In other words, the trade cycle is a monetary disorder that distorts the production structure. If this were not so then clusters of malinvestments would not appear at the end of a boom. Therefore monetary policy is the heart of the problem. Not a single member of economic commentariat is aware of this fact. Paul Kelly, The Australian's , Editor-at-large, made the ludicrous statement that our

. . . crisis is almost entirely externally induced. Australia has not followed the American model. Indeed, it has sharply separated itself from the US at virtually every point. (Poised for the storm, 1 November 2008 )

He then fatuously declared that the "Howard government ran strong budget surpluses [while] the Reserve Bank ran a tight monetary policy... " Nonsense doesn't begin to describe this rubbish. Under Howard the Reserve pursued a criminally loose monetary policy. Anyone who doubts this need look no further than the Reserve's own monetary aggregates. The chart below is based on Reserve Bank figures.

The blue line represents currency, bank deposits are represented by the red line, and the green line represents M1

This chart makes it absolutely clear that during the Howard years the Reserve's monetary policy was one of "let her rip". Only someone who thinks monetary aggregates do not matter could possibly assert that the Howard administration was one of monetary restraint. And only someone completely ignorant of how monetary expansion works could fail to make the connection between monetary expansion and a ballooning surplus.

Terry McCrann of Herald Sun is considered a top-notch economic commentator by a great many in business and the Liberal Party. Last month he argued that Australia was not in recession but New South Wales is. (Lane changes in the two-speed economy, 12 September 2008). Now the economy of NSW rests largely on manufacturing. As manufacturing is the first sector to feel the impact of a recession it follows that the NSW economy was telling us that recession had arrived.

There is no point in McCrann supporters asserting that he could not have known this since the Australian Industry Group's Performance Manufacturing Index report for September said that "Manufacturing activity fell for a fourth successive month". The fact remains that he never bothered to look because these statistics have no real meaning for him — and that goes for the rest of the economic commentariat. In any event, how the devil can any economic commentator argue that a contracting manufacturing sector does not signal recession? Yet this is basically what our economic commentariat have been doing.

Naturally, every recession is accompanied by rising unemployment. By how much unemployment will rise is impossible to predict with accuracy. But given Australia's labour market structure an unemployment rate of 10 per cent followed by a persistent rate of around 8 per cent is possible.

Although I have stressed the importance of manufacturing there is also another indicator that is forever being ignored and that is the money supply*. The following chart reveals that M1 peaked in December 2007 and then deflated until rising again in May, after which there was a slight decline. This monetary tightening made a manufacturing contraction inevitable. It is not generally known that the fed froze the money supply in December 1928. Some months later the US economy started to slide into recession.

The columns are currency, bank deposits are represented by the red line, and the green line represents M1

The chart exposes another flaw in what passes for economic commentary in this country, and that is an absence of any understanding of the nature and potency of money. Until the likes of McCrann get a grip on this extremely important subject their economic commentary will — to put it politely — continue to be misleading.

Professor Quiggin dismissed predictions of recession by Austrian economists on the grounds that they are always predicting doom. This is not true and he knows it. When he raised this with me in 1998 I pointed out that using Austrian analysis Credit Lyonnais successfully predicted the Asian financial crisis. It consistently warned its clients about the impending crisis and its causes. (See, for example, fourth Quarter 1995, Eye on Asian Economies). Under Dr Jim Walker its Asianonomics reports have been a striking expression of Austrian views.

Moreover, my own predictions have also been accurate. I am not sure the same can be said of Professor Quiggin. As for predicting doom and gloom, these Austrians are merely explaining the consequences of loose monetary policies and how they unfold.

*The Austrian definition of money: currency component, all checkable deposits, savings deposits, government demand deposits and note balances, demand deposits due to foreign commercial banks, and demand deposits due to foreign official institutions. (Some Austrians exclude savings deposits because they are immediately lent out, making them credit transactions.)

The Austrian definition of money is in keeping with Walter Boyd's classic definition:

By the words 'Means of Circulation', 'Circulating Medium', and 'Currency', which are used almost as synonymous terms in this letter, I understand always ready money, whether consisting of Bank Notes or specie, in contradistinction to Bills of Exchange, Navy Bills, Exchequer Bills, or any other negotiable paper, which form no part of the circulating medium, as I have always understood that term. The latter is the Circulator; the former are merely objects of circulation. (Walter Boyd, A Letter to the Right Honourable William Pitt on the Influence of the Stoppage of Issues in Specie at the Bank of England, on the Prices of Provisions, and other Commodities, 2nd edition, T. Gillet, London, 1801, p. 2).

Gerard Jackson Brookesnews' economics editor

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