Real headaches...

Many of US ag complaints about exchange rates are, in fact, solving themselves via the old economics school theories of foreign trade. Our comparatively (and absolutely) low interest rates and trade imbalance has put pressure on the Chinese currency especially and I think with implicit cooperation of Chinese central bankers, the yuan has drifted significantly higher.

But while we are watching that, another story unfolds south of us.

What's happening in Brazil? A big story is the country's high interest rates. These have landed the country in an extremelydifficult position. Inflation is high and rising, and so the central bank has responded by raising rates. But higher rates attract inflows of capital, which both bid up the value of the currency and support inflation. Because Brazilian rates are high, companies often opt to borrow abroad and repatriate the cash, essentially engaging in carry trade investments like big international investors and pushing up the value of the real.Meanwhile, Brazil's leaders find themselves facing an uncomfortable choice vis-a-vis cheap Chinese manufacturing imports. Cheap Chinese imports offer one source of disinflationary pressure in an overheating economy. But domestic producers are growing increasingly frustrated, and the government is concerned that appreciation is reducing competitiveness and undermining balanced growth. On the other side of the relationship, hunger for Chinese products continues to boost resource and labour demand in China, fueling inflation in the absence of a real Chinese appreciation. [More]

This complicates things for Brazilian farmers who have become quite the currency arbitrageurs. This from last year:

Soybean farmers in Brazil, the world’s second-largest grower, are withholding supplies of the oilseed as they bet the real’s drop will boost revenue from dollar-denominated sales abroad, the head of the nation’s biggest producer said.“It looks like the real will devalue a little bit more, so we are holding sales and waiting for the right moment to sell,” said Erai Scheffer, president of Grupo Bom Futuro, Brazil’s top soybean grower. The group has 230,000 hectares (568,000 acres) of soybeans, an area more than twice as big as San Antonio.The Brazilian real has lost 5.5 percent against the dollar this month, the worst performance of the seven most-traded Latin American currencies. Farmers don’t expect the real to rebound any time soon amid concern that the debt crisis in Europe may slow the global economic recovery, Scheffer said. [More]

Corn Belt growers are wallowing in an embarrassment of riches: record grain prices, record land prices, pitiful interest rates, and now, a currency tailwind.

If only we could get into the fields to plant a crop....

It's not QE2...

It's China.  As we see today, the Fed announcement of a second (and bigger) quantitative easing is perking up commodity markets.  Economist had expected it, except that may not be what is really happening.

So which kind of rise are we observing? James Hamilton credits QE2 with lifting commodity prices and posts charts tracking price rises across a range of commodities:
But what's interesting about his charts is that the steady upward trend common to all of them starts around the beginning of July—not the beginning of September, as we'd expect if QE2 were the causal factor. What happened around the first of July? Well, China's government, which had grown concerned about the too-rapid slowdown in its economy, paused or reversed some of the steps it had taken to dampen activity. This included restrictions on bank lending and a temporary halt to appreciation of the yuan. And what followed, we now know, was a remarkable resumption in Chinese industrial activity. To me, the steady climb in commodity prices over the past four months seems indicative of the surprisingly strong performance of emerging economies.
That doesn't mean that Fed activity has had or will have no effect. I'd be surprised if commodity prices didn't go on rising. But much of that rise will be an unavoidable knock-on effect from the collision of soaring global demand for commodities with lagging global supply. [More]

If you have entertained any doubts about the leading global economy right now, this might shift your gaze from Washington much further east. Despite our overwhelming lead in actual GDP size, it is the growth rate differential that will make China the mover and shaker.

Add in what will surely be a push for austerity measures which could well stop our feeble recovery in its tracks, and we'll be checking the overnights more assiduously than the noon prices.

Actually, it makes sense to me...

With the passage of the "finreg" bill, credit card companies are looking at the business model and going, "Dang!".  To the surprise of many, they are considering actually charging folks who receive the benefits of cards - not just those who they can exploit.

Though industry experts say the case is extreme, it illustrates the challenges credit card companies face. Issuers typically generate revenue from two sources, interest rates and fees. Congress has clamped down on both of those channels this year, including banning interest rate hikes on outstanding balances and curtailing penalty fees for late payments and over-limit purchases. The new rules are estimated to cost the industry at least $12 billion annually, according to law firm Morrison & Foerster, and issuers have long warned that customers in good standing could wind up paying the bill.

"A lot of people thought they were blowing smoke, but they were spot on," said John Ulzheimer, head of consumer education for Credit.com. "Now something has to give."

Many issuers have homed in on fees that typically accompany rewards cards as a potential moneymaker. The Pew study, which was to be released today, found that about 14 percent of bank credit cards have annual fees, about the same as last year. But the median annual fee for the 12 largest banks' cards rose 18 percent, to $59, over the past year. The cost of cash advances and balance transfers also rose from 3 percent to 4 percent.

Some consumers say they feel penalized for what they thought was good behavior. D.C. resident Alanna Sobel said she pays her balance in full each month and was surprised to get a letter from Chase, the nation's largest card issuer, notifying her that the annual fee on her Freedom card would be $30. The letter stated that the fee had been waived the previous year and would allow her to receive 3 percent cash back on gas and grocery purchases. If she did not pay the fee, she would have to settle for fewer perks. [More]

Many of us thought we were doing Citibank (in my case) a favor by allowing them to extend me ~30 day loans when I swiped my card at Sam's.  But that economic dog don't hunt.  I have been a freeloader on the system except for those aggravating days when I failed to pay the balance due to umm....lethargy.

