Nov. 12, 2021

We've Seen The Higher Prices, Is A Recession Next?

For 70 years, since 1950 every spike in inflation, like we're having right now, has been followed by a recession.

Nine inflation spikes followed by ten recessions. The 1980 spike in inflation was so great, it was actually followed by two recessions. And in counting these cycles, admittedly the 1961 recession followed a very tepid spike, with inflation at the time running at less than 2%.

But overall the pattern remains. Higher, inflation-driven prices lead, almost inevitably to economic recessions. As these higher prices cause a certain number of customers to be priced out of the market. Simply unable to pay those increased costs. And this loss in aggregate demand helps produce the recession.

But just how long, or how severe these inflation spikes are, varies greatly. The longest-lasting and most pronounced bout of inflation came at the end of the lost decade of the 1970s. In a time of stagflation, higher prices are combined with lower productivity. When this phenomenon of people getting priced out of the market was at its peak.

It has many similarities to today, in that energy costs were skyrocketing. People literally shivering at home, unable to afford the high cost of heating. For those of us who were around then, we'll never forget President Carter admonishing us to turn down our thermostats, and put on a sweater.

Advice from a failed energy policy.

Honestly, as history repeats, I expect to hear much the same thing from our current White House.

It took fully 4 years of that inflation spike to reach its peak. We went from over 5% inflation when Carter assumed the Presidency in 1976, to over 13% when he left in 1980. And almost immediately the first of two back-to-back recessions began.

These two recessions took 3 years to complete, and dropped the inflation rate by 10 full percentage points, to just slightly over 3% inflation.

The major driver in all of this was the cost of energy. It had begun with the OPEC oil embargo in 1973. By the 1970's the United States had become dependent upon foreign oil. We no longer produced enough oil domestically to support our economy.

OPEC, the Organization of Oil Exporting Countries, led primarily by Saudi Arabia, exploited this American weakness, by first reducing the amount of oil they shipped to us. And then dramatically raising the price of oil. Instant inflation.

President Carter's answer was principally to encourage the production of renewable energy sources: solar, wind, and hydro. His goal was to have renewables produce 20% of all America's energy needs by the end of his term in 1979.

Needless to say, this goal was a huge failure. Renewables came nowhere near that level of production. While the price of traditional carbon-based fuels, oil gas, and coal, kept rising with little to no new American production.

Does this all sound familiar?

It wasn't until a new occupant of the White House, President Reagan, came to power that the goal of cheap energy once again became central. Although we had to suffer through one of the worst post-World War 2 Recessions, we did have sustained economic growth for the next 11 years. All devoid of recession.

Today we have another anti-energy President. One who wants to transform our energy sector from traditional carbon-based fuels to a renewables-based policy. And he wants to do it by fiat. Not by working within the free market system.

Mandating overnight that leases not be drilled, and pipelines halted. This stark energy policy has been one of the hallmark issues of the political left in this country, at least going back to President Carter nearly a half-century ago.

It is no accident that both President Obama and the new comptroller of the currency nominee  Omarova have called for bankrupting coal companies. They have viscerally opposed all carbon-based energy for at least a generation. Even though each and every winter, it is fossil fuels that provide warmth and comfort to the majority of the American people.

We are walking down the same path that we walked nearly a half-century before. Higher energy prices, leading to ever-higher inflation. Leading ultimately to the next recession.

I hope and pray that isn't the case today.

But I wouldn't bet against it.