-Caveat Lector- from: http://www.zolatimes.com/V3.6/pageone.html <A HREF="http://www.zolatimes.com/V3.6/pageone.html">Laissez Faire City Times - Volume 3 Issue 6</A> The Laissez Faire City Times February 08, 1999 - Volume 3, Issue 6 Editor & Chief: Emile Zola ----- Deflation? by Don L. Tiggre Some months ago, a friend of mine who is a permanent tourist cautioned me about impending deflation. I was skeptical, as the United States hasn’t seen serious deflation since the last century (except for the early 1930s), but he made some good points, and I tried to keep an open mind about it. And now that I’ve been helping out at the local newspa per, certain items among the countless bits of information that flow across my desk have stood out and the pattern they suggest is as clear as it is startling: a giant economic deflationary "adjustment" may well be on its way. The argument made by the tourist was that while the Fed and monetary policymaking agencies around the world are still trying to control inflation, economic forces are shifting around to create deflationary pressures. This makes for a real possibility for turmoil when the central planners are caught by surprise. Governments in Latin America, Asia and Japan are not reacting to their on-going financial difficulties with the necessary tough measures, such as closing factories and shutting down mines that are not profitable. The massive unemployment that would result would topple governments in many instances, so the factories are kept open, and the TVs and barrels of oil continue to pile up on the docks faster than markets can be found for them. The glut in production will drive commodities prices down so hard and fast, the argument goes, that even unbridled cranking of the printing presses will not be able to keep up. This argument was not easy to swallow whole. It seemed hard to believe that the production of other commodities could overpower the production of fiat currency. However, one part of the argument for an impending and abrupt economic adjustment seemed quite solid: the focus central bankers are still placing on "controlling" inflation. Not only that, but in the world’s leading economies governments cannot easily resort to the printing press: they manipulate money supplies by fiddling with interest rates to expand or contract credit. This approach has its limits, as an interest rate can only go so low. In Japan, for example, the prime rate has dropped to almost zero. Evidence concerning deflationary pressures in the U.S. economy is what has me really wondering if catastrophic deflation could actually come to G7 countries. For example, U.S. senators from states with a heavy reliance on agriculture are working on a package of agricultural bills they say will ease the increased financial burden farmers and ranchers have faced the past few years—i.e. help them deal with falling prices. Agricultural statistics for the year end of 1998 show widespread and major drops in prices received for crops and livestock in the U.S., with consequent increases in livestock inventory. The Evidence from US Agriculture According to Wyoming’s Senator Michael Enzi, the prices farmers and ranchers receive for their commodities are at 20 and 30 year lows. Enzi is cosponsoring a number of agricultural measures he says will help people who work the land. One such measure would allow state inspected meat to be sold across state lines when the state requirements meet or exceed federal standards. The bill is supposed to increase inspection efficiency and add marketing possibilities. "We already allow Canadian and Mexican meat products to be sold in our nation, based on a promise that those nations’ standards are the same as ours," said Enzi. "I find it hard to believe our federal government trusts foreign inspectors and not state inspectors. Ending this practice would cut some red tape and free up domestic markets." Enzi hopes to introduce a bill in the Senate in the next couple of weeks, after finalizing details with House Agriculture Committee Chairman Larry Combest of Texas. Dan Glickman, the Secretary of Agriculture is also expected to issue a report by Mar. 31 on the effects of the federal inspection on interstate distribution of state-inspected meat. Of course, if Enzi and other republicans were as interested in cutting red tape as they pretend to be, they’d just scrap the entire government inspection process and let the market take care of quality assurance. But still, as tiny as this easing of some regulations is, the fact that any loosening of regulations is being proposed at all is a sign of the deep economic trouble ranchers are in because of the deflated value of their products. Another concern the agricultural community has raised is the consolidation in all areas of agribusiness. Senate Agriculture Committee Chairman Richard Lugar held a hearing the week of January 25 focusing on the issue. During the hearing Keith Collins, Chief Economist of the U.S. Department of Agriculture, testified that the number of U.S. farms has declined from nearly 7 million in the 1930s to 2.2 million in 1998 and the share of production accounted for by the larger farms increased, raising concerns about the level of economic opportunity for small farms. The four largest steer and heifer slaughter firms accounted for 80 percent of commercial slaughter in 1997. This "concern" seems little more than an attempt to secure the votes from people engaged in outdated forms of production that the U.S. government has been trying—and failing—to "protect" since the 1930s. Other measures advocated by special interest mouthpieces like Enzi include S 251, a bill that would require the labeling of imported beef, lamb and pork by country of origin and the "Truth in Quality Grading Act" of 1999 that would prohibit imported beef and lamb from being stamped with a USDA quality grade label. "The American consumer has the right to know what he or she is buying," said Enzi. "Not all the sirloin marked ‘USDA Prime’ you see in the supermarket was raised on American ranches. Proper labeling will allow people to choose and I’m confident people will choose more American beef." By "proper" labeling, Enzi means "protectionist" labeling, but such myopia is hardly surprising. "Wyoming was built by ranch and farm families," Enzi says. "They preserve our open spaces and they work hard for what they earn." But what about poor