The BBC series 'Life on Mars', is about a modern day policeman who gets hit by a car and wakes up in the year 1973! Are we about to be hit by a runaway financial storm, and find ourselves back in 1973?' 

Reserve Banks Lower Rates. That's good?
Last week, New Zealand's Reserve Bank reduced official interest rates responding to 'a shallow recession'. This follows Australia's earlier move in reducing rates in the face of an unexpectedly fast downturn in activity. Normal enough, except that inflationary pressure remains high in both countries and Reserve Banks usually hike interest rates to cut inflation!

Falling interest rates along with higher than expected inflation are taking the shape of the notorious 'stagflation' triggered by the "Oil Shock of 1973'. That was 35 years ago, and even a 50 year old in business now, was only 15 at that time. Most people in business, the banks, and government, didn't have to deal with that economic disaster. Can we learn something from that history to help ourselves now?

The Oil Shock of 1973
Early in 1973, the world was in the grip of a resources boom. Just like a few months ago. The OPEC countries wanted some of the action, and for the first time, cut oil production to jack up prices. Without prior history to guide them, they went too far, and choked the world economy.

With plastics, paint, and rubber all critically dependent on crude oil production, and other production materials and all major food commodities dependent on fuel oil supplies, there were drastic shortages in almost everything. Lead times went from one week to a month, from one month to six or twelve. Order books swelled with duplicated orders, shelves and silos were empty, and sales crashed because there was simply no stock to sell.

The resources boom ended, output collapsed, and inflation and unemployment soared. Governments seemed powerless to intervene. Even when oil supplies finally returned to 'normal' levels a year or so later, economic output remained flat - while inflation continued to push up prices and destroy value for years and years to come.

The Turbulence of 2008
It's not 1973, and this time OPEC did not need to cut oil production. Just keeping volumes fixed in the face of soaring demand has done the trick, and world oil prices 'took off'. A lot like 1973, really.

Again, the resources boom has begun to 'come off'. In response, the 'Aussie' has lost 20% of its value in 6 weeks - the steepest, longest fall in history. That is a massively powerful inflationary pressure about to roll through the economy, even now keeping fuel prices high in world terms despite oil prices having eased significantly!

Interest rate increases alone will not offset that impact, and the Reserve Bank in Australia is looking to unemployment to tame inflation. That can only happen as demand, investment, and production drop. Bad news for all business, but especially for some.

Mike Cutter, Head of GE Money, a division of the worlds largest retail funding source, predicts (The Australian, Sept 10, 2008) three more years to go before the 'subprime' problems are finally licked in the US economy, dragging down the world economy for some time to come. Now Wall Street is having another 'bear run'.

This Will be a Long Cycle
Despite such a gloomy outlook. last month's unemployment figure in Australia went down, sparking a spate of optimistic commentaries. However, the dynamic of the four great post-war economic calamities, (1961, 1973, 1982, and 1991) has always been to roll through the economy sector by sector. The investment sector is hit first, then retail and consumer goods slump. Finally, as retail spending starts to revive, the infrastructure sector gets whacked. It's a process that takes five years. We are only a few months in!

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