No bailouts for dairy farmers

 

Finance Minister Bill English must be getting good advice. Going against the wordlwide trend for such things, he has ruled out bailing out over-stretched dairy farmers.

English told TVNZ's Q+A yesterday that he doubted that would be a threat to the financial stability of the country, banks were stronger than at the time of the global financial crisis and the Government would not step in with any bailout for farmers.
    "A few billion in losses is not a threat to financial stability. The regime that's in place now means the banks are stronger than they've ever been with a greater ability to withstand those losses than they've ever had."
    He said there was a system for dealing with extreme hardship "because you are going to see, for a small number of dairy farming families, some real distress. But we're not going to be bailing them out."

Sadly, Labour leader Andrew Little can see only votes.

Little said some farmers were effectively now working for nothing and the Government could set up similar emergency provisions to those it uses in cases of drought or other 'adverse events.' …
    Little has also called on the Government to "stiff arm" the banks to ensure farmers are not forced off their land because they cannot keep up mortgage payments after the latest slump in milk prices.

Nothing like making your coercion explicit to truly reveal your underlying politicapl philosophy, eh, Andrew.

[Hat tip Eric Crampton]

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• “All that lending going into what Hayek explained as the “early stages” of production produced a short-term yet (this time) very flaccid boom. The bust is what happens when it is realised not all the world wants all that product, and at those prices as they are now few are in a position to stay afloat.
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• “From the debt problems of an underwater government --now over $100 billion in debt and counting -- to the debt problems of underwater dairy farmers who, like dairy farmers around the globe, had credit extended to bring new dairy into production, only to find that debt-driven overproduction has lowered dairy prices below what many need even just to repay their debt.
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Dairy’s debt delusion

From the debt problems of an underwater government --now over $100 billion in debt and counting -- to the debt problems of underwater dairy farmers who, like dairy farmers around the globe, had credit extended to bring new dairy into production, only to find that debt-driven overproduction has lowered dairy prices below what many need even just to repay their debt.

An anyone yet spell malinvestment?

Over the weekend a blog reader was asking why I haven’t written on the dairy debt crisis. I said I had: it was a few years ago before the malinvestment became obvious. You can read those again if you like, since only the details have changed (they’re below) or you should read Michael Reddell’s recent analysis here and here which (like this very post you’re reading) are tinged with the sadness of “I-told-you-so”:

The rate at which new dairy debt has been taken on (and made available by lenders) has slowed markedly since around 2009.  Dairy debt grew at an average annual rate of 17 per cent from 2003 to 2009, and by around 4 per cent per annum in the six years since then. … That [now means] that dairy farmers on average have $6 of debt for every $1 of GDP they generate –  and among the indebted farmers that ratio will be much much higher. …

• October 2009: Dairy bubble starts to pop – and guess who’s holding the pin?The Crafars are the tip of a multi-billion-dollar pyramid of debt – a pyramid propped up by the very assets that have been inflated by all that debt. … The Crafars’ collapse indicates the first major signal that defeat on all three fronts is now upon us … Are you surprised?  Mainstream economists might be, but this is precisely what Austrian economists expect to see as the “rapid growth” of a credit-created boom turns into debt-based bust. …
      If you want to get angry at someone, don’t get angry at the Crafars – get angry at those responsible for creating all the credit-backed profligacy: at the denizens of the Reserve Bank. It was them who inflated the bubble.  It’s reality that’s now holding the pin.
• July 2009: The Biggest Bill: And here ‘s another piece, on the debt problems of the dairy industry, who (in a story that’s now all too familiar) have partially substituted the “economically perverse” illusion of debt-fuelled capital gain (i.e., the illusory “wealth” of a bubble) for real productivity growth. Read Analyst warns of dairy debt tsunami
• June 2009: The credit/debt delusion: The faster you go, the bigger the mess: Many farmers have apparently been riding the bubble -- "farming for asset gains" the Agriculture Production Economics report calls it – leaving them exposed on three fronts … No debt bubble has ended well … Garrett talks about the “delusion of credit,” a mass delusion as widespread now as it was in the 1920s. And as destructive…
      Prosperity is so very far from being a product of credit that it is almost one-hundred and eighty degrees wrong to suppose that it is – in that the delusion that prosperity is a product of credit wipes out the pool of real savings that has been created by the increase and exchange of wealth, and on which further wealth creation actually depends.  Frank Shostak explained the destruction back in 2005 [as being robbed by means of loose monetary policy].
      “Robbed by means of loose monetary policy.”  That’s as true for creditors as is for debtors, and everyone in between.

