The New York Times has a nice piece of economics reporting on a downturn that affected the U.S. manufacturing, farming and energy industries in 2015 and 2016. I’ll see if I can summarize it, but really we have to admit to ourselves that spinning these narratives after the fact doesn’t mean we have the ability to predict the future.

• China tried to slow down lending because it was worried about a bubble. The article doesn’t say how, but maybe they raised interest rates or put other requirements on banks.
• This affected developing countries that export to China.
• The U.S. Federal Reserve was also starting to raise interest rates because it thought growth and inflation were both starting to pick up.
• Europe and Japan were decreasing interest rates due to low growth at time.
• The disparity in interest rates caused a rise in the dollar, because investors pulled money out of other countries/currencies to invest in the U.S.
• China’s currency is (partially?) pegged to the dollar, so this caused its currency to rise and hurt its exports.
• China reduced its peg to the dollar in response to allow its currency to depreciate and help its exports. However, this caused more investors to shift money out of China and reduced growth even more.
• Governments and companies in emerging markets had a lot of dollar-denominated debt, which was now more expensive to repay in their local currencies.
• The slowdown in emerging markets reduced demand for oil, minerals and agricultural goods, which caused prices to drop and hurt those sectors in the U.S., along with manufacturing that serves those sectors. Some emerging countries are also active in energy, mining, and agriculture so they were also hurt.
• This may have had political consequences both in terms of disgruntled voters in key states during the 2016 election, and the perception of increased growth following the election.

It’s pretty interesting how it is all connected, and even though it seems complex the reality is probably much more complex than the way I have tried to puzzle it out above. The lesson going forward seems to be that a slow down in China, coupled with a disparity in growth between the U.S., China, and other developed countries in Europe and Asia, can lead to recession conditions in the U.S., even if the U.S. economy is healthy at the beginning of the process. Put another way, global growth is clearly not a zero sum game as some politicians would like to try to convince us. The U.S. Federal Reserve is trying to gradually raise rates to give it some ability to respond to an event like this in the future, but it is clearly a balancing act.