2015: The Year Of The Global Economic Slump?

TMO ^ | 1-9-2015 | Alasdair Macleod

[blam]

January 09, 2015
Alasdair_Macleod

2014 ended with two ominous developments: the strength of the US dollar and a collapse in key commodity prices. It is tempting to view both events as one, but the continuing fall in oil prices through December reveals they are sequential: first there was a greater preference for dollars compared with other currencies and this still persists, followed by a developing preference for all but the weakest currencies at the expense of raw materials and energy. These are two steps on a path that should logically lead to a global slump.

Dollar strength was the first warning that things were amiss, leading to higher interest rates in many of the emerging economies as their central banks sought to control investment outflows. Since this followed a prolonged period of credit expansion these countries appear to be entering the bust phase of the credit-driven boom-and-bust cycle; so for them, 2015 at a minimum will see a slump in economic activity as the accumulated malinvestments from the past are unwound. According to the IMF database, emerging market and developing economies at current prices account for total GDP of over $30 trillion, compared with advanced economies' GDP totalling $47 trillion. It is clear that a slump in the former will have serious repercussions for the latter.

As the reserve currency the dollar is central to the exchange value of all other currencies. This is despite attempts by China and Russia to trade without it. Furthermore and because of this dependency, the global economy has become more geared to the dollar over the years because it has expanded relative to the US. In 2000, the US was one-third of global GDP; today it is about one-fifth.

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[plain talk]

if the US has moved from 1/2 to 1/5 of the global GDP it seems the other economies should be less affected by the US (which is strong compared to much of the world). So I don't quite buy the strong dollar = global recession argument.

I think the bigger danger is oil has dropped so low loans will be defaulting with a domino effect taking down banks. That is my concern - more of a potential 2008 effect

[Thunder90]

The answer... The Paper Tiger Chinese economy is not doing as well as we though.

[CommieCutter]

They built ghost towns from what I understand. That wasn’t ever going to end well. Talk about misdirected resources on steroids.