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Dairy bubble starts to pop – and guess who’s holding the pin?

The housing bubble went pop a long time ago, and now the dairy bubble is starting to burst.  The Crafars are the tip of a $28 billion pyramid of debt – a pyramid propped up by the very assets that have been inflated by all that debt.  I blogged about this back in June [Read the post: The credit/debt delusion: The faster you go, the bigger the mess]:

    “New Zealand farmers are in debt to the tune of $45 billion, 61% of which is in the dairy sector, leaving dairy farmers ‘reliant on continuing asset gains as income was never going to meet debt-servicing commitments’.  In other words, we’re looking at an agricultural debt bubble that is only being held up by an agricultural asset bubble that the debt itself has helped to inflate.
    “Oh dangerous times.
    “Many farmers have apparently been riding the bubble -- ‘farming for asset gains’ the Agriculture Production Economics report calls it – leaving them exposed on three fronts . . .”

  Home Paddock says “the announcement that Crafar Farms has been put into receivership is not unexpected.”  She got that right. The Crafars’ collapse indicates the first major signal that defeat on all three fronts is now upon us:

    “Bernard Hickey [analyses] the problems with the operation . . .      However [says Home Paddock], it’s not the size of individual farms or operations that’s the problem, it’s the rapid growth of dairying which has led to a shortage of good staff.”

Are you surprised?  Mainstream economists might be, but this is precisely what Austrian economists expect to see as the “rapid growth” of a credit-created boom turns into debt-based bust.   You see, Austrian economists understand two relevant things here that mainstreamers don’t:

1. The first result of debt-based monetary expansion is that those borrowers who are ‘first in’ get first use of the new money before the inflationary results of that monetary expansion are noticed through the rest of the economy.  But the inflation of prices in the class of assets in which the new debt is invested is inevitable – even if it is confused for “growth” and “prosperity” instead of simply price inflation.
2. The reason for the inevitable bust is not simply that these asset prices are inflated beyond real values.  It’s that the resources don’t exist to allow all the projects that the money has been borrowed for to be completed.

The first point is the problem of ‘farming for asset gains’ which I’ve already talked about before.  It’s this second point that Home Paddock identifies, and which I want to talk about here: that when all that “rapid growth” is happening, the resources necessary for all that growth don’t actually exist in either the quantities or at the prices that all the borrowers’ plans require..

Resources are now too short to complete all the projects all the dairy farmers planned, because the newly-created money funding all the new projects wasn’t funded out of the pool of real savings, but out of debt-backed credit created out of thin air – it’s what Austrian economists like George Reisman call counterfeit capital.  And since it’s unbacked by real resources, the resources for these new projects have to be bid away from where they used to be.

Now being ‘first users’ of all the counterfeit capital dairy farmers were certainly able (for a while at least) to bid resources away from those who hadn’t borrowed so heavily, and (for a while at least) were able to delude themselves that all was well, but in the end the resources simply don’t exist to allow all the projects they were planning on to be completed.

Home Paddock highlights the shortage of good staff. As Gene Callahan explains here so concisely,  that’s precisely the sort of shortage every debt-financed bubble inevitably experiences. The economy simply “runs out of gas.”

This is an important point to grasp about the booms created by our fractional reserve banking system, in which debt-based money is simply created out of thin air under the aegis of the Reserve Bank: that the resources don’t exist to allow all the projects backed by that newly created credit to be completed. It’s this shortage that is the primary cause of the inevitable busts of every credit-created boom.

