This is the first article of a three-part series.

Despite mounting evidence of the dysfunction being caused by Keynesian policies, rhetoric in Europe and the United States is overwhelmingly turned against austerity. Over three articles, the author will examine specific examples of the dysfunction that has been caused by such government intervention, and the very real economic pain being caused as a result with the objective of dispelling the dangerous notion that higher government spending is a victimless crime.

Here is a quick quiz: name a global industry that is as old as antiquity, employs millions of people, withstood and indeed thrived with technological change but perhaps most importantly of all with diverse supply and demand dynamics is an industry that has never been cornered by any particular group for very long in history.

If you thought the reference above was about shipping, well done. In contrast if you thought it was about prostitution, well then, time for a cold shower.

The typical cycle of shipping is as old as history and has always been about two contrasting and virtually uncorrelated forces: firstly the interaction of operations with risk, and secondly the boom-bust cycle. Western readers will remember learning about the exploits of sea-faring Greeks and other Mediterranean peoples as merchants far and wide seeking to profit from trade with other countries. This continued into the times of Shakespeare (examples include the Merchant of Venice and settled into modern times as shipping became the moving force of global economies post World War II. The advent of standardized containers during the Korean War and thereafter proved a boon for global trade, and with it, improved the economic fortunes of all countries involved.

For these 70 years or so of modern shipping, at least five boom-bust cycles were visible as the effects of the cold war, the oil crisis, the emerging-market crisis in the ’80s, Scandinavia’s sovereign debt crisis in the ’90s, and the decline in the industry in the first few years of this millennium.

Every one of these cycles has been driven by a function of overconfidence leading to an excess ordering of ships, and when a debt crisis that disallowed loans to be refinanced or an economic downturn came, demand was cut too quickly for the industry. More than once, a debt crisis came along with an economic downturn but the global nature of the industry and continued technology evolution always helped to pull the industry up.

The same occurred with risk management issues, whether it was destruction of ships due to natural causes like typhoons or man-made disasters ranging from accidents, sabotage, piracy and war. The origins of modern risk management had much to with the first attempts to insure seafaring businesses; the industry itself absorbed the additional financing costs when required but kept moving on with new sources of capital and diversifying the demand pace.

In every downturn, the sheer breadth of ownership in shipping combined with diverse pools of capital available globally helped to resolve the industry’s issues. The same held true for shipbuilding, which moved from China, Egypt and Greece in ancient times to a range of countries across the Indian Ocean before moving to Northern Europe and the US. After the Second World War, the biggest ship yards were no longer in the US or the United Kingdom but went instead to Germany, Japan and then on to Korea before going straight back to China.

Through the years, the fortunes of shipbuilders mirrored those of the shipping industry, with years of plenty followed almost inevitably by years of abject poverty in orders and employment. For example, the industry kept itself busy by having a side business of repairing ships and thus kept its workers handy for the next big orders.

Technological changes were few and far between – but almost always executed globally rather rapidly. As an example, consider the industry’s response to the Exxon Valdez disaster, which was to introduce double-hulled ships that have since become the norm for tankers globally: not bad considering the tonnage involved over a trivial period of just over 20 years. In contrast, look at the nuclear power industry, which 20 years after Chernobyl still couldn’t get its risk management right as seen in Japan later.

Along came Keynes

Shipping thus is one industry where one could draw a line through history identifying elements of perfect competition, booms and bust, diverse pools of capital and, overall, significant benefits to the global economy. All of that changed in 2007.

Firstly, in the post-Lehman phase of Keynesian intervention, with the US Federal Reserve loosening the purse strings and the Chinese government announcing massive stimulus efforts, the rise in the prices of commodities helped to boost demand for ships. Instead of hunkering down for a long slowdown in the global economy, which is what the hard data would have demanded, the industry did the unthinkable and went on a buying binge.

A closer look at the numbers shows that a bulk of the orders was funded by the shipbuilding industry itself – and looking closer still, the hands of the Chinese and European governments become easily discernible. Specifically, funding was provided to buyers for various classes of ships – dry bulkers in the case of the Chinese and specialist tankers in the case of the Europeans – at rates that made the “upgrade” process simply too attractive for the would-be buyers. Rising prices of commodities which specifically meant scrap metal had higher value also encouraged ship owners to purchase new ships – whenever the new ships were delivered, they could sell their old ships for scrap and make a decent bargain.

The expected surge in the real economies from 2009 though never came. Instead, what the world saw was a gradual deleveraging of the private sector debts that had been piled up before 2007 even as the additional government spending – increased welfare in Europe for example – proved too unfocused to have any discernible impact on commodity volumes.

