Central Banks Behind Slowdown in Global Trade: Why The Great Wealth Grab is Coming

Global trade has come a long way since the days of Ferdinand Magellan. In 1519, the Portuguese explorer became the first person to circumnavigate the world. More than 500 years on from his breakthrough voyage, the world is a different place.

People, and nations, are connected like never before. The movement of goods and ideas has exploded, creating a global network of interlocked trade. Owing to this is the most important development of our time: globalisation.

The mode of trade hasn’t changed much from Magellan’s time. Half a millennium later, we still rely on ships to transport goods. Maritime transport remains the cheapest form of shipping. Moving goods by sea costs 1/70th of what it does over land.

The only differences between then and now are those of size, speed and scope.

Today, large freighters circle the globe, unloading goods across ports the world over. They do so at a fraction of the time, with few restrictions on mobility. Free trade deals have removed tariffs, increasing the flow of goods between nations further still.

Whatever you want, you can have. And it doesn’t matter where in the world you are.

Yet something curious is happening to global trade. There are emerging signs we’re witnessing a reversal in trade. A de-globalisation, if you will.

After decades of nonstop growth, global trade is slowing down. Volume shipments are declining markedly. For the first time in 30 years, export and import volumes are both falling on a global scale.

When you look at the world, you don’t sense that immediately. You think that trade is expanding, not contracting. Everywhere there are signs of a developing global monoculture. We all buy the same goods, sold to us by the same global corporations. That’s true in Australia as it is in India. Consumer brands are the same regardless of what country you live in.

But the reality is different to our perception of this. Here’s Bloomberg reporting on this emerging de-globalisation:

For the third year in a row, the rate of growth in global trade is set to trail the already sluggish expansion of the world economy, according to data from the World Trade Organization and projections from leading economists.

Before the recent slump, the last time trade growth underperformed the rate of an economic expansion was 1985.

“We have seen this burst of globalization, and now we’re at a point of consolidation, maybe retrenchment,” said WTO chief economist Robert Koopman. “It’s almost like the timing belt on the global growth engine is a bit off or the cylinders are not firing as they should.”

Since rebounding sharply in 2010 after the financial crisis, trade growth has averaged only about 3% a year, compared with 6% a year from 1983 to 2008, the WTO says.

Few see any signs that trade will soon regain its previous pace of growth, which was double the rate of economic expansion before 2008. In 2006, global trade volumes grew 8.5%, compared with a 4% expansion in global GDP.

This year the WTO is expected to cut its 2015 trade forecast a second time after a sudden contraction in the first half of the year—the first such decline since 2009.

“It’s fairly obvious that we reached peak trade in 2007,” said Scott Miller, trade expert at the Center for Strategic and International Studies, a Washington, D.C., think tank’.

Why is trade growing at half the rate of even five years ago?

Economists blame on a few key factors. Foremost among these is China’s economic slowdown. Weak Chinese demand for materials shares responsibility for slowing trade. Yet this doesn’t tell the whole story.

Remember, trade was slowing as early as 2008 in the aftermath of the GFC. China was still seeing double digit growth rates during this time. Its economic slowdown is a relatively recent phenomenon.

Something else doesn’t add up about this.

China, as you probably know, is shifting to a consumer-led economy. Policymakers want consumers to ween the nation off its reliance on exports. This shift places less emphasis on rapid construction and expansion. The kind of activity that lends itself to importing vast amounts of materials.

Seeing Chinese exports decline is not altogether surprising. But the shift to consumerism should result in rising imports. Yet that’s not what’s happening. Chinese imports fell 14.3% in August, the seventh straight month of decline.

What else could explain the global slowdown in trade? Besides China, economists point to a lack of new free trade deals. They also bring up concerns about the effects of rising trade barriers.

The net effect of these factors could explain why trade growth has slowed as much as it has.

Either way, there are few signs the situation will improve. Economists aren’t forecasting any imminent rebound in trade.

As Bloomberg reported, the pace of trade growth doubled the rate of economic expansion before the slowdown. Shipment volumes grew at 8.5% in 2006, compared to 4% growth in global GDP. Things are very different now.

Does weak global economic growth explain this downturn in global trade? Again, it might.

But there are other, less obvious, factors at play. Factors which suggest that the world is reaching peak globalisation. Factors which suggest that slowing trade is part of a calculated scheme. One designed to usher in the greatest wealth grab the world has ever seen. I’ll touch on this more below.

I’ll also take you through the effects of the currency war now taking place. You’ll see why this war is crucial to world trade. And why it’s only making the situation worse.  We’ll also look at the role central banks play in this war.

Finally, we’ll finish by looking at a technology that is primed to boom as global trade weakens further.

For now though I want to turn your focus to the immediate outlook on global trade.