If the credit was funded out of the pool of real savings however, then this problem wouldn’t exist. The pool of real savings would have been built up as a result of savers who abstained from current consumption -- allowing entrepreneurs to put those physical resources into long-term productive — and, the entrepreneur hopes, profitable — pursuits in the meantime.  But this is not the case in the fractional reserve system – the new money hasn’t appeared because consumers forewent their consumption, so those resources on which the borrowers relied are needed elsewhere, and it’s precisely the long-term projects that are crying out for them that suffer. As Tom Woods explains (based on the insights of Ludwig Von Mises), the entrepreneurs have been deluded by the artificially lower interest rates of the counterfeit capital into starting more projects than the economy can finish:

    “Mises draws an analogy between an economy under the influence of artificially low interest rates and a homebuilder who believes he has more resources—more bricks, say—than he really does. He will build a house much different than he would have chosen if he had known his true supply of bricks. But he will not be able to complete this larger house, so the sooner he discovers his true brick supply the better, for then he can adjust his production plans before too many of his resources are squandered. If he only finds out in the final stages, he will have to destroy everything but the foundation, and will be poorer for his malinvestment.”

In the case of New Zealand’s dairy farmers, one of the “bricks” on which they obviously relied was good staff – and in the end there’s not enough of them to go round.   A shortage of good staff is the primary resource of which they’re short.

And the really sad thing is that this effects good operators as well as bad: since those who have borrowed heavily are able to bid staff and other resources away from those who haven’t, the inevitable price competition acts to raise costs for both kinds of operations. And as resources become more and more scarce – as the “bricks” of each operation become harder and harder to come by – ( as Gene Callahan explains) the bottom lines of both kinds of operators suffer.

Essentially you discover at the fag-end of the whole process of credit expansion that all the new credit that fuelled the boom hasn’t actually funded new production at all : it’s simply inflated the prices of assets, it’s raised costs all round, and it’s funded increased consumption all round – including the consumption of real capital.

As Frank Shostak points out, everybody eventually discovers they’ve been robbed. Every entrepreneur discovers the resources weren’t all there, and certainly not  at the prices he planned on; everybody holding dollars discovers that their purchasing power has been diluted by all this new unbacked money; and everyone holding assets discovers all the price gains they’ve been celebrating have only been an illusion.

In other words, everyone’s been “robbed by means of loose monetary policy.”

So if you want to get angry at someone, don’t get angry at the Crafars – get angry at those responsible for creating all the credit-backed profligacy: at the denizens of the Reserve Bank.

It was them who inflated the bubble.  It’s reality that’s now holding the pin.

Biggest bill ever

Last week I posted a piece on The Biggest Bill in the History of the World – that is, the $22 trillion bill American taxpayers and their children and grandchildren face for bailouts, stimulunacy and nationalisations.

It’s huge. It was huge even last year before the Barack Bailouts and Giant Stimulunacy added another $18 trillion to the bill, but even at the $4.6 trillion it was last November it’s bigger then any other government programme in history.

Not just bigger than any other government programme ever, but bigger than all America’s big-government programmes ever.

Bigger than the bill to purchase Louisiana from the French.

Bigger than the Apollo programme that was celebrated again last week – in fact, bigger than NASA’s entire, all-time budget.

Bigger than Roosevelt’s New Deal and the post-war Marshall Plan that rebuilt post-war Europe.

Bigger than the the cost of the Iraq War, the Korean War, and the Vietnam War put together.

In fact, the bill is bigger than all of them put together – and that’s just the bill to the end of last year.  See here (just click through for the full graphic):

And what’s been bought for all that you ask?  You tell me. But someone has to pay for it all – and it sure as hell isn’t going to be Goldman Sachs. 

And every dollar pissed away is a dollar businessmen can’t invest in productive activity – but it’s been hard work getting any sort of hard information from Henry Paulson, Helicopter Ben Bernanke or Little Timothy Geithner on which specific forms of unproductivity they’ve pissed it away on.

