The news, this week, has once again been bleak. Bank stocks collapsed again, led by Citi. Not very long ago, confidence in the Citi name led the bank to buy naming rights to the new Mets ballpark--Shea Stadium's replacement is Citi Field. Now, the name is mud, and most of the other big bank stocks are being dragged through it.
But to me, the more interesting, and potentially more dire news comes from the heretofore neglected realm of agriculture.
Conventional Wisdom at the moment seems to be that agriculture is going to do fine in this crisis. The price of oil (and hence, diesel for their various machinery) is down, while the price of crops is way, way up, right?
Wrong. The price of crops has crashed along with the rest of the commodities market. Right now, a bushel of winter wheat would go for about $5, but cost about $6 to grow.
This is a part of what economists talk about when they tell us that deflation is as bad, or worse, as inflation. It seems counterintuitive to think that lower prices could ever be a bad thing, and if all you ever are is a consumer, I suppose that's true.
But few of us are truly consumers, only. Many of us have jobs that produce, as well. Whether we're a "direct" producer, like a farmer putting seeds into the ground, reaping a harvest and selling it, or a more "indirect" producer, like me sitting in my office helping my company make better products, our livelihoods are ultimately tied to our ability to sell our product for more than it cost us to make it.
If the prices at which we can sell go down, something has to be done to cut the costs, as well. If you're a farmer, you don't have many options: you have to buy fuel for your machinery, you have to pay your taxes and possibly rent (many farmers lease rather than own the land they farm) or mortgage, and you almost certainly have to hire help. You could hire less help, or hire illegal help and pay them pennies, but you can't do away with the help entirely.
If you're a more industrial organization, you could try cutting costs by cutting wages and benefits, but most people react badly, even in an economic downturn when they're happy just to have work, to actually having their wages and benefits reduced rather than raised. In a unionized environment, it's often impossible, which is one reason (but not the only reason, by far) that Detroit is in the midst of catching fire and sinking into the swamp.
So instead, you cut hours, or cut jobs.
This, of course, feeds a deflationary spiral, especially when credit is also hard to come by. If people aren't buying, producers aren't selling. Ultimately, they cut the prices of what they've already made to just try to get it out of their inventory (especially if it's at all perishable, like food), but if they have to cut prices below what it cost them, they have to cut costs...
Another Norm Trashed
2 days ago