People who believe that history repeats itself are asking themselves: Is this a rerun of the '30s…or a replay of the '70s. Is it a deflationary recession we're rehearsing? Or an inflationary recession? How is this story going to turn out?

We look around. We don't see any breadlines…and people aren't dressed nearly as well as they were in the '30s. But now people get their free food through plastic "Independence" cards…proving that they are 100% dependent on the taxpayer for their daily bread. And as for dress…what do we know? If people like wearing flip-flops, pedal pushers, and shirts with reptiles on them, does that change the plot or alter the outcome?

It doesn't look like the '70s either. No afro hairdos…no muscle cars…no polyester shirts. (We had one…a brown one with white stitching. It clung to our manly, young body and almost electrocuted us each time we took it off. Elizabeth threw it away the first time our back was turned.)

Still, the economy is beginning to look a little like the '70s.

"Stagflation fears vexing Bernanke," says the Chicago Tribune.

"Spectre of inflation returns to global economy," adds a front-page headline on the Financial Times.

In the following reckoning we don't disagree. But we add a much-needed nuance. Not only is the spectre of '70s inflation haunting the economy…so is the spectre of '30s deflation.

Check out this headline: "Biggest drop in housing since Great Depression."

Yes, dear reader, get ready for a whiter shade of pale, as the two apparitions join in a ghostly hullabaloo. To the question - which will be have, inflation or deflation? - we have consistently replied, 'both.' And la voila - here they are.

But we're no longer alone in this opinion. Yesterday, the world's greatest investor and richest man, Warren Buffett, agreed with us.

"Stagflation," he said, was becoming a bigger and bigger problem. "I think the 'flation' part will heat up and the 'stag' part will get worse."

The Financial Times saw its inflation ghost in the huge price increases announced by Dow Chemical and South Korea's Posco. The former is America's biggest chemical group; the latter is the world's fourth biggest steel maker.

Meanwhile, said Mr. Charles Holliday, CEO of Dupont, and not putting too fine a point on it:

"Inflation is here big time."

You think you've seen inflation, said a spokesman for mining giant BHP Billiton. You ain't seen nothing yet. On Monday another mining group, Rio Tinto announced a price increase of 96.5%. Billiton said that even that would not be enough; it signaled a price increase of over 100%.

"Now," as Crocodile Dundee might have put it, "that's inflation."

"The sustained rise in the price of oil and commodities has hammered industries such as airlines and carmakers, and deepened fears of a global inflationary spiral as producers pass on higher costs to manufacturers and consumers," the FT figures.

The Reuters CRB index is up 45% in the last 12 months. So far this year oil is up 42%. Natural gas has risen 76%. Corn has popped 58%. Soybeans 26%. Base metals are up about 30%.

Buffett is right…the 'flation' part is heating up. You see it in the newspapers, the check lines and, prominently, at the gas station. But what about the 'stag' part?

*** We live in a world powered by fossil fuel and designed - particularly in America - for a time when it was cheap and plentiful. Too bad that world no longer exists. Instead of building the world of the future, we built the world of the past. Now, we have to turn our backs on it, move on, and rebuild. This time, we have to build a world designed for oil that is significantly more expensive.

"Our civilization is based on fossil fuel," writes Martin Wolf in the FT. "But since the end of 2001, the real price of oil has risen some six-fold. Today the real price is higher than since the beginning of the previous century."

How expensive will it get? We don't know. Our guess is that it will go down, not up, but still end up about twice as high as the price five years ago. T. Boone Pickens says oil output worldwide is peaking out. And never before have Americans had to compete with so many other people for it. Back in the early 20th century, a roughneck could sink a well in West Texas and have the oil all to himself. Now, there isn't much oil left in Texas…and what little there is has to be shared with three billion people, many of them with incomes rising a lot faster than ours. If Pickens is right, it stands to reason that the price will probably be higher than it used to be - in real terms.

That prices are rising in nominal terms should come as no surprise either. For many years, central banks have increased money supply faster than the rate of GDP growth - often several times faster. Now that this monetary inflation is turning into consumer price inflation, no one likes it very much. But the only way to stop it is the Volcker way - that is, pushing up rates and forcing a recession. People would like that even less.

Already, the world's capital markets are deflating. While prices for commodities and oil have risen steeply this year, stocks in Britain and America are down about 11%. Stocks in Europe have fallen even more - about 18%. And in Asia, markets have been beaten up and beaten down. The Shanghai market has lost 44%. Hong Kong is off 18%. And Vietnam has been whacked - down nearly 60% from the peak.

In America, the average stock may be down only a little more than 10%…but some industries have been hit much harder. Airlines, for example, are falling out of the sky. Finance is down about 40%. And homebuilding? Don't even ask…

So, for now, the Fed isn't fighting inflation at all; it's fighting another ghost from the past - deflation. You don't lend money at less than half the level of consumer price inflation if you're fighting inflation. You only do when you see the ghost of the '30s hard on your heels. Yesterday, the Fed must have looked back…seen the spectre of deflation…and decided to leave rates were they were.

*** Little noticed among all the noise and smoke is the way the two ghosts - of '30s deflation and '70s inflation - join forces.

As we explained yesterday, expensive energy is destroying the suburbs. That's not all, as Americans are forced to pay more for fuel, they pay less for other things. The whole retail sector suffers. And much of the hospitality industry; this year Americans are planning on taking 'stay-cations.'

The Fed tries to jolly things up with more money and credit, but what happens? Oh, cruel, cruel fate! The money feeds into other economies…and into the prices of commodities. Then, as fuel, food, and raw materials bills go up…the extra expenses weigh down the economy like a concrete block tied to a corpse in the East River.

Yes, dear reader, the ghost of '70s inflation frightens the economy…only to be followed by the ghost of '30s deflation. Between the two of them, they're going to scare the living daylights out of us.

Bill Bonner is the President of Agora Publishing. For more on Bill Bonner, visit The Daily Reckoning.