If There Is a Recession in 2016, This Is How It Will Happen
What we’re dealing with isn’t just a run-of-the-mill economic slowdown in emerging markets, but the reversal of a 15-year cycle in which capital has flowed into emerging markets year after year while debt grew. Now that’s reversing, and we’re seeing a version of Warren Buffett’s maxim that “you only find out who is swimming naked when the tide goes out.”
In other words, now that capital is going out rather than coming in, we’re seeing just how much of the growth in Asia, Africa, Eastern Europe and Latin America since 2000 has been driven by a credit bubble and how much is real, durable economic activity.
.. The weakening of emerging economies causes their currencies to fall relative to the dollar. Now that should help their exporters, but in the current moment it can make the debt crisis worse. Every tick the Chinese renminbi, the Indonesian rupiah or the Brazilian real goes down against the dollar makes it harder for the countries’ companies to repay their debts.
.. Now, it’s not clear that the Fed has the ability or the will to be a shock absorber for the economy in the same way. That same interest rate is now in the range of 0.25 to 0.5 percent, which means an interest-rate cut of the same amount would put the Fed in the uncharted territory of negative interest rates.
.. When an economy is already vulnerable, as the United States looks to be in 2016, it takes less to tip it over the edge than when it is strong.