The Baltic Dry Index
The Baltic exchange works as a maker of markets in freight derivatives, a kind of forward contract referred to as Forward Freight Agreements (FFAs) that are bought and sold over the counter. The primary principles of supply and demand explain the importance of the Index.
Because the Baltic Dry Index offers an assessment for the costs of shipping the major raw products by sea, it gives a rare window into the highly opaque and spread shipping market and the precise barometer of the volume of global business. It offers this devoid of political, social and other agenda concerns (Stopford 1997).
The Baltic Dry Index is based on the United States dollar and therefore it is influenced by the changes in the value of the United States dollar. The Baltic Dry Index can be observed on a daily basis from the Baltic exchange or from any major financial information centre and news services like the Thomson Reuters and Bloomberg L.P (Coricelli and Jazbec 2004). This means that the Index is available to any person willing to access information on global economic matters. This information is very crucial to global economists and investors. The Index is read by economists and stock markets because it measures the demand for shipping capacity in relation to the supply of dry bulk shippers. The demand for transporting varies with the amount of load that is being transported or sold in various markets. This is to say that the Baltic Dry Index also operates by the law of supply and demand (Kotilaine 1997).
The traditional indicators of economy that have been in use are not reliable in the current economic environment. The data that is generated from most of them is not current. By the time such data is reported, it is already weeks or months old. Other global economy indicators, which serve as the basis for the political and economic decisions, are mostly designed to serve narrow and precise interests. They are also subjected to revision and adjustments to serve the narrow interest. Payroll and employment numbers are mostly estimates consumer confidence measures nothing more than sentiment, usually with no link to the real consumer behaviour Gross National Product (GNP) figures are consistently revised etc (Kouwenhoven 2007). Unlike the stock and bond markets, the Baltic dry Index is completely devoid of speculative content. No one will book freighters unless they have cargos to transport (Gyllenhammar 1993).
In order to know the changes in the global economy, the answer is Baltic Dry Index.
Changes in the Baltic try Index can offer investors an indication into the global supply and demand trends. The change in the Index has come to be a leading indicator of the global economic growth (Klyuev 2002). Because the supply by large ships tend to stay tight, with long lead times and high cost of production, the Index can suffer high levels of instability if the global demand increases of falls suddenly. The slightest alteration in demand for shipping results in a change in the Index. Because the Baltic dry Index tracks the costs of unrefined materials, which are the forerunners of the economic output, instead of finished products, it offers an exact and exceptional measurement of the volume of global business at the most basic stage. A gradual increase means that the global trade is going up and a sharp decline indicates that it is decreasing. In view of the fact that the global economic activity eventually influences the equity markets, sharp changes in the Baltic Dry Index often foretells similar moves in the equity markets (Klyuev 2002).
The Index was used to determine the impact of the 2008 financial crisis. On May 20, 2008, the Index hit its record high level since it was introduced in 1985. It read 11,793 points. On December 5, 2008, half a year later, the Index had gone down by 94 percent, to 663 points. This was the lowest level since 1986, though by February 4, 2009, the Index had recovered a little to 1,316 points. The low rates went dangerously close to the collective operating costs of fuel, vessels and crew. By the close of 2008, shipping times had increased by decreased speeds to save on fuel use, but lack of credit meant the decreasing of Letters of Credit, required to load goods for departure at the port (Kotilaine 1997). Debt load for future construction of ships also created another problem for shipping companies. There was a threat of major bankruptcies and implications for shipyards. This together with the deteriorating price of the raw products created a perfect storm for the global marine trade. The flashing ember signals showed by the Index about the global economy, shows that there is something going terribly wrong. The Index had recovered to about 2,900 points by October 2009, a level that is somewhat normal (Coricelli and Jazbec 2004). This evidenced some hope that the worst was over. This was due to the capital injected into banks by Europe and the United States. The damage to the world economy is already a fact and the Index is showing a further slowdown in output and inflation in most of the global economies. The Index could also be indicating an even scarier issue. It may be telling the world that the great industrial powerhouse globally, that is, China, could be in trouble. Its imports of raw products are falling at a greater rate that the slow side in demand for chinas finished products from the West may imply (Datz 2008).
Investors use the Baltic dry Index to scan the global economic status. Currently they are scanning the globe for any signs of recovery or deterioration. Baltic dry Index is a significant way of confirming whether moves in equity globally are being showed in an increase in global shipping. For the people who are interested in following the stocks of the major dry bulk carriers, the best place to start is by observing the movements of the Baltic Dry Index. Investors also use the Baltic Dry Index to provide them with a good entry and exit signals and protect them from loosing their investment (Kotilaine 1997).
