Approximately three years ago, during a journey from Los Angeles to San Francisco through the vast San Joaquin Valley, we published an article titled Salting the Economy to Death. At that point, the financial landscape was nearing the peak of zero interest rate policy (ZIRP). We found a striking parallel between the notion of zero-bound interest rates and the sight of countless acres of flourishing farmland existing in a parched desert setting.
As financial conditions evolve, particularly with the likelihood of prolonged rising interest rates, we seize this chance to refine our perspective. This article aims to bring coherence to the surrounding chaos.
A natural starting point in this discussion involves addressing a common misconception. There exists a prevailing belief that central planners can effectively drive substantial economic growth by maintaining artificially low interest rates. The underlying theory suggests that cheap credit encourages individuals and businesses to borrow significantly and spend freely.
During the growth half of the business cycle, spanning five to ten years, central bankers may mistakenly attribute economic prosperity to their policies. Profits surge, jobs emerge, and wages ascend, fostering a cycle of expansion. These alleged benefits, claimed by central bankers as a result of increased liquidity, often mask an underlying disaster.
While inexpensive credit can stimulate growth in an economy with manageable debt levels, it loses effectiveness once total debt saturation is reached. When new debt ceases to produce new growth, the strategy of cheap credit undermines the economy. In reality, this surplus credit distorts prices and constrains future growth.
Over the past thirty years, and particularly during the last decade, monetary policy has placed the economy in an unfavorable position where an ever-increasing amount of digital credits is required just to maintain the status quo. After nearly a decade of ZIRP from December 2008 to December 2015, the economy became so distorted that a zero-bound federal funds rate became counterproductive. The Federal Reserve’s gradual rate increases since then have begun draining liquidity from the financial system at an alarming rate. A perilous scenario is unfolding.
Furthermore, the application of additional government debt through fiscal stimulus exacerbates the economy’s impending collapse. While President Trump’s tax cuts may have provided a brief boost to GDP, they also caused a significant increase in the deficit, permanently swelling the national debt. This momentary growth surge was effectively borrowed against the future, placing a heavier burden on tomorrow’s taxpayers.
The core reality is that the current financial and economic system, marked by heavy fiscal and monetary interventions, presents an enormous challenge. The debt-fueled stimulus simultaneously sustains and undermines the economy. This contradictory situation is glaringly absurd. Here, we turn to California’s San Joaquin Valley for illustrative parallels…
The World’s Richest Agricultural Valley
As one descends from the grapevine at Tejon Pass along Interstate 5 between Los Angeles and San Francisco, they are welcomed by an expansive array of agricultural fields. The farms of the vast San Joaquin Valley differ vastly from the traditional 160-acre homesteads of the 19th-century Midwest. Instead, these are large-scale, highly efficient corporate farms.
For those unfamiliar with this landscape, witnessing these colossal agricultural enterprises is extraordinary. Yet perhaps more astonishing is their very existence in such a harsh, arid environment, where one would expect nothing but cacti and scrub.
“The southern portion of the valley was a barren desert wasteland with scattered saltbush when first encountered by Don Pedro Fages in 1772, after crossing Tejon Pass,” noted James Parsons, Professor Emeritus at the University of California, Berkeley.
“This region receives less than five inches of rain each year in southwestern Kern County, and perhaps ten inches at Fresno. In summer, the pan evaporation on the west side can exceed 20 inches.”
Notwithstanding the desert wasteland and dry conditions observed by Fages nearly 250 years ago, including a negative water cycle, human ingenuity paved the way for what was to follow. With bold ideas, extensive water diversion projects, federal and state-supported water sources, and an ample supply of inexpensive labor, humanity transformed the area into what has been dubbed “the world’s richest agricultural valley,” a technological marvel of productivity.
However, relying on chemical fertilizers, pesticides, herbicides, and imported water applied to sandy soil over an impermeable hardpan comes with consequences. The same factors that have stimulated the San Joaquin Valley’s agricultural productivity over the past century are also those sustaining the nation’s financial markets and inflating government debt levels.
In his seminal work, Cadillac Desert, which chronicles the irrational development of water resources in the West throughout much of the 20th century, the late Marc Reisner remarked:
“Like so many grand and extravagant achievements, from the fountains of ancient Rome to the federal deficit, the immense national dam construction initiative that enabled civilization to thrive in the West’s deserts harbors the seeds of disintegration; it’s a reminder that as empires rise ever higher, they also risk falling just as far. Without federal support, the Central Valley Project would not have existed, and without that project, California would not have been able to amass the wealth or creditworthiness needed to create its own State Water Project, which facilitated significant agricultural and urban expansion under the false promise of a reliable water supply.”
Choking On the Salt of Debt
In the San Joaquin Valley, extensive irrigation systems transport water from afar to transform the desert into fertile land. However, as this surface water flows through California’s aqueducts, it evaporates and accumulates mineral deposits, resulting in increased salinity. Consequently, when this water is applied to irrigation, the residual salts accumulate in the soil.
Over decades, combined with excessive fertilizer application via mechanized systems, salt levels in the soil have risen to a point where they suffocate plant roots. To mitigate this, excessive watering is required, as the irrigation water—despite being salty—remains cleaner than the salt-laden soil. By inundating the crops, farmers temporarily refresh the soil around the plants to promote growth.
Yet, paradoxically, this overwatering exacerbates the salt concentration in the soil. With no outlet to flush the salt away, the valley acts as a basin with no escape. Thus, in a troubling irony, the very excess water that sustains the farmland is also the source of its decline. Reisner elaborates:
“Nowhere is the salinity issue more pronounced than in California’s San Joaquin Valley, which stands as the globe’s most fertile agricultural region. Beneath it lies a shallow, impermeable clay layer—the remnant of an ancient sea—underneath a million acres of incredibly profitable farmland. During irrigation season, valley temperatures soar between 90 and 110 degrees; good water evaporates rapidly, leaving behind poor-quality water that exacerbates the problem. Very little water can sink through the Corcoran Clay; instead, it rises back to root zones—sometimes just feet below the surface—causing waterlogging and killing crops.”
Similarly, the U.S. economy mirrors this dynamic. After almost a decade of aggressively expanding its balance sheet and injecting abundant liquidity into financial markets, the Federal Reserve has cultivated a parallel paradox. To keep the economy afloat, they must continue increasing the money supply, all while that very act threatens economic stability.
The Federal Reserve understands it cannot expand its balance sheet without implementing periodic, significant reductions. These recalibrations aim to manage overextended debtors and restore some semblance of alignment between the economy and financial markets. In a particularly bizarre twist, the Fed is currently shrinking its balance sheet and elevating federal funds rates, preparing for the inevitable necessity to re-expand its balance sheet and lower rates to address the recession created by its own measures.
To complicate matters further, Trump’s tax cuts and trade conflicts during the latter stages of a near decade-long economic expansion are driving up interest rates. Increased borrowing costs will suffocate an economy that relies on affordable credit to thrive.
In essence, whether the Fed decides to raise or lower the federal funds rate, or if Uncle Sam opts to borrow more or less, is ultimately irrelevant at this stage. There appears to be no viable escape route. The current financial arrangement, like the saline fields of the San Joaquin Valley, is fated to suffocate under the burden of debt.
Only a prolonged period—perhaps generations—of dormant conditions will enable economic rejuvenation and fertility to return to the nation. In contrast, the decline of the San Joaquin Valley as an agricultural hub is likely to be irreversible.
Sincerely,
MN Gordon
for Economic Prism
