Economy Watch: We're In an Inflationary Recession That May Start to Accelerate

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A concept that’s key to resource depletion is the higher volatility phase, in which both price and supply start to hit ceilings and floors in accelerated fashion. This tends to appear first during the actual peak supply period, or peak plateau period. The pattern has been seen in previous eras in such things as wood, fish, and whale oil. When the post-peak phase gets underway the price amplitude increases even further, playing havoc with supply and demand. As demand gets killed, and then finally collapses, it causes confusion about supply. But then, as demand returns, any questions about supply are soon answered as demand once again bumps up against the supply ceiling.

contracting-triangleVisually, we can think of demand in this phenomenon as being in a kind of contracting triangle. Every time consumption resumes after a previous demand crash, it hits the ceiling at a lower level. This is the point where, if you find yourself living in the age of biomass and wood, you get rescued by coal. For example. This is also the point where, if you are living in the age of oil, it’s less likely you get rescued.

Now, what’s interesting about this pattern in oil is that it appears to have arrived in conjunction with the bursting of an epic sized credit bubble in the West, a quarter century in the making. Leaving aside causality–and yes, there are many who have strong views about causality here–the two forces have now clearly joined. And so what we are dealing with presently is a very nasty ceiling. A unified ceiling, if you will. One made of both interest rates (as an expression of credit availability in a time of depressed economic activity) and energy.

low-ceilingCould this limitation finally resolve the dispute between inflationists and deflationists? I think it could. As I was laying out earlier this winter in Recession vs. Collapse, we are experiencing a deflation that appears to trigger both reflationary policy and reflationary responses in the dollar and commodities–which then leads to more deflation. This is a process that likely began as early as the Summer of 2007. In this deflation-inflation oscillation the metronome ticks first one way, and then the other, causing uproar and loud talk each time among the inflationists, and the deflationists. As I have been suggesting this year, why the need to choose? We have very likely been in an inflationary recession for nearly two years now, with massive deflation in housing and yet stubbornly higher food, energy and health care costs–the latter well above the price levels of just a few years ago. The risk, in my view, is that both trends now accelerate. And, that we experience next something more akin to an inflationary depression.


Graphic: Contracting triangle pattern (typical in technical price analysis).

Photo: clip from the film Being John Malkovich.