Row crop history - the changing distribution of crops

The total number of acres planted with row crops has been fairly steady over the last 30 years. The increase in the late 70's matched the price surge from the bad world harvests in the early 70's. This lead to the farm land bubble and financial disaster in the early 80's. There is a limit to the amount of land that can be planted. There has been urban sprawl which has taken out land. Government conservation land programs have also fluctuated over time. Assuming that there is no new land, the problem with row corp price prediction is determining the relative price based on the substitutability of planting. 

The major trend has been the movement to just three major crops in the US, corn soybeans and rice. Corn as a percentage of the total acreage has increased with the development of ethanol production. This has been from a decline in the 60's and 70's. Soybean has been the wonder crop since the end of WWII. Wheat has declined and cotton has been fairly steady. The decline has come at the expense of sorghum, barley, and oats. With higher prices and profits in corn, there will be more substitution to this cash crop. It will come out of the acreage from soybeans which has created the interest in corn soybean spread trades. 

The output gap problem

If you wanted to place the Great Recession into perspective, just look at the output gap. The output gap measures the difference between current GDP and trend. In a recession you will fall below trend, but the expectation is that the economy will grow faster in a recovery and then close the gap. This is not going to happen with the US economy anytime soon. We are still years off of getting back to the trend-line.

It is hard to expect higher interest rates or expect inflation to increase significantly if there is a large output gap. It is hard to talk about unemployment falling much further if there is no closing of the output gap. Discussions of tax revenue shortfalls will continue as long as there is an out put gap. The output gap will drive thinking about the potential for reflation of assets.

One graph which shows the risk of the Euro-zone

There clear country risk premiums in the Euro-zone before the development of the single currency. The arrival of the Euro changed Europe and took away all of the risk premium. Credit risk was a thing of the past because there would be constraints on the size of budget deficits. There would be no currency risk inside Europe. There would be no inflation differentials with a single currency. Current account deficits would exist but it would not matter with a single currency. This lasted for less than a decade. Now we are back to risk premiums, inflation differentials, current account deficits, and budget deficits. The world has returned to the 1990's but there will now be  single currency. A more structured snake or EMS. However, countries will not have flexibility with their own monetary policy. It is unclear what was gained if we took out the 2000-2008 period. 

Why is the middle class stagnating - no innovation

The total factor productivity is a strong measure of overall productivity in the economy. It would include both labor and capital productivity so it serves as a good measure of innovation in the economy. This is not just having workers work harder without compensation which is one form of productivity increase. While the trend was higher during the tech surge, the overall trend is much lower than what occurred during the 50's and 60's. The last 50 years could be considered the Great Stagnation in factor productivity. The last 15 years is better, but not like the old trend line. It is hard to have surges in real income if there is not higher productivity.

Under the Great Stagnation, there will be more fighting over economic resource. Politics will be more important to get your fair share. Government policies should be implemented to improve factor productivity. Innovation should be rewarded. This is a key role of government, not to support big or specific industries but to make sure that innovators are rewarded.

Developing market mercantilist policies in one graph

The international finance story for the last decade is not the financial crisis but the shift in behavior in the current account and official account. Prior to 2000 the current and official accounts were both close to zero. After 2000, developing economies started to show increasing surpluses . This trend was reversed with the Great Recession but has more recently started to move back to the old trend albeit not at the same rate. The net official flows show the significant buying of Treasuries by developing market central banks in order to stop currencies from appreciating. The Great Recession again caused the switch to lower official flows because there was a general depreciation of emerging market currencies when the dollar started to rise in response to the flight to quality. As the global economies started to improve, there was a a surge in Treasury buying. The pattern matches the current account.

The mercantilist policies of emerging markets is the greater theme for the last decade. This had real effects on employment and growth in the US. It also allowed for the strong growth and increase in income levels in developing markets. This is the fight that will continue this decade and will be a major driver in longer-term financial asset levels. Emerging market equities will do well and smaller cap developed market equities may do poorer if they do not have an international focus. Commodities will also do well as income levels continue to surge in emerging markets.

The debt problem and default

As debt goes up, bad things happen around the globe. An increase in the total public debt to GDP is generally not sustainable. There will be defaults and an increase in inflation. Nevertheless, it is not clear what is the timing and link between the two. The turn of the century showed high debt levels and no default. The great Depression was a different period with large defaults. The 1980's was also a very unique and special period with defaults and high inflation. Now we are hitting very high levels of debt but we have yet to see the increases in default and inflation. If history is a guide, it should follow.

Why is there gridlock in Congress?

There is a simple reason for gridlock in Congress. There is no overlap in points of view. Compare the 90th Congress with the 110th Congress. This is a 40 year difference that seems like from another era. This graph normalizes the voting record of Democrats and Republicans and shows that there was a degree of overlap between the two parties 40 years ago. More recently, there is almost no overlap. The parties have become more polarized.  This causes gridlock. The only way out of the gridlock is that there has to be politicians who are willing to move outside party norms. Under current conditions, this is unlikely until we have a crisis.