by evilgenius » Sun 13 Apr 2014, 12:55:05
I think the chart is more borne out of a pervasive fear that, should the weak economic recovery succumb to a recession, the world will go right back to where it was in 2008 than it is of some secret knowledge of natural resource conditions. The bad news is that we are headed for a recession. The news out of China demonstrates that. The potentially good news is that it should be just a business cycle determined event.
The fly in the ointment is deflation. When too much investment has been placed in the financial sector, and not into the real economy, then people lose their ability to react to changes brought about by recessions. When they cannot react in ways that address economic uncertainty and circumstances because of onerous independent contractor wage death or pervasive wage theft through paycheck cards and overtime reclassification etc., then the pool of money available to the economy by means of those affected people's collective actions is lost. All by itself these poorest of people are not, even collectively, enough to tip the scales, though. The problem is that those who own small businesses for whom those people are a percentage of their clientele and those whose jobs are therefore related to their plight have also not had the level of investment occur directed at them, and their local economies, sufficiently enough to raise their prospects for success in the face of economic trouble. What they would count on normally, compelling them in new creative directions, to fill the gap may not be there. The second line may not hold in the coming recession. When, if, it doesn't the faith of the people will be challenged.
The faith of the people is what counts when dealing with recessions. If people fear they reduce spending. If those reductions last too long or are aimed at the wrong targets because people don't have the options available to them to aim their cutbacks at the right targets, just look at how corporations protect themselves by lobbying for protections society ought not to give them, then the changes brought about by a recession can become counter-productive rather than creatively destructive. This disconnect has the ability to throw a lot of people out of work very quickly, like the shoe drop that occurred when upwards of $5.00 per gallon gas suddenly throttled the economy. People fought to pay those high prices and keep their things going for a while, they had few other choices, but at a certain point it all fell apart. Collectively they could no longer pay to keep every rich guy going as well as themselves. The poorest of them let their mortgages slide. They comprised enough of a group to make a difference that reverberated throughout the economy, taking down those above them quickly. Oh, at first no pundit looking at it was willing to say that the sub-prime defaults were going to be that serious, but within a few months they all changed their tune.
Given this history many don't believe that a new recession can be tolerated. Too much of the recovery investment spent has gone into financial institutions they say. Too many people are locked into serving this or that master, and won't be able to change their economic behavior in the event of a downturn. What I don't get is how these same people fear inflation. Sure, fear of inflation was pretty much all pervasive for much of the 20th Century, but you need appreciable growth to sustain it, or some corresponding communal lack of faith, such as that wrought against the currency of Zimbabwe. Armed with this attitude they excoriate the Fed for providing stimulus. Little do they realize that without that stimulus their broader fears would become reality. Instead they argue here and there that the opposite would happen, and that the Fed is actually causing the problems. This causes them to climb onto the backs of those who condemn the Fed and call loudly for an end to QE this and that. These people could find themselves walking seemingly quite happily into renewed deflation, all the while blind to it as they continue to harp endlessly about the dangers of hyperinflation.
Yeah, the graph is possible, if the wrong things happen. It's possible because under a deflationary economic environment energy companies are locked into capital investment that occurred under prior period conditions. The value of those prior investments becomes leveraged against them when new money is suddenly worth more than old money. They have a choice to find new investment, enough to overcome the leverage, or to quit. History tells us that often times companies in this situation do elect to quit.