For two decades the rate of growth of world trade volumes considerably outstripped that of industrial production as credit-fueled globalization created huge imbalances in the world. As Diapason Commodities’ Sean Corrigan indicates in these three simple charts, all that vendor-financed circular exuberance has come to an end. The bottom-line is that forced deleveraging (not least of which in Europe) is crushing the credit-fueled (and unsustainable) dream of endless growth as debt saturation has been reached (on private and now public balance sheets). To wit: Global Trade Volume growth is deep in the danger zone and about to turn negative; as the hopes of so manySinomaniacs and Pollyannas is slowly peeled back to a righteous recognition of reality.
The ratio of Global Trade Volumes to Industrial Production remained in a relatively stable uptrend as imbalances fueled by credit averaged 3.4% annually more trade than production. All that ended when whatever Keynesian Endpoint or Debt Saturation barrier we hit in 2008 and the impossible was proclaimed entirely possible.
What this means – simply – is that without credit expansion, world trade volumes are decelerating rapidly.
Moody’s Investors Service warned on Friday it could cut its ratings on five top Canadian banks on concerns about a softening economy and volatile capital markets, a blow to a banking system named the soundest in the world four years in a row.
But the outlook for the sector is no longer as rosy, Moody’s said, because of the risks presented by the macroeconomic environment and a business mix that leans heavily on domestic mortgages and other consumer lending.
Canadian consumer debt has risen to record highs in recent months, a situation reminiscent of the United States before its 2008 housing crisis. The household debt-to-income ratio jumped to 163.4 percent in the second quarter from 161.8 percent in the first quarter, Statistics Canada said a week ago.
Meanwhile, Canada’s housing market appears to be cooling after several years of red-hot gains.
All key measures of the eurozone money supply contracted in September and private credit fell at an accelerating pace, dashing hopes of a quick recovery from recession.
The broad M3 gauge — watched by experts as an early warning signal for the economy a year or so ahead — shrank by €30bn and is now down by €143bn since April. This is highly unusual.
The narrow M1 gauge watched for signals of activity six months head has held up better but also contracted in September, falling by €16bn.
“The message is clear,” said Lars Christensen from Danske Bank. “The ECB needs to stop obsessing about fiscal issues and do real quantitative easing (QE) if it wants to stop the eurozone going the way of Japan.”
Coal mining, steel and machinery firms feeling the greatest pinch
Tight credit and a weak business climate are forcing Chinese companies to neglect their bills, resulting in a surge in many businesses’ accounts receivable.
Accounts receivable refers to money owed but not yet collected from a company’s clients.
Enterprises are struggling to pay suppliers on time, adding to the financial strain felt by the suppliers, which in turn find it hard or impossible to repay their creditors.
As of August, combined net receivables for the nation’s industrial companies totaled nearly 8 trillion yuan ($1.28 trillion), up 15.6% from August 2011, outpacing the companies’ average operating revenue growth by 5.4 percentage points, data from the National Bureau of Statistics shows.
Most enterprises blame their liquidity pinch on difficulties recalling operating loans, said Song Hong, head of the department of international trade under Chinese Academy of Social Sciences.
Experts say this is partly due to the slowdown in infrastructure building. The head of the Liaoning Steel Circulation Association, who did not give him name, said primary contractors of projects such as the building of highways and high-speed railways defaulted most on operating loans to steel-supplying companies monitored by the institution.
Also affected are many export-driven industries, such as textile production and trading. Dragged by weak foreign demand, sales have been low and many textile companies have failed to recoup enough cash to pay for their supplies.
This set a chain reaction in motion.
There are increasing signs that the global economy is about to enter a new period of financial turbulence, coupled with deepening recession in a growing number of countries.
In the immediate aftermath of the global economic breakdown that began in 2008, set off by the collapse of the US investment bank Lehman Brothers, governments around the world took on increased debt as they made available trillions of dollars to prevent a complete collapse of the financial system. Meetings of the Group of 20 were dominated by pledges there would be no return to the conditions of the 1930s and assurances that the lessons of history had been learned.
The writings of John Maynard Keynes, the British economist of the 1930s who advocated increased government spending to counter depressions, were suddenly back in vogue. But a sharp turn came in June 2010, when a meeting of the G20 initiated a turn to austerity, emphasising the necessity to impose “fiscal consolidation.” The essence of this program was to claw back the money given to the banks through massive cutbacks to government spending, especially on social services.
However, this program brought a contraction in economic growth leading to decreased profit opportunities for major corporations. Faced with this situation, the US Federal Reserve initiated a policy of “quantitative easing”—the provision of unlimited supplies of money to banks and financial institutions. Central banks around the world cut interest rates to record lows and followed that up with their own versions of quantitative easing (QE). Under conditions of a stagnant real economy, these measures were aimed at boosting the value of financial assets, thereby providing a new avenue for finance houses to realise speculative profits.