But as protection for less liquid users roll into place, those of us who like not having to carry cash probably should pick up some load.

While many still are convinced "cash" has intrinsic value (It's a piece of paper, folks!), mostly they enjoy the sense of moral superiority left over from the Great Depression that still attaches to currency. Not withstanding, the hassle of cash is increasingly obvious.

The realistic prospect of an entire country abandoning cash illustrates the direction in which world commerce is headed. A whole host of forces (from government policy to consumer trends) is conspiring to make cash less and less relevant to daily economic life.

In fact, new transaction methods are popping up every day. Cell phone-based payments, for instance, have become widespread overseas in recent years and are now a standard means of paying for just about anything in Japan. The Times Online notes that of Japan’s six competing cashless payment systems, “many” are built into wireless phones. In total, Japanese consumers are estimated to carry some 120 million cashless payment chips.

In the United States, companies like PayPal are making it easy to make purchases and swap money using only a mobile phone. Rather than trying to replace credit and debit cards, American companies like Square and GoPayment are equipping phones to work with them. As the New York Times explains, the credit and debit card issuers “stay in the middle, extracting a fee with each swipe or bump” of the mobile phone. It may take a while for consumers to abandon cash completely, but in many ways, even here in the U.S., we already are a cashless society. [More]

While I can appreciate the fear many have that some government official or bad guy could wipe out their wealth by hacking a file, we passed that point long ago.

Cash is a dead king...

Actual currency, that is.  You know, the greenish paper stuff wadded into your pockets.  Because if you have a smartphone you can take credit cards easily now.

Square, which launched Tuesday with iPhone and Android support, is a small, plastic cube about the size of two Chiclets. From its bottom side an audio connector plugs into the headphone port on your phone. A slot in the cube lets you pass a credit card through. When you do, a reader converts the data from the magnetic strip into an audio signal and passes it on to software on the phone.

Wired got its hands on a test unit earlier this year and put it through the paces. Based on our early look, Square appears to be a great option to let anyone with something to sell accept credit cards as payment. [More]

So if you run into a buddy who owes you $50 from last week's road trip, and he claims to be a little short - whip out your phone and let VISA handle the debt.

New, improved money...

For those who still use cash.



 Megan McArdle left me leaning with this take on the new bill.

On the other hand, we don't use that much currency, so I'm not sure what all the fuss is about.  In theory, currency counterfeiting causes mild inflation.  In practice, the amount of currency that gets used in the United States is too small for counterfeiting to have any realistic impact on prices; these days, money is created not with the printing press, but in the electronic accounts of banks and the Federal Reserve.

But fraud! you will say.  Well, sort of.  If the stuff isn't distinguishable from real money, then who's defrauded?  The people who get the money will be perfectly able to exchange it for real goods and services. [More]

But what I do know is I rarely use cash and now routinely put my change in the collection box or penny tray.  I'm just too likely to lose it or forget where I sent it.

True story:  I dropped my "emergency" hundred from my cash wadded in my pocket whilst paying for some urgently needed vanilla ice cream at our local grocery. A really nice woman found it, called Jan and mailed it to us. Jan sent her some flowers, and it restored some measure of faith in folks for me.

Filthy lucre...

Really.

Also found on bills: fecal matter. A 2002 report in the Southern Medical Journal showed found pathogens — including staphylococcus — on 94% of dollar bills tested. Paper money can reportedly carry more germs than a household toilet. And bills are a hospitable environment for gross microbes: viruses and bacteria can live on most surfaces for about 48 hours, but paper money can reportedly transport a live flu virus for up to 17 days. It's enough to make you switch to credit. [More]

Also: the $ (dollar sign) is not found on the currency.

What if the dollar gets so weak...

McDonald's closes shop?

Hey - it happened in Iceland.

We sort of assumed that McDonald's could be profitable almost anywhere — perhaps even the surface of the moon — but apparently Iceland's economic problems are too much for the world's largest fast food chain to handle.

Bloomberg is reporting that all of Iceland's McDonald's will close at the end of the month due to the collapse of the country's currency. In order to remain open, the restaurants would have had to start charging the equivalent of $6.36 for a Big Mac. According to the Economist's Big Mac Index, the world's most expensive Big Macs are currently located in Switzerland and Norway — where they cost about $5.75. [More]

The puny dollar strikes most farmers as a great thing, since our world trade is essential to profits. I agree, but with some caveats.

• No whining about oil prices as the buck plumments.
• There will be some inflation costs on the consumer level, but harder to see on the farm input scene other than...
• Fertilizer could become very painful again.  In fact, I'd be putting more on right now it I had the umm, cash and it could actually be applied.
  

Could this ultimately lead to the end of the greenback (are they still truly green?) as the reserve currency?  This is likely already in progress, and I'm not sure there is much we can do about it unless the recession takes a double dip and every other currency look even uglier.

