Wednesday, October 15, 2008

Baltic Dry Index Falls Nearly 20% in Two Days

One thing about this financial crisis is that people are learning about all these indexes that affect their lives. How many people before the financial crisis knew what the Libor Rate was and why it so affects their lives. Now today I have learned about the Baltic Dry Index and why the news is not good for the economy.

The Baltic Dry Index is an index covering dry bulk shipping rates and managed by the Baltic Exchange in London. According to Baltic Exchange, the index provides:

“…an assessment of the price of moving the major raw materials by sea. Taking in 26 shipping routes measured on a timecharter and voyage basis, the index covers Supramax, Panamax, and Capesize dry bulk carriers carrying a range of commodities including coal, iron ore and grain.”

Because dry bulk primarily consists of materials that function as raw material inputs to the production of intermediate or finished goods, such as concrete, electricity, steel, and food, the index is also seen as a good economic indicator of future economic growth and production, termed a leading economic indicator because it predicts future economic activity.

The Baltic Dry Index has been falling since late June, not long before the commodities bubble burst in July, and has been in retreat since then. What is particularly worrisome is its steep dive in the last two days, despite Herculean efforts to get the banking system operational.

This Guardian article suggests that the culprit may be a rapid deterioration in the Chinese economy, but I am also concerned that another factor may be at work that the financing of trade is seriously impaired. In this post "International Trade Seizing Up Due to Credit Crisis," from the Naked Capitalism blog there are reports cited that banks are refusing to honor letters of credit from other banks. If this persists, international trade will break down, because shipping companies rely on these letters to underwrite their vast cargos.

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.

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