LONDON, England - February 7, 2011 - For those with long enough memories, it all seems eerily familiar. Against a backdrop of already-rising inflation, the Middle East descends into chaos, sending the oil price surging and tipping the global economy further into Depression.
Back in 1973-74, this is precisely what happened as a result of the Arab-Israeli war, via a boycott of the west by producers in OPEC and a fourfold rise in the cost of crude oil. The crisis, though, had deeper roots: the inability of the US to anchor the international financial system, given the cost of the Vietnam war and Lyndon Johnson's Great Society programs, a steady increase in price pressures over the previous half-decade, and the easy availability of credit as politicians tried to keep the long post-war boom going.
Not that difficult to read across from 1973-74 to 2010-11, is it? The period since 2007 has seen an international financial crisis which is, arguably, even more profound than the break-up of the Bretton Woods system in 1971. The US has been left severely impaired by military over-stretch and the bursting of its housing bubble. The flooding of the global economy with cheap money has hastened economic recovery, but at the cost of record food prices, copper at $10,000 a ton, and Brent crude back above $100 a barrel.
Now the dominoes are toppling across northern Africa: yesterday Tunisia, today Egypt, tomorrow perhaps Algeria. The equally undemocratic regimes in the Middle East, sitting on a large chunk of global oil reserves, look on anxiously.
Should history repeat itself, the result will initially be higher inflation as companies mark up prices and workers seek higher wages. This will be followed by deflation caused by a squeeze on corporate profitability and consumer real incomes from dearer food and energy, coupled with a tightening of monetary policy as central banks again seek to reduce inflation.
