Reserve Bank will likely defer needed cut

These warnings focused on the very things that were most obvious, including the unsustainable growth of credit, the monetary aggregates, consumer demand and housing prices.

Quoting Morgan again: "It was beyond argument that the rate of change in the growth of credit in all markets, particularly the household sector; the rate of growth in the money supply, however defined; the rate of growth in consumption and the staggering increase in housing prices; were proceeding at an unsustainable rate. It is just not possible to have credit growth and money supply increases in the realm of 14 per cent compound, without a disaster occurring."

To me, the woeful performance of the "official family" shows the dangers in group think and the closed, indeed incestuous, cultures that have developed in these institutions.

One assumes and hopes that one benefit of the global financial crisis may be to break open this cosy club, but then again they may merely pull the wagons into a tighter circle and more often tell each other what splendid chaps they are.

John Stone at the same meeting of the HR Nicholls Society forecast dire times ahead for Australia. Space does not allow this prediction to be reproduced here, but the full talk is reproduced on the Henry Thornton website.

His main focus was on the labour market and he produced wonderful quotes from the 1930s Depression to illustrate the need then for labour costs to be cut if recovery was to occur.

"Employment must be made profitable. This cannot be done by government relief works or subsidies to private industry, but only by removing obstacles to reduced costs, and by the restoration of confidence," he said.

This was written by four state Treasury heads for the Premiers' conference in 1931.

One cannot imagine the people in these positions today even thinking such thoughts. More's the pity.

Fiscal stimulus of demand may do little more than create massive debts to be paid off by future taxpayers.

The new "fair work" legislation has increased, not decreased, labour costs, thereby making employment less profitable.

Australian monetary policy is reaching the limits of what it can do to help the situation. The Reserve Bank should, however, cut cash rates by another 50 basis points today and then wait to see how the economy is responding to all the news, including the federal budget in May.