The predicted
avalanche of articles on the rate hike has appeared. The most interesting is
the front page headline from The
AFR –
“Reserve Bank riles Costello.” The subheads are equally interesting: “Rate hits
5.75pc; Budget undermined; Treasurer at odds on
inflation.”

The biggest
challenge facing Australia is geopolitical and has
direct implications for the price of oil and therefore for global inflation and
interest rates. Mark Steyn
has provided a powerful case for “facing down Iran” – now. This surely
describes views inside George Bush’s White House. Messrs Bush, Cheney
and Rumsfeld and their military advisors will be comparing a very tough
option – facing down Iran now – with a potentially much worse situation
when Iran has nuclear weapons.

…we face a
choice between bad and worse options. There can be no “surgical” strike in any
meaningful sense: Iran’s
clients on the ground will retaliate in Iraq, Lebanon, Israel, and Europe. Nor should we put much stock in the country’s
allegedly “pro-American” youth. This shouldn’t be a touchy-feely nation-building
exercise: rehabilitation may be a bonus, but the primary objective should be
punishment-and incarceration. It’s up to the Iranian people how nutty a
government they want to live with, but extraterritorial nuttiness has to be
shown not to pay. That means swift, massive, devastating force that decapitates
the regime-but no occupation.

The cost of
de-nuking Iran will be high now but
significantly higher with every year it’s postponed. The lesson of the Danish
cartoons is the clearest reminder that what is at stake here is the credibility
of our civilization. Whether or not we end the nuclearisation of the Islamic
Republic will be an act that defines our time.

The costs of
facing down Iran would be very high – as Henry’s editor PD Jonson writes: “If the bombs start falling on Iran or Israel, or even if the threat of
military action gets more immediate, oil will quickly reach US$100 a barrel and
this would severely damage the current global
boom.”

We re-present our
analysis from late 2004/early 2005 on the implications
of dear oil,
with links to eminences like Alan Greenspan, Warwick McKibbin and the old lady
of Martin
Place herself.

Clearly dear oil
and rising interest rates are not a happy conjunction. For some time the global
central banking brotherhood had (it seems to Henry) decided not to raise
interest rates but in recent weeks it seems the opposite decision has been
made. So the “stagflation” analysis covered off in late 2004 becomes highly
relevant and we all need to hold onto our hats.

Read more at Henry
Thornton.