News Are crop subsidies a good or bad thing?

[ShawnD]

American fiscal watchdogs (like John Stossel) point out over and over again how billions of dollars are used to subsidize crops grown in the US just so they can stay competitive with cheaper crops from other countries. At first glance it seems like an obvious waste of money. Forcing everybody to pay for more expensive food? wtf?
Anyway, the flip side is that subsidizing local crops lowers the amount of crops that are imported, which can be used as a method of preventing trade deficit with another country.
Just use this as an example using simple terms
Canadian grain would be $5
American grain would be $10
$5 worth of tax money is paid to American grain farmers so they can sell it to market for $5.
Americans buy American grain for $5 (plus $5 in taxes to make $10)
$5 worth of tax money goes towards socialism rather than trade deficit with Canada

Which is better? Having $5 leave the US and go to Canada, or having $5 of tax money spent on subsidizing overpriced American crops? This could be any country really, but the point still stands.

 

[Art]

America is not alone in this policy the EU also heavily subsidises it's farmers. There are several reasons to justify subsidies such as national security. Do you really want to become dependent on another country for your food supply? Then there is the social aspect. Do you want to decimate rural communities?

On the economic side there are some advantages even for the tax payer in subsidising farming such as the artificially cheap price of meat fattened on subsidised corn. Also by keeping the money in the country everyone gains from the multiplier effect which doesn't happen if the money has gone abroad.

Of course there are problems too with food surpluses etc but if the level of subsidy is set correctly this is manageable. The EU seems in recent years to have largely eliminated it's wine lakes and butter mountains whilst continuing to sustain farming.

 

[russ_watters]

Why is a trade deficit a bad thing?

In any case, the trade deficit isn't what the politicians in the US use to sell the farm subsidies - it is protection for farmers.

 

[Art]

Why is a trade deficit a bad thing?

It's not inherently bad, it depends largely on whether the imports are capital goods or consumer goods and currency exchange rate policy.

Trade deficits accumulated on the back of consumer goods can mean an intergenerational debt is being built up whereby future generations end up paying for today's extravagances whereas deficits based on the purchase of capital goods can be considered an investment for the future. Most countries for economic and prestige reasons like to maintain a strong currency but if a country is deemed to be living artificially beyond it's means it's currency takes a dive on the currency exchange markets leading ultimately to a fall in confidence and an unwillingness on the part of supplier countries to accept the currency in payment.

 

[loseyourname]

The reason we subsidize farmers are these:

1) Crop prices are unstable. One season they might be very high, the next they might be very low.
2) Smaller farmers tend to reinvest all of their profits back into their farms. Rather than accumulate profit in the form of liquid or stable assets, they plant more crops or buy better equipment.
3) This leaves them with little "cushion" money when prices drop, meaning they can easily be forced to sell the farm.

This places disproportionate strain on family farms, as corporate absentee owners can absorb the losses for a year and make the money back the next year. Small farmers eat the losses by losing the farm, usually selling it to corporate farms or housing developers depending on whether there is any housing demand. So, in short, we subsidize to guarantee a good enough price to at least stay in business each year, to ensure that farming remains a viable option for individuals and not just for larger entities with diversified holdings. In fact, I'm not even sure it would be a terribly viable option for corporations if it wasn't for the subsidies at this point. We're trying to not end up with every person and business in the midwest becoming a housing developer rather than a farmer. It's hard to ever regain farm land that becomes something else.

 

[out of whack]

to ensure that farming remains a viable option for individuals and not just for larger entities with diversified holdings.

Why is it desirable that a particular industry remains a viable option for individuals? We don't do this for mining or forestry. Why is it important for farming?

 

[edward]

Why is it desirable that a particular industry remains a viable option for individuals? We don't do this for mining or forestry. Why is it important for farming?

In addition to individual family farmers there are a lot of corporate farms that receive the same subsidies. It is important because food is important. Few people are willing to do without it.

 

[edward]

There are those who will milk the system.

This is an interesting site. Enter a zip code or county and it will show the top 20 recipients of subsidies over the past ten years.

http://www.ewg.org/farm/index.php?key=nosign

 

[ShawnD]

Why is a trade deficit a bad thing?

Having a trade surplus is like saving a small portion of your take home pay; it's responsible. Having a trade deficit is like spending more money than you're taking in, and by "like" I mean "it's exactly the same". Generally we laugh at people who voluntarily get into extreme amounts of debt, so why should a trade deficit be treated differently when it's basically the same thing?

Farming is just one thing. It's arguable that we can take a trade deficit on farming and take up a trade surplus on something else.

 

[edward]

IMO we should try to be nearly self sufficient when it comes to our food supply. The FDA can't even keep up with the safety of what is grown and produced here. No more Chinese wheat gluten please.

 

[out of whack]

In addition to individual family farmers there are a lot of corporate farms that receive the same subsidies. It is important because food is important. Few people are willing to do without it.

That does not really address my question. On a large scale, things in general (including food) are produced by corporations more efficiently than by family operations. Corporate farming is more efficient due to economies of scale. Encouraging this would help to make farming more competitive against foreign sources, reducing the need for subsidies and lowering the tax burden. Encouraging smaller, less efficient farming through subsidies seems to be against the national interest.

