Clouds hovered over the Eccles Building in Washington, D.C. this week as the Federal Open Market Committee (FOMC) held its final meeting of the year.
Inside the climate-controlled building, unelected nationalist central planners ate mugs of coffee brewed from beans imported from the Southern Hemisphere for dinner. They also applied consensus and speculation to fix credit prices.
The key idea is that the Federal Reserve can regulate the business cycle by directing the supply of money and credit. The Fed’s performance over roughly 110 years tells the opposite story of persistent inflation and the development of bubble finance.
What’s especially important to understand about the Federal Reserve is that it serves the interests of privately owned commercial banks through its 12 regional Federal Reserve banks. All efforts to improve the economy are secondary.
Understanding the Fed’s generally implicit goals is important for understanding what it says and does. In particular, the Fed’s words and actions do not always match.
For example, this week, following the release of the CPI report showing consumer prices rising at an annual rate of 2.7%, the Federal Reserve decided to cut interest rates well above the Fed’s arbitrary target of 2%. 25 basis points. This brings the total rate cut so far in the current rate cut cycle to 100 basis points.
Federal Reserve Chairman Jerome Powell himself word, “It was a closer call today, but we decided it was the right decision.”
Why is the Fed cutting rates when CPI is still hot? Do large banks like Bank of America need cheaper credit to bail out their underwater debt securities holdings?
Market intervention always has consequences. famine. Consumer price inflation. Lack of toilets. Supply deficiencies and excesses. Pretend your job. Administrative madness. Bubbles and Busts.
Cheap credit can have a stimulating effect on moderately indebted economies. But once the economy reaches total debt saturation, where new debt does not generate new growth, cheap credit tricks are no longer effective in stimulating the economy. In fact, additional credit and the debt behind it distort prices and dampen future growth.
The current financial and economic paradigm, characterized by excessive fiscal and monetary intervention and extreme debt levels, is a serious problem. Debt-based stimulus both sustains and kills the economy.
This ridiculous situation can only be created by the foolish hands of central planners. Here we explore California’s San Joaquin Valley for fun and free edification…
The richest agricultural valley in the world
Endless farmland greets us as we descend the backside of the vines from Tejon Pass along Interstate 5 between Los Angeles and San Francisco.
These farms in the sprawling San Joaquin Valley are not just 160-acre family homesteads with roots in 19th-century Midwestern settlements. Nor do they belong to the peasant tradition envisioned by Thomas Jefferson. They are large, highly productive corporate farms.
If you have never seen such large-scale agricultural activities, it is truly an amazing sight. But what’s even more amazing is that they actually exist. Due to the area’s dry environment, it is a miracle that any plant except cacti and shrubs can grow here.
The late James Parson, a longtime professor emeritus at the University of California, Berkeley, offered the following observations:
“The southern part of the valley was a barren desert wasteland dotted with salt bushes when Don Pedro Fages first saw it from the south over the Tejon Pass in 1772. Southwest Kern County receives less than 5 inches of rain each year. In Fresno, about 10 inches of rain fell. “In the summer, fan evaporation from the west pushes 20 inches.”
Nonetheless, the barren desert wasteland and arid conditions, including the negative water cycle observed by Fages some 250 years ago, did not detract from what was to come.
What has humanity been able to create with a stroke of imagination, multiple large-scale water diversion projects, federal and state subsidies, and cheap migrant field workers? “It has been called ‘the richest agricultural valley in the world’ and has achieved a technological miracle of productivity.”
But endless dumping of chemical fertilizers, pesticides and herbicides, and imported water into the sandy soil beneath hardened hardboard is not without consequences.
What stimulated the San Joaquin Valley’s productive miracle over the past century is the same mix of factors that sustained America’s financial markets and blew away the government’s debt burden during that same period. Cheap credit and excessive liquidity.
Seeds of Collapse
In his masterpiece, cadillac desertThis book, which chronicles the frenzied water exploitation of the West for most of the 20th century, features the following features from apocalyptic enthusiast Marc Reisner:
“Like so many great and extravagant achievements, from Roman fountains to federal deficits, the massive national dam-building program that allowed civilization to flourish in the Western Desert contained the seeds of its collapse. It’s the old saw of empires rising higher and higher and falling higher and higher.
“Without the federal government there would have been no Central Valley Project, and without that Project California would never have accumulated the wealth and credibility to build its own state water projects. Water that will never arrive.”
The San Joaquin Valley’s vast irrigation network transports water thousands of miles, blooming the desert. As this surface water is transported through the dry climate of California’s waterways, it evaporates and collects mineral deposits.
The combination of these factors concentrates the salt content of the water. Then, when used for irrigation, residual salts collect in the soil.
Decades later, excessive use of fertilizers through mechanized fertigation systems caused salts to build up in the soil, suffocating the plant’s roots. To prevent this, excessive watering is necessary.
This results in irrigation water containing salts but being fresher than salt-laden soil. Excess irrigation water temporarily freshens the soil around the plants, allowing crops to grow. At the same time, this excessive watering accelerates the amount of salt applied to the soil.
How the Fed is Choking the Economy
There are no outlets in the San Joaquin Valley to wash away the salt. The valley is the terminus of the basin. So in this great paradox, the relative freshness of the excess water that saves farmland simultaneously becomes a source of salt that kills it.
Reisner explains further:
“Nowhere is the salinity problem more severe than in California’s San Joaquin Valley, the most productive agricultural region in the world. There is a shallow layer of impermeable clay, the remnants of an ancient ocean floor, and a million or so acres of incredibly profitable land.
“During irrigation season, temperatures in the valley fluctuate between 90 and 110 degrees. Good water evaporates like a sponge in the sky, waste water goes down, and the problem gets worse. Very little water seeps through Corcoran Clay, so it goes back up to the roots. In some places, the clay is only a few feet below, so the water floods the ground and kills the crops.”
The same goes for the U.S. economy. After nearly two decades of rapid balance sheet expansion and flooding financial markets with cheap credit and excess liquidity, the Federal Reserve has created a similar paradox. To keep the economy going, you have to keep supplying more and more debt-based money, but in doing so, you’re ultimately ruining the economy.
Certainly the Fed knows that it cannot expand its balance sheet without periodic and sudden contractions. This is necessary to whip out excessive debtors and create links between the economy and financial markets.
What’s especially outrageous about the current situation is that the Fed is simultaneously shrinking its balance sheet and cutting the federal funds rate. This is like spraying water and salt on crops at the same time. The Fed’s unstated purpose is to free up space to stretch its balance sheet when the next big bank bailout is needed.
Nonetheless, there is no way for the Fed to get out at this point. The current financial order, like the salty farmland of the San Joaquin Valley, is doomed to suffocate in the salt of debt.
Perhaps a fallow period of a few lifetimes or more will restore the country’s economic growth and birth rate. But the San Joaquin Valley’s ultimate demise as an agricultural region may be indefinite.
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thank you,
minnesota gordon
for economic prism
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