Heinberg: Peak everything economics, or, what do you call this mess?

It’s becoming increasingly clear that 2008 will be a catastrophic year for the US economy, and therefore probably for that of the world as a whole. The reasons boil down to two: continuing and snowballing fallout from the subprime mortgage fiasco (exacerbated by an orgy of debt-leveraging), and record-high, continuously advancing oil prices.

But will the impact be inflationary or deflationary? This matters, because the diagnosis determines how governments and financial institutions should respond, and what private citizens should do to protect themselves.


Part of the answer depends on how one defines the terms.

Some economists are in the habit of defining inflation simply as rising wages and prices. From this standpoint, high oil prices (caused by depletion and scarcity) are inflationary.

Others define inflation as an increase in the money supply. Some would take that a step further by defining inflation as growth in the money supply that outpaces growth in the productive economy.

In the current instance, Peak Oil is occurring at the same time as the bursting of the real estate bubble, in which a rapid decline in the value of property is effectively causing money and credit to evaporate from the economy. This is being called a liquidity crisis, but for financial institutions it actually amounts to a solvency crisis, and will likely result in the collapse of several major banks. From a monetarist point of view, that’s deflationary.

Energy Bulletin