Is the world economy strong and growing, or is it weakening? Are we in a boom or in a bust?
Two ways that I use to gauge the strength is to look at the price of oil and the Baltic Dry Index (BDI). Oil is used in the production and transportation of most goods produced. The Baltic Dry Index reflects the price of shipping manufactured goods and materials internationally.
Used in combination, the two indicators give you a good idea of the status of the world economy. When the price of oil and BDI are above average levels, it indicates a growing or booming world economy. When they are below average, it indicates a contracting economy.
The collapse in the price of oil indicates the world economy is in contraction and moving into “recession.” The BDI is typically around 1000 during normal times. It went over 10,000 in the wake of the Housing Bubble. Today it is near all time lows at 317.
It is true that both oil and shipping capacity has increased. There has been a great deal of new investment and increased supply. However, this new investment is actually just examples of malinvestments induced by central banks’ monetary policy.
