Memo To: Federal Reserve Board Chairman Alan Greenspan
From: Jude Wanniski
Re: And You Did It, Alan!
Here is the latest editorial commentary from the Farm Journal. It says it all.
AG CRISIS: BLAME THE U.S. FEDERAL RESERVE
An editorial perspective from Farm Journal CEO and Chairman, Stanford Erickson.
Farmers and Congressional and Administration policy makers need to stop beating up each other on the inadequacy of the recently enacted Freedom to Farm Act to deal with the financial and production crisis now facing agriculture in the United States.
Federal Reserve Chairman Alan Greenspan is wrong: Farmers are not to blame for a worldwide price drop in commodities by being too productive. Chairman Greenspan himself has allowed his protracted fight against inflation to cause the kind of monetary deflation the United States has seen but a few times in the last 200 years.
The U.S. Treasury did it once on purpose, after the greenback era of the Civil War, when the decision was made to drive the price of gold back to $20.67 per ounce from the $40 range to which it had floated. This time, it appears accidental, but the unintended consequences of the Fed's actions on farm prices has been as savage as they were in the 1870s, when wheat followed the halving of the gold price to 50 cents from $1. Since November 1996, when the deflation began, the Fed has been starving the economy of liquidity-- cash and bank reserves -- in order to stop an inflation it imagined was going to happen. As dollar liquidity became scarce around the world relative to commodities, the deflation in prices began and continues to this day.
Although each farmer must work hard to find individual solutions to how this crisis in agriculture affects his operation, the U.S. government, along with the community of governments globally, needs to immediately work on heading off an agriculture disaster that could undermine farmers' ability to feed people for the next five years.
Structural damage to the world's agriculture industry is imminent. What can be done immediately by the U.S. government? First, we must understand why this crisis in commodity prices occurred. Because the central bank is no longer required to keep the dollar as good as gold -- since President Nixon broke that link in 1971-- dollar commodity prices ever since have gone up and down not only because of supply and demand, but because of monetary errors by the bank. It was in the long stretch from 1985 to 1996 that gold more or less stabilized and commodity prices hovered in predictable ranges as well.
When Chairman Greenspan worried about "irrational exuberance" on Wall Street, which was inspired by the promise of tax cuts in 1997, especially a lower capital gains tax, the Fed forgot about gold and commodity prices as clear signals of deflation and withheld dollar liquidity that was being demanded here and around the world.
Just as too much liquidity is inflationary, and immediately drives up commodity prices, a monetary deflation hits commodities first. The rest of the U.S. economy could expand because of the greater rewards to risk-taking allowed by the tax cuts. The agricultural sector, though, took it on the chin. Asian countries that tied their currency to the dollar in essence imported our deflation, unwittingly wrecking their own economies.
While farmers here enjoyed bumper crops in the last three years in expectation of record sales to the Asian market, the Fed's deflation undermined the financial well-being of both producers and buyers of commodities.
Since late 1996, the price of corn is down 32%, soybeans and wheat are down 42%, according to the Commodity Research Bureau, and 40% of all hog farmers are in such dire straits that they are moving out of producing hogs.
What is worst, Chairman Greenspan intends to keep the lid on the growth of liquidity, citing a shortage of workers in the labor pool available to American industry! In testimony before the House Banking Committee July 22, Chairman Greenspan said the real concern for our economy continues to be inflation. And even when House Banking Chairman Jim Leach (R-Iowa) suggested that the Fed should be "as vigilant in combating deflation as it has been in fighting inflation," noting "there is real deflation in aspects of agricultural policy," Mr. Greenspan continued to suggest the current low unemployment figures are real harbingers of inflation.
The Chairman should look at the ag unemployment that is widespread throughout rural America.
Lest you think I am alone in pointing an accusatory finger at our central bank, presidential candidate Dan Quayle from Indiana -- President Bush's Vice President -- has been hammering at the Fed. According to the Des Moines Register, which Mr. Quayle visited July 9: "Quayle almost took on a populist tone when farm problems were mentioned. He blamed Federal Reserve monetary policies and the big Eastern Banks. He said no one seems to recognize that farmers are suffering from deflationary conditions in the commodities markets.
"Officials of the Federal Reserve, he said 'time and time again side with the big boys and the banks.' In addition, , he said , there is 'the psyche out there and the mentality, which is decisively anti-rural, and it is anti-farmer.'"
Another presidential contender, Forbes Magazine Publisher Steve Forbes has also been calling for monetary deflation relief. More importantly, from my point of view, Jude Wanniski -- the supply-side political economist who advised President Ronald Reagan -- supports this view. In fact, two years ago, he warned me that the Fed's tight liquidity would hurt agriculture.
Now, the immediate solution, short term, would be for the Federal Reserve to shift gears to undo at least some of the price deflation caused by its policy errors -- increasing the supply of bank reserves with the announced intention of bringing relief to commodity producers. It can do so easily, by buying U.S. Treasuries.
Dan Quayle, for example, says if he were President today, he would sign an executive order to do just that, using the gold signal to offset at least half of the 33-month decline.
Jude Wanniski, to whom Mr. Quayle apparently listens, believes that an increase in commodity prices would not harm consumers, as the new focus on taking errors out of central bank policy would sharply lower interest rates. Also, processors did not pass on the price deflation to the consumers, so perhaps they needn't pass on commodity price increases to the consumers as well. For more long-term solutions, our Secretaries of Treasury and Agriculture must gather their global counterparts to deal with excess agricultural capacity and fund food to those who cannot now pay for it. Even longer term, the World Trade Organization needs to help create worldwide policies that encourage farmers to grow efficiently what they can grow efficiently in their parts of the world rather than grow everything everywhere, whether it is cost effective or not.
But first things first. Farmers and the agribusiness community need to put pressure of the U.S. Federal Reserve to expand liquidity until commodity prices overall, including gold, increase by 20 percent at least. We may no longer be on a gold standard, but as the most monetary of all commodities, gold is still the one that moves first, up or down, when the Fed makes a mistake. For America's farmers, this one has been a whopper.
Stanford Erickson CEO & Chairman Farm Journal Corporation