If oil prodution is disrupted because of the problems going on in the Middle East—which is completely within the “possible-to-likely” category at this time—or catastrophically, if there is a disruption of oil production in Saudi Arabia—then we would have a repeat of 1979.
Oil prices would spike quickly to $200 and beyond—how far beyond is anyone’s guess. But the immediate nightmare would be the ripple effect of that rise in oil prices: Food prices would be soon to follow.
In other words, the inflation Bernanke has been exporting will come back at the United States like a boomerang, and clock him upside the head.
But unlike Paul Volcker, who could raise interest rates 5% above the rate of inflation in order to halt it, the U.S. Federal government’s fiscal situation is too weak. With the current $1.6 trillion deficit, the Federal government now borrows more money via Treasury bonds than it takes in via tax receipts—it simply cannot afford to pay higher interest rates for the money it borrows to fund its continued operation.
If the Federal Reserve were to raise interest rates in order to halt inflation, it would make further Federal government debt so expensive that the government would literally go broke.
Bernanke and the members of the Federal Reserve Board know this—so they won’t raise interest rates in order to halt rising consumer prices.
Therefore, if the generalized revolt in the Middle East affects production and supply of cheap oil, then inflation in the United States will ramp up just as quickly as it did in 1979–‘80 following the disruptions caused by the Iranian Revolution. But unlike in 1980, the Federal Reserve will not have the bullets or the balls to halt inflation by raising interest rates. Which means that inflation in the United States will spiral relentlessly, catastrophically out of control.
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