I spent the afternoon doing something I almost never get to do anymore: read the papers, namely The New York Times and Wall Street Journal. Here are some of the things I learned:

  • Oil prices are testing new highs.
  • The dollar continues its slide against the Euro, hitting an all-time low. A weak dollar means pricier imports.
  • Prices on imported goods from China, essentially our manufacturing base, are rising alarmingly fast. (There’s a labor shortage among skilled workers in China, the Journal reports: "While China’s rural population represents a massive amount of untapped labor, skilled workers are in short supply.")
  • I know from other reading that food prices are rising quickly as well.

All of those factors would normally make the Fed seriously consider raising interest rates. Higher rates might inspire foreign investors to buy U.S. assets, giving the dollar a boost.

And a rate hike would help tamp down the inflationary pressures of pricier oil, food, and stuff from China. The Fed hates inflation; it cuts into the profits of Wall Street and the banks, which form that institution’s main constituency.

The Fed likes to boost rates at even a hint of inflationary pressure. Yet the Fed can’t raise interest rates, and is widely expected to cut them soon. Why?

Because boosting rates would only exacerbate the subprime mortgage debacle — to which Wall Street and the banks are highly exposed.

Also, even as inflationary pressures build, the economy is slowing, which also militates against a rate hike.

In other words, the Fed is in a pickle — the worst one, it seems to me, since the early 1980s, when Paul Volker faced the specter of "stagflation": rising prices in a shrinking economy.

Stick with me; there’s an environmental angle coming.

Volker dealt with stagflation by dramatically jacking up interest rates, sending the economy into a tailspin. U.S. companies laid off thousands of workers, and wages came under serious pressure (precisely the point of interest-rate hikes).

Meanwhile, U.S. policymakers began a campaign to open foreign labor markets to U.S. firms, using high debt levels in "developing countries" as a lever.

As Southeast Asian and Latin American economies opened to U.S. capital, U.S. companies began to shift operations overseas to take advantage of cheaper labor. That effect, too, put serious pressure on U.S. wages.

As U.S. workers lost leverage, the labor movement — so strong through most of the post-war era — went belly-up in the 1980s, and remains on the mat today.

Thus Volker fought inflation by directly attacking wages — and won.

Meanwhile, oil prices declined steeply after their 1980 peak, also aiding Volker’s war on inflation. (They stayed generally low until the late 1990s, when a jump in demand from China and India — source of so many products enjoyed by U.S. consumers — began to push oil prices up.)

As wages stagnated and the economy shifted from manufacturing-based to services-based, the U.S. began to grow briskly again. Stagflation had been defeated.

Workers got the shaft, but they also won two bonuses: One was cheap oil. The other was ever-cheaper stuff from Latin America, Southeast Asia, and eventually, China.

That, I suppose, was the quid pro quo of turn-of-the-century globalization. Your job may not be secure, but your living room will contain a flashy TV and VCR, and you might even be able to afford an SUV. (Another important part of the story, one that I won’t go into here, was the steady fall in food prices after 1973 or so.)

Volker and his rate hikes essentially ushered in the era of corporate-led globalization. That economic order delivered great benefits to the "economy" (in the abstract sense of the word laid out so well by Clark Williams-Derry.) It kept inflation down by pitting U.S. workers against lower-paid foreign ones; and by opening the gates to a flood of cheap goods from overseas.

And low inflation is the fuel for stock-market booms, real-estate booms, and other bonanzas for the rentier-creditor classes.

That’s why Fed chief Bernanke finds himself in such a tight corner. If he lowers rates to shield Wall Street and the banks from getting hammered by all of the subprime mortgage paper they’re holding, he risks stoking inflationary pressures already smoldering from high food and energy prices.

If he jacks up rates to get a handle on inflation and shore up the dollar, he risks unleashing a financial crisis that will burn not only the bankers and speculators, but also thousands of financially strapped homeowners. (The latter will get it even worse, especially after Bush tightened up rules on personal bankruptcy.)

Thus the era of corporate-led globalization may be waning, and a recession may well be on the way.

Recessions, of course, always fall hardest on those with the least resources to ride them out: the poor and low-income people. But they also expose the fault lines in a global economy built on cheap oil, cheap coal, and cheap labor.

Crises are painful, but can point the way to alternatives. As greens contemplate the seemingly inexorable rise of greenhouse gas emissions and associated environmental calamities — and gape at the feeble official response — I hope they’ll think hard about other, possible economic orders.