graph 3 ). so notwithstanding their evident caution at present, people remain essentially optimistic about the long term. graph 2 graph 3 consumer demand in australia, while weak compared with recent years, is actually at the stronger end of international comparisons among advanced countries. this presumably owes something to the stimulatory effects of fiscal measures and lower interest rates for borrowers ( though savers are feeling the pinch ). but perhaps it also shows the inherently optimistic view australians take in the future. optimism, combined with an awareness of risk, is a fundamental strength. it is to be hoped that this will be matched by a recovery in business confidence over the months ahead. that remains to be seen, though there have been some encouraging signs recently. what can policy - makers do to help? unfortunately, there is no lever marked “ confidence ” that policy - makers can take hold of. our task is very much one of seeking to behave, across the board, in ways that will foster, rather than erode, confidence. over the past six months, that has, of course, involved the rapid deployment of both fiscal and monetary measures, to support demand. the effects of those measures will still be coming through for some time yet. measures to sustain confidence in the financial sector and to keep key markets functioning were also important. perhaps there is also some value in articulating a view of where we want to get to when the cyclical downturn ends, as it will, and recovery takes hold. what sort of country does australia want to be, economically, during the next expansion? how do we want to be positioned in the global marketplace for capital, in an environment in which markets will have absorbed a lot of government debt and will be evaluating opportunities for other uses of capital? i suggest that australia has a very good chance of offering an economic setting in which the following conditions hold. first, political stability remains assured – something becoming a bit less common. second, the government does not own, and has not had to give direct financial support to, the banking system. australia will be free of the difficult governance and exit strategy issues that such support is raising in a number of countries. third, public finances remain in very sound shape, with modest debt levels and a mediumterm path for the budget back towards balance. without the massive obligations arising from bank rescues that will inevitably narrow the options available to governments in other countries, australia should be able to articulate such a path more effectively than most. fourth,

and posing new questions and challenges. in this context, i would like to touch briefly on three issues. the first is the challenge that low interest rates pose to anyone who is seeking to fund future liabilities. low interest rates mean that the present discounted value of these liabilities is higher than it once was. in turn, this means that more assets are needed to cover these liabilities. for anyone managing a long - tail insurance business or a defined benefit pension scheme, this is a major challenge. it is also a challenge for retirees and those planning for retirement. the second issue is the effect of low interest rates on asset prices. just as low interest rates increase the value of future liabilities, they increase the value of a given stream of future revenue from any asset. the result is higher asset prices. another way of looking at this is that faced with low returns on risk - free assets, investors have sought other assets, and in so doing they have pushed up the prices of these assets. a good example of this is commercial property, where investors have been attracted by the relatively high yields, pushing prices up even though rents are declining ( graph 10 ). a rise in asset prices is, of course, part of the monetary transmission mechanism. but developments here need to be watched very carefully. history is littered with examples of unsustainable asset price rises emerging on the back of perfectly justifiable increases in prices. in a number of cases, this has ended badly, especially if there is leverage involved. also, we should not lose sight of the fact that interest rates and the returns generated from assets are ultimately linked to one another. so, interest rates may be structurally lower in part because the stream of future income generated from assets is also lower than in the past. this would have obvious implications for the sustainable level of many asset prices. the third issue is the effect of low interest rates on firms ’ investment decisions and hurdle rates of return. in today ’ s environment, it seems that many investors have, reluctantly, come to accept that they will earn lower yields on their existing assets. an open question though is whether the same acceptance of lower returns is flowing through to firms ’ decisions about the creation of new assets – that is, their own investment plans. the international evidence is that the hurdle rates of return that firms use for new investment are quite sticky and that they are not very responsive to movements in interest rates. 3 there is less evidence of this issue in australia,