Have you ever wondered what it would be like to be hit with both the oil crisis in the 1970s and the financial crisis in the 1990s at the same time? With soaring oil and food prices hitting an all-time high, combined with global mortgage problems and credit card debt, we are moments away from facing a resources crisis – one that may very well drive us into a global recession.
Recently, we’ve seen oil hit an all-time high at $140 per barrel and while most consumers believe this will only affect the pump, they have failed to see the big picture. Crude oil is an important input in every process of the commodity chain, from production to transportation and distribution of every good. To companies, this will translate to higher cost of inputs, which leaves them with two options: cut cost or raise prices.
If companies decide to cut cost, they will downsize and layoff thousands of workers. While this is an ideal business solution, it does not solve the economic problems at hand. With thousands of workers unemployed, less disposable income will be available for consumption, which will shrink profits and affect global GDP.
Alternatively, companies may decide to raise prices and put the burden on the consumers. By doing so, the obvious problem will be inflation, which is the biggest fear of every government. With recent announcements in US, Canada and China to hold interest rates, it is evident that government s are beginning to panic. If inflation does become a problem, the only way to control it is to raise interest rates to discourage consumption so prices will fall. However, this will force mortgage owners to dig deeper into their pockets and turn the recent global condo boom into a bust, shredding the real estate market thin.
Switching to the consumer sid ...