| WHERE TO DIRECT THE FLOW OF EXPENDITURES TO ALLEVIATE UNEMPLOYMENT |
| In the early 1960s, labor was transferred from the agricultural sector (in excess) to the manufacturing sector in expansion by the time. Between 1950 and late 1999, total U.S. non-farm employment grew from 45 million workers to 129.5 million workers. During roughly this same period, farm employment declined dramatically -- from 12.5 million in 1930 to 1.2 million in the 1990s, even as the total U.S. population more than doubled (Source: http://usinfo.state.gov/products/pubs/oecon/chap8.htm). In today’s economy (about fifty years later), we will probably see surplus labor transferred from manufacturing, construction, business and professional services to the agricultural sector where demand is strong for food and raw materials for bio-energy production. For sure there will a need of training and aptitude development, but in a sector where demand for labor is strong, employers could be more flexible and willing to provide on the job training. At Capital Seeds Corporation, we do believe that the world is in the process of an “Agro-Industrial Revolution”. Recent increases in productivity combined with deficiency of aggregate demands in manufacturing, construction, professional and business services contributed to a rise in the rate of unemployment in the United States. According to Jared Bernstein of the Economic Policy Institute, capital expenditures decreased by 3% from 2003 to 2006. Unemployment alleviation would require increases in the flow of capital expenditures. The good week ending of the stock market on April 04 2007, could be a sign that capital expenditures are currently increasing. In fact, shares have been on average up 5% for the week ending on April 4, 2008. The sectors which benefited better of the increase in share prices are: commodities 7% transport 5%, energy 5%, retail 6% (Ref. Larry Kudlow, on Friday April 4, 2007). Based on the fact that GDP growth remained low for the last quarter of 2007 (0.6%) and in a broad sense could remain at the same level for the first quarter of 2008 (~ 0.8%, based on Macro-Economic Advisors estimate), it seems that expenditures are rising more than income. If it is the case, the effect is expansionary and the easy money policy of the Federal Reserve may have had positive efects. Part of the funds poured into the Financial Circulation by the Federal Reserve has increased the motivation to purchase income- bearing financial assets, broadly by banks and institutional investors. Banks and institutional investors may use the strategy of buying growth sensitive stocks as a hedge against their potential losses in the subprime mortgage market. We may see banks continue this hedging strategy until they take out all the doubtful collateral papers from their balance sheet or until share prices are higher than book value. At that time, they will start lending money to consumers and businesses and rate could start decrease at the retail level. When financial institutions will increase their lending to consumers and reduce their willingness to acquire income bearing financial assets, credit will be tighten and Fed Funds rate will start to rise. Currently, it seems that the discount window and other lending facilities provided by the Federal Reserve benefit only banks and financial institutions (broker-dealers), that’s why the Fed may hold on the rate cuts at the April Meeting. But, the Federal Reserve will further pursue the strategy of cutting rate until the economy will reach its bottom. The bottom will be reached when the unemployment rate will stop rising and the balance will be reestablish between housing prices, inventories and sales. When the bottom will be reached, the financial market will also be able to put a price on the doubtful collateral papers they have in hand. We should understand that the value of the mortgage-backed securities and related derivatives could get eroded when the rate of unemployment is rising, because more and more homeowners will loss their job, not be able to pay back any loan and they be underwater. The creation of new jobs could bring additional revenue to distressed households actually facing foreclosures because of recent job loss, and would also bring new home owners on the market, while prices and interest rates will still be low. However, of the 321 Chief Executives surveyed by the Chief Executive Magazine between March 11 and March 26, most of the CEOs (56.7%) expect a drop in employment level over the next four to five months while only 13% gave that answer about one year ago, mentioned Edward Kopko, publisher of Chief Executive Magazine. US employers cut non-farm payrolls by 80,000 in March (bigger than 60,000 job cuts economist were expected), according to the Labor Department, and kicking the unemployment rate to 5.1%. The biggest losses were in construction (51, 000), manufacturing (48,000), profession and business (35,000) while services were up to 13,000. When professional and business services starts falling, this could be a really negative sign for the economy, said Lawrence Kudlow. The average hourly earning was up to 0.3% in March; the danger of higher spending is therefore reduced because the level of unemployment tends to rise. Rising level of expenditures combined with continuous increase in the global demand for food products and energy maintain the risk of higher inflation that could be spread to the rest of the economy by the cost mechanism. As the Federal Reserve Board can not ease and tighten at the same time, the priority is rather to deal with the credit crisis in the banking system, the stabilization of the housing market and the reduction in the rate of unemployment to avoid a deep recession. An option to control inflation of food and energy resides in increasing the global supply of food and developing alternate sources of energy. High commodities prices and the need to develop alternate sources of energy from biomasses represent an opportunity for low income developing countries to make money from their comparative advantage in agriculture. |