IN SHORT, the dollar-reserve system is already fraying. The question is, what will happen next? Economists are not good at predicting timing—when will all of this happen? And things don’t always move smoothly. During the crisis, the dollar actually strengthened. With the U.S. government providing guarantees on money markets and other deposits—and a U.S. government guarantee having more credibility than that of many developing countries—money sought a safe haven. America, from where the crisis originated, seemed safer than those countries that were the innocent victims.
And the dollar may continue to be strong for some time because what is happening elsewhere could be worse: worries about inflation are also arising in other countries. There may be even less confidence in, say, Europe’s ability to manage its affairs, and if so, the dollar may strengthen further, not because of confidence in the United States, but because of a lack of confidence in other markets. No wonder that, with all these uncertainties, almost the only thing we can be certain of is that markets will be marked with volatility.
As we move (hopefully) toward a global reserve currency, there will be inevitable bumps in the transition along the way. There are, of course, alternatives to the SDRS approach. We may create a multiple-exchange-rate system, in which countries diversify their reserve holdings between the dollar, euro and yen. Over the long run, this system could be highly unstable, as in one period the euro will appear stronger, and funds will shift there, weakening the dollar and strengthening the euro. In another, just the opposite may happen.
Or we may begin to form regional reserve systems. They also manage and dole out reserves for a group of countries but on a smaller scale (along the lines of the Chiang Mai Initiative in Asia, which has been greatly expanded during the crisis). Latin America is discussing doing something similar. One of the ways of creating the global reserve system is through developing and then interlinking these regional efforts.

Whichever path we take, like it or not, we will be moving away from current arrangements, the dollar-reserve system. There are only two questions: will the movement away be orderly or disorderly, and will America play a part in shaping the new system that will emerge? I believe that the transition to the new system will be smoother and that both the United States and the world will benefit if we stop putting our heads in the sand and help create the worldwide reserve system that the globalization of financial markets requires. Keynes recognized the need for such a global reserve currency seventy-five years ago. At the Bretton Woods meeting of 1944, in a costly act of self-interest, the United States blocked the full implementation of Keynes’s scheme. This is an old idea whose time has finally come. [More]

Compared to the 2009 harvest - a work still in progress - the strength of the dollar will remain further down my worry list.



[via free exchange]

Two things...

I've never understood.

1. Renminbi
2. Yuan

So: renminbi is the name of China’s currency; but yuan is the denomination of bills, the unit in which prices are measured, etc.. The closest parallel I can think of is Britain’s currency, which is sterling, but whose unit is the pound.
In the case of Britain, however, everyone is easy on talking about the pound’s value, the pound’s exchange rate, and so on; if you talk about sterling’s value, most non-Britons will have no idea what you’re talking about. But for whatever reason, using yuan in the same way draws disapproval.
But here’s the thing: talking about the number of renminbi per dollar is also, as I understand it, wrong — as wrong as talking about the number of sterling per dollar. Renminbi is the currency, but not a unit of the currency. [More]

And...I still don't.

And how do you pronounce it, fer cryin' out loud?

You talkin' to me?...

'Fraid so.  One of the likely implications of the new credit card law is freeloaders like me are coming to the end of a wonderful joyride.

Credit cards have long been a very good deal for people who pay their bills on time and in full. Even as card companies imposed punitive fees and penalties on those late with their payments, the best customers racked up cash-back rewards, frequent-flier miles and other perks in recent years.

Now Congress is moving to limit the penalties on riskier borrowers, who have become a prime source of billions of dollars in fee revenue for the industry. And to make up for lost income, the card companies are going after those people with sterling credit.

Banks are expected to look at reviving annual fees, curtailing cash-back and other rewards programs and charging interest immediately on a purchase instead of allowing a grace period of weeks, according to bank officials and trade groups. [More] [My emphasis]

This is harshing my buzz, dudes.  I looked up the new rules, and no mention is made of a mandatory grace period.

Like other irresponsible citizens, the only time I ever paid any interest was when I was a day late paying the statement.  Since I signed up for inter venous withdrawal from my checking account, even that meager of source of income from me eluded those poor schmucks at Citicorp.

Meanwhile, they were handing me free frequent flier miles.  In fairness, I do pay $75 per year for this card, but it's still a big bargain in my book.


I'm a deadweight bad person.

But here's the deal.  I've gotten hooked on using credit cards instead of checks/cash.  Plus it helps me keep track of exactly how I squandered my dough. It always reminds of the sci-fi future when nobody uses money, only "creds" or something.

But if every swipe starts the interest counter going, how will our economy survive?  We can't go back to cash - all the bills are in Russia and Mexico.  And nobody can make change anymore.

I'm not the only one calling their bluff.

They say limits on fees and interest charges will mean the end of bonus rewards programs and low interest rates, as well as the return of annual fees for customers in good standing.
Scherer said he fears card companies could start charging interest from the day of a purchase, rather than after the traditional 30-day grace period.
“If they start charging interest from the day of purchase, I’ll just pay cash for everything,” he said. “It’s no big deal to me at all.”
In fact, experts said, that would be the response from many consumers, making the elimination of all incentives and the grace period doubtful.
“Companies would lose a lot of business,” said Scott Laughlin, client service manager at Consumer Credit Counseling of Buffalo. “These good customers are the ones with the bargaining power. Nothing is keeping them with a credit card company that has nothing to offer them.”
Cristian Tiu, assistant professor of finance and managerial economics at the University at Buffalo School of Management, agreed that clamping down completely would be difficult. While interest rates might increase at first and bonuses such as frequent flier miles could disappear, they probably would kick back in eventually, he said.
“Somebody has to drop first because of competition. Somebody will want to snatch that customer and will offer incentives to do it,” Tiu said. “I wouldn’t be too worried that those benefits would go away forever.”
In addition, credit card companies collect merchant fees on each purchase. That revenue would disappear if consumers switch back to cash, giving credit companies another reason not to penalize good customers. [More]

Besides, I've almost got enough miles to get to Australia.

They don't actually "print" it...

