Saturday, November 15, 2008
more on the trade finance shutdown
When central bankers back in the old days argued that banks were “special” – and therefore demanded higher capital, strict limits on leverage, tight constraints on business activity, and superior integrity of management – it was because they appreciated the harm that a bank failure would have in undermining the supply chain for business in the real economy for real people causing real joblessness and real hunger if any bank along the chain should be unable to perform.
As the “specialness” of banks eroded with the decline of the real economy (and the migration globally of many of those real jobs making real goods and providing real added-value services to real people), the nature of systemic risk was adjusted to become self-referencing to the financial elite. Central bankers of the current generation only understand systemic risk as referring to contagion of illiquidity among financial institutions.
They and we all are about to learn the lessons of the past anew.
the collapse of global trade is one of the key elements which levered the financial collapse of 1929 into the great economic depresison of the 1930s. and we are witnessing the early stages of just such a collapse in global trade. brad setser noted last week the downturn in both exports and imports. calculated risk sees it in the port traffic data. the WTO doesn't seem to see relief on the horizon even as global stocks run down. the UK independent:
[T]he real trouble is less obvious, largely unprecedented, and potentially devastating.
... "We have the hugely worrying and unprecedented development where there are perfectly creditworthy shippers and receivers unable to open perfectly standardletters of credit," Mr Kerr-Dineen said.
Cargos are sitting on docksidesbecause the finance is not available to ship them, with the gravest implications for the future. "This is a nuclear bomb in the freight market, and in world trade," Mr Kerr-Dineen said. "Liquidity has to return because if there isinsufficient money to provide standard finance, world trade will be sharply cut back and economic growth willimplode."
Against such a background, more recent concerns over the economic slowdown in both the East and the West have pushed users of commodities to run down their existing stocks, rather than buy in new supplies at what are still relatively inflated prices.
These are all to some extentpredictable economic adjustments, but a more sinister effect has been that de-stocking is masking the shortages caused by the dearth of credit. Mr Kerr-Dineen says there are around three months left before stocks run out.
"If the problem is not resolved, there will be no way in which even the sharply revised economic growth forecasts for 2009 will be met, because without normal trade economies cannot function. Ultimately, flour mills will run out of wheat and power stations will run out of coal," he said.
George Cambanis, head of global shipping at Deloitte, said: "Everybody can still hold their breath for the time being, but it is anybody's guess how long it will take for money to startcirculating again."
He added: "Trading has virtually come to a standstill, because there is no cargo for the ships. There has also been no trading of vessels in the last few weeks, so there is no market value out there for companies' capital investment in their ships."
the revolution of the last ten years which yielded "just-in-time" shipping and razor thin inventory management seemed not long ago to be one of the cost saving benefits of the information age. in this light, however, it looks more like an expedient transmission for the conversion of severe financing difficulties into a global economic collapse as rapidly as possible.
Of the $13.6 trillion of goods traded worldwide, 90 percent rely on letters of credit or related forms of financing and guarantees such as trade credit insurance.
think about that for a moment.
UPDATE james surowiecki on the perils of the food supply chain. the financial times on the perils of integrated suppliers generally.