Not for the first time, and certainly not the last, the world is facing yet another economic downturn. Normally, this shouldn’t pose much of a problem. Economic downturns are harsh, they tend to hurt a lot of people, but as a general rule it also acts as a sort of weedcutter. It cuts out the bad weed that was ravaging your garden and led it into trouble in the first place.
But there’s a problem. For the first time, we are in danger of getting into something we can’t get out of because the reliable machinations don’t work anymore.
In a liberalised economy that depends largely on international trade, the separate national economies are intertwined. This has resulted in economic highs, but also downturns quickly spreading across the globe.
For many poorer countries, it proved to be more difficult than the rich countries to weather an economic storm that swept the globe. But there was always one tool we could count on that would help economies revive themselves: prices.
Normally, in an economy driven by supply and demand, prices drop when there’s no demand for the supply. In order to sell his products, the producer then lowers prices in order to stay competitive, or even survive.
In an economic downturn, demand for products dries up pretty soon, forcing producers to cut back on production, but also to lower prices to get rid of the remaining stock.
This helps economies revive themselves because, when prices of products drop below certain wage levels – which we assume dropped, because of the economic downturn – people slowly but surely start buying those products again.
As a result, the producer starts selling products again, he starts to make more money again, hires people who then get off welfare and receive a salary (which is often higher than the welfare benefits) with which they buy products — you get the picture.
But now I’m not so sure that this system is still working like it should.
Take energy prices. Even though the United States went through a mini-recession (or at least a hefty cooling-off period) these past 4 months, and companies cut back on spending (we know this happened) and while the weather was pretty warm (less consumption of combustion fuels), oil prices went going up, up, up. And so did liquid natural gas prices, and so did coal.
Analysts today said that they are already penciling in prices as high as $200 per barrel of sweet crude. If I had written that line a year ago, people would have ridiculed me.
Then take food prices. Inflation in that area has been stellar, with rice prices jumping by a whopping 400% in some places. There were food riots in Egypt, the Philippines, India and other places. Yes, bad harvests in some areas were responsible, but still the world rice output wasn’t much lower.
This is all resulting in higher prices at your gas station and your supermarket. Keep tabs on the price of rice lately, or bread? If you have, then you know what I mean.
So, will all this now wreck the system? Not necessarily. Just 3 years ago, analysts said that the world would be falling into a 1929-like Depression if the price for a barrel of oil broke the $80 mark. Hell on earth, fire and brimstone, cats and dogs living together – MASS HYSTERIA! But that didn’t happen. It’s still not happening and that while that barrel passed $117 today.
And it won’t break the system as long as there are people who are able to pay that money. Because gas companies will raise the prices at the gas station because they have to pay higher prices for a barrel of oil.
But there are people who won’t be able to pay those high energy and food prices. And like in the poor countries of the world, it will be the poor people in the rich nations – like yours – who will start to suffer, widening the gap between the rich and the poor. Which will, in the longer term, lead to a world of problems.
So will these higher prices break the system? I’m hoping they won’t. Unfortunately, we’ll have to wait for a real recession to find out.