The author argues that the policy response to the economic difficulties will be to create a general rise in the price level to reduce the burden of the existing debt on households, businesses and governmental entities. As prices, and especially wages, rise, domestic spending will recover and unemployment will be reduced, although this process could take several decades.
Very significant inflation will likely be necessary to prevent an even more severe drop in employment and output in the economy given the magnitude of the shock to the economy created by continued declines in global oil production. As of this writing in mid-2012 global production of crude oil has not surpassed the 2005-2008 levels despite sustained high prices. International and sovereign-owned oil companies have had seven years now to respond to high prices with increased exploration, drilling and production. The results have been less than encouraging, to say the least..
Dramatic changes in the economy as a result of Peak Oil will alter the approach that would optimally be taken by investors and those wishing to preserve savings. The issues of asset allocation and sector weighting are explored together with alternative investments in commodities and real estate.