Recently, the Federal Open Market Committee (FOMC) convened for its final meeting of the year, amidst clouds looming over the Eccles Building in Washington, D.C. Inside, a group of unelected officials engaged in discussions, fueled by coffee brewed from imported beans, as they attempted to fix the price of credit based on consensus and conjecture.
The central belief driving the Federal Reserve’s actions is that it can regulate the business cycle by controlling the supply of money and credit. However, its 110-year history reveals a pattern marked by ongoing inflation and the proliferation of bubble finance.
Crucially, it’s vital to recognize that the Fed primarily represents the interests of privately owned commercial banks through its twelve regional Federal Reserve Banks, while actual efforts to bolster the economy remain secondary.
Comprehending this largely unaddressed intention of the Fed is essential for deciphering its communications and activities. Notably, there often exists a mismatch between what the Fed says and what it does.
This week, for instance, the Fed decided to cut interest rates by 25 basis points, despite a recent Consumer Price Index (CPI) report indicating an inflation rate of 2.7%—well above the Fed’s target of 2%. This latest decision raises the cumulative rate cuts in the ongoing cycle to 100 basis points.
In Fed Chair Jerome Powell’s statement, he remarked, “Today was a closer call but we decided it was the right call.”
This raises a pressing question: Why is the Fed cutting interest rates when inflation remains high? Do major banks, like Bank of America, require cheaper credit to stabilize their underwater debt securities?
Market interventions invariably produce consequences, such as food shortages, rising consumer prices, and unusual scarcities. The impact of cheap credit might spur growth in a moderately indebted economy. However, once total debt saturation is reached—where additional debt fails to generate growth—the strategy collapses; excess debt distorts prices and hinders future growth.
The current economic landscape, characterized by aggressive fiscal and monetary intervention along with soaring debt levels, presents a monumental challenge. Debt-fueled stimulus is both sustaining and simultaneously undermining the economy.
This convoluted scenario illustrates the pitfalls of central planning, drawing our focus to California’s San Joaquin Valley for a case study.
The World’s Richest Agricultural Valley
Descending from the Tejon Pass on Interstate 5 between Los Angeles and San Francisco, one witnesses an expansive vista of agricultural land. The massive farms in the San Joaquin Valley are far removed from the traditional 160-acre family homesteads of 19th-century America; instead, they epitomize large-scale, highly productive corporate farming.
These immense agricultural operations are a marvel, especially considering the severe conditions that prevail in the region, where only tough vegetation like cacti would naturally thrive.
The late James Parson, an emeritus professor at the University of California, Berkeley, previously illustrated this reality: “The southern part of the valley was a barren desert waste with scattered saltbush when first viewed by Don Pedro Fages in 1772. Less than five inches of rain annually falls in southwestern Kern County, and roughly ten inches at Fresno. In summer, pan evaporation on the west side can reach 20 inches.”
Despite the unfavorable conditions highlighted by Fages 250 years ago, significant agricultural advancements have transformed the landscape. Through ambitious water diversion initiatives, substantial federal and state water subsidies, and inexpensive labor, humanity has transformed this once-barren landscape into “the world’s richest agricultural valley, a technological miracle of productivity.”
However, this agricultural success has not come without its repercussions. The liberal application of chemical fertilizers, pesticides, and imported water has serious long-term consequences for the region’s sandy soil.
Seeds of Disintegration
In his significant work, Cadillac Desert, Marc Reisner describes the excesses of western water resource development throughout the 20th century. He observes: “Like so many grand accomplishments, from the public fountains of Rome to the federal deficit, the massive dam-construction program that enabled flourishing civilization in the West carries the seeds of its own disintegration. It embodies the old adage about an empire rising higher only to face a steeper fall.”
Reisner further explains: “Without the federal government, the Central Valley Project wouldn’t have existed, and consequently, California would not have attained the wealth and creditworthiness to build its own State Water Project. This project enabled a vast expansion of farming and urban development based on the misleading promise of water.”
In the San Joaquin Valley, elaborate irrigation systems deliver water over long distances to nourish the desert. However, this movement of water leads to evaporation and mineral buildup, increasing the water’s salinity. As this salt-laden water is applied for irrigation, it accumulates in the soil, causing significant long-term problems.
Decades of this cycle, coupled with over-fertilization, have resulted in a soil saturated with salt, which hampers plant growth. To counter this, excessive watering is needed to temporarily freshen the soil around roots, thus perpetuating the cycle of increased salt application.
How the Fed Chokes the Economy
In the San Joaquin Valley, there’s no outlet for the accumulating salt, making the area the terminus for what becomes a devastating cycle. Ironically, the very water that sustains the farmland is simultaneously the source of its demise.
Reisner poignantly encapsulates this crisis: “Nowhere is the salinity problem more severe than in the San Joaquin Valley, the most productive agricultural region in the world. A shallow, impermeable clay layer remains below millions of acres of fertile land, exacerbating the situation.”
As temperatures in the valley rise during the irrigation season, valuable water evaporates, worsening the salinity issue. Though the Fed aims to stanch the economic decline by injecting more debt-based currency, it ironically orchestrates the very conditions that threaten the economy’s longevity.
The Fed is aware that it cannot endlessly expand its balance sheet without executing abrupt reductions, essential to reestablishing some equilibrium between the economy and the financial markets.
What stands out in today’s scenario is the Fed’s simultaneous reduction of its balance sheet while cutting the federal funds rate—a dubious approach akin to applying both water and salt to crops at once. The underlying motive appears to be to create room for future balance sheet expansion amid a looming bank bailout.
Ultimately, the Fed finds itself trapped within a detrimental system similar to the salt-affected fields of the San Joaquin Valley, destined to suffocate under the weight of debt. The prospect of restoring economic growth may take generations, yet the decline of the San Joaquin Valley as a vital agricultural hub could indeed be permanent.
[Editor’s note: Have you ever heard of Henry Ford’s vision for a southern dream city? If not, you might want to explore my recent special report titled, “Utility Payment Wealth – Profit from Henry Ford’s Dream City Business Model.” If you’re curious about tapping into this rarely discussed piece of American history for potential wealth, I encourage you to get a copy. It’s priced at less than a penny.]
Sincerely,
MN Gordon
for Economic Prism
Return from How the Fed Chokes the Economy to Economic Prism
