Let’s begin at the beginning, shall we?…as the egg goes, so goes the chicken. A game of consumer product mousetrap…desperate times for the airline industry and the manufacturing sector. Is this a rerun of the 1970’s? Don’t pull out the shag carpeting and the disco ball just yet…and more!

Today, we begin ab ova, as the Romans say – with the egg.

The price of eggs has gone up 30% in the last 12 months. Why the big increase? Because the things that go into making an egg have gone way up – feed for the chickens, heat, light, and transportation.

As the egg goes, so goes the chicken…and the whole chain of consumer products that make up our cost of living. Everything is going up.

If we were looking for something to blame, we could turn to the price of oil. It was only $80 a barrel as recently as last summer. This morning, it is trading at $127 a barrel – near an all-time record, even in inflation-adjusted terms.

Modern economies run on petroleum products. As oil has gone up…so has everything connected to it. But as the oil price rises, it sets in motion a whole contraption of actions and reactions. As the price of a gallon of gas rolls up a penny, it tips over a little cup in which there is a steel ball. The little ball rolls down a track, trips a number of levers and switches, and runs into another ball attached to a string, which then swings over to the left and knocks over a glass of water, which falls down onto a tray of fast-growing ivy seeds, which send out shoots and vines and strangle the entire apparatus.

Well…you get the point: one thing leads to another…

And one thing that high oil prices lead to is higher prices for everything else. And higher prices lead to less purchasing power on the part of the average consumer, which leads to fewer sales, which leads to less output, which leads to lower earnings and slower growth…etc. etc.

This has put the airline industry is in “desperate” condition, reports the New York Times . Fuel is the airlines’ biggest expense. As it has gone up, airlines’ profit margins have gone down.

The latest report from the manufacturing sector show declining factory orders for four months in a row. And USA Today reports that many people are seeing declines in their incomes – in ways that don’t show up in the employment numbers. While the unemployment figures show little contraction, sales commissions, tips, and even Wall Street bonuses are going down fast.

Foreclosures are still rising nationwide, says the Wall Street Journal . The famous Foreclosure Bus Tours have now moved beyond hard-hit cities in Nevada and California; now there’s one touring the New York area!

Forbes has a word for all this: Stagflation. Of course, it’s not a very original word, but Forbes is not a very original magazine. But it’s not a new situation either, says the magazine. Stagflation is the devil’s child you get from the unnatural union of consumer price inflation and a stagnant economy. It’s also what the United States endured in the 1970s…the last time oil prices were so high. The price of gasoline rose during the late ’70s…and hit a record high, adjusted to today’s dollars, over $3 at the beginning of the ’80s. For all the whining about it, today’s gasoline is not much higher. But by 1981, the price of fuel was headed down. Over the next four years it fell in half…and stayed low until George W. Bush invaded Iraq.

Are we enjoying a re-run of a ’70s show? Is it time to get out the strobe lights and the leisure suits? Should we repaint the house in ’70s style slime green and dirty-carpet beige? Can we forget about trading in the SUV or putting in a wood stove? Won’t this whole thing blow over – the way it did in the ’70s?

George Soros says the bubble in commodity prices will burst. We believe him. So, can we stop worrying about high oil prices and rising inflation?

Not so fast, says Paul Krugman. This ain’t the ’70s because we don’t have the same kind of inflation, he points out. At the end of the ’70s, everyone was sure prices would continue to go up. In May of ’81, the United Mineworkers Union was able to negotiate a 33% pay raise spread over three years. The miners thought they needed the increase to make up for increases in the cost of living. And the mine owners thought they could afford it – because the price of coal had been going up for many years. They were both wrong.

But that was “wage-push” inflation, Krugman maintains, very different from what we have today.

Yes, he is right. This is a different kind of inflation…a different kind of stagflation…and, we predict, a story with a different kind of ending.

Stay tuned…

*** How will the story turn out?

Well, we repeat ourselves, what ultimately turned the situation around at the end of the ’70s was a change in regime at the Fed…the worst recession since the ’30s…and a whipsaw on Wall Street that whacked both the bond market and then the stock market, wiping out more than half the value of each of them.

At the end of the ’70s, the jig was up. When everyone had come to expect more inflation from the Fed, the central bank no longer saw any benefit in it. Its new money and credit was being anticipated and absorbed – in wage and price increases – even faster than they made it available. Inflation no longer worked, in other words. It no longer deceived businessmen into thinking they should expand production. It no longer deceived investors into believing their assets were going up in value. And even the lumpen householders had caught onto the game; as soon as they got a wage increase, they spent it quickly…and then demanded another one.

The feds didn’t have much choice. They could either inflate much more heavily than expected and wait for the disaster to catch up to them…or they could admit that the flimflam no longer worked, raise rates, and squeeze the “inflationary expectations” out of the system. Paul Volcker took the latter course. That, combined with the natural feedback look of the oil cycle – in which higher prices drew forth new supplies, as they always do – sent the price of oil back down. In today’s dollars, a gallon of gasoline sold for about $1.50 from 1986 until 2003.

Volcker’s anti-inflation Fed also knocked the price of gold down from over $800 in 1980 to around $275 in 1998.

(It was at this point that the then-chancellor, now-Prime Minister of England, Gordon Brown, decided to sell tons of Britain’s gold. It is why the low point in the gold market, set in the late ’90s, is still known as the “Brown bottom.”)

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