Because few Americans understand how our money supply is created the phrase "print money" has gone from economic shorthand to a physical description of the creation of liquidity.

So to set the record straight:

9  All the U.S. coins and bills in general circulation today have a total worth of about $829 billion.
10  Two-thirds of that cash is held overseas.
[More things you don't know about money]

[via FX]

The money problem...

My bias against cash is well-documented.  Not only am I unapologetic, I think we are discovering some aspects about money that should give us pause before swallowing whole-hog the relentless and often groundless (pun intended) advice of wealth specialists whose attachment to money borders on the...ummm, theatrical.



Let me state my perspective up front.  Money may not be the root of all evil, but it is the root of much faulty thinking and it is only one choice modern citizens have for wealth storage. More importantly, it is often a very poor choice compared to alternatives.  Money strongly linked to fear, as we are seeing in the debt markets right now.  You don't loan wealth to a government you accuse of being socialist for microscopic returns because you are brimming with self-assurance and a feeling of safety.

But money has other intrinsic properties that screw up our brains.

Vohs suggests there is a simple dynamic at work here. "Money makes people feel self-sufficient," she says. "They are more likely to put forth effort to attain personal goals, and they also prefer to be separate from others." The touchy-feely social side of us may disapprove of such behaviour but it is useful for survival. This ability to assess which set of norms applies in a particular situation is important in guiding our behaviour, Ariely says. It allows you to avoid expecting too much trust in the midst of a competitive business negotiation, for example, or making the mistake of offering to pay your mother-in-law after she has cooked you a nice meal. "When we keep social norms and market norms on separate paths, life hums along pretty well," says Ariely. "But when they collide, trouble sets in."
The trick is to get the correct balance between these two mindsets. Numerous psychological studies have found a general trade-off between the pursuit of so-called extrinsic aspirations - such as wealth, but also fame and image - and intrinsic aspirations, such as building and maintaining strong personal relationships. People who report a focus on the former score low on indicators of mental health, and those strongly motivated by money are also more likely to find their marriage ending in divorce.
This is not to say that we shouldn't focus at all on extrinsic aspirations. Everyone needs money for those parts of their lives governed by market norms, and it's well known that financial strain can bring depression, perceived loss of control and reduced life expectancy (see "Buy into happiness").
Now that the days of easy credit and rampant consumerism appear to be over, for the time being at least, it would be nice to think that we might acquire a more balanced relationship with money. Unfortunately, it's unlikely to be that simple. One reason why is exposed by Vohs's latest findings, which reveal another peculiar aspect of our mental relationship with money.
In a study to be published soon in the journal Psychological Science, Vohs and psychologists Xinyue Zhou of Sun Yat-Sen University in Guangzhou, China, and Roy Baumeister of Florida State University, Tallahassee, found that people who felt rejected by others, or were subjected to physical pain, were subsequently less likely to give a monetary gift in a game situation. The researchers then went on to show that just handling paper money could reduce the distress associated with social exclusion, and also diminish the physical pain caused by touching very hot water.

"Money seems to have symbolic power as a social resource," says Vohs. "It enables people to manipulate the social system to give them what they want, regardless of whether they are liked." Put bluntly, it looks as if money is acting as a surrogate friend. Could that explain why some people focus on extrinsic aspirations at the expense of real social relationships? [More]

The perennial advice for farmers that "cash is king" is another example.  One durable and entertaining oracle of money as the The Right Answer is the indefatigable David Kohl.

I've been listening to Dr. Kohl for 15 years or so now, and even though he updates a few graphs and adds new anecdotes of farmers behaving badly, his message throughout has been essentially unaltered - which is strange when you consider the wide range of economic conditions we have seen in agriculture over that time.  My impression of it boils down to this: Get money. Keep it.

“I see more [economic] danger in crop farms than in livestock. Why? Livestock producers have had to count their dollars. In crop, the two and 10 rule applies: two out of 10 years they make tons of money and in the other eight years, they get by.

“American [farmers should] be careful. A lot of farmers have a lot of money and haven't earned a dollar.

“Eighty-seven percent of farm value balance sheets are land values. What happens if adversity hits? We are vulnerable if we have to unload some of that land.

“Twenty-five percent of small businesses filing bankruptcy come off their most profitable year. Egos get in the way and they live high off the hog.

“Money is cheap, so borrow and expand. Yeah, money is cheap, but payback can be hell.

“We have six million homes that nobody wants now — big Barbie doll houses with high maintenance. They will go the way of the Harvestore silo. Who will buy big houses? Foreign investors.

“We are going to be in an extended economic downturn. Cash is king. Be resourceful and have a game plan to operate in good and bad times. But agriculture is one of the best-kept secrets in America. I think it is an engine for growth.” [More]

Demonstrating the paucity of alternate views in ag economics, a nearly similar article of Kohl-isms graced the pages of Farm Journal as well.  The guy is a aphorism machine.

Permit me to offer a response: Meh.

To begin with, try to remember the last time Kohl or the legion of voices who nag us about our wealth management seriously encouraged owning farmland.  Oh sure, if we could put down 85% and cash flow it with $2 corn and 50% yields, they might OK such a radical step.

Now ponder how the claim of capital (land) on profits continues to grow at the expense of labor inputs.  This is the ratio of cash rents you pay versus profit per acre.  Surprise!  Ownership of land now easily commands a 2 or 3-to-1 advantage.  The old rule of thumb of 50/50 has been left behind.

