Are you a Malthusian or a Cornucopian? That was the question pondered during the 2016 Florida Agricultural Financial Management Conference held at Campions Gate. While there are plenty of economic headwinds, overall the evidence provided by the speakers at the two-day conference in Orlando favored the Cornucopian’s corner.
Dr. Ed Seifried, Executive Director of the Sheshunoff Affiliation Program, is always a highlight of the annual conference. He gave an economic outlook that, while not bullish, does suggest that America is in a better position than many economies around the globe.
Seifried introduced a new term making the rounds among economists called “permazero.” It is the notion that interest rates will stay near 0% permanently. There is another term associated with this called ZIRP (zero interest rates policy), which central banks, including America’s Federal Reserve, have embraced.
“Recall that dark day in 2008 when Lehman Brothers and AIG went belly up,” Seifried said. “Notice how all the G7 countries’ interest rates plummeted to zero. Our recession ended in summer 2009, but our rates never rebounded. We have stayed at 0% or close to 0% ever since, giving rise to permazero.”
Suggesting the audience needed more evidence of permazero, he pointed to two new bonds in Europe — a French 50-year bond and a Belgium 100-year bond.
“The French 50-year bond will pay 1.9% interest,” Seifried said. “What about the Belgium 100-year bond? None of us will be alive when this thing matures at only 2.3%. Both of those bonds sold out. What that tells you is inflation is expected to be near 0% for the next 100 years.”
How could the globe see 0% inflation for the next century? Seifried said technology will be a big driver of this.
“People ask me if a $15 minimum wage is a job killer,” he said. “It is. You will go into a McDonald’s soon and there won’t be any people. There will be a screen and you put in what you want and swipe your credit card and food will come out of a slot. High costs of labor can be solved by technology in almost all cases.
“Think of inflation as a floor of wooden planks. Every time a nail pops from the floor, technology hammers it back down. We are lowering costs almost daily in most industries.”
China will keep costs low as well with its cheap labor force. But, with a population of more than 1.3 billion, only a quarter of their people work.
“Then there is Africa, which produces virtually nothing other than natural resources,” Seifried said. “There is a huge pool of labor there waiting to be organized and trained to make low-cost goods.
“In South America, the unemployment rate averages more than 20%. Think of a world where low cost of production will be the norm and anything that is expensive there will be a technological solution to fix it. So, it will be hard to raise prices in this competitive world.”
Less Than Zero
Since 2008, interest rates have been very low in America. But elsewhere in the world, some central banks are at negative interest rates. In fact, 45% of all sovereign debt is priced at a negative yield.
In America, the 10-year treasury bond is priced at 1.5%, but Germany’s 10-year bond is priced at -0.1% and Japan is at -0.28%. So, the investor will get back less than what than he or she put in. In Germany, for example, if you purchase a 10-year bond today for $1,005, in 10 years, the investor would get $1,000.”
“How does this work?” Seifried asked. How do you earn negative yield? Why don’t they just hold cash? For you and me it would be easy enough to just hold our cash. But, for corporations that is hard to do when you are talking about millions, even billions of dollars. You would need a vault and security to guard, so corporations are almost forced to accept negative rates.
“Thankfully, this spring, Janet Yellen [Federal Reserve Chairwoman] said we are not actively considering negative rates in America.”
With negative rates in other countries, the U.S. dollar is strong. That is not necessarily good news for American agricultural exports. According to the Federal Reserve, for every 10% appreciation of the dollar, exports begin to drop. After one year, they fall by 4%; after two years, they drop by 6%; and after three years, they fall by 8%.
“How will those negative rates hurt us here in Florida?” Seifried asked. “Money will flow into America for the higher interest rates due to the other rates around world. To invest in American currency, you need our dollars, so they trade their currency for ours. The more demand for dollars, the higher the value, making what we sell more expensive around the world.”