Look at the Stimulus, they say, celebrating the Golden Shower pissing out from the printing presses.  Never mind the quality, just enjoy the Stimulus!  If Roosevelt’s New Deal failed for insufficient stimulus, which is what the mainstream bozos say, then just sit back – they insist – and enjoy the ride this time!

How much stimulus is enough? Keynesian stimulus-monger and Nobel Prize winner Paul Krugman reckoned a while back that the "spending hole" in the U.S. economy is $2.9 trillion dollars. We’re already well past that with nothing to show for it except a huge bill and the failure to recover.

How could there be a genuine recovery when every dollar pissed away is a dollar businessmen can’t invest in productive activity? That’s even less real productive spending than the $2.9 trillion hole Krugman says needs to be filled up.  As Ludwig von Mises wrote,

a government can spend or invest only what it takes away from its citizens … its additional spending and investment curtails the citizens' spending and investment to the full extent of its quantity.

This leads to the question [says ‘Lilburne’ ] of whether government spending and investment does more good than private spending and investment.

    Sound economics answers this question with a resounding "no" . . . because ultimately, Keynesian fiscal stimulus is not even about the goods and services produced by the additional spending (infrastructure, welfare, etc). You see, the fiscal stimulus might as well be literally filling holes, since according to Keynes's ridiculous understanding of how an economy works, it doesn't matter what the government spends money on; even digging up holes just to refill them would qualify as beneficial stimulus. You might think that this must not be literally true. "Keynes may have been wrong on some things," you may protest, "but no economist as prominent as him would believe something so foolish!" Read the man's words for yourself:

If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.

    The above passage is not some off-hand note written to a colleague in a fit of academic speculation. It is part of Keynes's chief contribution to economics, upon which his reputation rests: The General Theory of Employment, Interest, and Money. I don't care how prominent, credentialed, or "accomplished" an economist is. If he says that burying cash in the ground can be a boon to society, then he should be immediately dismissed from public and academic discourse.
    That thinking hasn’t just not been dismissed – it’s the very “thinking” that made the government and its minions piss away $22 trillion on things you aren’t allowed to know about.

Happy about that, are you? Because our own government is still promising its own “decade of deficits."

UPDATE 1: More good stuff on our local problems from David Beatson of all people, who says, “in case you’ve missed the main message: the tradable sector of our economy – the real driver of sustainable growth in New Zealand – has been in recession for the past five years. No wonder we’re in trouble.”

   The sector that produces the goods and services we export to the rest of the world and that competes with imports for your purchasing power at home actually shrunk around 10% over the last five years. If we want it to grow, something else has to make way – like central and local government spending. . .
   The recession is going to change everything else in New Zealand. Why shouldn’t it change the shape and nature of our public sector too?

Trouble is, it’s not, is it.  Job losses in real businesses are going through the roof.  Job losses in the bureaucracy by comparison?  Bugger all.

UPDATE 2: And here ‘s another piece, on the debt problems of the dairy industry (who in a story that’s now all too familiar) have partially substituted the “economically perverse” illusion of debt-fuelled capital gain (i.e., the illusory “wealth” of a bubble) for real productivity growth. Read Analyst warns of dairy debt tsunami (and also, if you’re keen, a piece I wrote a few weeks back on the foolishness of “farming for asset gains”: ‘The credit/debt delusion: The faster you go, the bigger the mess.’)

The credit/debt delusion: The faster you go, the bigger the mess

New Zealand farmers are in debt to the tune of $45 billion, 61% of which is in the dairy sector, leaving dairy farmers “reliant on continuing asset gains as income was never going to meet debt-servicing commitments” says Fran O’Sullivan in the Business Herald.  In other words, we’re looking at an agricultural debt bubble that is only being held up by an agricultural asset bubble the debt itself has helped to inflate.

Oh dangerous times.

