Simultaneous Declines In Capital Flows And Commodities Have Led Economic Crashes Before, And It May Be Happening Again

A new paper entitled Global Cycles: Capital Flows, Commodities, and Sovereign Defaults, 1815-2015, Carmen Reinhart, Vincent Reinhart and Christopher Trebesch look at the historical connection between capital flow, commodity prices and economic crises. According to the authors, the recent slumps in commodity prices and capital flows are connected to the boom in both areas from 1999 to 2011, and they could ultimately lead to a series of global economic crises.

According to the paper, many emerging market economies are currently experiencing “double bursts” in both commodity prices and capital inflows, a development that has historically led to economic crises.

“While not all capital inflow cycles ended with a global wave of new debt crises, all the major spikes in sovereign defaults came [on] the heels of surges in capital inflows, especially those followed by ‘double busts’ in capital and commodity markets,” the authors explain.
 

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The table below shows a comparison between the latest cycle in commodity prices and global capital flows and other cycles in recent history.



“Perhaps emerging market economies are more resilient this time around,” the authors conclude. “But perhaps the protracted nature of the downturn in international conditions has yet to take its cumulative toll.”

So far this year the iShares MSCI Emerging Markets Indx (ETF) EEM is up 1.8 percent.

Disclosure: the author holds no position in the stocks mentioned.