 

[edward]

If we were to allow a total take over of farming by big business our food supply would be at the mercy of market forces. That may sound good to some until you think of milk costing $6 per gallon, because one huge dairy producer is facing a hostile takeover by another.

Even with a total corporate farm situation, they would still need subsidies to keep up with cheap foreign labor.

Other than that I just like the idea of family farms. I see a farmer caring more about his land than some CEO who sits in an office 1,000 miles away. With the growing popularity of organic foods the smaller farms may once again become competive.


http://www.npr.org/templates/story/story.php?storyId=1137493

 

[out of whack]

If we were to allow a total take over of farming by big business our food supply would be at the mercy of market forces.

It already is, and foreign competition also keeps things in check. I don't see a problem, capitalism works.

That may sound good to some until you think of milk costing $6 per gallon, because one huge dairy producer is facing a hostile takeover by another.

Market forces prevent this. When Daimler and Chrysler merged, car prices did not jump like that.

Even with a total corporate farm situation, they would still need subsidies to keep up with cheap foreign labor.

That's probably true. I also agree that for reasons of national security, farming must be allowed to survive and subsidies may be needed. But they can be reduced if farming can be done more efficiently, and this should benefit every tax payer.

Other than that I just like the idea of family farms.

I suspect this is the main reason. Farmers are voters, and even non-farmers like the romanticism of family farms. It's very Smallville.

 

[edward]

It already is, and foreign competition also keeps things in check. I don't see a problem, capitalism works.

Yep nothing beats capitalism when times are good.

Market forces prevent this. When Daimler and Chrysler merged, car prices did not jump like that.

The merger didn't cost Chrysler anything. Currently Daimler is trying to dump Chrysler. This was kind of my point , market forces are never stable, and our food supply has to be.

That's probably true. I also agree that for reasons of national security, farming must be allowed to survive and subsidies may be needed. But they can be reduced if farming can be done more efficiently, and this should benefit every tax payer.

Efficiency has gained in farming, even with small farmers most use computer programs to keep up with what works best.

I suspect this is the main reason. Farmers are voters, and even non-farmers like the romanticism of family farms. It's very Smallville.

I agree, farmers do get a lot of attention form Washington. As for living on a farm, you just can't beat waking up to the smell of real cow manure, instead of the sanitized odor of the bag of stuff from home depot.

 

[russ_watters]

In addition to individual family farmers there are a lot of corporate farms that receive the same subsidies. It is important because food is important. Few people are willing to do without it.

You're saying we will go hungry without farm subsidies? Seriously, what exactly would happen if we got rid of them?

 

[russ_watters]

Having a trade surplus is like saving a small portion of your take home pay; it's responsible. Having a trade deficit is like spending more money than you're taking in, and by "like" I mean "it's exactly the same". Generally we laugh at people who voluntarily get into extreme amounts of debt, so why should a trade deficit be treated differently when it's basically the same thing?

It should be treated differently because it isn't the same thing. It is not like spending more money than you are taking in, it is simply that you are importing more goods than you are exporting. But the balance sheet always equals zero: we pay for the goods we import, we don't get them on credit.

Also, for the US, currency itself is an export product. So why don't we consider that when calculating the deficit?

Seriously again: why, exactly is a trade deficit a bad thing. Because the word "deficit" sounds bad? What harm, exactly, does it cause to the economy?

 

[Bitter]

Why is it desirable that a particular industry remains a viable option for individuals? We don't do this for mining or forestry. Why is it important for farming?

Well, I grew up on a farm and one main reason why it is important for an indiviual have the option to be a farmer is that some operations are to costly for industry.

It is easy for the industry to sit a few thousand chickens in a room and let them lay eggs or place a few hundred cows in a room and milk them. However, when it comes to letting cattle graze and roam free, then it becomes a problem. It is far easier for a family to manage cattle that will be meat than for the the industry.

 

[Anttech]

Seriously again: why, exactly is a trade deficit a bad thing. Because the word "deficit" sounds bad? What harm, exactly, does it cause to the economy?

Money flows out rather than in.
I disagree with the idea of subsiding Farmers, not because it makes more economical sense at home, but because of what effects it has on Farms in poorer regions, who cannot compete and thus because of the greed of the richer nations are forced to live in abject poverty. Example is http://www.un.org/ecosocdev/geninfo/afrec/vol17no1/171agri4.htm

 

[Anttech]

$5 worth of tax money goes towards socialism rather than trade deficit with Canada

Whats socialist about your example? If you are referring to the redistribution of money to the poor, I don't think that is what is happening at all. Rich farmers are being kept rich. If you are referring to the fact the government is controlling production, you may have more of a point.

 

[Moridin]

The EU is spending countless of millions of dollars on it, paying farmers to grow it, just about ignoring whether or not it is used.

http://europa.eu/pol/agr/index_en.htm

 

[Anttech]

Yeap and so is the USA...

