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Name That Bubble

Posted by: Michael Mandel on March 18

Here’s a little quiz for you. Which of the following quantities grew the most between 1998 and 2007?

A) Market value of owner-occupied U.S. homes
B) Dollar amount of debt owned by U.S. households
C) Dollar value of global trade

Answer below. Don’t peek.

The answer, of course, is C.

According to the International Monetary Fund, the dollar value of global trade rose by 150% from 1998 to 2007

Over the same period, the market value of owner-occupied U.S. homes rose by 132%, and the dollar amount of household debt rose by 135%.

I could twiddle with the start and end dates to make the rankings come out a bit different, but the point would remain. Global trade rose at roughly the same amazing pace as household debt and housing.

We had a credit and housing bubble--does that mean we had a global trade bubble? I think so. Here's a chart of global trade as a share of global GDP.


As of October 2008, the IMF was forecasting global trade as 33% of the global economy in 2008, up from 23% in 1998. That's too big a jump.

If the 'correct' number is closer to 28%, then global trade needs to fall by roughly $3 trillion to get back into line.

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Reader Comments


March 18, 2009 01:38 PM

It is pretty much obvious that American GDP was debt fueled (home equity loan, credit card loan, car loan etc..) and since American GDP is 70% based on consumption and service, we should expect contraction of American GDP. American GDP in 2008 was 14 Trillions and 70% of that based on consumption so 9.8 Trillion was consumption and service of GDP!
If American started to save up to 10% of GDP and use another 10% GDP reduction due to pay off their debt and lost of income due to job loses, then American consumption is lower by is 9.8T x0.2=1.96T.
I would not be surprised if American GDP can get down from 11T to 12T Dollars


March 18, 2009 02:56 PM


A jump in the amount of trade doesn't prove a bubble in trade, although it certainly ought to draw attention.
The most important aspect of a bubble is its un-sustainability. You could argue that with economies opening quickly, a jump in trade is expected. But the unbalanced nature of current trade flows by definition indicates a wealth transfer. If you can show the wealth transfer is unsustainable, then the trade structure is unsustainable. If the rate of transfer is significant compared to the amount of wealth available for transfer, *then* you have your smoking gun.
The problem we have is that American consumption was not sustained by income, but assets. When those assets turned out to be overvalued (due to the savings glut driving up prices relative to incomes, which was due to an export-driven philosophy), you have a snake eating its own tail. Protectionism built and is sinking the global economy as we understand it. This was not merely individual action: this was policy applied on a grand scale.


March 18, 2009 03:36 PM

My guess would have been home values, except approaching it open-book confirmed that global trade growth is greater, and household debt growth seems to be the slowest of the 3. For the U.S. it appears that import growth outpaced all of these, but U.S. export growth rate lagged.


March 18, 2009 03:49 PM

What do you think of Antonio Fatas' Macro Imbalance,

The US has been consuming more than anyone else and increasingly so. In part it may be higher incomes and expected living standards, in part education and health are household consumption here, in part the shift from capital intensity to human captial, or perhaps expectations of a future decline in investment leading to lower rather than higher investment. Just not sure which.


March 18, 2009 07:29 PM

Wow, the continuing intellectual justification of idiotic leftist policies by Mike is breathtaking. It really does seem to me that Mike's M.O. is to construct false justifications for whatever the prevailing mood is, right now it's protectionism. As CompEng noted, growth doesn't imply a bubble, lack of sustainability and future declines do. The reason for trade growth was that manufacturing and some exportable services were reallocated to where labor was cheapest, that is clearly a sustainable trend, not a bubble. Conversely, there is no rationale for house prices to have jumped so much other than the fact that a lot of credit was dumped into the housing market, because idiot financiers didn't know where else to invest it. No doubt each of the three trends fed on the others and it's possible that global trade also expanded too much, but it's likely that trade will keep growing soon, whereas housing won't. The only reason trade might not recover is if idiot govts start going protectionist, which is unfortunately what Mike seems to be trying to rationalize with the idiotic notion that perhaps trade needs to go back to 2006 levels.

Tom e.

March 18, 2009 08:39 PM

The US increasing its savings rate and the on going contraction in credit card lines will reduce consumer purchases. In addition, reduced trade credit will contract global trade.
Michael Mandel looks ahead with new ideas that threatens the psyche of linear thinkers. Some people cannot handle disruptions of the status quo.

Joe Cushing

March 19, 2009 12:49 AM

Boy that's a tough call. I'm inclined to say $ value of homes but then you put the word global in front of trade. Anything global has to be the largest. Why don't we know this off the top of our heads?


March 19, 2009 02:38 AM

Why is global trade a 'bubble'? Isn't it just a natural progression of technological advancement, and more countries opening up to free markets (India and China, for starters)?

Didn't trade between California and Texas also increase between 1998 and 2007?

Tom e

March 19, 2009 06:32 AM

The idea seems to be that trade is fueled by credit. Institutions that were leveraged 30 to 1 are shrinking to 10-14 to 1. This means less credit to fuel less consumer purchases and less investment which equals less trade. This in addition to greater US savings which means less purchases. Global trade will probably shrink to a more sustainable level before turning up. Someone has to finance trade and someone has to buy, both forces are in retreat.

Mike Mandel

March 19, 2009 08:31 AM

I just call 'em as I see them, without regard to left or right. Before this all happened, I would have said that globe trade was the result of opening up of opportunities around the world. Now, I think it's very suggestive that global trade, home values, and debt all trace out roughly the same pattern, with the same timing and the same magnitude of change. If we think home values and debt were bubbles, then we are obliged to be suspicious of the proposition that globe trade is sustainable at the current level.

