from that there is no discernible impact. But if you look closely there is a lot to discern.

In an interconnected, globalised world, trouble in one place quickly spreads elsewhere. A slowdown in Europe (and the US) hurts China just as it tries to deal with a burst credit bubble. That in turn hurts the Australian economy. But it's not just via trade links that we feel the impact of a northern hemisphere economic chill.

The flow of capital also dries up. This keeps interest rates elevated, no matter what the RBA does. It also wakes people up to the double-edged sword of debt. And that hurts Australia's property market - that supposed bastion of indestructible wealth. As our mate Kris Sayce over at Money Morning has been saying for years, Aussie property prices are way overvalued.

In a somewhat alarming occurrence, Gail Kelly, Westpac's chief, came out in support of Mr Sayce yesterday. Well not exactly. We're sure she's not the type to read anything as provocative as Money Morning. But she did say that the years of compound growth for house prices were over...for good.

That's hardly a revelation to long time readers. But when a bank boss comes out and says it you know the boom is well and truly dead. It points to the psychological change that takes place as boom turns to bust. At first, only the 'crazies' talk about it. Then the business leaders accept it as reality...in preparation to explain why profit growth remains elusive. Then people wake up to themselves and wonder why they paid $1 million dollars for an inner city (depreciating) shack.

The psychology of Europe is certainly in the bust phase. For the Australian economy, the smell of prosperity is still in the air. But the winds are beginning to change...

Regards,

Greg Canavan
for The Daily Reckoning Australia