05/11/2011 04:54 pm ET Updated Jul 11, 2011

A Recession Is Coming But Not Yet

There will be many dress rehearsals in commodity markets before the next global recession. An example is last week's dramatic and broad-based sell off that took oil prices for over a $10/barrel tumble. And there is no doubt that despite the scarcity of the resource, the price of oil will crash the next time the global economy sewers.

But is that time already upon us? If the monetary authorities in China and India continue to hike interest rates at the pace they have set recently, the next global recession may not be that far off. After all, these economies are today's global economic growth engines. But when push comes to shove, the political masters of those central banks may soon temper their enthusiasm so they can battle inflation.

If the money-printing U.S. Federal Reserve Board doesn't care about inflation why should the People's Bank of China ? Compare income per capita between the U.S. and China and it is not too difficult to figure out which one should be more desperate for economic growth and, as a result, more willing to seek trade-offs against inflation.

In the meantime, there are several tactical paths China can take that at least give the appearance of holding inflation in check. Reducing the weighting of food and energy prices in China's consumer price index would be one way. As long as the country's headline inflation rate stays below 5 percent, markets won't get too upset about what it is really measuring.

Having the People's Bank of China step away from the U.S. treasury auction could be another way of keeping reported inflation at bay. A soaring Yuan, and hence tumbling import prices would provide a partial offset to building domestic price pressures, such as what led to the recent truckers strike in Shanghai.

Of course, there could be other reasons for commodity market sells-offs in the future. But let us not lose sight of the forest for the trees. No matter how much oil prices and other key commodities such as copper and grain fall, look at the parameters in which they now move.

Even land-locked oil prices like West Texas Intermediate barely dipped below $100 per barrel. And Brent, the world oil price never made it below the triple digit price threshold.

How the goals posts have moved. Five years ago, those prices would have been all time highs. Last week, they generated headlines of plunging oil prices.

What hasn't changed however is the intrinsic relationship between oil and economic growth. Ratchet down expectations for economic growth and quite naturally you lower expectations for future oil prices.

But that's only because without burning more oil, there is no economic growth.