Meanwhile, the competition to rent and land prices have zoomed, and nary a regret sounds from money men for all the farmers who no longer remain in the ranks simply because they believed they could farm a bank account, as they advised.

But my experience shows it has been the single best strategy to ensure my farm not only grows and prospers, but extends beyond my lifetime.  Owning the ground in not just good business - regardless of price - it is now clearly seen as far less risky that the alternatives these gurus have been pushing. Not because it is risk-free, but because unlike alternatives the risks are obvious and within our expertise to grapple with. Compare and contrast with Citibank stock or GM bonds.

Moreover, if we do enter a phase of brisk inflation, which is not my opinion alone, those piles of cash will diminish in value just like millions of stock portfolios have.  In the most surprising development in years, some ag economists are actually embracing long term debt, but fall back into the money-worship trap by not investing the proceeds in an asset with the promise of actual performance like...land, to pick a random example.

I readily admit to being semi-rational about land, but in my defense, I would point out that money-lovers rarely acknowledge their own blind sides, as the research above illustrates.  And I can point to more than one example where buying land in the face of advice like Kohl's have been the best choices I have ever made.

Perhaps, economists and accountants like money because it is simply measured for neat charts and graphs.  It works well for theories and models.  It is easily converted into other assets, allowing commissions to be extracted in the process, as well.  It is inconsistent to claim "agriculture is an engine for growth" and advise extracting wealth from that industry to hold as cash.  If you believe in farming, put your money where your mouth is.

But if economic advice doesn't have to be shaped by reality, and if there are Eternal Truths about cash, wealth, and proper choices that are applicable in any economic environment, how much science is there in economics?


Dr. Kohl may be right, of course. But there is a calculable chance that those of us who choose to own our industry rather than money may be right as well. The outcome of this debate will be evident by those who are farming in a decade or so.

My Deep Think Future™- Dot #2: Finance, money, capital

I have been spending spare moments looking at our farm budget for 2009.  While I know somewhere in my brain that the farm is expanding next year by about 25%, we have invested prodigiously for the future since Aaron returned, and the farm is profitable and [relatively] secure, the huge numbers are freaking me out!

While I have been known to suck it up and plod on, it's not my first instinct. Alas, I don't see many other options, right now.  Therefore, I need to get a firm grasp on my tools for coping with the Money Problem in the next 4-5 years (no reason for this duration, just an arbitrary window).

The most basic question is how wealth will be allocated and traded, or what investing and commerce will look like. Let's look at the economy as a whole and then zero in on farms.

The big picture for the future of wealth is being shaped, I think, by the End of Trust. The idea of handing your wealth over to other people to invest and earn income off of has taken a huge hit.  Consider the ongoing unraveling of the Madoff Swindle.  Even if you had never heard of the guy, a fund you own might own a fund which invested in his imaginary products. And just like financial institutions are frantically trying to find out if they own some "toxic assets" indirectly, many are finding out the hard way, they were connected to Madoff.

The 53-year-old investor, who asked not to be identified to protect his stake, took out about $600,000 this year from his $1.5 million account, using some of it to pay down a mortgage. He and other Madoff clients who withdrew funds as long as six years ago may be sued on behalf of other victims to return profits and even principal, securities and bankruptcy lawyers say. 
...
Under New York state law, which can be invoked for Madoff recoveries, a trustee can seek redemptions going back six years, said Tracy Klestadt, a New York bankruptcy lawyer.
In a similar case, U.S. Bankruptcy Judge Adlai Hardin in White Plains, New York, ordered investors of defunct hedge-fund manager Bayou Group LLC in October to disgorge profits they’d taken out. Investors were required to pay back any gains they’d redeemed involving “fictitious profits.” Before the fraud was discovered, Bayou paid out more than $135 million, according to court papers.
‘Good Faith’ Rule
Hardin also ruled some investors would have to hand back their principal. Only investors who acted in “good faith” -- a legal standard that makes investors prove they didn’t have knowledge or suspicion of fraud -- could protect their initial stake, Hardin ruled. He said investors could show they had good faith if they didn’t see any “red flags” when they withdrew the funds.
That decision could be a guide for Picard, Klestadt said.
The Bayou decision set a high bar for investors who hope to protect their principal, said Carole Neville, a lawyer representing Bayou investors.[More]

As "clawbacks" leave painful "clawmarks" on victims, the hard lesson is being broadcast globally.  Now couple that with the general contempt for Wall Street denizens and corporate leadership and you have a decreasing number of folks you would willingly hand your money to.  Arguably, it might be forgotten if roaring good times return next week, but I suspect something has been broken deep in the engine of American commerce.

So how might this play out in the months ahead?  Has trust left the building?

We were wrong. Madoff's pyramid scheme, far broader than anything MMM dreamed up, was made possible by our own tradition of lawfulness. And now he will help bring that tradition down. Here's a prediction: In the coming years, American capitalism will become slower, more cautious, less productive, and less entrepreneurial. We're still a long way from Eastern Europe of the 1990s or from the Latin America or Russia of the present. But maybe not as far as we think. [More of a great article]

I tend to agree, and think it will take a decade at least to recover.  It might even require generational change to lose the living memory of these fiascoes.  Others think we'll be back with our checkbooks at the first sign of a bull market.

If there is a lasting effect from Madoff, it will be to accelerate a shift already well underway: the idea that, when it comes to their money, the only thing many Americans now truly trust is a specific government promise.

In his inaugural address in 1981, President Reagan intoned that "government is not the solution to our problem; government is the problem."

