19 September 2011

When BRICs Crumble, Will Commodity Prices Collapse?

Common wisdom assumes that commodity prices, including oil prices, will continue to rise on exponential demand from emerging nations, such as China, India, Brazil, Turkey, Russia, etc. But under the sheen of those rosy projections, exists a growing excremental stench of corruption and decay. If the magical trajectory of the BRICs should falter, how far would commodities prices fall? And what would be the repercussions for already stressed world financial markets, desperate for safe havens and hedged to the hilt?
China's property bubble is set to implode, and when it does, the Chinese economy will cool far more than anyone thinks, taking commodities along for the ride. Commodity producers like Australia and Canada are at extreme risk as well. _Mish
Not just Australia and Canada are at extreme risk. Two BRICs -- notably Russia and Brasil -- are gambling on continued high commodity prices into the indefinite future. Corruption in all of the BRICs is hampering genuine market-based growth, but economic dependence on raw commodities prices is particularly bad in Russia.

When commodity prices dive, Russia may well grow desperate.
Prime Minister Vladimir Putin, the country's uncrowned czar, has linked his legitimacy to the economy's performance by offering the Russian people a grand bargain: submit to his increasingly autocratic rule and the state will compensate with economic goodies like higher incomes and hefty social-welfare spending. Now that the economy is faltering, Putin is under intensifying pressure from a discontented public to restore Russian democracy, potentially destabilizing Russian politics. He has already faced protests in Moscow against his rule amid the economic downturn. There's also a risk that leaders in Moscow will resort to nationalistic appeals to distract the public from problems at home, escalating tension with Russia's neighbors, the rest of Europe and the U.S. _Time

Russia's ongoing demographic collapse, and the threat of losing much of Eastern Siberia to Chinese influence, is not helping the mood in Moscow. But without the clout that comes from high energy prices, Russia becomes an angry dancing toy bear with nuclear weapons.

Venezuela, Iran, the Arab states of MENA, Mexico, and many countries in tribal Africa and Asia, are also pathologically dependent on high commodity prices, due to internal corruption having squeezed natural markets to death. How will their people deal with the many difficulties and hardships they will face when their governments cannot feed, clothe, house, or water them?

Even the US is vulnerable to a fall in commodities prices. The US is the world's third largest oil producer. The recent boom in US shale oil & gas production is one of the few bright lights in an otherwise dim Obama economy. And although the jobs, housing, manufacturing, and other sectors in the US economy continue to sag, Obama has not had enough time to entirely destroy the US private sector.

Few readers of this blog understand the precarious state of China's economic house of cards. That is because almost all of the economic information coming out of China is closely controlled, and coated with a shiny facade. But it is time for readers to begin asking themselves about the global repercussions of a more sustained commodities price slump than they have seen.

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Anonymous Anonymous said...

1) Most readers of your blog are well aware of the fragility of the Chinese world. Most other people are probably not.

2) Falling commodity prices will be a boon to the American economy. True, Texas and North Dakota and Alaska will suffer, but the rest of the economy is oil dependent, and high oil prices are a cost that is currently born.

3) A large amount of oil production around the world has total cost in the $50/barrel range. Even if marginal cost is lower, projects will come to a halt if oil falls to $60. Eventually, supply will fall - and oil will remain above $60 for a long time.

4) Falling commodity prices would be a boon to world peace. Corrupt and war-like civilizations tend to impoverish their people. The only way they can survive is through free money - oil is one of the few forms of free money in those countries.

Monday, 19 September, 2011  
Anonymous Anonymous said...

I was reading last night about the demographic problems in China (Russia's demographic problems distract us from what is in China's immediate future). The economic growth and demographic collapse are combining to consume any cheap labor advantage.

Manufacturing may actually start returning to the US with low skilled manufacturing going to Africa & India. That's if someone can break the unions in the US a bit.

Monday, 19 September, 2011  
Blogger Ivan said...

India is in no great shape either, I expect that the next election will see the BJP return to power. Indian elections still turn on the price of onions.


Wednesday, 21 September, 2011  

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