12 December 2009

The Collapse of Global Trade: A Deleveraged World

...the decline in trade was far larger than the quite small drop in global economic output. It turns out that many aspects of globalization were overleveraged. Exports, currency trading, and cross-border investment were fueled by debt and credit. In the United States, consumption of imports was stoked by borrowing and the booming housing market. _Deglobalization
The world economy is deleveraging. Huge freighters and oil tankers are sitting idle. Exporting countries such as China are sitting on a huge manufacturing overcapacity. Importing countries are slowly realising that they can manufacture many products better, faster, and cheaper themselves.
Businesses have learned in the past two years that the longer the supply chain, the more possibilities there are for disruptions—from flu viruses, geopolitical disturbances, and spikes in energy prices. While China is still the world's factory, in an age of volatile demand, some companies have realized that manufacturing closer to home is more efficient, even if production costs are higher. In March U.S. Block Windows, an acrylic block window manufacturer based in Pensacola, Fla., bought competitor Hy-lite, a division of Fortune Brands. Hy-Lite was outsourcing the molding of acrylic blocks to China. "It became very evident to us, that we could do it cheaper in-house, because we had the facilities, and we were operating at less than capacity," said Roger Murphy, president of U.S. Block Windows. More significantly, manufacturing in China had its downsides. U.S. Block Windows ships orders within four days of receipt. But the lead time in production from China was 12 to 16 weeks. In a period where it's difficult to forecast demand far out into the future, "it's very difficult to match those two things up," said Murphy. In September, U.S. Block Windows moved Hy-Lite's molding work from China to Florida.

...In the months after September 2008, pretty much every metric that testified to the growing interconnectedness of the global economy collapsed. Between April 2008 and April 2009, foreign currency trading volumes in London were down 25 percent.... _Deglobalization
The world is reacting to the global credit deleveraging in the same way as the US housing market, business startup market, and jobs market -- it is hunkering down and focusing on the local, and the immediate.

Much of the world is beginning to contemplate the massive collapse that would inevitably follow a much-discussed US government default on its sovereign debt. The 25% drop in trading volumes would suddenly change to 70% or more. Importing countries would make do with local products instead of imports. But exporting countries would find themselves suddenly short of cash. For Russia, Saudi Arabia, Iran, China, etc. that spells massive civil unrest.

As the US congress prepares to raise its debt ceiling by $1.5 trillion, the rest of the world -- particularly lenders to the US -- are getting the jitters. The global trading community has already suffered some large jolts. It is just starting to understand the devastating impact that wide-scale carbon regulations will have. Now it has to think about a US default that would bring the entire house of cards down on itself.

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“During times of universal deceit, telling the truth becomes a revolutionary act” _George Orwell

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