The Great Recession and its aftermath was actually the best of times for
countries with natural resources to sell. The US, Europe and Japan ran record
deficits and cut interest rates to zero or thereabouts, sending hot money
pouring into mining and energy projects around the world, while China
borrowed (as it turned out) $15 trillion for an epic infrastructure
build-out.
The result was robust demand and high prices for raw materials like
copper, oil and iron ore, and a tsunami of cash pouring into Brazil, Canada,
Australia and the other resource producers. Conventional wisdom deemed these
countries to be well-run and destined for ever-greater things, which led locals
to borrow US dollars at cheap rates and invest in mines, factories and/or
domestic government bonds with much higher yields. Good times and fat margins
all around.
Then it turned out that the debts accumulated by the resource-consuming
economies had created a headwind that they couldn't overcome. The Chinese
build-out abruptly ended and the developed world failed to achieve escape
velocity, causing the US dollar to soar and commodity prices to plunge. Oil,
for instance, is down 21% just the last in last six weeks. while the Bloomberg
Commodity Index is 42% below its recent high.
For a sense of what this means, pretend you're Brazil. During headier
times your oil, iron ore and soybean exports created a generation of new
millionaires and allowed your government to balance its budget. This in turn
led your leaders to ratchet up spending and your entrepreneurs to borrow what
now looks like an insane amount of US dollars.
Now your currency, the real, is plunging...
...while your interest rates are surging:
Among other things, this gives you: a ton of dollar-denominated loans that
are deeply under water and will be defaulted upon soon; plunging tax revenues
necessitating huge cuts in government spending and/or much higher taxes -- at
exactly the wrong time; and hundreds mines and factories that aren't
generating enough cash flow to cover their cost of capital and will soon
fail.
Variations on this theme are playing out across the resource economy
world, so depending on the country, it's crisis now (Argentina and Venezuela)
or crisis in 2016 (nearly everyone else).
And that's if everything stabilizes around these levels. Let resource
prices keep falling and/or the dollar rise further and we can replace
"crisis" with "chaos."
