If we shore up the economy, we're helping to shore up demand,” says David Anderson, Texas A&M University Extension agricultural economist.
That's the primary benefit cattle producers could receive from the government's myriad economic stimulus packages.
As it is, recession-depressed demand is capping cattle and beef prices despite tight supplies. It could get worse, too.
“The data from the U.S. are grim. Our economy contracted at an annual rate of 6.3% in the fourth quarter of last year,” says Richard Fisher, president and CEO of the Federal Reserve Bank (FRB) of Dallas. In recent remarks to Japanese bankers and economists, Fisher said: “We currently have roughly 13.2 million people without jobs, which equates to an unemployment rate of 8.5%. I expect the unemployment rate to continue rising to a level that could surpass 10% by yearend. Among other things, this has compounded the problem of the much-watched housing market, where many of the problems we have encountered in our financial markets germinated.”
Beginning with the Bush Administration, Congress — responsible for national fiscal policy — and the FRB — responsible for the nation's monetary policy — have thrown everything but the proverbial sink at stemming the tide of last fall's credit implosion, the commodity bubble collapse that exacerbated it and the housing mortgage crisis that preceded it.
Money for everybody
The most visible and costly tools applied so far are the American Recovery and Reinvestment Act (ARRA — $787.2 billion) and the Emergency Economic Stabilization Act (EESA — $700 billion).
Among other things, Vincent Amanor-Boadu, Kansas State University (KSU) agricultural economist, explains the ARRA is aimed at job preservation and creation, stabilizing state and local governments, as well as investing in infrastructure that will provide long-term economic benefits.
It's too early to see much impact from ARRA. The Congressional Budget Office (CBO) estimates it will take three years for 91.3% of the total $787.2 billion of the stimulus outlay to be spent. Along the way, though, Anderson says the stimulus could provide consumers positive psychological stimulus.
Similarly, EESA has offered little impact. It was aimed at clearing the credit logjam by reducing lender fears and risk concerning toxic financial assets, while injecting capital into faltering financial giants. Think of finance behemoths like AIG and CitiGroup.
“Its hypothesis was that providing capital to banks while relieving them of their troubled assets would unclog the credit markets and restore growth,” explains Amanor-Boadu. “A critical assumption underlying the hypothesis was that prices of the troubled assets were transparent and could, thus, be acquired easily and quickly.”
That hasn't been the case. Amanor-Boadu believes the troubled assets themselves may not be the problem, but rather, “It's the prevailing uncertainty about the extent of exposure of financial institutions to the risks associated with opaque financial instruments used to acquire these assets and complicate their risk ratings.”
In other words, pricing the troubled assets is so difficult, the risk so uncertain, that sellers and would-be buyers of the assets have remained on the sidelines.
“Until progress in the credit markets occur, the stimulus package may fail to arrest the credit crunch recession,” says Amanor-Boadu.
Closer to home, agricultural credit conditions are mixed.
According to Laila Assanie, associate economist for the Dallas FRB, “Fund availability is steady but collateral requirements have tightened up at some banks. A higher percentage of bankers reported waning loan repayment rates and rising requests for loan renewals and extensions compared with the previous quarter.” That's based upon the most recent quarterly survey to assess credit condition in the 11th Federal Reserve District (Texas, southern New Mexico and north Louisiana).
“Overall loan demand has pulled back compared to last year. In particular, demand for feeder-cattle and farm machinery loans have declined,” Assanie says. “Some respondents cited the ongoing dry spell and high feed costs in the district as factors impacting loan demand. Farm real estate loan demand has fallen, as well, while land sales have slowed and land prices are beginning to flatten out.”
Debt worry and inflation fear
As stimulus dollars filter into the economy, policy makers are already battling the potential outcome of their success: increased national debt and inflation.
According to Fisher, “The net new supply of Treasury debt is predicted to expand by $2.5 trillion in the current fiscal year, vs. $788 billion in the last fiscal year, and only $145 billion in fiscal year 2007.”
That doesn't necessarily mean the stimulus packages themselves equate to a net debt.
“With government spending, it comes down to whether the money is being spent on things that will bring back an economic return. As an example, spending money for improvements to infrastructure can foster economic growth. If we spend money that way, then assuming additional debt isn't necessarily a bad thing,” says Anderson. “But debt still has to be paid and the only way for the government to do it is with spending cuts and increased taxes. And, I don't know that you can cut spending enough to pay for it.”
Likewise, Anderson points out some EESA money spent in loans as part of the Troubled Asset Relief Program might be repaid at a lofty interest rate.
As for the threat of inflation, though the $1.5 trillion in government spending stimulus poses risk, it's not a given.
“It is clear to me that in this environment, inflation is unlikely to present a serious threat given the pervasive bias in the U.S. economy toward wage cuts and freezes, rising unemployment, the widespread loss in wealth that has resulted from both the housing and equity-market corrections, continually declining consumption and business investment and the anemic condition of the banking and credit system, all of which reinforce downside price pressures in a global economy groaning with excess capacity,” Fisher says.
In some ways, the primary threat to increased inflation is successfully putting the recession behind us.
“At some point, the economy will recover and interest rates will go up,” Anderson says. “Interest rates are related to the supply of money, but also to expectations about inflation. … I tend to think we'll see increased inflation in the future, but I don't know to what degree.”
Consumers are doing their part to stem inflation; they're spending less and saving more, exactly the opposite of what will lead the country beyond this recession.
That's because consumer spending adds up to about two-thirds of America's annual gross domestic product. The balance is comprised of government spending (20%) and private investment (16%), says Amanor-Boadu.
“Even when the government pumps money into the economy, consumers still have to spend it,” he says.