In this financial mess, government is turning out to be the only solution.

There have been runs on plenty of hedge funds this year, but no run on the banks overall, because the government insures deposits and most people (thankfully) still have faith in that insurance.

Likewise, many investors have been happy to sink their savings into low-yielding U.S. Treasury securities because they're confident that, at the very least, Uncle Sam will return their principal intact.
...
As for the issue of Wall Street's wretched image, history is clear: It's nothing that a good bull market, somewhere down the line, won't make a lot people forget, if not forgive. [More]

Carving a position somewhere in between these two, I believe folks with cash will take about 6 months to get tired of zero-return government paper before contemplating anything a sliver of risk higher. Assuming dramatic stimulus measures are enacted, it would seem at least some stocks will rise. But it may take several months of climbing before even aggressive investors develop much appetite for risk.

A complicating factor is how fear of unemployment freezes our brains when it come to wealth decisions.  Evene though the vast majority of Americans will not lose their jobs, they will likely know well someone who become a casualty.  Further, unlike previous recessions, many of the job losses are coming much higher up the ladder.  The financial sector has essentially disappeared, for example, and along with it thousand very highly paid jobs.

Surviving in the job market will not eliminate some collateral damage to most of us.  Wages will be depressed by the availability of eager (and cheaper) replacement workers right here at home.  At the same time some organizations are experimenting with lower hours to avoid layoffs.  The prospect for income growth as a whole could be impaired for a considerable period, as a result.

Meanwhile, back on the farm, we not still be connnected to those who are on the front line of this misery. Children and other family members may need temporary help. Siblings who inhereited with you may need to liquidate their share of the farm to fund retirement, college, whatever. Landowners may see the same pressures, although I don't think that will have much impact if land prices hold steady while all other assets struggle.

So the combination of these factors could produce these capital characteristics:

• Cheap borrowing for 12-18 months for upper tier operations, especially from deposit-based lenders (banks). (Of course, it looks like every financial institution will be a bank soon.
• Possible relief in inputs, but not until later into 2009, meaning continuing demand for credit for ag.
• Wild ranges between borrowing rates since swithcing lenders will be viewed with considerable risk.
• Credit shortages for farms highly dependent on off-farm income, when such employment is an area under pressure, such as manufacturing.
• Less urgency to expand if it requires massive drains on working capital (new machines, storage, people, etc.). At the same time cash-rich operations will look more favorably on expansion, since cash will be such a poor income generator.  While this strikes me as logical, I tend ot forget cash-rich operations often are not aggressive by nature, so those needing to sell out may struggle to find reasonable value for their operations.
• New paperwork we can't even imagine yet.  If Enron gave us SarBox, heaven knows what bizarre regs will be attched to the flood of government money surging toward us.  This will try the patience of many farmers and their lenders.
• A rare opportunity to lock in historically cheap long-term money.  I'm not sure where it will come from, but if home mortgages hit 4.5% there would likely be some farmland money for similar rates.

Unlike most of the rest of the economy, access to capital is not our biggest problem.  That will be demand for our output.  And we'll look at that presently.

But money?  I think this one is manageable.

Some kind of "flation", anyway...

I have been leaning toward a scenario of increasing inflation, and as a result bear many scars and bruises from the current deflationary spiral. It would be human to stubbornly cling to me now-obvious mistake, but I still think we will experience a period of serious inflation.  Here's why.

To downward plunge in housing prices must stop to permit any credit to flow and march to prosperity resume. To arrest that dive, world banks are creating and infusing money into all forms of financial institutions - and the biggest and boldest move of all may be about to happen.

Published reports indicated that the government is planning a bold move to loosen credit markets. The Federal Reserve and Treasury Department are said to be considering buying commercial paper, short-term financing that companies use to fund day-to-day operations, from individual companies.

This would, in essence, put the Fed in a position of funding companies in order to keep the economy running. In the current credit crisis, companies are having a difficult time getting funds to operate. [More]

The minute enough investors sense a bottom or even a slowing of deflating asset values, all those dollars will be chasing stuff to buy.  That is classic inflation - too many dollars seeking too few goods and services.

Moreover, a little inflation could quietly devalue the monstrous debt we have added primarily by the bailout(s), but also with the war and fiscal foolishness. It is clear the Federal Reserve and other central banks has put inflation fears on the back burner - something to worry about after the economy is moving forward.  I agree with this priority, but the overshoot in money supply will be significant, I believe.

For the meantime, the deflation hawks are in charge. And they make a powerful argument for why the dollar may not drop sharply - a principal feature of inflation.

My inclination is to think the dollar will hold its value.  I don't trust any of the macro models of currency values and we do know that purchasing power parity, while very approximate, and exerting its force only in the long run, does not imply a bearish stance toward the dollar.

Here is a list of European banks with assets greater than the gdp of their respective home countries.  And read this.

As for this country, the Chinese now regard us as "battle tested."  We have been through some truly major bumps, yet no major U.S. politician has called for "not paying back the Chinese."  We've even guaranteed the $350 billion in agency securities held by the Chinese central bank and without a stir.  I think the Chinese are shocked by that and in many ways they now trust their investments more than before, not less.

The Chinese do not have comparable trust in "Europe."  If something went wrong in the financial realm, who would they call up on the phone?  Which country?  What do they think is the power base of the head of the ECB?  What political party does that person belong to?  What favors can be traded and with whom?  Whose answer would count as definitive?  Keep in mind that for all of China's modernity, their leaders are still communist party functionaries.

