Back to the Future: Stagflation

The economy growing had been growing at 5%+ prior to the continuing rise in commodity prices; the country is engaged in a wildly unpopular war, which helps to worsen the growing budget deficit and ever-expanding foreign borrowing; the Middle East is in turmoil; the American dollar is in a free-fall with no bottom in sight due to a lax monetary policy; commodity prices are surging - oil having quintupled in the past half-decade alone. That's right, it's the early 1970s all over again!

The similarities between the current state of the economy and that of three-decades ago are eerie indeed; Dick Cheney is even in the white house - just as he was then under President Ford as his chief of staff and, as then, is often blamed for America's pursuit of so-called stability in the Middle East to help assure the flow of oil. Of course, with no oil actually emerging from Iraq, that's a whole other story. Thirty years ago we were in a very similar situation - it was called stagflation: slowing growth, rising unemployment and inflation. We recovered then at significant cost, which led to slow growth, high interest rates and high inflation for the better part of the following fifteen years. The question now is how will we get out of the current state of economic woes?

Fortunately, there is a growing consensus about what the solution is to get the global economy out of its current doldrums: technological advancement. Although it is an admittedly simplistic analogy, imagine if the cost of the war in Iraq had instead been invested in sustainable technologies - whether in food, energy, water or even climate change. 

Assuring the flow of energy to America need not be as expensive as it has been. The cost of the war in Iraq is estimated at nearly one-half trillion dollars; yes, trillion! The cost of a nuclear power plant is less than $10 billion per reactor - not even counting the fact that the investment wouldn't be flowing across the border and would instead create jobs both during the construction and the following operation and maintenance. Of course this is just one example, but you get the idea.

The sheer numbers involved open the doors to tremendous opportunities for technological advancement. America is currently spending on its war in Iraq the sorts of dollar sums that could quite literally solve problems and answer questions that have caused impediments to scientific progress or, at least, slowed its progress. Science and technology can improve yields per acre - resolving any concern over food shortages. Science and technology can clean not only the drinking water, but also clean-up our lakes and rivers and prevent future pollution. Imagine how much better the world would be, let alone America. Imagine further how admired America would be as a leader in technological advancement.

Sky-High Commodity Futures Prices Not Good for Farmer?

It's counter-intuitive, I know. But the sky-rocketing prices of commodity prices have made things difficult for farmers. Logically, you would think that higher prices for their produce would make farmers ecstatic, and they are. Getting more for their output is always a good thing. The problem arises from what has been happening in the financial markets and understanding how farmers use those markets to protect their income.

Farmers are investors! It's true; although farmers have an unwarranted stereotype of being uneducated 'rednecks', reality is far from that.

First you have to understand that farmers plant their crops months before they'll be able to harvest and even longer before they'll be able to sell. This leaves farmers with a lot of uncertainty as to what they'll actually get for their harvest when they're sowing those seeds. To help hedge against that risk, farmers participate in the futures market - selling contracts on exchanges like the Chicago Board of Trade (CBOT). They do so in order to ensure that they'll be able to sell their crops at the price guaranteed by their contract - regardless of what the market condition is at the time of harvest. The problem is volatility.

So many new investors have entered the hot commodities markets that volatility in these markets has almost doubled over the past year. That doubling means a lot more uncertainly for those selling the contracts - farmers. What used to be a great way to hedge against uncertainty now has more uncertainty that the market for the crops itself. The market for crops such as grain and corn have been rising steadily for most of the past decade. This is the saving grace for farmers; while they may not be able to use the future contracts to protect future revenues, those revenues are more likely than not, to rise.

...Of course, then there's the whole problem that farmers face with the rising cost of fuel, but that's a story for another time.