Well I've got some very bad news for Dr Brendan — he is absolutely wrong. Despite the lousy economic advice that he's been given plus the wrongheadedness of Keynesian reasoning, the Reserve — and this goes for other central banks — cannot prevent interest rates from rising once monetary policy and real forces* have moved to lift them.

It was once a given that economists knew that rising interest rates were a sign that the boom had peaked and that an impending contraction would make itself felt, particularly if the central bank had tightened the monetary spigots. Readers will know that I have long lamented the failure of our economic commentators to tale in to account the vital role that money plays. However, M3 is now being taken account of, the growth of which is being stressed as the tripwire that made the Reserve raise the cash rate.

Unfortunately M3 is not a true measure of the money supply because it contains credit instruments that are not money despite being highly liquid. It does not matter how 'liquid' an asset is, if it has to be exchanged for money (sold) it cannot be money.

Now for some recent monetary history. From March 1996 to December 2007 currency rose by 110 per cent, bank deposits by 178 per cent and M1 by 163 per cent (Bulletin Statistical Tables, Liabilities and Assets - Monthly - A1). For the same period the Reserve's assets rose by 163 per cent. The significance of these figures has completely eluded our economic commentators.

As a boom comes to a head firms find that they need to borrow more as rising costs begin to squeeze profit margins. The increased competition for funds exerts an upward pressure on rates irrespective of the cash rate. This is why interest rates can continue to exceed the cash rate by a considerable margin until real factors eventually bring finally triumph*.

It logically follows that if the central bank tightens money this will hasten the moment when the boom collapses. M1 peaked in December 2007 at 231.3 and bank deposits at 191.3. Any competent economist should find the monetary figures for last April revealing a very grim picture: bank deposits had dropped to 177.6 and M1 to 216.9 while currency virtually remained unchanged at 40. In other words, bank deposits fell by 7.2 per cent and M1 by 6 per cent. We shall have to wait and see whether the Reserve will change its monetary course once a recession starts to bite.

It should be self-evident that it is Messrs Nelson and Turnbull who are in need of a "reality check".

*As Fritz Machlup put it:

. . monetary factors cause the [business] cycle but real phenomena constitute it, Essays on Hayek, Routledge, Kegan Paul 1977, p. 23).

Gerard Jackson is Brookes' economics editor