The price of oil
rose further overnight, just over US$77 per barrel on Henry’s reading. This is
another part of the mix that Chairman Bernanke and his colleagues will be
grappling with as we sleep tonight. US markets have convinced themselves (with
around 80% probability) that the US Fed will pause in its rate hiking
propensities this time round.

The situation in
the Middle East remains dire, and could quickly
get worse. We might before long see the price of oil far higher than it is now
and there is nothing much that we can do to prevent this. Encouraging
alternative fuels is a ten or 20 year project, even assuming we can face the
possibility that the odd parrot will be killed as part of the
process.

As the
Oz reports, yesterday’s
Coalition party-room discussion gave rise to a number of approaches reducing our
dependence on increasingly expensive imported oil, including the proposal to
offer subsidies to motorists who switch their car to LPG. Also being considered
are ways to make the use of bio-fuels, such as bio-diesel and ethanol, more
attractive.

David Bassanese in
today’s AFR discusses the
relationship between housing affordability and consumer confidence. He notes
that household debt servicing “has been rising steadily” and is expected to rise
further. “So far so bad, but here’s the rub: the last time interest rate
burdens were this high [in late 1989], consumer confidence was plummeting, and
the economy was slipping into its worst recession since the Great
Depression”.

This time round,
consumer confidence has fallen, but only by about one third of the fall in
1989. We are experiencing “a classic credit-collateral asset price boom …”.
This has meant people can borrow against the value of their homes (and other
assets), thereby keeping asset prices rising along with people’s debt servicing
burdens. The risks escalate as interest rates rise – gently, in an attempt to
keep the whole show continuing.

Even dearer oil
could be the trigger that sends the whole process into reverse. A big drop in
consumer confidence would be proof positive that this was occurring, but by then
all we could do is hang onto our hats as the roller coaster goes down the other
side of the hill it has been climbing.

Read more at
Henry Thornton.

Peter Fray

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