 

[BobG]

America is not alone in this policy the EU also heavily subsidises it's farmers. There are several reasons to justify subsidies such as national security. Do you really want to become dependent on another country for your food supply? Then there is the social aspect. Do you want to decimate rural communities?

On the economic side there are some advantages even for the tax payer in subsidising farming such as the artificially cheap price of meat fattened on subsidised corn. Also by keeping the money in the country everyone gains from the multiplier effect which doesn't happen if the money has gone abroad.

Of course there are problems too with food surpluses etc but if the level of subsidy is set correctly this is manageable. The EU seems in recent years to have largely eliminated it's wine lakes and butter mountains whilst continuing to sustain farming.

I agree with Art. Some products are critical enough you want your own country to capable of producing them. Just look at the problems caused by the US having to import so much oil.

 

[Anttech]

I agree with Art. Some products are critical enough you want your own country to capable of producing them. Just look at the problems caused by the US having to import so much oil.

Sure thing, but would you say cotton is one for example? Or perhaps the idiotic EU Common Agricultural Policy specifically for French farmers?

 

[Averagesupernova]

There are those who will milk the system.

This is an interesting site. Enter a zip code or county and it will show the top 20 recipients of subsidies over the past ten years.

http://www.ewg.org/farm/index.php?key=nosign

I looked at this site and can tell you that on the crop subsidy end of it that I know personally many of the individuals and companies listed in my locality. It's nothing I didn't already know before looking at the site, but Anttech is right, rich farmers are being kept rich. Our current farm program is taking too much financial risk out of the equation for large farms. That's how the US seems to be run. Big business takes priority over small business. Whoever said corporate farms are more efficient than small farms doesn't know anything about farming at all. I will guarantee that if farm subsidies go away (not necessarily a bad thing) corporate farms will be out of business. There is not enough money in it without farm subsidies to make it worth doing for most corporations.

 

[edward]

You're saying we will go hungry without farm subsidies? Seriously, what exactly would happen if we got rid of them?

Those are good question Russ. I don't think that we would go hungry, but we would definitely be eating a lot of food and food ingredients that comes from countries which do have subsidies.

As far as what would happen if we did away with farm subsidies, I don't think that anyone knows for sure. The subsidies work in a complex way and I sure don't know the formula the government uses.

The subsidies originally were meant to stabilize prices and act as a safety net for small farmers. They now seem to be going to the most wealthy farmers, especially corporate farms. I think that it is time to overhaul the whole situation, but we have to leave American farming in a competitive position.

When it comes right down to it I really have a problem with the fact that a good portion of the subsides go to pay farmers not to grow a certain crop, or not to produce over a certain amount of milk.

Below is an interesting link on people who are not farmers, yet are paid not to grow a crop.

http://www.washingtonpost.com/wp-dyn/content/article/2006/07/01/AR2006070100962.html

 

[out of whack]

Whoever said corporate farms are more efficient than small farms doesn't know anything about farming at all.

That was me and you caught me right, I'm no farming expert and I should say so. I only respond to posts made here and ask questions. I said that corporate farming should be more efficient than smaller operations by extrapolation from other industries plus the mention that subsidies are needed to keep family farms alive. So I withdrawing this claim but wouldn't mind some details about how small farm operations are more efficient than larger ones from those in the know.

I will guarantee that if farm subsidies go away (not necessarily a bad thing) corporate farms will be out of business. There is not enough money in it without farm subsidies to make it worth doing for most corporations.

How do subsidies to family farms differ from those made to corporations? Why wouldn't both types suffer equally from a drop in subsidies?

 

[Averagesupernova]

That was me and you caught me right, I'm no farming expert and I should say so. I only respond to posts made here and ask questions. I said that corporate farming should be more efficient than smaller operations by extrapolation from other industries plus the mention that subsidies are needed to keep family farms alive. So I withdrawing this claim but wouldn't mind some details about how small farm operations are more efficient than larger ones from those in the know.



How do subsidies to family farms differ from those made to corporations? Why wouldn't both types suffer equally from a drop in subsidies?

Without being exposed to daily life on a farm it is difficult for me to explain why I feel larger farms are less efficient. For a start, larger farms rely on employees. Most employees are unwilling to work the kinds of hours it takes to get all the work done. On a small farm most of the work is done by one to two people and both usually have a direct interest in the operation. They are willing to work long hours like most entreprenuers. (sp?) I thought I explained it well enough, but I'll just say it again, the larger farms are run by people who have the thirst for large amount of money that is generated by farming on a large scale with todays farm subsidie program. The typical small farmer is happy living with a lower income and has an interest in the farming itself more so than generating large amounts of money. If more financial risk is brought back into the equation (relying on what farmers used to rely on, mainly weather) the large farms will go away. The owners are simply not satisfied with lesser potential of income.
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On a different note, any business person, farmer or otherwise needs to think ahead in terms of having a poor year. It is always good to reinvest in the business, but in all reality business persons should be saving for a rainy day. Or in the farmers case, no rain.
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A question in general for everyone: Why should the US taxpayer be subsidizing a producer to compete with a global market? With ethanol booming this may change. But not considering ethanol wouldn't it be smarter to reduce production to keep the price high enough so the US producer can make it without subsidies? I think I know why, although some of you may disagree. The reason is because politicians want low food prices. In all reality, the US taxpayer is subsidising the small farmer enough to get by, the large farmer enough to do more than well all in order to keep the cost of food low. So technically, the consumer is the one being subsidized (by themselves, makes sense huh? )
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Edward, I didn't look at the link (yet) but most people have no idea how much money the USDA hands out to people that have nothing at all to do with agriculture.

