One of the few bright spots in the gloomy world economic picture has been the absence of inflation even as governments around the world go deep into debt and the world’s central banks print money in unprecedented quantities.Could that be changing?Energy and food are pretty much the basics of the world system, and prices may be about to nudge up for both.On energy: Tension over Iran’s nuclear program is pushing up energy prices. And that confrontation is unlikely to fade away any time soon. There’s more: The civil war in Syria could easily spill over into Iraq, where Sunni-Shiite tensions are high. A Sunni government in Syria overseeing chaos and armed groups running around could mean more support, fighters, and weapons for Sunnis inside Iraq. Throw in the possibility that political unrest could spread in the Gulf, and the energy picture could turn scary very fast.The other problem is food. The worst drought in years is hitting the American breadbasket. Earlier this year the U.S. looked set to produce record harvests. If, as forecasters now believe, the region stays dry for the next two weeks, corn and soybean yields will plummet, and prices will rise.Food riots and political unrest across the globe are likely consequences. But this will also push price increases and demands for higher wages around the world to keep up.We should all be very, very glad that inflation hasn’t made an appearance yet, but it’s getting easier to envision the conditions that could bring it roaring back. That’s a very ugly thought, as policymakers couldn’t do much about it without pushing the world back into a new and perhaps even deeper recession than we just had.Stagflation is another big worry: stagnant economies, high unemployment, and rising prices. Next to actual deflation, it’s the worst thing, because all the policy options you have to curb the inflation actually make unemployment worse.Nouriel Roubini, the famed Dr. Doom, shares some of these fears. He predicts a “perfect storm” in 2013: a convergence of multiple bad economic trends and geopolitical crises. Reuters summarizes:
Those factors are a worsening of the debt crisis in Europe; tax increases and spending cuts in United Sates that may push the world’s biggest economy into recession; a hard landing for China’s economy; further slowing in emerging markets; and a military confrontation with Iran.
When (if) that happens, says Roubini, governments will quickly realize they have no more “rabbits to pull out of the hat.” Other doomsayers more radical than Roubini see an even more frightening picture. Via Meadia hopes things don’t go that way.