As the newly ordered ships from late 2008-2009 started getting delivered in late 2010 onwards (remember some of these ships had been partially completed and left unfinished after the bust out in early 2008 so weren’t really “new” builds), the industry particularly in dry bulk saw supply of ships exceeding demand pretty quickly.

Other parts of the shipping business – tankers and containers – were already seeing this. As new super-tankers (the so-called Ultra Large Crude Carriers, or ULCCs, for example) were delivered along with the “super” container ships each of which could carry over 12,000 20-foot equivalent units (the standard industry measure) – some three times the volumes carried by an average container ship before 2007 – the glut became deadly over the course of 2011. By the second half of 2012, the glut of supply had become a virtual flood as the daily rates started slipping below the basic operating costs of ships.

Think about that for a second – why would any shipowner rent out his ship for less than what it cost him to pay for operating expenses? Simply put, because some of those contracts involve ships that need to be continually employed to be relevant – for example capesize bulk carriers. In other cases, its because the shipping company has a budget to lose money, thanks to his friendly banks (more about that later). Usually though, its because shipping companies are trying to play the working capital game – keep enough money coming in to pay this month’s expenses, and let’s worry about next month’s expenses, well, next month.

Historically, when shipping went into oversupply due to technology changes, older ships were simply scrapped: think of what happened to sail ships when the first turbine powered ships came into being, and you get the picture.

This time around though, that wasn’t going to happen – the new ships were not a new technology, just an old technology that had been improved upon. Governments wary of hardships to consumers had also rolled back certain environmental directives (for example. a mandated reduction in fuel consumption) even as they increased incentives for businesses to invest more in capital formation and equipment.

With low scrap rates and no specific regulatory standards, the glut in supply that had become a flood caused many shipping companies to go belly up. This is where the next aspect of Keynesian intervention showed up – governments simply did not allow any of these companies to cease operations and effect panic sales of their assets. Instead, banks were asked to extend financing for these companies, roll over their debts and basically disallow people being put out of their jobs. So these companies survived – and well, so did their ships.

It might shock capitalists to see that such companies actually have a “burn allowance” from the banks – money to burn through for salaries and maintenance expenses whilst everyone sits around waiting for a global economic recovery to increase demand higher than what supply currently stands at. Banks are too scared of governments now to reject such entreaties, and simply go through the motions that would minimize their credit losses.

To be sure, there are specific factors at work too that have cost the industry dear. For example, increased production of oil and gas from shale sources in the US – a private sector enterprise if there ever was one – has reduced demand for crude carriers ferrying products to North America. That excess crude has been consumed onshore in the Middle East as domestic demand has risen thanks to the Arab Spring and the government munificence that followed: Saudi Arabia’s significant domestic investments and welfare payments for example have vastly increased domestic consumption of oil.

The point is that in days before government intervention, such adjustments would have been quick – a few crude carriers would have been retired and sold for scrap while other specialist ships, such as LNG (liquefied natural gas) carriers – would have been ordered to reflect changed industry dynamics. Now, only one leg of the trade – ordering of new LNG tankers – is taking place while the other side, namely scrapping useless capacity, has been put on hold.

The decline in demand for crude carriers though should have been offset by increased demand for dry bulkers (for commodities like iron ore) and containers (for manufactured goods). That hasn’t happened because in places as diverse as the US and Saudi Arabia government excesses are being mitigated by belt-tightening efforts (or deleveraging efforts) of individuals.

None of which is helping the shipping industry of course. To make matters worse – if that is indeed possible – the Chinese government has noticed the sharp increase in order cancellations from the end of 2012, as well as the increasing unemployment at its shipyards. To that end, the government has ordered various state controlled enterprises to expand their order book for ships.

I am told by an industry insider that there are some very comical orders going through – wholly unnecessary upgrades for perfectly normal ships as each state-owned enterprise head tries to outdo his competing party members for the boasting rights of biggest ship orders.

Not to be left far behind, we are told now that the Japanese government’s efforts on money printing and supporting asset prices will soon extend to capital investments; specifically, various Japanese trading companies have been asked to “consider” ordering new ships from local shipyards.

Companies in the business of shipping have to focus on these threats when they evaluate what to do with orders and prices for the next few years. Competing on a global scale on the basis of pure pricing and efficiency is one thing; competing with pseudo-state companies kept on life support on government orders is a whole different matter.

Meanwhile, as employment figures, retail sales and factory orders show, there is very little macroeconomic cheer out there to help boost the case for the demand side; heck, there is very little out there to boost the case for slightly higher scrap metal value that could help the shipping industry overall.

So there you have it – one of the world’s historically most dynamic industries is now turned into a playground for governments, thereby becoming a warehouse for zombies. No one would imagine the turnaround process for shipping is going to be easy, or quick; nor that those millions of jobs are anywhere near safe.

Next: The retirement industry