 

[Art]

I'm still struggling to understand how small farms can be more efficient than large farms. How are you measuring efficiency? Yield per acre? Cost of crop per tonne? Do you have any sources to support this contention?

As for the idea of reducing output to push up prices, how is that supposed to work? All that would do is suck in cheaper imports.

 

[Averagesupernova]

I'm still struggling to understand how small farms can be more efficient than large farms. How are you measuring efficiency? Yield per acre? Cost of crop per tonne? Do you have any sources to support this contention?

As I said before, it's difficult to explain. I guess my source would simply be living around it. It's pretty obvious really when you figure the costs. It's always the cost of crop per unit of crop. Acres figures in by how much a farmer is paying per acre in rent or how much is paid in interest on a loan and how many dollars per acre were paid in a purchase. The value of the land is pretty high all across the ag belt right now. As I said before, you have to figure labor into it as well. Who is willing to work for how much and for how long?

As for the idea of reducing output to push up prices, how is that supposed to work? All that would do is suck in cheaper imports.

So you are saying raising all the product we can possibly grow at or near a loss which is what we are doing now is better? By the time you take off the subsidies that is exactly what we are doing. As I stated in my last thread why do we need to compete in a world market? Why are US taxpayers subsidizing (themselves) in order to be able to compete in a market with the foreign competition that raises the product at a much lower standard of living? The US should worry about the US concerning food supply and many other things for that matter.

 

[loseyourname]

Why is it desirable that a particular industry remains a viable option for individuals? We don't do this for mining or forestry. Why is it important for farming?

In part because farmers have usually had a fairly good lobby and it's desirable to keep powerful blocs of voters happy, at least from the perspective of the politicians that put and kept subsidies in place. At the time the subsidies were originally created, small farmers didn't have much in the way of alternate job options, either. If they lost their farms, about the only thing they could do was become agricultural workers, taking a rather extreme wealth loss. The country didn't want to create millions of new poor people for no good reason. Another reason is that corporate farms have had somewhat of a history of putting out less healthy food products. Efficiency isn't necessarily the primary concern when it comes to a national food supply, given the primacy of nutritional quality to general citizen wellness. We can see with the craze for organic foods lately that people are willing to pay more to be healthier when they're educated about nutrition.

Of course, corporate farms easily can and already have started to put out a better product. Most of it probably is nostalgia. There still exists the Jeffersonian ideal of self-sufficient farm owners working the land and that old John Wayne rancher image, even if both were mostly myths from the beginning. There are a lot of sad tales out there of families that have been in the farming business for centuries losing everything, but I suppose it was once the same for doll makers and book transcribers and every other form of individual artisan replaced by mass production.

 

[Bitter]

I'm still struggling to understand how small farms can be more efficient than large farms. How are you measuring efficiency? Yield per acre? Cost of crop per tonne? Do you have any sources to support this contention?

As for the idea of reducing output to push up prices, how is that supposed to work? All that would do is suck in cheaper imports.

Well, One way to look at it how much it cost to run a farm to home much you make in return. A corparation would find it hard to do large cattle operations because of the land needed. They would have to pay workers to tend the cows, maintain the land, transfer the cattle, and various other jobs. Plus when bad weather comes, extra procautions are needed.

It generally is easier for a family to take care of 200 cows and a few bulls than it would be for a corparation to do so. A family can work every day for a week and run more effectively and at a lower cost. It is one of the few fields that the industry has yet to take over in farming.

 

[Art]

Well, One way to look at it how much it cost to run a farm to home much you make in return. A corparation would find it hard to do large cattle operations because of the land needed. They would have to pay workers to tend the cows, maintain the land, transfer the cattle, and various other jobs. Plus when bad weather comes, extra procautions are needed.

It generally is easier for a family to take care of 200 cows and a few bulls than it would be for a corparation to do so. A family can work every day for a week and run more effectively and at a lower cost. It is one of the few fields that the industry has yet to take over in farming.

My understanding is corporations are far more efficient in this area because they use confined animal feeding operations CAFO though corporations wouldn't be interested in a couple of hundred cows precisely because at those numbers it would be inefficient and by definition would not qualify as large scale.

There are arguments over the effect of CAFOs on the ecology but disregarding those it is a far more efficient system than the small farmer can implement.

