It is Labor Day in the United States of America. The country is taking the day off, in honor of the toiling masses. Since almost everyone toils in some way or another, and always has, a day off – celebrating labor – seems both oxymoronic and purely moronic. Why not to take a day off to celebrate breathing? But nothing is so absurd, so pointless, or so appalling that it can’t be made the law of the land.
Our own contribution to the Labor Day festivities began at 6:15 AM when we boarded the train to Paris.
“Well, I guess this is the end of the summer,” said Elizabeth, as she said goodbye. “But it has been a very nice summer for everyone. We can’t complain.”
The station is so small; we were alone on the platform. Your editor was the only passenger to board the train. A couple other drowsy travelers were already in the car when we took our seat. Neither raised his head or opened his eyes. Soon, you editor, too, was enjoying a little railroad sleep.
Sleeping on a train is different from sleeping in a bed. You are never fully unconscious. Instead, your mind replays the dramas and delights of the recent past...drifting between the facts and fantasy.
We began to think about the parties we’d attended over the summer...about the children and their whereabouts. We imagined we were painting the shutters (we finished them all – about 100 of them!) and we thought of the credit crunch.
We recalled our own words, (to a friend):
“Calling it a ‘credit crunch’ is probably misleading. It’s not something that just happens – and then it’s over. More likely, it is the beginning of a trend. Interest rates (real and/or nominal) tend to go up and down in long cycles that last about a generation – 25-30 years. When they go down, people borrow more freely and the value of the collateral – houses, businesses, whatever – goes up, making it possible for them to borrow even more. That’s the boom phase of an economy. But when rates go up, asset prices tend to go down. So, the lenders lose money, because their collateral is worth less than it was before...and because borrowers are either unable or unwilling to pay off loans. Naturally, the financiers stop lending so freely...and you get what people call a ‘credit crunch.’ It’s just the beginning of a bust.
“The actual ‘crunch’ part disappears from the headlines in a few months, but the trend towards lower rates continues...for a long time.
“Of course, it’s hard to see what it going on, because there are nominal rates...and there are real rates. And it really is like a battlefield; with so much going on in so many different places it is hard to know who’s winning. A period of rising real interest rates is inherently deflationary, meaning...at least as we use the term...that asset values deflate and people aren’t as rich as they used to be. And since asset values go down, businesses stop expanding, jobs are cut, and you typically have a recession or a slump. But you can have inflation – consumer price inflation – at the same. That’s what happened in the ’70s. Falling asset prices make the rich poorer. Rising consumer prices make poor poorer. Of course, they can get poorer simply by spending more money too. There are a lot of ways to ruin yourself.”
Americans ruined themselves in the boom years by spending more than they made. Now, one way or another, they have to correct the mistake. Spend less. Save more. Work longer.
Two headlines over the weekend illustrated our point:
“Laboring longer is growing trend for Americans,” said an AP article. The average retirement age is currently 63; it’s likely to go up.
“Saving up for a down payment is the new reality,” came a headline from a forgotten source. Lenders, concerned about falling collateral values, will no longer put up 100% of the money needed to buy a house. Anyone who wants to buy a house will need to put up some money of his own.
“But economic cycles are very confusing,” we went on. “That’s why so many economists are certifiably insane. It drives them crazy.
“But we try to look for the major trend...and try to understand what is really going on. There’s no point in trying to be precise about it. The best you can do is to understand, vaguely and imperfectly, the fundamental direction of the economy is. What we mean is that every day is a new day...with new and unanticipated price movement. But there are broad patters too. And the best you can do – or, perhaps it is the best that WE can do – is to try to see where we are in terms of those broad patterns of human behavior that seem to recur throughout history. And, looking at it that way, it appears to us as though we have just been through a once-in-a-generation credit expansion...which is now being followed by a once-in-a-generation credit contraction. And that means, generally, lower real asset prices and higher real rates of interest. It also means lower standards of living.”
After boring our dinner companion with this economic mumbo-jumbo, the conversation shifted.
*** “You know, everybody thinks we farmers are making a killing this year,” he began. “Prices are the highest we’ve ever seen. Grains are about 70% higher than a year ago. But we’re not getting rich. Because the prices we pay for fertilizers and other inputs are also through the roof. Besides, farming is always a boom and bust business. When prices are good, we use the extra money to replace our worn-out tractors and other equipment. When they are bad, we just hunker down. We never end up with a lot of free cash.”
One of the ideas, recently very popular, is that farm prices are destined to rise as more and more people compete for food. We have said so ourselves. But now, we’re not so sure. There is huge untapped capacity for food production.
“Land rush transforms rural Russia,” is a headline in today’s International Herald Tribune. The accompanying article describes how Russia’s collectivized farms are being taken over by agricultural
enterprises. Russia is an enormous place, but its collectivized farming system has been a disaster. More than 86 million acres of farmland has been allowed to go fallow. And even where the land is farmed, the yields are pathetic. Were its farms managed correctly, Russia could quadruple today’s output per acre...while putting millions of more acres into production.
From a purely economic point of view, the collapse of communism was one of the worst things to happen to American. As long as China and Russia were red, the U.S. had no significant economic competition. Their crackpot agricultural ideas lowered farm output so dramatically that Russia – which had been a major grain exporter under the Tsar – practically starved under the commies. And China, while it was under the spell of Marx and Lenin, exported nothing but trouble. Now, it is the world’s leading exporter of finished products.
We mentioned last week that Russia – after being broke and defenseless 20 years ago – is getting back on its feet. With money and energy to burn, it is asserting itself in Ossetia.
And soon, Russia – with 7% of the world’s arable land -- could not only be one of the world’s greatest energy exporters, it could also be one of the world’s leading exporters of food.
*** “Why do you use the “royal ‘we’” when you write?” asked a reader recently. “Isn’t it a little pretentious?”
The answer: yes. But it is a fairly innocent pretension. Actually, we don’t really know why we use ‘we.’ But we can make a guess. Ours is a lonely métier. We never met a politician we wanted to vote for – except for lost causes like our friend Ron Paul. We never saw a line of people that we wanted to join or a club we wanted to be part of. And, often, it seems as though we are the only one getting on the train – whether we are describing the end of the empire...the war on terror...or the decline of U.S. economy. Using the ‘I” just makes us feel lonely.
Enjoy your Labor Day,
Bill Bonner
The Daily Reckoning
Paris, France
Monday, September 1, 2008 – Labor Day
