| LEVERAGE ON THE CURRENT USA STRUCTURAL DISEQUILIBRIUM TO FOSTER AN AGRO-INDUSTRIAL REVOLUTION |
| Prices are rising in some sectors of the economy where demand is growing rapidly (agricultural commodities, energy and basic materials), while prices are declining in sectors where demands are falling (housing markets, consumer durable goods).The fact is that the global market has been unable to keep pace with the rapidly demand arising, particularly from emerging economies. When the composition in demand of individual products change rapidly, the cost of production for the underlying products tend to rise also. As a consequence, the cost of production for other products increases at the same time. The path of inflation in the USA did not come from an excess of money but it is spread out by the cost mechanism. The US Labor Department reported that Producer Price jumped a monthly 1% in January and saw an annual 7.4% increase. As of late 2007, the increase in the production of “biofuels” has pushed up the price of wheat (58%), soybean (32%), and corn (11%) over a year. During the housing boom, a lot farms shut their door and sold their land to builders and developers. The Job market deteriorated also; the Labor Department said the number of people applying for first-time unemployment benefits last week rose by 19,000 to 373,000.The persistence of relatively high unemployment rates while the price level of certain products continue to go upward is considered as a structural disequilibrium in the economy. As we are a capitalistic system (where free market predominates), economic activities are directed by the search of high income and profits, prices may influence the quantity of production of individual products and entrepreneurs decisions are influenced by current and future demand of specific products. More impressive evidence of the recent moves of the Federal Reserve on the discount rate consist in giving incentive to entrepreneurs to invest in technology, improve productivity, reduce cost of production, increase the supply of food products, energy and basic materials. Monetary Gold Stock and Federal Reserve Credit are the items considered as high-powered money. Gold is priced around $973 an ounce, already gaining more than 16% this year and expecting to reach the psychological bar of $1,000 an ounce. The United States' total gold reserves, 8,966 tons (27% of central banks and Government holding of gold around the world), are valued at approximately $278.29 billion (at the rate of 1oz = US$ 970). Increase in the price of gold should increase the size of the money supply (caeteris paribus). But in fact, Bank reserves and credit decreased sharply in 2007, despite increases in the price of gold; the money supply declined. The decline principally occurred because of heavily write off by financial institutions as a consequence of issues related to the housing market, perhaps the velocity of the money supply declined also. The current series of cut in the discount rate by the Federal Reserve have the increase in the price of gold transferred to the monetary system, will increase commercial banks reserves and speed up monetary growth. An increase in bank reserves is expansionary, because changes in the level of the money supply tend to be transmitted to changes in the total of expenditures through commercial banks loans. The series of cut in the discount rate from 2000-2004 increased the size of the money supply and brought up the flow of consumer expenditures for durable goods (car and appliances) and households investment (purchase of primary residence or second home). These new series of cuts in the discount rate undertaken by the Federal Reserve will increase capital expenditures (machinery and building) for businesses which will be used up in making intermediate products (basic materials) and final products (agribusiness production: grain and meat) and meet the additional demand for those categories of products in the global market. The increase of capital expenditures will generate additional revenues for workers, enable them to buy the excess of currently produced durable goods, reducing or even eliminating the risk of deflation incurred in the market of durable goods. At the same time, expenditures for production could increase the supply of basic materials and agribusiness products, reducing or eliminating the pattern of inflation. As the concerns and trends are inflationist, the global result will be a process of “Disinflation”, as we wrote in our story of last week. In addition, a weak dollar could be good for the innovative model, the Federal Reserve is currently undertaking. A weak dollar could make changes in the asset preference of the public in the global market, particularly in the emerging economies, like China, India, and Brazil. A potential shift from currency to demand deposits in these emerging markets could be expansionary at the same time. As the dollar is weak, consumers in these countries would need a reduced amount in the money of their own country to purchase goods produced in the USA; as a consequence US exports will surge creating more opportunities for business having recently investing in capital expenditures. Capital expenditures have an important relation to economic welfare, for they determine the level of job creation, income generation, consumption expansion and market prices for resources, goods or services. A lot of eminent economists think the Fed has taking the wrong direction by cutting rates in an inflationist environment. At Capital Seeds Corporation, we do believe the Fed is doing quite right: THE FEDERAL RESERVE IS ENGINEERING THE GLOBAL ECONOMY. The situation represents a great opportunity for low development countries, particularly those having an economy still based on agriculture; they may have to understand and rely upon past China pattern. The world knew the invention of farming as an evolution from hunting and gathering to the rational production of food, associated with the adoption of farming techniques, crop cultivation and domestication of animals. As of 2006, an estimated 36% of the world’s workers have been employed in Agriculture, down from 42% in 1996 (Source: International Labor Organization: Key Indicator of the Labor Market 2007). Despite the fact that agriculture employs about one third of the world labor force, agriculture output accounts for less than 5% of the world gross production. As it is urgently necessary to increase agricultural output to meet the aggregate demand for food around the world, what we call an Agro-Industrial Revolution is on its way. The agro-industrial revolution will associate the development of capital goods to the development of technology and methods to be used on farms for the production of food and meat, like the industrial revolution facilitated the development of capital goods to be used on plant for the production of durable goods; the invention of the combine harvester is a perfect example. The combine harvester is a machine that combines the tasks of harvesting, threshing and clearing grain crops. The agro-industrial revolution will upgrade technology, machinery and methods in order to improve productivity in the agricultural sector. Practices and methods will vary depending on whether agricultural production is for subsistence, intensive or a combination of both. The end result of what we called the Agro-Industrial Revolution will lead to a significant increase in agricultural production, allowing food production to keep pace with worldwide aggregate demand for food and livestock. |