families in the Bronx—families that will have to pay more for their food if Enzi has his way—don’t they work hard for what they earn? They don’t live in Enzi’s district, so it’s not suprising that he doesn’t care about them. "It’s vital," Enzi sums up, "that government provide them with an environment that preserves their way of life." The important aspect of the breathtaking economic ignorance of people who think government can provide "an environment that preserves their way of life" (and stop the march of time) is not the ignorance itself, but the effects such ignorance can have on the inflation/deflation question. What happens if Enzi and his cronies are successful in propping up economically non-viable forms of production in the face of falling prices? It would create a huge drain on the economy, which would increase the number of people with fewer dollars to spend and build more pressure for a dramatic market "correction." The Evidence from the US Oil Industry Another U.S. industry in which the economics are even more alarming is the oil industry. Senators from oil-producing states are pressing for the adoption of measures to spur domestic oil and gas production and "help" struggling oil patch workers at a time when the world market is seeing an oil-glut of historic proportions. "The stakes couldn’t be higher for the health of our local economy, maintaining jobs associated with production across the country and for our long-term defense strategy tied to domestic oil production," Senator Craig Thomas (R-WY) said. "If we continue to lose these marginal wells and jobs to overseas producers we may never have an opportunity to get them back when prices improve." Protectionism rears it’s ugly head again, but the key point to observe is that wells that were profitable last year are now "marginal". Also note the assumption that prices will improve—not likely in the near future with so many oil-producing countries facing economic hard times. One U.S. company, Union Pacific Resources Group, Inc. (NYSE: UPR) announced that the oil price collapse of 1998 led to a loss for the year of $899 million, or $3.63 per share, despite a 53 percent increase in production and a 49 percent increase in proved reserves. The increased production and reserve amounts are the kind of economic factors that would tend to create a great deal of deflationary pressure. Also, while the market is enforcing discipline and shutting down wells that cost more to operate here in the U.S., other countries are keeping them open, at taxpayer expense, forcing the prices ever lower. During a Senate Energy Committee hearing recently on the state of the petroleum industry, Thomas warned that a combination of record low prices and the Asian financial crisis has forced oil production down in 19 of 23 American states. This is an appropriate market response, but all Thomas seems to see is that the U.S. is losing "jobs to overseas producers." In response, he is cosponsoring the "U.S. Energy Economic Growth Act" of 1999, which would provide tax credits for existing marginal well production and for inactive wells, creating an incentive for independent producers to recover abandoned wells and put them back to work. According to Thomas, the plan would strengthen small businesses that are on the brink of bankruptcy. However, if the plan succeeds in in creasing production during a time of glut, it will only force the prices down farther, again marginalizing wells that cost more to operate. The Department of Energy, Thomas asserts, has resisted taking any concrete steps thus far to address the economic devastation taking place in the domestic oil patch. "Although there has been plenty of talk from the Administration about the need to support the domestic petroleum industry, I’ve seen little action," Thomas said. With less crude being produced in the United States than was produced in 1955, Thomas says that the U.S. now relies on foreign importers for nearly 56 percent of its oil and gas. Great. Protectionism and economic ignorance. Meanwhile, displaced workers with fewer dollars to spend will be exerting their own pressure for reduced prices, and that pressure will only build to higher levels if the government tries to mask the effects instead of letting the market correct itself as needed. When the Government "Stabilizes" Consider the giant fires that swept through Yellowstone National Park in 1988. Almost a million acres were leveled at once because politicians made the foresters suppress all fires in the park, even though it was known that occasional forest fires are an important part of forest ecology. For decades dead wood built up on the forest floor, until the whole park became a firetrap, just waiting for a spark to set it off. Remember this when law-makers and central bank planners talk about how their work has stabilized the U.S. economy—remember it when the market snaps and the inevitable correction takes place. Will that correction take the form of catastrophic deflation? I don’t know, but it sure seems a lot more possible now than it did a year ago. All of the sudden, it seems less pressing to worry about what Y2K might do, and a lot more important to worry about what the world’s economic trends will do. ------------------------------------------------------------------------ Don L. Tiggre is the author of Y2K: The Millennium Bug, a suspenseful thriller. Tiggre can be found at the Liberty Round Table. -30- from The Laissez Faire City Times, Vol 3, No 6, Feb. 8, 1999 ----- Published by Laissez Faire City Netcasting Group, Inc. Copyright 1998 - Trademark Registered with LFC Public Registrar All Rights Reserved Disclaimer The Laissez Faire City Times is a private newspaper. Although it is published by a corporation domiciled within the sovereign domain of Laissez Faire City, it is not an "official organ" of the city or its founding trust. Just as the New York Times is unaffiliated with the city of New York, the City Times is only one of what may be several news publications located in, or domiciled at, Laissez Faire City proper. For information about LFC, please contact [EMAIL PROTECTED] ----- Aloha, He'Ping, Om, Shalom, Salaam. Em Hotep, Peace Be, Omnia Bona Bonis, All My Relations. Adieu, Adios, Aloha. Amen. Roads End Kris DECLARATION & DISCLAIMER ========== CTRL is a discussion and informational exchange list. 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