Falling interest rates present a profound opportunity for refinance-ready farmers, while a dauntingly familiar rise in inflation sets experienced producers on edge.
During a Kansas State University Risk and Profit Webinar, agricultural economics professor Brian Briggeman discussed the macroeconomic climate post-pandemic.
Three key macroeconomic implications are closely tied to lower interest rates.
• Falling U.S. Dollar
By design, lowering interest rates allows the United States some control over the global strength of the U.S. dollar, but if decisions are made hastily about where and when to lower rates, the response to lower interest slows.
“If we have those lower interest rates, that should be putting downward pressure on the U.S. dollar, which should make our goods and services more affordable in the global marketplace,” Briggeman said. “Typically, when the fed drops those interest rates so rapidly, the dollar has a bit of a delayed response."
Events outside of the pen and paper side of the U.S. economy can also dampen immediate results to lower interest. In 2020’s case, the pandemic had a profound effect.
“In the Great Recession, we saw a big spike in the U.S. dollar and then when the COVID-19 pandemic hit we once again saw a spike,” Briggeman said. “A lot of that is just driven by flights to safety.”
Briggeman said as consumer confidence grows better and the pandemic stabilizes, he can see the U.S. dollar spike begin to naturally fall off, increasing trade.
• Low Interest Rates
Fixed interest rates are currently lower than they have been in many years and consumers across a wide variety of industries have locked in fixed rates.
“I’ve been talking a lot with producers, agricultural businesses and coopertives about locking in current low interest rates,” Briggeman said.
However, Briggeman said he can see the tide turning toward higher rates in the future, and perhaps a rise in popularity for variable rates, especially in agriculture.
“Maybe we are beginning to see this period of lower fixed rates end and the beginning of a period where we would see variable rate financing become more attractive,” Briggeman said.
Variable rates are typically a wise idea in times of yield curve inversions, which can be a sign of economic conditions to come.
“When the yield curve inverts, and what that means is shorter term rates are greater than longer term rates, that’s a signal that something is going awry within the overall economy and a recession might be coming soon,” Briggeman said.
• High Federal Debt to GDP
The federal debt to gross domestic product ratio in the U.S. is nearing 100%, the highest the ratio has been since World War II, with a projected ratio of 200% by 2050. Briggeman said the rising debt to GDP ratio is concerning, especially if the trend continues into the future, but it doesn’t appear to be slowing down any time soon.
“The conversation today is not around whether we should pull back or not have any more COVID-19 related spending, in fact there’s a 1.9 trillion bill being discussed,” Briggeman said. “One of the reasons we’re not talking about cutting back is, unlike in the past, the very low interest rates we have currently make that debt more affordable.”
During World War II, interest rates averaged 1.8% and during the COVID-19 pandemic, they averaged 1.5%.
“The increase that we had in the money supply when we went through the Great Recession went from 8 trillion and then popped up to nearly 9 trillion — that had never been seen before,” Briggeman said. “Here today, you can see that money supply has even taken a larger increase, going from nearly 16 trillion to almost 20 trillion.”
The “Just Print More” money mentality in the current economic climate is familiar, and worrying, for farmers who operated during economic events from the 1980s through the Great Recession. While 2020, might appear to be a similar economic cycle, Briggeman said there are key differences to note.
“Certainly, following the old adage of rapid inflation and the fear of the 1970s and 1980s, this would be too much money,” Briggeman said. “In order to have that, you have to have too much money chasing too few goods and right now, the U.S. consumers have really pulled back.”
It’s the "chasing" component that makes the difference in this case, Briggeman said. And the absence of the chasing component does not indicate a similar rapid rise in inflation to the 1970s or 1980s.
“The big reason why the old way of thinking about inflation doesn’t apply here is because of quantitative easing,” Briggeman said. “When it comes to the different securities that the fed holds, the quantitative easing they have embarked on will not enter in to the fractional reserve system, the lending system within the U.S.”
Quantitave easing is a policy where a bank purchases bonds or financial assets in order to expand economic activity. Because the funds in this case won’t enter in to the fractional reserve system, the big spike of money supply disconnects from the typical inflationary pressures that might lead to extreme inflation, Briggeman said.
Despite the absence of the “chasing” factor, there are still two issue with the federal money supply that Briggeman finds concerning.
The first is that with the current policies, the Federal Reserve chooses winners and loser in this style of lending, essentially picking which industries it will choose to support. In this case, one major industry would be the housing market.
The second issue, according to Brigeman is that the Central bank is purchasing more and more of its own government’s debt.
“This is all new, uncharted territory,” Briggeman said. “Clearly, the inflation is too much, too soon and it will have to unwind at some point. The question is when.”