December 20, 2014

THE MALTHUSIANS NEVER TIRE OF BEING WRONG:

Putin's Bubble Bursts (Paul Krugman, 12/18/14, NY Times)

[W]hile oil has indeed plunged, the ruble has plunged even more, and the damage to the Russian economy reaches far beyond the oil sector. Why?

Actually, it's not a puzzle -- and this is, in fact, a movie currency-crisis aficionados like yours truly have seen many times before: Argentina 2002, Indonesia 1998, Mexico 1995, Chile 1982, the list goes on. The kind of crisis Russia now faces is what you get when bad things happen to an economy made vulnerable by large-scale borrowing from abroad -- specifically, large-scale borrowing by the private sector, with the debts denominated in foreign currency, not the currency of the debtor country.

In that situation, an adverse shock like a fall in exports can start a vicious downward spiral. When the nation's currency falls, the balance sheets of local businesses -- which have assets in rubles (or pesos or rupiah) but debts in dollars or euros -- implode. This, in turn, inflicts severe damage on the domestic economy, undermining confidence and depressing the currency even more. And Russia fits the standard playbook.

Except for one thing. Usually, the way a country ends up with a lot of foreign debt is by running trade deficits, using borrowed funds to pay for imports. But Russia hasn't run trade deficits. On the contrary, it has consistently run large trade surpluses, thanks to high oil prices. So why did it borrow so much money, and where did the money go?

Well, you can answer the second question by walking around Mayfair in London, or (to a lesser extent) Manhattan's Upper East Side, especially in the evening, and observing the long rows of luxury residences with no lights on -- residences owned, as the line goes, by Chinese princelings, Middle Eastern sheikhs, and Russian oligarchs. Basically, Russia's elite has been accumulating assets outside the country -- luxury real estate is only the most visible example -- and the flip side of that accumulation has been rising debt at home.

Where does the elite get that kind of money? The answer, of course, is that Putin's Russia is an extreme version of crony capitalism, indeed, a kleptocracy in which loyalists get to skim off vast sums for their personal use. It all looked sustainable as long as oil prices stayed high. But now the bubble has burst, and the very corruption that sustained the Putin regime has left Russia in dire straits.

Putin put all his chips on peak oil.  Of course, he wasn't the only one who fell for the canard, The Finite World (PAUL KRUGMAN, December 26, 2010, NY Times)

Oil is back above $90 a barrel. Copper and cotton have hit record highs. Wheat and corn prices are way up. Over all, world commodity prices have risen by a quarter in the past six months.

Is it speculation run amok? Is it the result of excessive money creation, a harbinger of runaway inflation just around the corner? No and no.

What the commodity markets are telling us is that we're living in a finite world, in which the rapid growth of emerging economies is placing pressure on limited supplies of raw materials, pushing up their prices. 



MORE:
Cuba hopes to spur oil industry  (JENNIFER KAY and JONATHAN FAHEY, 12/20/14, Associated Press)

One of the most prolific oil and gas basins on the planet sits just off Cuba's northwest coast, and the thaw in relations with the United States is giving rise to hopes that Cuba can now get in on the action.

Posted by at December 20, 2014 8:45 AM
  

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