Many farmers have apparently been riding the bubble -- "farming for asset gains" the Agriculture Production Economics report calls it – leaving them exposed on three fronts:

1. Debt is a problem throughout NZ agriculture, but at the farm level it is still highly concentrated.
2. Where that farm debt is highly concentrated - eg, at least 20 per cent of New Zealand's dairy farm production - it is such that farms cannot, and will not ever, meet their debt servicing commitments even under the most promising payout and interest rate scenarios. This is New Zealand's equivalent to US sub-prime lending: reliant on continuing asset gains as income was never going to meet debt-servicing commitments.
3. The issue is building as its destructiveness compounds along with the debt. The real questions are as to the detonator, the timing and how well the consequences are handled.

No debt bubble has ended well, and as O’Sullivan points out this one is unlikely to be an exception.  Writing in 1931, two years after the great stock market crash, author Garet Garrett gives some lessons for 2009 and beyond in his book A Bubble that Broke the World – a debt bubble built (at first) on the back of unpaid yet ever-expanding war debts, and subsequently on the back of the Federal Reserve’s printing press. (What George Reisman calls counterfeit capital.) Said Garrett, back then:

    Organized credit is relatively strange in economic life. New and experimental forms of it are continually being invented and we love to deceive ourselves with them. We forget that credit in any form represents debt in some other form. We know about ourselves, that we have seizures of ecstasy and mass delusion. We know that a time may come when the temptation to throw the monetary machine into wild motion, so that everybody may become infinitely rich by means of infinite debt, will rise to the pitch of mania as it did, for example, in 1928 and 1929.
    For a while the difficulty of not knowing what anything is worth inflames the ecstasy. Everything will be priced higher and higher to make sure that it is high enough; there will be the illusion that things are becoming dear and scarce. They seem to be dear because the value of money in which they are priced is falling; they seem to be scarce because people are buying in the expectation that prices will go higher still. Suddenly doubt appears, then comes awakening, and - panic. The faith is lost... This is the financial crisis...

Garrett talks about the “delusion of credit,” a mass delusion as widespread now as it was in the 1920s. And as destructive.

    The general shape of this universal delusion may be indicated by three of its familiar features.
    First, the idea that the panacea for debt is credit. . .

Borrow and spend; borrow more and spend more . . . borrow more to make your payments on the earlier borrowing . . . that’s not a “recipe for success” but a formula for destruction reliant on an ever-expanding credit line.  In other words, a pyramid based on The Reserve Bank’s printing press.

Second, a social and political doctrine, now widely accepted, beginning with the premise that people are entitled to certain betterments of life. If they cannot immediately afford them, that is, if out of their own resources these betterments cannot be provided, nevertheless people are entitled to them, and credit must provide them. . .

An oh so familiar plaint.

Third, the argument that prosperity is a product of credit, whereas from the beginning of economic thought it had been supposed that prosperity was from the increase and exchange of wealth, and credit was its product.

Prosperity is so very far from being a product of credit that it is almost one-hundred and eighty degrees wrong to suppose that it is – in that the delusion that prosperity is a product of credit wipes out the pool of real savings that has been created by the increase and exchange of wealth, and on which further wealth creation actually depends.  Frank Shostak explained the destruction back in 2005:

    Let us now examine the effect of monetary expansion [in the form of Reserve Bank-created credit] on the pool of real savings. The expanded money supply was never earned, i.e., goods and services do not back it up, so to speak—it was created out of  “thin air.” When such money is exchanged for goods it in fact amounts to consumption that is not supported by production. (As a rule it leads to nonproductive consumption).
    Consequently, a holder of honest money, i.e. an individual who has produced real wealth that wants to exercise his claim over goods, discovers that he cannot get back all the goods he previously produced and exchanged for money. In short, he discovers that the purchasing power of his money has fallen—he has in fact been robbed by means of loose monetary policy.

“Robbed by means of loose monetary policy.”  That’s as true for creditors as is for debtors, and everyone in between.

NB: You can buy Garrett’s book at the Mises Store, or download the PDF here.

LIBERTARIAN SUS: National’s Four Corners

Susan Ryder goes looking for National round every corner . . .

“Disappointing and unhelpful” was Prime Minister John Key’s reaction to the news that the United States intends to subsidise its dairy industry.

