Global Trade Recession Indicators Redline – It’s Going To Hurt

| October 17, 2008

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As mentioned in an early post, there are no clear signals that the global economy is skidding to a violent halt. This can only spell additional trouble for activist governments intent on conjuring up enough money to bluff the world wide credit implosion into submission.

For the past two decades, the most prosperous nations on Earth have been working hard towards a lofty target of “Globalization”, creating a large, highly inter-connected economy that bridges wealthy and developing nations. The pin-up girl for this effort has been China, who have leveraged their impoverished people and disregard for their environment into becoming the world’s manufacturing shop. The changes in China have been dramatic, and in general positive for the majority of the Chinese people (but more so for the Communist party bosses). Hoping to replicate this fountain of prosperity many countries across the world have worked hard to replicate these policies.

This means if you guy to buy an HD Television, you are buying something made in China. If you have problems and call customer support, most likely you are talking to someone in India. If you paid for it with a credit card, that money was loaned into existence with dollars from China (that they got for selling you that TV, you know). The bonds that back that credit card are likely held by banks in Iceland, Brazil or Korea. Through this approach the world became tightly inter-connected, and everyone enjoyed the massive cheap credit wave that swept the world over the last 5 years.

Now this credit wave is receding fast, and everyone is learning that there is a heavy price to pay for the excesses they have had a hand in creating. But don’t take my word for it! Let’s look at the most direct of global trade indicators, something called the Baltic Dry Index.


When Samsung orders that HD Television to be built, it has to find it’s way from China to the US somehow. Typically that is done via container transport ship. Likewise the plastics, steel, microchips to make it and the boxes to put it in arrive in China via the same route. The measurement of this cargo ship traffic is what the Baltic Dry Index tracks.

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From our friends at the UK Guardian: Baltic Dry warns of tough times on the horizon

The Baltic Dry shipping index, which has been flashing amber signals about the world economy for the past couple of months, is telling us there is something going badly wrong because it is now stuck firmly on red.

The index has long been seen as a good leading indictor of future economic production levels because it charts the cost of freight movements in 26 of the world’s biggest shipping lanes of “dry” materials, such as coal, iron ore and grain which feed into the production of finished goods some weeks or months ahead.

There is some hope today that the worst of the financial crisis may be over, thanks to the mass injections of capital into banks by governments in Europe and the US. But the damage to the world economy is already a fact of life and the Baltic Dry is pointing to a further slowdown in both output and inflation in many of the world’s economies.

The index may also be telling us something scarier. It may be telling us that the world’s great industrial powerhouse, China, could be in trouble and that its imports of raw materials are collapsing at a far greater pace than the slow slide in demand from the West for China’s finished goods would imply.

In part it seems this slowdown is a result of the credit crunch, and not because business are ordering less from China or elsewhere, but because they can no longer obtain letters of credit. Yes, the Letter of Credit is an essential tool of the world economy. Think of it as a short term loan to the shipper that is repaid by the receiver. It means I can ship my ton of steel to Korea with the assurance that I will be paid, or that the farmer can ship his corn to Russia, or the factory in China can ship the TVs to the US.

Without these letters of credit, producers stop shipping things anywhere. This is the most effective way to shut down world trade, even more effective than trying to sink all the ships.

From the Financial Post: Grain piles up in ports

The credit crisis is spilling over into the grain industry as international buyers find themselves unable to come up with payment, forcing sellers to shoulder often substantial losses. Before cargoes can be loaded at port, buyers typically must produce proof they are good for the money. But more deals are falling through as sellers decide they don’t trust the financial institution named in the buyer’s letter of credit, analysts said.

“There’s all kinds of stuff stacked up on docks right now that can’t be shipped because people can’t get letters of credit,” said Bill Gary, president of Commodity Information Systems in Oklahoma City. “The problem is not demand, and it’s not supply because we have plenty of supply. It’s finding anyone who can come up with the credit to buy.”

“We’ve got a nightmare in front of us and a lot of people are concerned it’s going to get a lot worse,” said Anthony Temple, a grain marketing expert based in Vancouver.

While the central banks of the world throw everything they can at the problem (except what might solve it), the financial plumbing of the world is grinding to a standstill. Indicators are starting to pile up that this downturn will be the first real tough period since the 1970’s. For many people in their 30’s and younger, this will be their first real recession.

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Category: China, Credit Backlash, Economics, Main, Recession Watch

About the Author ()

Bruce Henderson is a former Marine who focuses custom data mining and visualization technologies on the economy and other disasters.

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