The negative scenario for the dollar is where the Chinese economy collapses, not where the Chinese become too afraid to buy dollar-denominated assets.

Bush, Bernanke, Paulson -- we call them leaders.  The Chinese think of them as the customer service department.  I suspect the Chinese get straighter answers from them than we ever do. [More]

But if all currencies are inflating, this argument becomes less potent, and our currency can still devalue with inflation.  This is what I expect in just a few months.

Meanwhile, those few months will not be much fun for ag producers.  If land values hold up, we'll be fine, and so far it seems to be a relatively immune asset.

If this seems a little Pollyannish, check out this graph of the loooong term outlook.

 

[More]

Take a breath, talk to friends, remember how you got here.  It will help.

Money will change us, too...

Consider this fascinating research finding that I found both troubling and explanatory.  I think it offers problematic implications for rural community as the farm boom continues.

In a series of experiments, Vohs and her colleagues found ways to get people to think about money without explicitly telling them to do so. They gave some people tasks that involved unscrambling phrases about money. With others, they left piles of Monopoly money nearby. Another group saw a screensaver with various denominations of money. Other people, randomly selected, unscrambled phrases that were not about money, did not see Monopoly money, and saw different screensavers. In each case, those who had been led to think about money – let’s call them “the money group” – behaved differently from those who had not.

    * When given a difficult task and told that help was available, people in the money group took longer to ask for help.

    * When asked for help, people in the money group spent less time helping.

    * When told to move their chair so that they could talk with someone else, people in the money group left a greater distance between chairs.

    * When asked to choose a leisure activity, people in the money group were more likely to choose an activity that could be enjoyed alone, rather than one that involved others.

    * Finally, when people in the money group were invited to donate some of the money they had been paid for participation in the experiment, they gave less than those who had not been induced to think about money.

Trivial reminders of money made a surprisingly large difference. For example, where the control group would offer to spend an average of 42 minutes helping someone with a task, those primed to think about money offered only 25 minutes. Similarly, when someone pretending to be another participant in the experiment asked for help, the money group spent only half as much time helping her. When asked to make a donation from their earnings, the money group gave just a little over half as much as the control group.

Why does money makes us less willing to seek or give help, or even to sit close to others? Vohs and her colleagues suggest that as societies began to use money, the necessity of relying on family and friends diminished, and people were able to become more self-sufficient. “In this way,” they conclude, “money enhanced individualism but diminished communal motivations, an effect that is still apparent in people’s responses today.”  [More]

The numbers for rents, land prices, inputs and of course grain prices captivate us, partly because they are so much larger than they used to be, and perhaps because they are changing so fast.  But as we concentrate on the amount of money being transacted, it would appear we may become worse neighbors.

maybe this is no big deal, to be sure. Modern advantages don't make self-sufficiency all that unpleasant, but the decline in social capital would certainly diminish our lives.  What this study makes clear is how uncontrollable our response to money is and how deeply buried in our instincts.

Will we still be the same people we were before the Great Grain Boom? 

I wonder.




[via mankiw]

Money is only one asset choice...

I have never been a fan of money as a form of wealth. Much of its allure has been the easy comparability with other's pile of money. It also seemed to "hold value" and was "safe". Maybe it was the inflation of the '70's that formed my instinct, but a preference to other assets over money is paying off big time - and has for several years.

Conversely, carefully considered debt is not to be despised out of hand either.

Max Weber argued convincingly in his famous book The Protestant Ethic and the Spirit of Capitalism that the frugality and industriousness promoted by the early Protestants in opposition to the opulence of the Roman Catholic Church were values conducive to and perhaps critical in the rise of commercial society. Protestants who believed in predestination wanted to show by their modesty, austerity, and avoidance of lavish display that they were predestined for salvation.

But saving plays a less important role in economic progress today than it did in the sixteenth century. Its role in powering economic growth has been taken over, to a large extent, by technology. The great rise in standards of living worldwide is due far more to technological progress than to high rates of savings, that is, to deferring consumption.

At the same time, now that we have efficient debt instruments that in former times did not exist or were extremely costly, the role of personal debt (Brooks does not criticize corporate or government debt) in human welfare is more apparent than it was. Apart from its role in solving short-term liquidity problems resulting from delay in the receipt of income, debt enables consumption to be smoothed over the life cycle. Without debt, a family might have to wait 20 years before it could afford to buy a house. Of course, debt creates risk for both lender and borrower, as the subprime mortgage crisis has dramatically illustrated. But if the risks are understood, it is unclear why the assumption of them should be thought harmful to personal or social welfare. At worst, debt leads to bankruptcy, but bankruptcy is not the end of the world either for the borrower or for the lender. [More]

Holding corn instead of paying off operating loans is a winning strategy and has been for two years. Borrowing to buy a tractor last year means you'll save far more than the cost of the interest. The list of examples goes on.

But financial advisers and economists love the neat countability of money. They worship its liquidity and in some cases only generate revenue when moving money around. Owning land doesn't give them much chance to churn the account when they need income, for example.

Many other assets now approach cash in liquidity, especially for farmers. Have any trouble selling your corn? How about a used combine? Now imagine the rush to your door if you decided to part with an 80.

Even that most loathsome economic vice - borrowing for consumption - is subject to unfair, and often outdated prejudice. Derived largely from the intertwining of finance and morality by smug hypocrites, current economic conditions are proving these near biblical maxims less than logical.