Here's a good overview on US farming in relation to subsidies from 2006 a key point being the number of farms in the US has decreased enormously as small farms have gone under to be amalgamated into bigger farms because of the greater efficiencies in large scale production.
http://www.abareconomics.com/publications_html/trade/trade_06/us_ag.pdf

 

[Anttech]

As I said before, it's difficult to explain

Dont you mean impossible? I think every economist, or even someone with a slight interest in how business are run could tell you "mass production = more savings/unit produced." This carries through to mass production of food stuffs

Although I despise this whole keep farmers rich BS, I am afraid I can't agree with your argument.

 

[russ_watters]

Money flows out rather than in.

So what? Why is preferable for money to flow in rather than out?

Again, where is the harm? Everyone takes it as a given that a "deficit" is a bad thing, but no one can explain why!?

 

[russ_watters]

Those are good question Russ. I don't think that we would go hungry, but we would definitely be eating a lot of food and food ingredients that comes from countries which do have subsidies.

As far as what would happen if we did away with farm subsidies, I don't think that anyone knows for sure. The subsidies work in a complex way and I sure don't know the formula the government uses.

The subsidies originally were meant to stabilize prices and act as a safety net for small farmers. They now seem to be going to the most wealthy farmers, especially corporate farms. I think that it is time to overhaul the whole situation, but we have to leave American farming in a competitive position.

When it comes right down to it I really have a problem with the fact that a good portion of the subsides go to pay farmers not to grow a certain crop, or not to produce over a certain amount of milk.

Below is an interesting link on people who are not farmers, yet are paid not to grow a crop.

http://www.washingtonpost.com/wp-dyn/content/article/2006/07/01/AR2006070100962.html

We are more or less in agreement. I'd probably lean toward getting rid of them completely, but like you say, the situation gets complicated since they are so intrenched. A slow pullback/overall, giving time to evaluate what happens, would be how I'd approach it.

 

[Art]

So what? Why is preferable for money to flow in rather than out?

Again, where is the harm? Everyone takes it as a given that a "deficit" is a bad thing, but no one can explain why!?

I already explained why in post #4

In fact there are strong indications that America's deficit could already be leading the US economy into major problems.

The US dollar is in severe decline against all other major currencies. This fall could become precipitous as more countries decrease their holdings in US dollars to avoid being caught with a depreciating asset. Already some oil producing countries are demanding payment in euro leading to further falls in demand for USD reserves thus perpetuating the downward spiral. Add to this reduced demand for US treasury bonds (again depreciating asset) and you have all the ingredients for an economic crisis. To shore up the currency the fed will need to raise interest rates which applies deflationary pressure to the economy which can in turn lead to recession.

 

[Averagesupernova]

I might add that paying farmers NOT to produce is what is known as the Conservation Reserve Program (CRP). This is often applied to land that is not very productive crop-wise. Anyone who owns land can participate in this. It is not uncommon for a wealthy non-farmer to purchase land and take advantage of this. To say the least, this does NOT bring in more income than actual farming. It is often done for hunting or similar reasons. The more you study farm subsidies the more you will learn that they help the actual farmer who has a direct interest in growing a crop less than anyone else. Too bad most farmers are unable to see or accept this.

 

[Bitter]

My understanding is corporations are far more efficient in this area because they use confined animal feeding operations CAFO though corporations wouldn't be interested in a couple of hundred cows precisely because at those numbers it would be inefficient and by definition would not qualify as large scale.

There are arguments over the effect of CAFOs on the ecology but disregarding those it is a far more efficient system than the small farmer can implement.

Here's a good overview on US farming in relation to subsidies from 2006 a key point being the number of farms in the US has decreased enormously as small farms have gone under to be amalgamated into bigger farms because of the greater efficiencies in large scale production.
http://www.abareconomics.com/publications_html/trade/trade_06/us_ag.pdf

Well it depends on what you mean by effective. If you mean that produce more, than you are right, they do produce more. When a corporation handles cattle in all processes, the beef is generally damaged. This may happen for a number of reasons. Most commonly is that most corporation don't have time to deal with rogue cows and instead of dealing with the lead cow, they tend to beat and drag all the cows. It is quicker, but not exactly good for the animal or you.

Small farmers tend to produce a higher number of better quality meat than the big industry. It is far to costly for the industry to invest in doing so and the return wouldn't be that great, but it is cost effective for the small farmer. Holding cattle in a pen and feeding them while they stand is not the way to produce good meat.

So, it really depends on what you mean by more effective.

 

[Bitter]

I might add that paying farmers NOT to produce is what is known as the Conservation Reserve Program (CRP). This is often applied to land that is not very productive crop-wise. Anyone who owns land can participate in this. It is not uncommon for a wealthy non-farmer to purchase land and take advantage of this. To say the least, this does NOT bring in more income than actual farming. It is often done for hunting or similar reasons. The more you study farm subsidies the more you will learn that they help the actual farmer who has a direct interest in growing a crop less than anyone else. Too bad most farmers are unable to see or accept this.

Well, I must say that it may help us less, but help is help. In Missouri, we are suffering through a drought, so it is tough to be a self-sufficient farm right now. Anything from drought relief to subsidies do help even if only a little.

