UsableMarkets

For those of you who follow such things, it has certainly been interesting to note the decline in the Baltic Dry Index (or BDI). I have, for the moment anyway, a chart of the BDI in the right column of this blog. A quick glance will show you its direction. Namely: down.

I wasn’t the only one who was wondering at the decline of the BDI, and stories from The Economist and FT’s Lex discuss the meaning behind it.

The Economist says:

There are growing doubts, however, about what the Baltic Dry is actually signalling. The confusion is whether the index is saying more about the supply of ships than the demand for their cargoes. The index spiked dramatically in 2008 as China’s imports of commodities soared at a time when the supply of ships was constrained and port congestion added to demand for capacity (see chart). The financial crisis soon caused the index to fall back but not before this period of dramatic growth in demand from China had prompted a surge of orders for bulk carriers, especially the very largest ones that are used on the China trade routes.

These ships take around three years to come on-stream. Despite the cancellation of some orders the new ships are now flowing in: in the first half of this year the global fleet increased by 23% as new vessels came into service at the rate of 16 a month. There are now 23 such vessels arriving each month, adding to oversupply.

So, oversupply of ships? The FT’s Lex concurs:

Several analysts have poured cold water on the BDI’s prescience though, given some obvious distortions. It takes about three years to build new capacity and, as the peak of the commodities bubble was two to three years ago, new ships are now depressing charter rates. The global fleet has expanded by about a quarter this year alone. For now, other indicators of commodities demand trump the BDI.

Cross-checking with ostensibly similar global measures such as air freight sheds little light on the matter, but rail traffic compares more reliably. Trains carry the same types of materials as shipping and volumes rather than tariffs are reported while capacity changes only slowly. American carriers provide the most detailed and timely data and they continue to report outstanding year-on-year gains for tonnage of key industrial commodities such as metallic ores, coke and lumber, up 93 per cent, 28 per cent and 11 per cent for the first 27 weeks of the year, respectively.

However, both articles hedge their bets. With the threat of a double dip recession, that’s probably smart. And if it comes to pass, the BDI may not be so misleading after all.

~alex

Raghuram Rajan, my new favorite economist, has an interesting piece on the Project Syndicate website, How Inequality Fueled the Crisis.

The crisis in the title of course refers to our recent recession. But then the crisis we’re in can perhaps be perceived as something more long lasting. At UM we’ve talked about the income gap before, which is where Rajan begins.

Since the 1970’s, wages for workers at the 90th percentile of the wage distribution in the US –such as office managers – have grown much faster than wages for the median worker (at the 50th percentile), such as factory workers and office assistants. A number of factors are responsible for the growth in the 90/50 differential.

Perhaps the most important is that technological progress in the US requires the labor force to have ever greater skills. A high school diploma was sufficient for office workers 40 years ago, whereas an undergraduate degree is barely sufficient today. But the education system has been unable to provide enough of the labor force with the necessary education. The reasons range from indifferent nutrition, socialization, and early-childhood learning to dysfunctional primary and secondary schools that leave too many Americans unprepared for college.

The everyday consequence for the middle class is a stagnant paycheck and growing job insecurity.

Rajan also asserts that this equality is not something that people (read politicians) don’t know about. It’s just something they won’t talk about.

Cynical as it might seem, easy credit has been used throughout history as a palliative by governments that are unable to address the deeper anxieties of the middle class directly.

Politicians, however, prefer to couch the objective in more uplifting and persuasive terms than that of crassly increasing consumption. In the US, the expansion of home ownership – a key element of the American dream – to low- and middle-income households was the defensible linchpin for the broader aims of expanding credit and consumption.

Which has led to the result we’re all to familiar with.

The problem, as often is the case with government policies, was not intent. It rarely is. But when lots of easy money pushed by a deep-pocketed government comes into contact with the profit motive of a sophisticated, competitive, and amoral financial sector, matters get taken far beyond the government’s intent.

So, does someone need to break our current education system and put it back together?

~alex