My friends who study humanities are shocked and do not believe me when I, a pension economist, tell them they should not be saving. Prudent advice has become: You should always save some fraction of your income. You should save not only for retirement, but also for adverse income shocks. But, Mr Becker points out, these new lines of credit help workers cope with income shocks.

Young consumers who take on debt are often classified as impulsive and irresponsible. Some deserve that label—for example, people who take on massive amounts of credit card debt to finance the purchase of multiple flat-screen TVs. But saving does not necessarily make sense for everyone at every age. For some, higher rates of debt are appropriate in order to smooth consumption and, ultimately, increase welfare. [More]

So as the pages of farm media are overflowing with advice on what to do with our current windfall profits (oh yeah - they are real), every other sentence is to pay down debt and build cash reserves.

Well, here's an alternative strategy. Reinvest. Buy land close to you, build infrastructure (bins, buildings, tile, etc.). Start two years ago when the same advice filled the pages.

And then consider what form you want your wealth to be in if the looming inflation takes off.

Digits are destiny...

A great debate is going on in the economic and investor community about the status of the American housing market. Has it bottomed? Or is there even more depressing news to come?

Regardless of your particular prognostication, consider the graph below from an article on the geography of the house price mess.



Note that the long term rent-to-price level seems to wander around 5%. It struck me because I've always used 5% as the quick-and-dirty factor between cash rents and land prices: $300 rents are to be expected for $6000 dirt.

Or vice-versa.

What if 5% is some kind of embedded value in our brain, and we revert to it as nominally fair over the long-long term for any kind of capitalization problem? I think that could be the case for a simple reason: it's easy to calculate in your head. Double the rent and add a zero. Or halve the price and lose a zero.

In the heat of deciding what's fair, rules of thumb can take over if time is of the essence.

We could be simply trapped in a decimal system and wedded to 5% because we have ten fingers. If we were base-8 for example, we'd settle for...don't rush me now...carry the two...and , ummm...something else.

Look, it's just a theory.

Something else you need to spend now...

As every economist and government official urges you to spend your rebate, there is another form of wealth you need to make sure you get into circulation.

Another reason I use credit cards...

Apparently some folks prefer paper money. I support paper debt.



How People Count Cash? - video powered by Metacafe


[via Info Nation]

I think I've been phished...

If this e-mail I got this morning is legit - which I am convinced it is not - the IRS is out of its bureaucratic mind.

After the last annual calculations of your fiscal activity we have determined that you are eligible to receive a tax refund of $268.32. Please submit the tax refund request and allow us 6-9 days in order to process it.

A refund can be delayed for a variety of reasons. For example submitting invalid records or applying after the deadline.

To access the form for your tax refund, please click here

Regards,
Internal Revenue Service
© Copyright 2007, Internal Revenue Service U.S.A. All rights reserved.

Further note: the sender address is service@irs.gov

This is a pretty good try by current scam standards.

As phishing schemes become more sophisticated I take great comfort in knowing the ultimate defense of my wealth lays in two barriers:

1. It's almost all land.
2. The meager amount of cash is guarded by people who know how I write my name, spend my money, and sound like on the phone. Heck, I took square-dancing lessons with the bank president. (Very funny - HER name is Connie).

In this case, I'll just wait for the letter the IRS must send. Besides I make sure the IRS never owes me money.

Warning - loose money!...

The queasiness on Wall Street could surprise LaSalle Street.

Commodity investors may never have a better time to buy corn, cotton and sugar instead of oil and copper.

Sugar, the world's primary source of ethanol, is the cheapest it has ever been relative to crude oil. Corn this year dropped the most since 1998 after U.S. farmers planted the biggest crop since World War II. Cotton is the worst commodity investment over the past three years.

Goldman Sachs Group Inc., the world's biggest securities firm, is recommending corn after correctly predicting a rally earlier this year. Former hedge fund manager Jim Rogers and Marc Faber, who told investors to sell U.S. stocks a week before the 1987 crash, also say agricultural commodities are the ones to buy. Wheat, coffee and corn this month outperformed almost all commodities in the UBS Bloomberg CMCI index. Oil tumbled 8 percent and copper fell to the lowest price since March as loan losses hurt consumer demand. [More]

A price decline in copper would be a welcome relief for many as "copper security" is becoming a major industrial problem.

The culprits were not the typical ones — heat waves, fires or drought — but thieves, who have been stripping the copper wires out of irrigation systems throughout California. The rampant thefts have left farmers without functioning water pumps for days and weeks at a time, creating financial loss and occasional crop devastation in a region still smarting from a spectacular freeze last winter.

Theft of scrap metal, mostly copper, has vexed many areas of American life and industry for the last 18 months, fueled largely by record-level prices for copper resulting from a building boom in Asia. Common in developing counties, metal theft is now committed in nearly every state, largely by methamphetamine users who hock the metal to buy drugs, the authorities say.

Thieves have stripped the wires out of phone lines, pulled plaques off cemetery plots, raided air-conditioning systems in schools and yanked catalytic converters from cars, all to be resold to scrap metal recyclers.

But perhaps no group has been as been as consistently singled out as California farmers, who provide roughly half of the nation’s fruits and vegetables. Irrigation systems, a treasure trove of copper, tend to be in remote places, out of the eyes of farmers and, until recently, law enforcement. [More]

We have wealth splashing around the globe like beer in a plastic cup.

Somebody should drink it just to prevent spillage.

(Sometimes my metaphors get a little surreal.)