 

[mbrmbrg]

Then there's http://www.nytimes.com/2007/04/22/magazine/22wwlnlede.t.html?_r=1&oref=slogin" fascinating article from this past Sunday's New York Times which adds the dimension of what should be subsidized as long as subsidizing is happening...

edit: added same article as an attatched Word document

 

[russ_watters]

I already explained why in post #4

You said they are not inherrently bad and I agree.

But when you talk about accumulated debt, that just simply isn't true. That's not what a trade deficit is: There is no such thing as a 'trade debt'. We've had that discussion before: since people assume all deficits are talking about the same thing, they assume there is a 'trade debt' like there is a national debt. There isn't.

In fact there are strong indications that America's deficit could already be leading the US economy into major problems.

The US dollar is in severe decline against all other major currencies.

Whether a falling currency is a problem depends again on who you ask (our gdp growth is a strong as ever), but regardless, the trade deficit isn't why the dollar is falling. The dollar is falling because money is a commodity like any other, so when people start buying Euros instead of Dollars, the dollar falls. Simple supply and demand.

 

[BillJx]

I know next to nothing about farming. Come to think of it, ranchers, wheat farmers, truck farmers and organic herb gardeners probably don't know much about each others' businesses either. So I don't feel too alone.
Anyway, what I do know is that in my part of the world, good farmland is continually being converted to suburban development, despite an agricultural "land freeze" that's been in place for decades.
In my overwhelming ignorance of the issues, it seems reasonable to use subsidies to compensate farmers for farming their land instead of selling it off at ridiculous prices.

 

[Art]

said they are not inherrently bad and I agree.

I added the proviso so long as the deficit is related to capital investments then it isn't bad.

But when you talk about accumulated debt, that just simply isn't true. That's not what a trade deficit is: There is no such thing as a 'trade debt'. We've had that discussion before: since people assume all deficits are talking about the same thing, they assume there is a 'trade debt' like there is a national debt. There isn't.

Whether a falling currency is a problem depends again on who you ask (our gdp growth is a strong as ever), but regardless, the trade deficit isn't why the dollar is falling. The dollar is falling because money is a commodity like any other, so when people start buying Euros instead of Dollars, the dollar falls. Simple supply and demand.

There are a few elements to this.

Currency is akin to an IOU. You pay for your imports with currency which worthless in itself is subject to redemption at some time in the future which is why I referred to it as an inter-generational debt.

America's economy is critically dependent on the dollar being a strong currency used in international transactions amongst leading countries thus requiring them to hold large dollar reserves and thus never redeeming the debt which in effect means America gets other countries goods and services in return for pieces of paper. The greatest most farsighted and skillful economic achievement ever was America persuading the Saudis and other OPEC countries to only sell oil only in dollars. Not only did this instantly create a huge demand for dollars then but as the world's economy has grown and demand for oil has soared so has the demand for dollars soared with it.

Problems arise when the value of a currency is perceived as not being backed up by economic output and this perception leads to currency devaluation on the world markets. You refer to simple supply and demand and you are right but it is critical to understand the reasons behind falling demand. Large trade deficits are a key driver.

Currency devaluation reduces international confidence leading other countries to look for ways to reduce their dollar reserves thus increasing the fall in demand leading to further falls in the exchange rate of the dollar, leading to further loss of confidence etc...

Left unchecked you reach the point where other countries are no longer prepared to accept your currency in return for their output and so to pay for your imports you now have to spend your own foreign currency reserves which were earned by selling actual products with real value.

To further the pain those countries holding your currency who no longer need it to finance trade with other trading partners want to get rid of it and so they start to buy your products using the money you paid out x years ago (never expecting to see it again) to pay for them. Suddenly not only does America no longer receive other countries' goods in exchange for worthless pieces of paper but those worthless pieces of paper you thought you had seen the last of years ago are now coming back to bite you hard.

It is this that can make trade deficits a very bad thing.

The above doomsday scenario is not far-fetched. Iran has set up a new oil bourse trading in euro* and Russia too is converting it's energy sales to euro. China and Japan have both expressed a willingness to pay for their fuel imports in euro whilst China has also said it intends to substantially reduce it's dollar reserves and so the dollar is currently under serious threat from a multitude of sources.

* Iraq under Saddam did this too which leads some to suspect this was a major factor in the decision to invade Iraq. One of the first things the US did after the invasion was to revert oil sales to dollars.

ps If you want to discuss this further you might think about splitting the relevant posts off into a new thread as we seem to have drifted away from subsidies.

 

[russ_watters]

Currency is akin to an IOU. You pay for your imports with currency which worthless in itself is subject to redemption at some time in the future which is why I referred to it as an inter-generational debt.

That's a run-on sentence, but you seem to be saying that at some time in the future, people might call on the US to provide them with gold in exchange for their paper money. That isn't how money works anymore. Money today (the money of a rich nation anyway) is a commodity like any other and does have real value in the way that gold or diamonds do and like gold or diamonds, the value is set by supply and demand. And I know your response - but diamonds and gold have industrial value besides their precious commodity value. That's true, but it isn't what drives their prices and money also has a real value: it is an enabling medium for trade (which is the whole reason other countries use the dollar or the euro).

