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Oil Shock Prompts Likely Double-Dip

March 8, 2011

When the first oil crisis hit in 1973/1974, I remember the consternation it caused among economists. Was the price rise inflationary or deflationary? the debate raged. But the answer was disturbingly simple. Both. It was inflationary of the price level and deflationary of real demand.

– UK. Telegraph, March 8, 2011

I started reporting on the oil situation early on. I put up the link to Gas Buddy so people can locate the least expensive gas in their area. I have tracked oil prices and cautioned my readers to stock up on items they need as prices will go up on everything. There will be inflation. As the double-dip ensues and if this DD is anything like the one in the 1970s, prices will then go down, but money will get very tight as interest rates go up. The jobless recovery will persist. And once the Federal Reserve QE2 program ends in June, money will indeed start to get tight. It’s all a perfect storm situation.

What exactly is a double-dip recession? Investopedia states:

The causes for a double-dip recession vary but often include a slowdown in the demand for goods and services because of layoffs and spending cutbacks from the previous downturn. A double-dip (or even triple-dip) is a worst-case scenario. Fear that the economy will move back into a deeper and longer recession makes recovery even more difficult.

So, we are right on the brink of a double-dip brought on my sky rocketing oil prices. This is EXACTLY what happened in the 1970s after the Viet Nam war ended and oil prices shot up. This time is different because the 2008 global financial collapse caused $24 trillion to be sucked out of the economy and has weakened every sector. We are barely chugging along. So, unless some unforeseen event occurs, it is likely we are headed into a double-dip recession. How does that affect everyone?

I lived and worked through the 1970s DD-recession. Money was very tight. Some deflation occurred as retailers dropped their prices making things more affordable, but no one had any money. It felt like a depression. This time I think it will be the same if not worse as the political climate is very volatile, more like the 60s. Social unrest is more likely.

Even if the U.S. releases gas from the Strategic Oil Reserves, it will have a minor effect on gas prices. We are in a helluva fix.

Analysts say the economy can probably stay on the upswing as long as oil remains below $120 per barrel. If it goes higher, and pushes up the cost of fuel, consumers could rein in spending, more commuters may opt for public transportation and car pools, and leisure travelers will probably vacation closer to home.

“That’s when it really starts to do damage,” Flynn said. If oil rises to $150 or more per barrel, and holds at that level for months, some economists think another recession could be triggered.

Source: Yahoo News

Related: UK Telegraph reports: Middle East deserts hold seeds of a double-dip recession
http://www.telegraph.co.uk/finance/comment/rogerbootle/8364783/Middle-East-deserts-hold-seeds-of-a-double-dip-recession.html

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