That Australia is especially affected by commodity prices movements, mining booms, wage pushes and drought means that these factors, according to Downes, influence the degree of any downturn or recovery, and three factors mainly determined short-run activity with a further five having a dampening effect on them. The three factors are: the building cycle, the inventory cycle and the investment accelerator.

The five factors are: short-term demand leaking into imports, responses from the state sector, the impact of rising labour costs as activity intensifies, higher prices as activity intensifies, higher interest rates and an appreciating currency as demand rises. And it is the labour markets and the financial market that have the most dampening influences on the business cycle. The only thing right about this is the statement that there is no such thing as a business cycle, the name of the alleged boom-bust periods that are supposed to be an inherent part of capitalism. Now for some of Downes' factors:

1. There is no inventory or building cycle.

2. There is no accelerator.

3. Demand proper does not leak into imports.

Basically what happens is that the rate of interest is forced below its market rate and expands the supply of credit. The newly created credit is then employed in projects for which all the factors necessary for their completion are not available. In other words, the lower rate of interest has misled businessmen into thinking that real savings have increased.

Now interest is the means by which the supply of capital goods are brought into balance by the demand for capital goods and which allocates them through time, so to speak. It follows from this line of reasoning that artificially lowering the rate of interest therefore expands demand for producer goods without increasing their supply. (For the sake of simplicity I have ignored the phenomenon of 'forced savings').

This 'cheap money' policy fuels speculation and housing: eventually prices begin to rise as does the demand for imports in response to the increase in monetary demand which also misdirects production. As prices rise the price premium also rises causing nominal and eventually real interest rates to rise. At some point the central bank is forced to apply the monetary breaks, the country goes into recession, unemployment rises, excess capacity emerges and inventories pile up. Of course, as Australia imports most of its capital goods a great deal of the newly-created bank credit will immediately be directed to foreign producers of capital goods.

(The so-called accelerator has nothing to do with it. In fact, the accelerator is a myth — it does not exist. Therefore any economic analysis based on the concept of the accelerator is guaranteed to give lousy results. For a full refutation of the accelerator principle readers should turn to Professor W. H. Hutt's The Keynesian Episode: A Reassessment, chapter 17, LibertyPress, 1979) .

So rather than attenuate any cycle we find that the rise in imported capital goods is only one of the ingredients of our credit-generated boom. Even if Australia implemented a sound money policy the inflationary policies of other countries would still destabilise us. (This is not an argument against such money policies. Their absence has caused much damage to the economy).

As other countries inflate they increase their demand for our products thereby causing us to direct investment into those lines of production; when they finally call a halt to their inflationary policies demand for our exports fall and this reverberates throughout the economy. The extent of the immediate damage is really determined by the degree to which resources were shifted to those export sectors. Although members of Australia's so-called economic commentariat casually dismiss this view they still refuse to debate it. Nevertheless, some are wondering what the consequences for the Australian economy will be if an economic contraction in China causes our mineral boom to collapse.

Note: Regular readers will have quickly realised that this is a very broad outline of the Austrian school's theory of the boom-bust phenomenon. However, I think it's pretty clear that our economists are still stuck in a Keynesian rut despite any protestations to the contrary.

Gerard Jackson is Brookes' economics editor