America's economy is critically dependent on the dollar being a strong currency used in international transactions amongst leading countries thus requiring them to hold large dollar reserves and thus never redeeming the debt...

Again, there is no debt there. There is nothing to redeem. You cannot go to a bank and exchange your dollars for gold. A dollar's value is what it is.

...which in effect means America gets other countries goods and services in return for pieces of paper.

Well gee, now you're making a trade deficit sound like a good thing - like we are getting something for nothing. Ironic that you're contradicting yourself like that, but still wrong.

Problems arise when the value of a currency is perceived as not being backed up by economic output and this perception leads to currency devaluation on the world markets. You refer to simple supply and demand and you are right but it is critical to understand the reasons behind falling demand. Large trade deficits are a key driver.

Currency devaluation reduces international confidence leading other countries to look for ways to reduce their dollar reserves thus increasing the fall in demand leading to further falls in the exchange rate of the dollar, leading to further loss of confidence etc...

Again, you are looking at the issue backwards. Economics is competition and so while people like to say the value of the dollar is "falling", it is kind of a meaningless thing to say. Due to inflation, the value of every currency drops. What is meant/implied is that the dollar's value is decreasing faster than previously in history and that just plain isn't true. Inflation for the past decade has been as low as it ever gets.

What is true is that the value of the dollar relative to some other currencies is fallling. But that isn't because the dollar's value is decreasing more than normal, it is because those other currencies (specifically, the Euro) are getting more competitive.

As a result, this is good news for Europe, but it does not present the crisis for the US that people like to think it does. As long as our economy keeps growing, we can simply absorb money dumped back into the open market - much like a corporate stock buy-back.

Left unchecked you reach the point where other countries are no longer prepared to accept your currency in return for their output and so to pay for your imports you now have to spend your own foreign currency reserves which were earned by selling actual products with real value.

"Left unchecked" a decending plane will crash. You're talking about consequences that just aren't in the reasonable realm of possibility.

 

[Art]

Russ you appear to have completely missed the point so I see no benefit in rehashing what I have already said as I suspect no matter how I rephrase it you will continue to refuse to accept it.

One point I will make is your continual reference to gold is a total strawman. Not once did I refer to gold in any of my posts. I referred to people redeeming currency for solid goods which have consumed real resources in their production as opposed to the token resources consumed in the printing of money.

And the 'check' to prevent a run on the dollar is a rise in interest rates, as I already said in an earlier post, which can lead to recession.

Dollar Trades Near Record Low Versus Euro; U.S. Growth May Slow

By Gavin Finch and Kosuke Goto

April 26 (Bloomberg) -- The dollar traded near to a record low against the euro as signs of slowing U.S. economic growth prompted traders to increase bets the Federal Reserve will lower interest rates this year.

The U.S. dollar fell to an all-time low against currencies of its major trading partners yesterday, according to a Fed index published on its Web site.

http://www.bloomberg.com/apps/news?pid=20601101&sid=aNB.3dAAZPOk&refer=japan

So America is in a quandary. They need to reduce interest rates to boost the home economy but doing so will lead to a further drop in the value of the dollar which further erodes confidence and threatens the US dollars status as the world's reserve currency.

All of this relates directly to America's current trade deficit

Petrodollar Hegemony
So how is Iran refusing to sell oil for dollars is connected to the US current accounts deficit?

Normally, when a country runs a current accounts deficit, it must pay the difference in cash. However, since the early 1970s, the US has had a special deal.

When OPEC formed, the US government negotiated a deal that all OPEC countries would only sell oil for dollars and dollar denominated securities. In other words, if you want to buy oil from an OPEC country, you need to buy dollars first.

This was a great deal for the US because it could essentially print dollars and sell them abroad to cover its trade shortfalls. Other countries had to buy those dollars so they could buy oil.

The OPEC countries, in turn, tended to invest their wealth back into the US (this is called petrodollar recycling) so the US economy could essentially enjoy its benefits without actually having to produce anything to earn it.

The run-up in oil prices since 2000 has been a bonanza for the US economy despite higher prices at the pump since the international demand for US dollars has grown in lockstep. This has allowed the US current accounts deficit to reach its present state of unimaginable bloat.

If OPEC changed its policy and allowed people to buy oil with other currencies, it would be a disaster for the US economy, because international demand for all those little green pieces of paper would evaporate.

Despite the high oil prices, the value of the dollar has been flagging against the euro since 1999 when the common European courrency was first introduced. This reflects the poor fundamentals of the US economy - other than the petrodollar system, US currency isn't backed by any real economic foundation

Iran leads attack against U.S. dollar

by Jerome R. Corsi

Global Research, April 12, 2007
WorldNetDaily.com

While the world press has focused on Iran's plans to move ahead with enriching uranium, Tehran continues to wage economic war against the U.S. dollar behind the scenes.

Tehran has reached a decision to end all oil sales in dollars, according to statements by Iran's central bank governor, Ehrabhim Sheibany, in Kuala Lumpur at the end of last month.

