by T. M. Beeker

Created on: April 28, 2008

The debate topic is misleading in that I feel gas prices will cause something of a recession but a depression is another matter entirely. This speaks to the lack of information people have when it comes to economics. Yes, the dismal social science is often difficult for people to fully grasp the nuances and meanings of terms and concepts.

With respect to gas prices they will eat into the profits of firms, the wages of workers, and likewise restrict purchases for travel and luxury. This will slow the economy down which is where a recession gets its name. Now, if the downturn continues from one year to the next then it could be considered a depression.

I see that refineries who must pay the 100$ dollars or more a barrel have cut back production which is where the price at the pump is affected. Also government is experiencing a Reagan style situation. Decreasing tax revenue (rebates / stimulus packages) while spending tons on war, welfare, and other programs. The deficit grows which eats up capital available for consumers. The mix is one that increases prices, unemployment, and saving while on the other side wages, profits, and luxury spending goes down.

The fact is this recession is over due. The economic expansion of the Clinton era and the first Bush term had artificially staved off a slowdown thanks to war spending, inflated markets (real estate and stocks), and tinkering with interest rates.

Now as the reality of troop reductions looms there will be less spent on beans, bullets, and bandages which reduces profit and employment in the defense sector.

The grossly inflated real estate market has finally burst and people who bought more house than they could afford using an ARM (Adjustable Rate Mortgage) are getting caught with their fanny in the breeze.

The stock market likewise is seeing the quirky IPO's fall in value. Firms whose stock price rode high on consumer confidence, war profits, luxury buying, and other factors are starting to feel the pinch.

There is a double impact of the mortgage / foreclosure situation. Government which doesn't have the money on hand is bailing out people and firms (Savings and Loan crisis in 1991) thanks to sub-prime lending which was fine when rates were low and wages high. People who bought too much house had it easy when their rate was low. As it rose and equity in homes fell people found they could not lock in a good rate and now payments are more than they can pay. Firms that handed out these low initial rates can't cover their overhead on foreclosed homes so they are also in serious trouble. This seems to be the catalyst for our economic woes. People lose homes, jobs, and lenders likewise go belly up.

Simply put, yes, gas prices will hasten the recession. They will not send us crashing into a depression akin to the Great Depression (what was so great about it?). Lucky for us there are better controls in place to prevent an economic down turn from continuing until we all crash.

Rising gas prices will mean more airlines and delivery firms go bankrupt and many of us will opt to vacation locally if at all. My guess is that Congress and whomever is the new President will reduce federal taxes on gas (which are quite high) and work to make deals with Russia, South America, and other non-OPEC producers to up crude oil production. That should lower the price per barrel which in turn prompts refineries to make more gas. Lucky for us oil and gas are commodities that respond (usually) to supply and demand pressures.

All that I know for sure is I am giving my little Volkswagen a big hug next time I go to the pump.

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