Some perspectives
Robert Samuelson offers some history and analysis on global commerce and problems:
From 1896 to 1913, trade roughly doubled. Declining steamship and telegraph costs were melding countries together. “There was something close to an integrated world market for most goods,” writes Harvard political scientist Jeffry Frieden in his book “Global Capitalism.” In 1870, wheat in Liverpool was about 60 percent higher than in Chicago; by 1913, the gap was 16 percent. European investors eagerly bought bonds of then-developing societies — Argentina, Australia, the United States.
Compared with this earlier extravaganza, today’s boom still impresses. From 1990 to 2005, trade rose 133 percent. Supply chains are increasingly global. Since 1985, imported components as a share of worldwide manufacturing output have doubled to almost 30 percent. Cross-border money flows (for stocks, bonds, loans, real estate, entire companies) are huge: $6 trillion in 2005, says the International Monetary Fund. Finally, the boom has reduced acute poverty. The share of the world’s population living on $1 a day or less has dropped from 40 percent in 1981 to 18 percent in 2004, estimates the World Bank…
Today’s global economy undeniably faces some big, potentially destabilizing threats, oil being the most obvious. The world now uses 86 million barrels a day; almost a quarter comes from the insecure Persian Gulf…Although subprime U.S. mortgages — home loans to weak borrowers — are the center of attention, they’re not the real problem. Altogether, the riskiest U.S. mortgages total about $1.7 trillion, reckons Moody’s Economy.com. Losses will probably exceed $100 billion. Even at twice that, they’re chump change compared with the total value of all global stocks, bonds, securities and bank loans. In 2005, that was $165 trillion ($50 trillion in the United States alone), says the IMF.
The real problem is the unanticipated nature of the losses…The result: a so-called “credit crunch.” Last week, outstanding U.S. commercial paper — a type of short-term business loan — fell a huge $91 billion.
It is hard to assign precise causality to market behavior, but as of this point we continue to think that the uncertainty of whatever problems derivatives may cause, along with the uncertainty of a Bernanke response versus a Greenspan response to turmoil, have accounted for a large portion of the unusual volatility in the market of late.