Zhuhai Zhenrong Trading, a Chinese state-run company that buys 240,000 barrels of oil per day from Iran, approximately 10 percent of Iran's 2.2 million barrels per day total output, has confirmed a shift to the euro for its Iranian oil purchases.

About 60 percent of Iran's oil income is currently in non-dollar currencies, according to Hojjatollah Ghanimifard, who is responsible for international affairs for National Iranian Oil.

Even Japanese refiners who buy some 550,000 barrels of oil a day from Iran have indicated their willingness to buy Iran's oil in yen.

China, which buys approximately 12 percent of its crude oil supply from Iran, signed last year a long-term $100 billion deal with Iran to develop Iran's giant Yadvaran oil field. Estimates indicate China could draw 150,000 barrels of oil from the Yadvaran field for the next 25 years, assuring Iran's position as one of the major suppliers of oil to China for decades to come.

One possibility is that China may begin paying Iran for oil in yuans.

http://www.globalresearch.ca/index.php?context=viewArticle&code=COR20070412&articleId=5370

The threat to a fistful of petrodollars
By Liam Halligan

From Russia, you might say, with love. This weekend, Alexei Kudrin, Russia's finance minister, dropped a bombshell in Washington.

Attending the annual meetings of the World Bank and International Monetary Fund, Kudrin caused his American hosts discomfort by openly questioning the dollar's pre-eminence as the world's "absolute" reserve currency.

The greenback's recent volatility and the yawning US trade deficit, "are definitely causing concern with regard to its reserve currency status," he said. "The international community can hardly be satisfied with this instability."
<snip>
Most nations stockpile their foreign exchange holdings in dollars. The US currency accounts for more than two thirds of all central bank reserves worldwide.

This reserve status means that the dollar is constantly in demand, whatever the underlying strength of the US economy.

And now, with massive trade and budget deficits to finance, America is increasingly reliant on that status. The unprecedented weight of US liabilities means a threat to the dollar's dominance could result in a currency collapse, plunging the world's largest economy into recession.
<snip>
Kudrin's statement followed news that Sweden has cut its dollar holdings, from 37 per cent of central bank reserves to 20 per cent, with the euro's share rising to 50 per cent. Central banks in some Gulf states have also lately mooted a shift into the euro.

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2006/04/23/ccliam23.xml

You will note a common theme when countries talk of switching their reserves to another currency is a concern about America's trade deficit.

That is what makes trade deficits a bad thing!

So to use your analogy the engines on your hypothetical plane are begininning to make uncomfortable grinding noises .

 

[Moonbear]

Why is it desirable that a particular industry remains a viable option for individuals? We don't do this for mining or forestry. Why is it important for farming?

I haven't read every reply in this thread, but I don't think I've seen this reason addressed: if you leave all farming to large corporations, large portions of your food supply are in the hands of very few people. If that corporation decides they're making a better profit selling widgets than farming, and sells the farm, you could lose a large part of the food supply all at once. With farming diversified among many smaller farmers, if one sells, you don't lose a lot of your food supply all at once.

Also, thinking through to the recent recalls this year with large corporations running packaging plants, etc., we saw what happened, for example, with everything containing spinach disappearing from store shelves because ONE plant processed so much of the food that what could have been isolated contamination in one field ended up wiping out sales of an entire crop. Can you imagine if you couldn't have even isolated the contamination to one of many farms?

As was alluded to before, national security is a good reason to subsidize crops, and part of that also involves ensuring that too few individuals don't gain control of too much of the food supply, otherwise they could potentially call all the shots while threatening to leave the people starving if they don't pay what they demand. Subsidies don't eliminate competition within the country that keeps food affordable.

 

[out of whack]

The need to retain farms instead of importing cheaper food is not in dispute. Subsidies are one way, another might be tax exemptions on anything farm-related. I don't have a grasp of all factors so I must defer to the economists.

About my own question on why it is desirable that farming remains a viable option for individuals, I summarize the points I have found most relevant:

1. Because private owners have a good lobby and outnumber CEO votes. Well, this is just political and not necessarily what is best for the country. But it is reality.

2. Because private owners care more about their land than corporations. This goes to motivation and love of the land. It has to be a strong factor that influences every decision made by the land owner so I see it as a real plus. Nothing beats personal commitment.

3. Because private owners have a history of higher food quality. This may be true and is probably linked directly to point 2 above (maybe it's actually the same point). Corporations must be pushed by market forces to improve quality, private owners do it naturally since they see what they eat directly while they produce it.

4. Because private owners are willing to put in more hours for equal pay. I'm ambivalent on this one since business owners in all other fields do this as well. There is a capital gain incentive so it's not strictly true that they don't get compensated for their time. They put in more hours to maintain and grow high-value operations that they can sell at retirement.

5. Because some farming tasks may not permit economies of scale. This was debated but not convincingly demonstrated in my opinion.

6. Because distributing food sources provides safety and stability. This goal is valid and sensible, and supporting private owners works towards this end. Of course, preventing over-sized farming operations through legal, fiscal or other methods could also do this, possibly better if it addressed the goal directly instead of indirectly. But here again I must defer to economists for the best approach.