Economic “Contagion” Threatens “Impending Crisis”: Exposure to Falling Oil Prices Driving Global Defaults and Slowdown

On the surface, the United States is currently one of the stronger global economies.

But lurking beneath that may be an ‘impending crisis’ that threatens to drag everyone down with it.

That’s according to the Financial Times, who say that falling oil prices combined with a strong dollar (hence reduced trade in exports) and a likely increase in U.S. interest rates could contribute to the “familiar pattern” of economic slowdown. As Satyajit Das writes, “bankruptcies, defaults, banking problems and reduction in credit availability drive contagion.”

Weak growth, high debt levels, disinflation or deflation, policy driven destructive competitive devaluations, inflated financial risk taking and mispricing compounds the problems. The impending crisis may develop as follows.First, US equity prices come under pressure from a stronger dollar.

[…]

Decreased funding availability and higher interest costs create a toxic spiral of reduced borrowing, production, cash flow and earnings.

Finally, a combination of low growth, low inflation and political considerations destabilise sovereign debt markets, especially in Europe.

These triangulated risk factors will be worsened by the timing: the Federal Reserve is scheduled to reign in its quantitative easing program, which will pose liquidity problems for the global market.

Additional injections from Europe, Japan and China cannot adequately offset reduced US dollar availability from the end of the Federal Reserve’s quantitative easing programme.

In turn, this reduces the flow to U.S. markets of petrodollars, given the falling oil prices. American investment dollars are quite exposed here, with about a fourth of total investments in the energy sector:

The US economy — one of the best performing developed economies — is exposed. The energy sector accounts for roughly 25 per cent of S&P 500 capital expenditure and R&D spending. […] The energy sector is about 15 per cent of the Barclays US Corporate High-Yield Bond Index — up from less than 5 per cent in 2005.

[…]

Lower oil prices reduce available surplus petrodollars that help finance budget and trade deficits, keep interest rates low and support asset prices worldwide.

Moreover, foreign debt is heavily tied to the U.S. dollar, with high dollar prices making debt harder to service. Currency battles are already in the air:

Perhaps 75 per cent of emerging market foreign debt is denominated in US dollars. Falling oil and commodity revenues reduce the US dollar cash flow available to service this debt, creating a currency mismatch.

Meanwhile, Europe’s problems with debt multiply these problems across the global market. Ditto for the problems of Russia, Mexico, Brazil, Iran and other socialized countries heavily dependent on the oil price and gas sales.

FT’s Das warns that the lower price of oil will be no where near enough to compensate for slowdowns in other variables. Shorfalls in “investment, employment and consumption” will likely be enough to undermine American economy momentum and some of the baby steps to “re-shore” jobs on U.S. shores.

As NPR reports, the “reshoring” effort, while perhaps a positive step, is hardly enough to put a dent in the trade deficit, much less to account for the global tide:

A report on the phenomenon known as “reshoring” — the opposite of offshoring — shows that while a growing number of companies are returning to the United States to do their manufacturing, the trend is smaller and less significant to the economy than it appears.

“You see more manufacturing activity within the U.S.,” said Van den Bossche, “but relatively speaking you’re actually seeing even more in Asia for products coming to the U.S.”

“There’s a trend here that says that, ‘Yes, we are starting to manufacture more, we are getting more and more competitive,’ but it’s not quite yet showing in the economic data,” Van den Bossche says.

The looming calculus of falling oil’s impact on the economy is likely to setback any of that progress, anyway.

Source:: ShtfPlan

Best Survival Books:

THE LOST BOOK OF REMEDIES-All Medicinal Plants and Lost Cures of North America

THE CARNIVORE'S BIBLE-A complete solution to meat curing, food preservation, storage and cooking and it will change your life for the better

THE LOST WAYS-Learn the long forgotten secrets that helped our forefathers survive famines,wars,economic crisis and anything else life threw at them

EASY CELLAR-AMERICA'S NATURAL NUCLEAR BUNKERS: FIND THE CLOSEST ONE TO YOUR HOME

THE LOST WAYS 2-This lost super-food will bulletproof you against any food shortage or famine

LESSONS OF YESTERDAY-American Recipes from the Old-American Frontier

BLACKOUT USA-EMP survival and preparedness guide

MEGA DROUGHT USA-Discover The Amazing Device That Turns Air Into Water

LIBERTY GENERATOR-Easy DIY to build your own off-grid free energy device


BACKYARD LIBERTY-Easy and cheap DIY Aquaponic system to grow your organic and living food bank


BULLET PROOF HOME-A Prepper’s Guide in Safeguarding a Home


SOLD OUT AFTER CRISIS-Best 37 Items To Hoard For A Long Term Crisis


SURVIVAL MD-Learn how to survive without medication in any crisis


ALIVE AFTER THE FALL-Advice on handling crisis situations


STOCKPILE CHALLENGE-The secret to a 1-year food stockpile


DIY HOME ENERGY-Follow the step-by-step guide from A to Z and you will have a working system to reduce your electricity bills and save energy


MY SURVIVAL FARM-This hidden survival garden will keep you well fed when shtf


OLD TIME WISDOM-THE REAL HOMEMADE AND HEALTHY MEATY TREATS OUR GRANDPARENTS USED TO MAKE...


Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.