OK. It doesn't have the same lexical qualities as stagflation (combination of stagnation and inflation). Remember the double digit inflation days of the Carter period? It was coupled with little or no economic growth and so the moniker was invented to capture, what was until then, the unusual characteristics of a flat economy coupled with high inflation rates.
Contractflation sounds awful. My only excuse in coining this is that if follows precedent, you know like somethinggate is used to point to the latest administration scandal where a cover up is suspected. Why append 'gate' to any descriptor of a scandal just because the first big one started at the Watergate hotel in Washington DC? Who knows? But the habit seems to have been formed. So I'm merely following suit here.
Contractflation is a combination of contraction and inflation trying to emphasize what I think we will have as the next phase of economic reality in the world. A new word because our economy is going to start to shrink by conventional standards (growth rate of the GDP, see: "How might we face economic contraction?") while, at the same time, we will experience increasing inflation. Ironically, both effects come from the same cause — diminishing amounts of energy available to do useful work.
As the energy flow reduces due to peak oil first, followed by peak natural gas, and then peak oil, less real work can be accomplished. Ergo, the economy goes into a contraction phase as fewer products and services can be produced. That alone will drive some prices up, but it is even worse than that. Because money value is not tied directly to available energy (i.e. a dollar's purchasing power is measured in units of energy rather than floating freely - in this case in free fall), a unit of money will be able to buy less work, also causing prices measured in that money to rise. It will be a double whammy. Supply falls, demand stays the same or grows, currencies worth less. Classic.
But for the Great Depression we have never really experienced anything like this in our history. There is a major difference between now and then, however. Then there was a growing capacity to supply energy, meaning that a recovery only needed concerted energy investments (like Grand Coulee Dam) to increase the amount of available energy for useful work. Increases in coal and oil during and after the depression along with a stimulus boost due to WWII allowed us to crawl out of that crater. If we are entering the period of post peak oil we face an entirely different set of conditions.
It takes oil input to power the mining of coal and the pumping of natural gas. In other words, if oil goes into decline the cost of the other fossil fuels will start to rise and force them into peak and decline much sooner than expected. It takes oil and natural gas to power agriculture. The current run up in food prices can be attributed to the decline in oil due to demand (mostly from China and India) growing beyond effective supply.
That leaves alternative energy sources as the only real solution but there are some fundamental problem here that most environmentalist don't seem to grasp. First is the sheer scale of the replacement problem. Since oil accounts for something in the neighborhood of 50% (very rough estimate) for our energy needs (primarily in transportation, heating, and farming), coal another 30% (electricity), and natural gas about 10% to 15%, and alternatives barely show up at all (< 5% altogether) think what kind of massive construction and switch-over would have to take place over the next decade just to keep up with our gluttonous energy consumption now. As the oil production diminishes over that time, the cost will climb tremendously. Then since coal and natural gas depend on oil-based energy inputs to extract and refine, their costs will rise commensurately. Farming will become far more expensive as diesel fuel and natural gas (for fertilizer production) increases in cost. Indeed, the very production of alternative energy capture capital (solar panels, windmills, etc.) will increase as will the cost of installing and repairing them. Thus even alternative energy costs will grow over time until they become self-sustaining (a solar panel produces enough extra electricity to build its own replacement, essentially). No one knows when that might happen, or even if it can happen at the current consumption rate.
In the end, the more currency tokens out there trying to represent fewer and fewer BTUs of available energy, the less each token is worth. The less work each token can buy. Combined with the fact that with less work actually possible given the less energy to do that work with, there will be less goods and services to buy anyway. The economy will be in contraction and money will be tending toward worthlessness. Depression. But with no attempt to replace the energy input to the economy, there will be no recovery from this sad state - contractflation. The word is ugly in many ways.
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