Access Economics has forecast a recession in Australia for 2009. This isn't actually the reason behind this post, I'd rather focus on a bit of commentary found on Business Spectator, in particular the part where the author (Alan Kohler) writes:

Throughout most of last year Access's very good economist Chris Richardson and I conducted a friendly debate about growth and inflation - Chris was saying, both privately and publicly, that the authorities should focus on inflation and that growth would be okay; I was saying and writing that we were in a for a serious recession and that inflation would not be a problem and that rates should be cut and fiscal stimulus should be used.

and he continued,

It would be wrong to beat up Chris and his colleagues for their insouciance last year (they were in good company).

Now here's my take on this. While Chris Richardson is wrong in his reasoning, his response would actually be the better course of action (albeit accidentally). That is only because by ‘controlling inflation' he would have inadvertently kept the money supply closer to the level it should be at (in other words, he would have intervened less). Fueling a debt-ridden economy with yet more debt is not the way out of this thing...

No prizes for guessing when the other two depressions occurred. Luckily our debt-GDP ratio is half that of the U.S. so we're not going to be hit as hard as they are.

Just because Chris was wrong does not make Alan correct by default; in fact they were both wrong. Alan's prescription would actually lead to a worse recession -- first, increasing the money supply will only treat the symptoms and not the disease. It is akin to putting out a fire with gasoline; it would make things worse. We don't have a problem of monetary deflation, quite the contrary. We have price deflation -- people have decided the good times are over and are now starting to build up their savings rather than spend (this is a good thing). So increasing the money supply probably won't do much, at least not in the short term (in the long term when the money ‘gets out' it could lead to, worst case, hyperinflation). Encouraging more debt-fueled consumption isn't the way out of a debt-fueled crisis...neither is inflating our way out (it worked wonders for Zimbabwe).

Secondly, ‘fiscal stimulus' won't help at all. It will rob peter to pay paul as government fiscal spending only creates a diversion of jobs. It moves labour from productive areas of the economy to unproductive areas - from somewhere people want to somewhere a bureaucrat decides is best. Take this example.

Alan and Chris strike me as two people arguing over where to place the deck chairs on the titanic as it sinks. Although Alan is correct about one thing in his article -- forecasts are pure guesswork and should never be taken as anything else. I'll leave you with some interesting quotes from history,

"The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbled of a few years back." - Keynes, The General Theory of Employment, Interest and Money.

Then there's this beauty (I just love really old quotes for some reason),

"The budget should be balanced, the treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and assistance to foreign lands should be curtailed les Rome become bankrupt. People must learn to work, instead of living on public assistance." - Cicero, 55 BC.

Finally, Mises on the Causes of the Great Depression,

"All attempts to emerge from the crisis by new interventionist measures are completely misguided. There is only one way out of the crisis: Forgo every attempt to prevent the impact of market prices on production. Give up the pursuit of policies which seek to establish interest rates, wage rates and commodity prices different from those the market indicates. This may contradict the prevailing view. It certainly is not popular. Today all governments and political parties have full confidence in interventionism and it is not likely that they will abandon their program. However, it is perhaps not too optimistic to assume that those governments and parties whose policies have led to this crisis will some day disappear from the stage and make way for men whose economic program leads, not to destruction and chaos, but to economic development and progress."