What the Baltic Dry Index tells us about world trade

Global trade hasn’t bottomed out. We’re a long way off that.

One way we know there’s no improvement coming is because the Baltic Dry Index (BDI) is plunging.

The BDI, if you’re not familiar, is a key indicator of global economic health. It tracks the price of shipping major materials, like iron ore, by sea.

The BDI’s performance in 2015 caused a lot of confusion among observers.

The index started badly, crashing to historic low in February. That was surprising considering the outlook for global economic growth was poor. Then something strange happened.

The BDI doubled from 509 to 1,250 between February and July. It did so even as commodity prices, and Chinese asset bubbles, were bursting as the year unfolded.

China’s slowing demand for materials should have sent freight rates down. It didn’t. Prices weren’t readjusting to weaker demand. That was the case until last month.

During August the BDI fell back down to 876. That’s a 400 point drop compared to its peak in 2015.

What caused these wild swings on the BDI this year? Speculators.

Investors were betting that shipping price would rebound this year. That caused the index to rise. Quite why they thought this is anyone’s guess. But with no recovery in sight, the index is now in correction.

Reuters reports:

Shipping freight rates for transporting containers from ports in Asia to Northern Europe dropped 22.8 per cent to $400 per 20-foot container (TEU) in the week ended last Friday, data from the Shanghai Containerized Freight Index showed.

‘Freight rates on the world’s busiest shipping route have tanked this year due to overcapacity in available vessels and sluggish demand for transported goods. Rates generally deemed profitable for shipping companies on the route are at about US$800-US$1,000 per TEU.

‘It was the third consecutive week of falling freight rates on the world’s busiest route. Container freight rates have so far increased in 5 weeks this year but fallen in 23 weeks.

‘In the week to Friday, container freight rates fell 24 percent from Asia to ports in the Mediterranean, fell 4.4 per cent to ports on the US West Coast and were down 3.7 per cent to ports on the US East Coast’.

The BDI masked a sickness in global trade for much of this year. But the markets are now realising what’s happening.

Shipping prices are falling because demand is plunging. Demand is falling because economies aren’t growing.

Why did I bring up the BDI? To show you that the future outlook for trade looks increasingly worrying. Economists thought that high shipping prices were a sign of health. They saw it as an indication the global economy was heading for a rebound.

But that belief is now unravelling. Global trade is headed for decline, as economies retreat. There’s nothing policymakers can do about this either. In fact, central banks would be better off not doing anything at all.

Currency wars aren’t helping global trade

Policymakers haven’t sat idle as global trade has unwound. Central banks have been particularly active. They’ve combated slowing trade by loosening interest rates to historic lows.

In theory, lower rates boost national export volumes. They do this by making goods cheaper to export. Lower rates help weaken the dollar, making exports more competitive.. Or so the theory goes.

Problem is, most central banks are reading from the same script. Over the past decade, interest rates have plunged across the developed world. Every central bank has joined in what’s become a global race to the bottom — currency wars. Which is simply another way of saying currency devaluations.

But the central banks went into overdrive with currency devaluations. Their monetary loosening has spiralled out of control.

Australian interest rates are at a historic 2% low. Rates were as high as 7% prior to the GFC, showing how quickly they’ve fallen.

US rates are even lower, sitting at 0.25%. Worse still, the European Central Bank sets rates at 0.05% in the Eurozone.

This central bank-led race to the bottom was framed as a leg up for trade. But it’s done more harm than good.

The Financial Times did some research into the effects of this global monetary policy. It compared changes in the values of 107 currencies, looking at how it affected trade. What it found flies in the face of conventional wisdom.

FT reported that currency devaluations have damaged world trade. From the Australian Financial Review:

‘[Our] findings suggest that any currency war between developing nations is likely to be even more damaging than previously thought, leading to a reduction in global trade and possibly economic growth, rather than just reapportioning a fixed level of trade between winners and losers.

FT’s analysis shows that weakening currencies doesn’t guarantee rising export volumes. Instead, it results in falling demand for imported goods. When currency values decline, they push up the cost of imports. It found that volumes fell 0.5% for every 1% that a currency fell against the US dollar.

Take Brazil as an example.

Brazilian import volumes have declined 13% year on year. This came on the back of a 37% collapse in its currency, the real. Russia, South Africa, and Venezuela have seen similar drops in import volumes.

Emerging markets have suffered during this currency war more than developed economies. We can add any commodity exporter, such as Australia, to that group too.

For emerging markets in particular, currency wars create a vicious spiral that’s hard to escape. In trying to fix current account balances, emerging markets import less. They don’t export more as you might think.

All that does is put downward pressure on global trade, leaving few winners in the long run.

And now comes the great interest rate policy reversal

Over the next few years, interest rates are expected to start rising. If lower rates were ‘good’ for global trade, rising rates will be devastating.

