Salting the Economy to Death—-Lessons From The San Joaquin Valley

One popular delusion that won’t seem to go away is the notion that policy makers can stimulate robust economic growth by setting interest rates artificially low.  The general theory is that cheap credit compels individuals and businesses to borrow more and consume more.  Before you know it, the good times are here again.

Profits increase.  Jobs are created.  Wages rise.  A new cycle of expansion takes root.  These are the supposed benefits to an economy that central bankers can impart with just a little extra liquidity.  Unfortunately, this policy antidote doesn’t always work out in practice.

Certainly cheap credit can have a stimulative influence on an economy with moderate debt levels.  But once an economy has reached total debt saturation, where new debt fails to produce new growth, the cheap credit trick no longer works to stimulate the economy.  In fact, the additional credit, and its counterpart debt, actually strangles future growth.

Present monetary policy has landed the economy at the unfavorable place where more and more digital monetary credits are needed each month just to stand still.  After seven years of ZIRP, financial markets have been distorted to the point where a zero bound federal funds rate has become restrictive.  At the same time, applications of additional debt only serve to further the economy’s ultimate demise.

The fundamental fact is that the current financial and economic paradigm, characterized by heavy handed Federal Reserve intervention into credit markets, is dying.  Debt based stimulus is both sustaining and killing the economy at the same time.

No doubt, this is a strange situation that has developed.  For further instruction, let’s look to California’s San Joaquin Valley…

The World’s Richest Agricultural Valley

Dropping down the backside of the grapevine from the Tejon Pass, along Interstate 5 between Los Angeles and San Francisco, one is greeted by an endless sea of agricultural fields.  However, the farms of California’s San Joaquin Valley are not the 160-acre family homestead farms rooted in the 19th century settlement of the Midwest.  Nor are they in the yeoman farmer tradition envisioned by Thomas Jefferson.  They are large-scale, highly productive, corporate farms.

While these massive agricultural operations are quite a sight, what’s more incredible is that they even exist at all.  Given the natural resources of the area, the possibility for anything – aside from cactus and scrub – to grow here is a miracle.

“The southern part of the valley was a barren desert waste with scattered saltbush when first viewed by Don Pedro Fages in 1772 coming from the south over Tejon Pass,” wrote University of California Berkeley Professor Emeritus, James Parson.  “Less than five inches of rain annually falls in southwestern Kern County, maybe ten inches at Fresno.  Pan evaporation in a summer month on the west side pushes 20 inches.”

Nonetheless, a barren desert wasteland and parched conditions didn’t stand in the way of what was to come.  For with a little imagination, several mega water diversion projects, subsidized water, and cheap migrant field workers, mankind was able to create what “has been called ‘The world’s richest agricultural valley,’ a technological miracle of productivity.”

Regrettably, endlessly dumping chemical fertilizers, pesticides and herbicides, and imported water on sandy soil underlain by indurated hardpan is not without consequences.  What has stimulated the productive miracle of the San Joaquin Valley over the last century is the same blend of factors that has propped up American financial markets, and government debt, over this same period.  Namely, cheap credit and excess liquidity.

Salting the Economy to Death

For example, in the San Joaquin Valley, vast irrigation networks convey water thousands of miles to make the desert bloom.  But as surface water is conveyed along the open California aqueduct it collects mineral deposits and becomes saltier.  Then, as it’s applied for irrigation, the residual salts collect in the soil.

After decades of this, the salt in the soil has built up so that it strangles the roots of the plants.  To combat this, over-watering is required because the irrigation water – while salty – is fresher than the salt encrusted soil.  By applying excess irrigation water, the soils around the plants are temporarily freshened up so that crops can grow.

Yet, at the same time, this over-watering accelerates the mass quantity of salt being applied to the soil.  In this grand paradox, the relative freshness of the excess water that’s keeping the farmland alive is the source of the salt that’s killing it.

So, too, goes the U.S. economy.  After seven years of rapidly expanding their balance sheet and pumping cheap credit and excess liquidity into financial markets the Federal Reserve has produced a similar paradox.

They must keep expanding the money base to keep the economy afloat…but in doing so they’re ultimately killing it.  This, in short, is why it doesn’t matter if the Fed raises the federal funds rate next month or not.  The present system is doomed either way.  The crafty bankers are finally figuring this out.

Sincerely,

MN Gordon
for Economic Prism

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