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February 20, 2022 | MN Gordon: How to Reconcile Numbers that Don’t Pencil Out

John Rubino is a former Wall Street financial analyst and author or co-author of five books, including The Money Bubble: What to Do Before It Pops and Clean Money: Picking Winners in the Green-Tech Boom. He founded the popular financial website in 2004, sold it in 2022, and now publishes John Rubino’s Substack newsletter.

From MN Gordon at Economic Prism:

Do you want to make a fortune?

Then open a Lamborghini dealership in the Midwest.

That’s what investment biker Jim Rogers recommended in late-2014. He also recommended becoming a farmer. According to Rogers, you can make a lot of money as a farmer – even if you’re not any good at it.

“Buy yourself some land and become a farmer […] because there’s going to be some fortunes made in agriculture and when an industry breaks full faith even mediocre people make a lot of money because everything is going right.

“So if you really want to make a lot of money, that’s the best way to do it. Alternatively, you can buy land and lease it out if you can find a good farmer.

“There are other ways to make money in agriculture, of course. You can open a chain of restaurants in the agricultural areas of the world because the farmers are going to be much more successful in the next 30 years than in the last 30 years. Or open shops. Get the Lamborghini dealership in the Midwest. There’s more than one way to make money in agriculture.”

Did farmers get rich during the years since Rogers’ recommendation? Have Lamborghini dealerships in the Midwest boomed?

Not exactly.

But what about the years ahead? Will there be a great agricultural prosperity? Will farmers and Lamborghini dealers in the Midwest get rich?

Was Rogers’ recommendation wrong…or was it early?

Time will tell, of course.

At the moment, there’s bountiful uncertainty that could drive agriculture prices much higher. Though it won’t likely line the pockets of Midwestern farmers.

Diminishing Returns
The latest report from the Bureau of Labor Statistics showed consumer prices, as measured by the consumer price index (CPI), increased 0.6 percent in January. However, the food index increased 0.9 percent.

The index for cereals and bakery products increased the most, rising 1.8 percent over the month. Dairy and related products followed at 1.1 percent. And fruit and vegetable prices rose 0.9 percent.

Yet for farmers, these price increases don’t come anywhere close to covering rising input costs. The cost of phosphate and nitrogen-based fertilizers, for example, have soared 80 to 200 percent. At these prices, there’s not much profit left over. Certainly not enough to buy a new Lamborghini.

Bill Taylor, who farms 2,500 acres of corn and soybeans in central Missouri, recently described the challenges of higher fertilizer prices:

“Prices are all higher, it’s just crazy. Guys like me are talking about reducing the amount we apply, or maybe delaying to see if prices come down. It’s going to mean lower profits, or not even being able to break even.

“There is still a lot of penciling to do. If you don’t raise the crop, what do you do with all these excess inputs? It’s going to make it hard on these younger guys, too, and the guys who are already struggling.”

The application of fertilizer, like caffeine or credit, quickly reaches a point of diminishing returns. Where further additions yield progressively smaller, or diminishing, increases in output.

And when the rising cost of fertilizer rapidly outpaces the price of corn and soybean, its application becomes less about maximizing crop yield and more about minimizing input costs. Add government-induced supply chain disruptions and labor shortages to the mix, and you have all the ingredients for further food price increases.

How to Reconcile Numbers that Don’t Pencil Out
The means and methods for reconciling numbers that don’t pencil out are extremely disagreeable. Some of the rising input costs can be passed on to consumers. Some can also be absorbed through lower profit margins.

But there are natural limits to what price increases can be absorbed and passed along. When the numbers don’t pencil out, they don’t pencil out.

For example, when input costs, including fertilizer and labor, push the costs of the final crop production above what the crops can readily be sold for, the business motive breaks down. Halting operations makes the most business sense. Consequently, as production is halted, and supply shrinks, consumer prices rise.

The challenges farmers are facing are but one more example of the ramifications of government policies of extreme dollar debasement. Rising prices – i.e., declining money – produce strange and painful distortions. Fertilizer price inflation and labor price inflation, and the subsequent mismatch of agricultural prices, must be reconciled through agricultural supply shortages.

But it’s not just food. Used cars. Gasoline. Computer chips. You name it. Prices are up across the board.

More than anyone else, the Federal Reserve’s mass money supply expansion policies combined with Washington’s mass money printing policies have brought us to this special place. Where the relentless effects of rising consumer prices grind far and wide.

For one, the grind rising prices put on savers and wage earners is extraordinarily painful. It acts like a hefty tax…eroding family budgets that are already stretched. Moreover, within this evolving regime of stagflation, personal income gains lag far behind rising consumer prices.

Up and down, in and out of the economy, the numbers don’t pencil out. And for the first time in over 40 years, the Fed can’t reconcile them with lower interest rates and fake money.

In short, the point of diminishing returns has been passed, where greater inputs of credit no longer stimulate the economy. Rather, they stimulate rising consumer prices.

Hence, the Fed has a lot of catching up to do. The federal funds rate is at practically zero. The CPI is at 7.5 percent. Raising the federal funds rate 50 or 100 basis points isn’t going to cut it.

It may bring on a recession. But it won’t reign in consumer price inflation. By this, it’ll merely enhance the stagflation.

In truth, it’ll take much more than a few rate hikes to get the economy’s numbers to pencil out. If we’re lucky, a decade or two of depression and chaos will do the trick.

Find MN Gordon’s other posts here.

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February 20th, 2022

Posted In: John Rubino Substack

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