Quotulatiousness

February 13, 2016

You notice you only ever hear of the Baltic Dry Index when it’s way down?

Filed under: Economics — Tags: — Nicholas @ 02:00

Tim Worstall says that the Baltic Dry Index is way down … and there’s zero reason to panic over it:

The Baltic Dry Index is now down to 293, near 50% down on a year ago and almost 40% down just so far this year. This does not though, despite a remarkable amount of panicking over it, mean that global trade has fallen off a cliff. It does not even mean that global trade has contracted at all. The important point here being, as it is about any other price in the economy, that the price is determined by the interplay of supply and demand, not just demand alone.

Actually, we need to take a further step back. The Baltic Dry Index is an index of the price of shipping (specifically, of large bulk dry cargoes like grain and iron ore, there are other similar measures for oil, containers and so on), not an indication of the volume of shipping or trade. It’s then that we have to recall that prices are about the interplay of supply and demand, not just demand itself.

And the truth is that global trade is not shrinking, despite what is happening to the price of doing that shipping of that trade. Now, if trade were shrinking that would be a problem, yes, because it would be an indication of a general slow down, possibly even recession, in the global economy. That’s not something we want to happen. But the price of shipping falling is something very different.

[…]

Yes, the Baltic Dry Index has collapsed: but that’s a collapse in the price of shipping, not in the volume of shipping nor of global trade. Far from this being a bad sign for the global economy, it contains within it the seeds of good news. If shipping is becoming cheaper therefore it will be cheaper to trade and there will be more of it. Which is good news, because more trade makes us all richer.

And we need to recall this basic point when we think about either economics or public policy. Yes, price changes are indeed telling us something about the economy around us. But we do have to be careful that we pick up the right message. A falling price can be a symptom of increased supply just as much as it can be of reduced demand.

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