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I beg to differ with Dr. Krugman's January analysis.
The bubble in oil prices continued unabated for so many years, not only because of the rise of the Chinese economy, but because speculators needed to find other ways of making money than by investing in the USA during an 8 year period when a housing bubble was rising and likely to burst.
In this case, many dollars have fled the American economy to chase petroleum and energy investments world wide. This was because the military and war-making were helping to underserve the core industries in the United States. That is, too little homegrown investment in alternative energy production was being undertaken as banks and scammers were encourage to go for the gold in housing and financial markets, because the Bush Administration was so interested in getting Americans to spend during war-time--rather than to save and invest in key national industries.
In short, war-making was covered up by a spend-crises philosophy in Washington, with the hallmark being low interest rates while the federal government was throwing money around only marginal sectors of the economy or in marginal regions of the global economy, like Saudi Arabia and Russia.
Couldn't this be partial cause for the sudden deflation in oil prices only months after the bubbles in the USA collapsed and the government of China began to curtail energy consumption in 2008 by reducing price guarantees in its local economy?
I believe "Yes".
This is what has happened, and if the U.S. hadn't been so closely embedded with the Gulf Sheikhdoms over the past 8 years over endless war, even the U.S. government could have persuaded or signaled the Gulf States to help reduce fuel prices two years ago already--i.e. when the housing market first collapsed and showed that U.S. consumers no longer could afford the record global prices. (The historical precedent for both Bush and the Oil Sheikhs to observe was that the Carter Administration in 1978-1980 had similarly seen such a negative impact on the U.S. economy from higher oil prices, but the high federal interest rates had put a damper on energy consumption, on investment, and on oil prices within a two to four year period.)
Finally, the ongoing cost of a three-front war on terror will continue to tie the federal government's hands for years to come. This means that government will continue to borrow and increase spending for both (a) war and (b) non-war items. This would normally lead to inflation at some point next year-unless the Fed keeps interest rates at their historical lows.
However, that sucking sound for unheard of war deficits in a state in the midst of Depression are coming from the USA.
This means that (1) there will continue to be disincentives to save money in the U.S.A which (2) will lead to further borrowing sooner than later.
This could lead to a bubble again in various investment markets--and then we have a repeat recession or stagflation if the new Obama government allows the Federal government to incentivize savings or creates high-interest bonds to pay off the current war debts.
THE LESSON
The lesson is don't try and hide the elephant in the room.
If endless wars are sucking up money, let everyone know the facts, so we can handle the debacle before it gets way-out-of hand.
America must avoid any more suicidal melt-downs like the Soviet Union faced in the 1980s, i.e. when that former federal state overspent on wars on multiple fronts over decades, without paying attention to growing and building a strong home market.
China will likely learn from this crises of the WEST in order to build up and serve its own local (sometimes) pent-up demand.
