Global Economic Crisis

History may not exactly repeat itself, but it often rhymes. The recent spike in oil prices, now above $100 per barrel, mirrors a development that occurred in the middle of 2008. Then, oil prices hit more than $140 per barrel.  Earlier in 2008, the U.S. Congress passed a major stimulus spending bill, financed with borrowed money,  with the promise that this step would ensure America did not slide into a recession due to falling house prices. We all know what happened afterwards; the oil spike trashed the global economy, after which the world’s financial system was brought literally to its knees. The subsequent global economic and financial crisis brought on the worst recession since the Great Depression of the 1930s.

While supposed experts maintain that the global economy is undergoing a recovery, it is fragile at best, and totally dependent on massive sovereign indebtedness, which is now bringing on a sovereign debt crisis. Just days ago, the ratings agency Standard & Poor’s turned negative on the future credit worthiness of the U.S. government.  If, on top of all these developments, oil prices return to the highs of the summer of 2008, the largely state-subsidized economic recovery underway in many advanced economies is likely to  falter, precipitating a double-dip recession.

Oil prices are not the only metric to watch in the months ahead. It  is, however, a leading indicator of  what is likely to occur to the global economy. If oil price inflation causes enough economic downturn to further depress government revenues, the accelerating sovereign debt crisis will inevitably get much worse.