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VIDEOFive Things You Need to Know: Deflation Grips Main Street
It affects not only prices, but every aspect of our lives.
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Kevin Depew's Five Things You Need to Know to stay ahead of the pack on Wall Street:
1. Down on the Farm
During the Great Depression, the real-estate crisis was largely isolated to farming communities because: 1) the economy was still then largely agrarian, and 2) the business of farming itself became highly leveraged as farmers chased the asset bubble that formed in agricultural commodities during the previous years.
At some point, the foreclosures on family farms became too much for many to bear. The collapse in commodity prices caused by that deflationary debt unwind culminated in farmers across the country withholding produce from the markets, dumping milk in ditches, and creating blockades along delivery routes, which police had to forcibly reopen. This was called the Farm Holiday movement.
In many parts of the country, farmers formed armed groups to prevent bank officials and local authorities from removing families from foreclosed farms. In Nebraksa, farmers created the Madison County Plan, a group which claimed to have as many as 30,000 members. In early 1933, members of this movement marched on the courthouse in Lincoln demanding a moratorium on all foreclosures. Violence ensued.
The most difficult thing for farmers during the Great Depression was trying to understand why commodities prices were declining. It just didn't make sense. Even a massive drought wasn' enough to dislodge the deflationary grip on commodity prices.
2. Why Are Commodity Prices Declining?
I was reminded of this episode from the Great Depression recently when I came across a piece written last month by the North Dakota State University Extension Service that appeared on the AmericanCowman.com website, "Why Are Commodity Prices Declining?
"Since midsummer new-crop December corn futures prices have declined more than $4 per bushel from the $7.88-per-bushel high," the article noted. "During the same time, November feeder cattle futures prices declined more than $20 per hundredweight (cwt) from highs of more than $119." What's so unusual about that? Well, according to the ND State Extension Service, the relationship is usually the opposite between feeder cattle and corn prices.
An economist cited in the article notes, correctly, that "concern about domestic and export demand for beef during the economic crisis caused prices to decline." But that's a bit like saying the basketball team lost the game because of concern the other team would score more points. The real answer is that too much debt globally, supported by too little real income, is now being unwound. That is what is known as a deflationary debt unwind.
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