But surely the real surprise is why anyone should be shocked at the USA’s change of direction. President Obama is a socialist, so government interference is what he does best. And in subsidising an arm of the agricultural sector, he is doing exactly what his hero, FDR, did in similar economic circumstances 75 years ago.

If nothing else, Barack Obama is sticking to the red corner. John Key, on the other hand, continues to bounce between all four – red, green, brown and blue, (alright then, bluish) – depending upon the subject. Here’s what he said to Newstalk ZB’s Mike Hosking yesterday on (a) this week’s Budget and (b) special Maori seats for the new Auckland council:

MH: The Budget this week: Are you worried about a downgrade from the (credit-rating) agencies or not?

JK: I’m not, because of the actions that Bill English and the Cabinet have taken. Our two focuses [sic] have been:

1. Firstly, we can’t afford to be downgraded. If we do, it adds 1-2% to interest rates to every borrower, homeowner and business. That’s bad news; it would cost Mum and Dad a lot of money and we’re not going to do that. And secondly, it would saddle the next generation of New Zealanders with a lot of debt and that’s unfair as well.
2. We’re worried about jobs and making sure we come out of this recession. I think we’ve got the balance nicely ... we’re not breaking any entitlements, you know. Zero per cent loans, they stay; Working for Families, that stays; benefit entitlements, they all stay. But obviously we’ve had to tweak one or two things which, in a perfect world, we wouldn’t do.

Let’s pause to take stock of that. His government is happy to retain all that welfare at the expense of “tweaking one or two things”, i.e., by not delivering promised tax cuts to the very people who fund all that Labour-imposed welfare.

Ding, ding: Round 1 to the red corner! Back to the bout …

MH: The big hikoi today: Do they (Maori) stand a chance of getting any seats at all, or not?

JK: Well, I wouldn’t say no. I mean, I think the hikoi … there’ll be a lot of people who turn out for a variety of reasons. Some will protest because of that. Some will protest because they want a different structure on that second tier of a Super City or more people to be elected from wards and not at large, and some people will just protest for the sake of protest.

MH: But Maori seats: Are you into them or not?

JK: Well, um, I’ve had presentations on the manawhenua seats, you know, and the government is considering those but it’s far too early to tell if we’d change anything at this point. As I say, I think this hikoi is a bit ahead of itself. We haven’t had the select committee process yet, where people can actually present their arguments and those arguments can be tested. So it really would have made more sense for it to be later. I can understand why they’re having it today because of the significance of Bastion Point, but I do think they’re ahead of themselves.

MH: What are their odds, do you think, in percentage terms?

JK: (Quickly) - I’m not going to put odds on it.

Well, no. Because it’s a thorny issue with many people. Because it might involve having to make a decision and sticking with it. No U-turns, no flip-flopping, no back-tracking, but actually taking a principled stand for equality.

But isn’t this an example of what happens when parties with little in common join forces to form a coalition? It would appear that National has learned little from watching Helen Clark’s nine years of manoeuvring around the minefields of juggling New Zealand First, the Alliance, the Greens and Jim Anderton. The Maori party is unashamedly single-minded in its pursuit of preferential treatment for New Zealanders of Maori descent. To give the party credit, it makes no bones about it. John Key’s brown chooks are simply coming home, via the Auckland Harbour Bridge, to roost.

“It’s not about race; it’s about rights!” cried one of today’s protestors. Dead wrong, pal. It is about race. It’s only about race.

You are marching for special race-based treatment, even though all seats are open to anybody to contest. You are marching for division, for separatism, for bloodlines. And in that last respect, you are no different to the masked monsters of the Klan - but then racism always does make for strange bedfellows. Conversely, the true opponent of racism is not concerned with another’s DNA.

Of course, John Key could say that, too. He could say that what matters is what a candidate says and does, as opposed to whom his parents are. That he doesn’t even seem to understand that point has Round 2 going to the brown corner. Unanimously.

* * Susan Ryder writes every Tuesday here at NOT PC * *