Exposure to Falling Oil Prices Driving Global Defaults and SlowdownMac Slavo But lurking beneath that may be an impending crisis that threatens to drag everyone down with it. Thats according to the Financial Times, who say that falling oil prices combined with a strong dollar (hence reduced trade in exports) and a likely increase in U.S. interest rates could contribute to the familiar pattern of economic slowdown. As Satyajit Das writes, bankruptcies, defaults, banking problems and reduction in credit availability drive contagion. Weak growth, high debt levels, disinflation or deflation, policy driven destructive competitive devaluations, inflated financial risk taking and mispricing compounds the problems. The impending crisis may develop as follows. First, US equity prices come under pressure from a stronger dollar. [] Decreased funding availability and higher interest costs create a toxic spiral of reduced borrowing, production, cash flow and earnings. Finally, a combination of low growth, low inflation and political considerations destabilise sovereign debt markets, especially in Europe. Additional injections from Europe, Japan and China cannot adequately offset reduced US dollar availability from the end of the Federal Reserves quantitative easing programme. In turn, this reduces the flow to U.S. markets of petrodollars, given the falling oil prices. American investment dollars are quite exposed here, with about a fourth of total investments in the energy sector: The US economy one of the best performing developed economies is exposed. The energy sector accounts for roughly 25 per cent of SP 500 capital expenditure and RD spending. [] The energy sector is about 15 per cent of the Barclays US Corporate High-Yield Bond Index up from less than 5 per cent in 2005. [] Lower oil prices reduce available surplus petrodollars that help finance budget and trade deficits, keep interest rates low and support asset prices worldwide. Moreover, foreign debt is heavily tied to the U.S. dollar, with high dollar prices making debt harder to service. Currency battles are already in the air: Perhaps 75 per cent of emerging market foreign debt is denominated in US dollars. Falling oil and commodity revenues reduce the US dollar cash flow available to service this debt, creating a currency mismatch. Meanwhile, Europes problems with debt multiply these problems across the global market. Ditto for the problems of Russia, Mexico, Brazil, Iran and other socialized countries heavily dependent on the oil price and gas sales. FTs Das warns that the lower price of oil will be nowhere near enough to compensate for slowdowns in other variables. Shortfalls in investment, employment and consumption will likely be enough to undermine American economy momentum and some of the baby steps to re-shore jobs on U.S. shores. As NPR reports, the reshoring effort, while perhaps a positive step, is hardly enough to put a dent in the trade deficit, much less to account for the global tide: A report on the phenomenon known as reshoring the opposite of offshoring shows that while a growing number of companies are returning to the United States to do their manufacturing, the trend is smaller and less significant to the economy than it appears. You see more manufacturing activity within the U.S., said Van den Bossche, but relatively speaking youre actually seeing even more in Asia for products coming to the U.S. Theres a trend here that says that, Yes, we are starting to manufacture more, we are getting more and more competitive, but its not quite yet showing in the economic data, Van den Bossche says. The looming calculus of falling oils impact on the economy is likely to setback any of that progress, anyway. You can read more from Mac Slavo at his site SHTFplan.com, where this article first appeared. 