The first push will come from the US Federal Reserve.

In the next eight months, the Fed is likely to raise rates at least once. It won’t happen this week, but the timing itself is irrelevant.

The point is that it will hike rates by mid-2016, kick-starting a major reversal of global monetary policy.

What happens then?

Central banks across the developed world will start lifting rates too. The British central bank is already making noises about its intentions. The Reserve Bank has toyed with the idea too.

As interest rates rise, global trade will withdraw even further. Why? Because tightening of credit will put a stop to capital outflows. Emerging markets have already suffered from falling commodity prices. Restraining capital outflows will hurt emerging markets, hindering global growth. That will affect demand, trade, and growth in equal measure.

Why then are all central banks slashing rates in unison? To boost exports in their economies?

Any short term gains must come at the expense of someone else. So how can they expect devaluations to improve global trade overall? The answer is that they don’t, and they never have.

Instead, what we’ve gotten is something no one bargained for. Falling demand for trade means that countries are buying less of what emerging markets are producing. That’s happening even as the price of goods fall.

I have my own theory about why central banks are doing this. I think they communicate between one another a lot more than we give them credit for. I don’t for a second believe that monetary policies are determined alone. I believe policies are agreed upon with other central banks ahead of time.

It’s not as farfetched as you might think.

The Bank for International Settlements

Central banks have a de facto governing body: the Bank for International Settlements (BIS).

The BIS is an ‘international company’ that central banks the world over own shares in. Its mission statement reads as follows: ‘[the BIS] fosters international monetary and financial cooperation and serves as a bank for central banks’.

That’s not a misprint.

Central banks have their very own country club. Where they exchange views on everything. Matters such as monetary policy probably come up as topics of conversation. Central banks aren’t nearly as independent as they’ll have you believe.

I bring all this up to illustrate a point.

I believe the global monetary easing of the past decade was calculated. I think that central banks knew exactly what they were doing. And I don’t believe they believed currency devaluations would assist economies in the long run.

Central banks have created the greatest monetary expansion in history. The currency devaluations, and this argument that it boosts trade, is all a ruse. A ploy designed to pull the wool over your eyes to what’s really happening.

What reason do they have to do this? To create the greatest wealth grab this world has ever seen.

First it’s important to note that central banks are a monster commercial banks created. This took place in the early twentieth century. The heads of the big US banks got together, and masterminded an instrument that could prevent ‘economic crises’. That birthed the idea of the central bank. But instead of preventing crises, what they created became the cause of most disasters we’ve seen since!

How will this wealth grab take place?

Commercial banks issue money through fractional reserve lending. That means banks can accept deposits, and hold reserves that amount to a fraction of that amount. A $10 deposit results in $90 of new money creation. Every dollar that’s deposited is lent out several times over. The net effect is that banks literally create money out of thin air. Since money isn’t backed by gold anymore, there’s nothing limiting this practice.

When economies hit the wall, as in recessions or depressions, banks hoover up what people owe them. This debt doesn’t disappear into thin air. They walk away with hard assets, like property, that they never had the reserves to cover in the first place. And they ruin smaller, competing banks as well, just as they did during the Great Depression.

Which brings me back to interest rate rises.

Once central banks start raising rates, credit will tighten. And it will signal the final throes of the existing financial system. The wealth grab that will leave banks richer at the expense of everyone else.

When credit tightens, growth will become even harder to achieve. Demand for trade will weaken even further. Economies will become even more inward looking. This unravelling will threaten to undo what globalisation has done over the past fifty years.

Yet in its wake, trade may not recover for a decade or more. Protectionist policies will be the order of the day. Trade barriers will rise, and trading cliques will form. The free, open world trade of today will be a distant memory.

Yet this might usher in a new era of trade. One that doesn’t depending on the movement of finished products. Let me explain…

Why 3D printing is on the cusp of exploding

One side effect of slowing trade is that newer technologies will gain prominence.

3D printing is a game changer when it comes to trade. It could effectively make trade obsolete. At least when it comes to shipping finished products.

All 3D printing requires is materials. Using these, it quite literally prints products as any regular printer would. All that’s needed is that you ensure it’s loaded with the required materials. A few years ago, this would have sounded like science fiction. But it’s real, and it works.

Don’t mistake 3D printing for a fad. It’s still early in its life cycle, but it has amazing potential. Just imagine downloading designs for a new car part, and printing it in your living room.

We’re only scratching the surface of what this technology is capable of. 3D printing will become an indispensable part of life for most people in the future.

As global trade slows, it’ll open up new opportunities for investment in this technology.

You’ll be hearing a lot more about 3D printing over the coming years.

Mat Spasic,

Contributor, Markets and Money

PS: The low interest rate environment we live in is a by-product of central banking gone mad.

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Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

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