New Zealand farmers are in debt to the tune of $45 billion, 61% of which is in the dairy sector, leaving dairy farmers “reliant on continuing asset gains as income was never going to meet debt-servicing commitments” says Fran O’Sullivan in the Business Herald. In other words, we’re looking at an agricultural debt bubble that is only being held up by an agricultural asset bubble the debt itself has helped to inflate.
Oh dangerous times.
Many farmers have apparently been riding the bubble -- "farming for asset gains" the Agriculture Production Economics report calls it – leaving them exposed on three fronts:
1. Debt is a problem throughout NZ agriculture, but at the farm level it is still highly concentrated.
2. Where that farm debt is highly concentrated - eg, at least 20 per cent of New Zealand's dairy farm production - it is such that farms cannot, and will not ever, meet their debt servicing commitments even under the most promising payout and interest rate scenarios. This is New Zealand's equivalent to US sub-prime lending: reliant on continuing asset gains as income was never going to meet debt-servicing commitments.
3. The issue is building as its destructiveness compounds along with the debt. The real questions are as to the detonator, the timing and how well the consequences are handled.
No debt bubble has ended well, and as O’Sullivan points out this one is unlikely to be an exception. Writing in 1931, two years after the great stock market crash, author Garet Garrett gives some lessons for 2009 and beyond in his book A Bubble that Broke the World – a debt bubble built (at first) on the back of unpaid yet ever-expanding war debts, and subsequently on the back of the Federal Reserve’s printing press. (What George Reisman calls counterfeit capital.) Said Garrett, back then:
Organized credit is relatively strange in economic life. New and experimental forms of it are continually being invented and we love to deceive ourselves with them. We forget that credit in any form represents debt in some other form. We know about ourselves, that we have seizures of ecstasy and mass delusion. We know that a time may come when the temptation to throw the monetary machine into wild motion, so that everybody may become infinitely rich by means of infinite debt, will rise to the pitch of mania as it did, for example, in 1928 and 1929.
For a while the difficulty of not knowing what anything is worth inflames the ecstasy. Everything will be priced higher and higher to make sure that it is high enough; there will be the illusion that things are becoming dear and scarce. They seem to be dear because the value of money in which they are priced is falling; they seem to be scarce because people are buying in the expectation that prices will go higher still. Suddenly doubt appears, then comes awakening, and - panic. The faith is lost... This is the financial crisis...
Garrett talks about the “delusion of credit,” a mass delusion as widespread now as it was in the 1920s. And as destructive.
The general shape of this universal delusion may be indicated by three of its familiar features.
First, the idea that the panacea for debt is credit. . .
Borrow and spend; borrow more and spend more . . . borrow more to make your payments on the earlier borrowing . . . that’s not a “recipe for success” but a formula for destruction reliant on an ever-expanding credit line. In other words, a pyramid based on The Reserve Bank’s printing press.
Second, a social and political doctrine, now widely accepted, beginning with the premise that people are entitled to certain betterments of life. If they cannot immediately afford them, that is, if out of their own resources these betterments cannot be provided, nevertheless people are entitled to them, and credit must provide them. . .
An oh so familiar plaint.
Third, the argument that prosperity is a product of credit, whereas from the beginning of economic thought it had been supposed that prosperity was from the increase and exchange of wealth, and credit was its product.
Prosperity is so very far from being a product of credit that it is almost one-hundred and eighty degrees wrong to suppose that it is – in that the delusion that prosperity is a product of credit wipes out the pool of real savings that has been created by the increase and exchange of wealth, and on which further wealth creation actually depends. Frank Shostak explained the destruction back in 2005:
Let us now examine the effect of monetary expansion [in the form of Reserve Bank-created credit] on the pool of real savings. The expanded money supply was never earned, i.e., goods and services do not back it up, so to speak—it was created out of “thin air.” When such money is exchanged for goods it in fact amounts to consumption that is not supported by production. (As a rule it leads to nonproductive consumption).
Consequently, a holder of honest money, i.e. an individual who has produced real wealth that wants to exercise his claim over goods, discovers that he cannot get back all the goods he previously produced and exchanged for money. In short, he discovers that the purchasing power of his money has fallen—he has in fact been robbed by means of loose monetary policy.
“Robbed by means of loose monetary policy.” That’s as true for creditors as is for debtors, and everyone in between.