What Blows Up Next? Part 1: Resource-Based Economies

By: John Rubino | Thu, Jul 23, 2015
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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...

US Dollar per 1 Brazilian Real

...while your interest rates are surging:

Brazil Interest Rate

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."

 


For more, see:
Brazil slashes fiscal savings goals for 2015 and 2016 on plunging tax revenue
The Australian dollar is smashed and poised to fall below US70 cents, analysts warn
Mexican peso continues to sink
Canadian dollar drops to lowest level since 2004

 


 

John Rubino

Author: John Rubino

John Rubino
DollarCollapse.com

John Rubino

John Rubino edits DollarCollapse.com and has authored or co-authored five books, including The Money Bubble: What To Do Before It Pops, Clean Money: Picking Winners in the Green Tech Boom, The Collapse of the Dollar and How to Profit From It, and How to Profit from the Coming Real Estate Bust. After earning a Finance MBA from New York University, he spent the 1980s on Wall Street, as a currency trader, equity analyst and junk bond analyst. During the 1990s he was a featured columnist with TheStreet.com and a frequent contributor to Individual Investor, Online Investor, and Consumers Digest, among many other publications. He now writes for CFA Magazine.

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