World trade fall-off ends an era

The deep declines in both exports and imports may end a golden era of trade. The above two graphs tell the story of what happens when you have a financial dislocation. The real economy gets hurt. Industrial production around the globe has not just lowed but actually seems to have halted. The excess capacity around the globe is staggering and will fore price deflation in the goods market. The fear is that we may have asset inflation without goods prices going up. While inventories are declining the inventory to sales ratios in the US are actually going up. The decline in inventories is not fast enough relative to the overall slowdown in GDP.

The decline in industrial production is associated with a sharp all-off in imports and exports. The decline has been especially strong in Asia and Japan which have been major sellers to the US.

One area which has to receive more attention is trade financing which is the greases that moves international goods. Firms are seeing a lack of credit for the shipping of goods across borders. Now, there may be little reason for governments to push this because of the concern for only domestic production but trade has to stabilize or there will be dire ramifications for many of the small open economies. The largest export from the developed world in 2009 may be unemployment if there is a greater focus on trade.

While we expect some stabilization as multinational banks stabilize, small open economies that are export driven will see little improvement in current accounts with an overall fall in trade. Their monetary policy will be biased to lower rates allow competitive devaluations to improve trade.