The Global Economic Crisis
Over the past decade, the emerging economies have realized a tremendous increase in total capital flows. However, as global capital movements have been the key catalysts for the increasing global economic integration, failures in markets linked to them have also become more apparent. Since 1982 the economy has been rocked by three serious financial crises the 1980s American debt crisis the 1994 and 1995 Mexican crisis and the 1997 Asian crisis (Datz 2008). These are the three major crisis but they are not the only ones. Even recently from 2008, the world economy has been experiencing crisis that it has not fully recovered from. The Asian crisis extended to Russia and Latin America. It also affected the economies of most of the industrialized nations (Blustein 2001). In emerging economies, financial crisis are very different than they used to be in the past. Between 1940s and 1970s, financial crisis were in the form of large fiscal deficits, suppressed domestic financial structures and balance of payments states associated with sharp worsening of trade terms. In the late 1990s, a new form of crisis evolved especially in Asia. Most of the emerging economies experiencing financial trauma have been considered successful until the crisis impact. The common factors that raise vulnerability to the financial crisis are imprudent fiscal policies, financial sector fragility, lack of prudential management and regulation, appreciated real rate of exchange, heavy loaning to private sector and low foreign reserves as compared to government liabilities. It is agreeable that all the crisis of 1990s involved two types of market failures global financial institutions like IMF and WTO, over-lending to emerging market economies and state financial institutions and corporations over borrowing (Looney 2007).
In the 1970s, there were no banking crisis and this can probably be attributed to the highly monitored nature of financial markets in that period. There are two problems that are worsened when the local financial market become global. The irregularity of information widens when the borrower and the lender belong to two different economies. The consequence is that risk and instability associated with financial operations are more in global that in local markets. The other way through which the instability in financial markets as they become global arises is by the increased use of options and futures (Helleiner 2009).
As economies emerge in the world, there are troubling signs in the global economy horizon. Unemployment is on the rise in majority of economies around the world. In most of the western countries, costs of housing are on the decrease as there is over supply of houses, tight credit conditions and foreclosures that continue to obstruct the market. While the rate of mortgage is low, houses are more affordable than any other time since the 1980s, but the increase in the rate of unemployment continues to push more and more people to default on their mortgages and foreclosures will continue to increase (Ghosh and Ariff 2004). The dangers of a double-drop recession or a w- shaped recovery still ringer in most parts of the world. Even as the output globally starts to pick up, unemployment seems to continue rising up as capacity use rates remain low all over the world. The ILO estimated that unemployment would rise by 30 million globally in 2009 (Seavoy 2003).
Before the current crisis, a research by the World Bank had estimated that the number of those living below the poverty line at about 1.4 billion world wide (Blustein 2001). Their preliminary studies had indicated that an additional 43 million would fall below the poverty line by 2009. The results of the crisis may be severe than those experienced in the short-run, probably changing a short-run macro-economic adjustment into a lasting development problem. Children pulled out of school are at risk of not returning back after the crisis, or that they may never recover from the learning gap emanating from the lack of attendance. The decline in nutrition and health status can be irreversible. The middle class people may also suffer from unemployment, losses of equity markets, currency depreciation and fear of the security of local banks (Seavoy 2003).
Restrained by the eroded financial space and foreign exchange reserves, most third world countries will not be able to employ counter-cyclical policies by themselves. After all the crisis is decreasing their income, thereby making worse public finances threatening current levels of spending. This further reduces the services to those living in poverty. It is clear that the global economy may be experiencing nothing short of development emergency (Helleiner 2009).
There are two major theoretical and empirical explanations for the causes of economic crisis. No matter what the explanation is, global crisis comes up due to the failure of government, be it locally or globally. An economist, Krugman argues that economic crisis occur whenever an incessant worsening in the economic fundamentals becomes contradictory with an effort to fix the Exchange Rate. This explains the crisis as a result of basic inconsistency between domestic economic policies and the effort to uphold a fixed Exchange Rate (Gurria 2008).
As learnt from the past economic crises, the global governance on global economic matters has not been efficient. With the global poverty becoming worse, economists and policy makers globally contend to sustainable recovery and economic growth as the only solutions to the predicaments facing the global economy. There are efforts by groups like the G7 (finance ministers from united states, united kingdom, Italy, France, Germany, Japan and Canada) and the G20, the group of twenty, finance ministers and bank governors. They have been trying to intervene in the matters of global economy. They have been trying to unite systematically significant industrial and developing economies to look at major issues that affect the global economy. With its rich history, the large amount of knowledge gathered, its painful experience, its vibrant and knowledgeable community and the ongoing processes of learning, East Asia is better placed to offer way forward on effective development strategies and the more appropriate procedures to recovery from economic crisis (Blustein 2001).
Beyond the terrible and painful cruelty of any financial crisis, economists should acknowledge the fact that they spark an evolution of thoughts about economic growth. Crisis opens their eyes on the nature, causes and choice of policies required to deal with them (Allen 2000). This helps policy makers to manage and design policies that can effectively handle the problem. Economists are put in a position to acknowledge mistakes like naive belief in the end of volatility, and the impact of complacently. They gather knowledge on the gaps in the existing stock knowledge, and use the crisis as a basis for fresh thinking on macro and development matters. For better governance of global economy matters, policy makers should draw lessons from previous crises and the variety of experiences and policy reactions of the Asian countries. They also need to realize that global crisis has not altered the fundamental objectives of economic policy (Looney 2007). The basic objectives are prosperity, equity and continuity or stability. The boundaries and balance between the state and markets, and the central responsibility of financial institutions, that is, regulation and regulatory measures in the case of equity markets, will continue to be at the centre of discussions in development economy in years to come. Even in the industrialized nations, it is noted that the most successful economies are not the ones that the role of government is minimal but those that employ a practical approach to economic policy and the government get involved at the time when its intervention is expected to give superior social outcomes (Ghosh and Ariff 2004).