From the debt problems of an underwater government --now over $100 billion in debt and counting -- to the debt problems of underwater dairy farmers who, like dairy farmers around the globe, had credit extended to bring new dairy into production, only to find that debt-driven overproduction has lowered dairy prices below what many need even just to repay their debt.
An anyone yet spell malinvestment?
Over the weekend a blog reader was asking why I haven’t written on the dairy debt crisis. I said I had: it was a few years ago before the malinvestment became obvious. You can read those again if you like, since only the details have changed (they’re below) or you should read Michael Reddell’s recent analysis here and here which (like this very post you’re reading) are tinged with the sadness of “I-told-you-so”:
The rate at which new dairy debt has been taken on (and made available by lenders) has slowed markedly since around 2009. Dairy debt grew at an average annual rate of 17 per cent from 2003 to 2009, and by around 4 per cent per annum in the six years since then. … That [now means] that dairy farmers on average have $6 of debt for every $1 of GDP they generate – and among the indebted farmers that ratio will be much much higher. …
- October 2009: Dairy bubble starts to pop – and guess who’s holding the pin?The Crafars are the tip of a multi-billion-dollar pyramid of debt – a pyramid propped up by the very assets that have been inflated by all that debt. … The Crafars’ collapse indicates the first major signal that defeat on all three fronts is now upon us … Are you surprised? Mainstream economists might be, but this is precisely what Austrian economists expect to see as the “rapid growth” of a credit-created boom turns into debt-based bust. …
If you want to get angry at someone, don’t get angry at the Crafars – get angry at those responsible for creating all the credit-backed profligacy: at the denizens of the Reserve Bank. It was them who inflated the bubble. It’s reality that’s now holding the pin.
- July 2009: The Biggest Bill: And here ‘s another piece, on the debt problems of the dairy industry, who (in a story that’s now all too familiar) have partially substituted the “economically perverse” illusion of debt-fuelled capital gain (i.e., the illusory “wealth” of a bubble) for real productivity growth. Read Analyst warns of dairy debt tsunami
- June 2009: The credit/debt delusion: The faster you go, the bigger the mess: 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 … No debt bubble has ended well … Garrett talks about the “delusion of credit,” a mass delusion as widespread now as it was in the 1920s. And as destructive…
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 [as being 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.