My vote is with Tom E on this.


March 19, 2009 09:00 AM

Actually Tom, a retrenchment is likely to lead to more trade, not less, barring protectionist policies. As consumers shift purchases to lower-price items, those items are more likely to be made abroad. Take computers. While all of them are manufactured abroad, Mac sales have fallen a lot recently while the cheaper PCs are made by Asian ODMs like Acer or Asus, that do their minimal design work in Asia instead of hiring tons of expensive US engineers in the bay area like Apple does. What gets dumped in a recession are the higher-margin items that are made here or in Europe, like Macs or BMWs. Financial institution deleveraging has very little to do with all this and certainly isn't the reason for less credit, it's heightened risk aversion by investors.


March 19, 2009 09:58 AM

Tom E,

certainly we have some linear thinkers in these parts, but if your ideas have merit, it is possible to capture them in a detailed and precise logical fashion so that it doesn't require much imagination to know what you're getting at. Then an interested linear thinker can follow along, and maybe even help fix any flaws in your thinking.
Of course, A belligerent linear thinker is another matter. They come to their own conclusions, and the best you can do is check over your shoulder once in a while to see if they've found something. Even Karthik picks up some interesting tidbits once in a while.


March 19, 2009 10:19 AM


A minor point: retrenchment might lead to more trade relative to the size of the economy, but might not it still be smaller in absolute terms? Isn't that what we're seeing right now?


March 19, 2009 12:13 PM

I am leaning toward Ajay's angle of attack as being more useful: what can people afford, and where is it made? People's perspective of their wealth (and therefore what they can afford) is affected heavily by asset values and perception of income security.

I really hope that over anything but the very short term, an individual's perspective of wealth is not dominated by their access to credit. Business spending is a little different because both revenue and investment are more volatile, and until recently there has been very little incentive to park profit in liquid assets.

Of course, if individual income is dominated by wages and business spending is dominated by access to credit (because revenues are down), then there is some correlation between access to credit and individual spending.
But individuals will probably buy what they can afford regardless of where it is made. The questions remain: what can business and consumers afford, where is it made, and are current trends sustainable?


March 19, 2009 02:47 PM

The recent collapse in port traffic,, says it was unsustainable. Manufactured goods are luxuries compared to food and shelter. This may lead to a recovery in trade eventually when the dollar declines and we begin exporting to pay for imports, but I have doubts foreigners will continue to buy jobs by paying us to consume.


March 19, 2009 02:58 PM

Ajay, CompEng,

Allow me to remind you that there is a limit to the amount of physical things that a population can consume except through immigration or increased longevity or birth rate, even assuming infinite resources. You couldn't get me to consume much more stuff than I do now, even if it was free. I really don't foresee us moving toward imported disposable houses, for instance.

Services are constrained in a different way -- time savings generated or time available to partake -- and there is a limit to how much service can be imported. I am sure that innovations I can't imagine could alter my view somewhat, but unless this country wants to reopen its borders to the tired, poor, teeming masses, the growth in imports will eventually slow. I wouldn't venture to predict the timing (oops, it's already happening).


March 19, 2009 04:31 PM


Your point isn't lost on me that various limits exist on demand, and at some point in the future those limits will become more obvious. However, I assure you that American imports are not dropping because consumers are content and satiated. Economic data and mountains of anecdotal data contradict that assumption.


March 20, 2009 09:12 AM

There's going to be a severe contraction in world trade....this is news? It's the size of it that's important and it's not remotely in the US housing market class (housing starts have fallen by 65% or prices by 27% according to Schiller). It's probably not going to be very different from the overall contraction in the US economy or high single figures....Serious, sure....Cataclysmic,not really.


March 20, 2009 09:29 AM

Mr. Mandel,

Global trade is something measured by the Baltic Dry Index, it's been there, done that (crashed big time) but is already on the recovery:

Jeffrey Yasskin

March 20, 2009 09:42 AM

I'm not sure this follows. The housing bubble obviously fed on itself since it convinced people that houses were a good investment. The credit bubble fed on itself because it increased the money supply, allowing house prices to go up, which put pressure on non-participating banks to get in on the action or lose business.

How does world trade feed on itself? Where's the feedback loop that would cause it to overshoot?


March 20, 2009 11:25 AM

Jeffrey Yasskin,

As for U.S. imports, the feedback loop could very well be the lower paying, lower skill jobs that result from importing for retail versus the higher paying local manufacturing related jobs that are displaced. The use of credit to make up the difference is not sustainable. The use of housing appreciation to make up the difference has proven unsustainable.

It seems self-limiting, and I imagine one could draw some curves to show when import growth smashes into wage stagnation, given enough data. Exchange rates are the big unknown that play an important role, and it is difficult to imagine that the dollar will persist in remaining as relatively strong as it is now. It is that strength that makes U.S. exports unappealing. A plunge in the dollar might tend to reverse all this, but it would wreak havoc on budgets as long as so much energy and raw material are imported.


March 20, 2009 01:22 PM

More is moved offshore than manufacturing, but otherwise that's my suspicion, as well: that some areas of the economy are stickier than others, and that we might be called to pay for our standard of living more suddenly than gradually.
What's going on is part of that, but as sudden as the changes have been so far compared to what has gone before, they have not been immediate.

Thank you for your interest. This blog is no longer active.



Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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