For the longest time in my farming career, I’ve been concerned about debt. Is a fact of life that farmers borrow a lot of money. In fact the world borrows a lot of money. Credit is the lubrication of our economy and it doesn’t matter if you are on the back concession of Canadian farm country or in the annals of Wall Street. If you don’t have credit or real cash, the economy slows down and nothing works real well.
We are not there now. In fact, you could probably make the opposite argument that credit has never been easier. I have told this story many times. My first demand loan as a farmer was for 23.25%. That was in 1981 when Canada experienced some of the highest interest rates ever. I paid for several of my farms at interest rates of 12.75%. So as we careened into the 2000s the relatively low interest rates that we pay now seemed like a walk in the park.
This has led to some pretty interesting decisions for Canadians. In fact our finance minister and the Bank of Canada Governor have publicly acknowledged they don’t like the amount of debt that Canadians are carrying. I can translate that into Canadian agriculture by counting the number of new pieces of iron I see on today’s farms as well as the inflated price of land. Low interest rates and the way people behave with it are all part of the greater fiscal and monetary Canadian plan.
In late July we were inundated with news reports about the impending debt ceiling talks leading up to August 2nd in the United States. On that day, the United States would theoretically default on some of its debt. If you have read any of my other writings on the subject, you will know that I think that is insane. It’s the equivalent to there being no oxygen tomorrow morning for people to breathe. That’s the analogy I give regarding what the American economy means to world economics. It’s our benchmark with the world’s default currency and the specter of default is flat out unthinkable.
However, I do not want to yell fire in a crowded theater. The United States is still the United States with the biggest economy in the world and the biggest guns. Its debt to GDP ratio is approaching 100%, which puts it about 17% deeper than the UK and 16% deeper than Canada. On the other hand Greece is sitting at 152% debt to GDP ratio in Japan is sitting at 229% debt to GDP ratio. So the United States has some company in this neighborhood. It also has a 24-hour news cycle and a political environment polarized between Democrats, Republicans and the radical right, Tea Party. So the debt buzz was shrill.
It has real ramifications for both American and Canadian agriculture. Of course the big one is the value of the US dollar. As we approached the August 2 deadline, markets took risk off the table. The US dollar has fallen, equities have gone down and the general nervousness has set into markets. In late July, many American commentators started talking more about it, in an almost embarrassing tone. The specter of their politicians playing with economic fire was hard to stomach. The thing everybody wanted to avoid was a global economic slowdown caused by an artificially produced political event over a routine debt ceiling change. US and Canadian farmers were staring down the barrel of that gun.
At a certain point cuts will have to come to US government spending and that will certainly cut a wide swath in farm programs. At the same time if the US bonds rating is cut, interest rates will need to move higher to attract capital and credit to lubricate the economy. This only makes things more expensive for everybody involved in American agriculture. On the other hand in Canada, our loonie will probably rise even higher despite the fact most everything we produce we still sell to the United States. On August 1st, there was finally a debt deal, but the US debt problems lives on.
American debt now stands at $14 trillion. A reasonable person knows that a debt of zero doesn’t make much sense especially when it comes to one of the greatest country and richest countries on earth. Yes, tough choices will have to be made, cuts, cuts and more cuts. Surely agriculture will have their fair share of them. If US debt doesn’t soon get under control, we’ll have much higher interest rates both in the US and Canada. I really don’t want to go there.