One enduring misconception suggests that policymakers can invigorate significant economic growth by keeping interest rates artificially low. The underlying theory posits that accessible credit encourages individuals and businesses to borrow and spend more, leading to a resurgence of economic prosperity.
As a result, profits soar, jobs are created, and wages increase—all heralding the dawn of a new expansion cycle. These are the anticipated advantages that central bankers believe they can achieve through a modest increase in liquidity. Regrettably, this approach does not always yield positive results in reality.
While inexpensive credit can stimulate an economy burdened with moderate debt, this effect wanes when it reaches total debt saturation. In such a scenario, new debt fails to generate additional growth, rendering the low-interest strategy ineffective. Instead, the influx of new credit and its corresponding debt can choke future growth.
The current monetary policy has led us to a precarious point where an escalating amount of digital monetary credits is required each month merely to maintain the status quo. After seven years of a Zero Interest Rate Policy (ZIRP), financial markets have become so distorted that a zero-bound federal funds rate feels restrictive. Meanwhile, the application of further debt only exacerbates the economic decline.
The fundamental reality is that our existing financial and economic landscape, dominated by aggressive Federal Reserve intervention in credit markets, is deteriorating. This debt-fueled stimulation is simultaneously propping up and undermining the economy.
Indeed, this peculiar situation warrants deeper analysis. Let’s turn our attention to California’s San Joaquin Valley for clarity.
The World’s Richest Agricultural Valley
As you descend from the grapevine at the Tejon Pass along Interstate 5, between Los Angeles and San Francisco, you’ll encounter an endless expanse of agricultural fields. However, the farms in California’s San Joaquin Valley are not the quaint 160-acre family homesteads typical of 19th-century Midwestern settlements, nor do they represent the yeoman farmer ideal envisioned by Thomas Jefferson. Instead, they are expansive, highly productive corporate farms.
While these monumental agricultural enterprises are impressive, what’s even more astounding is their existence at all. Given the region’s natural resources, the ability to cultivate anything beyond cactus and scrub is nearly miraculous.
“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,” noted 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.”
Yet, despite these daunting conditions, innovation, significant water diversion projects, subsidized irrigation, and an influx of migrant labor have transformed this area into what has been dubbed “The world’s richest agricultural valley,” a marvel of technological productivity.
However, the relentless application of chemical fertilizers, pesticides, herbicides, and imported water onto sandy soil that sits above a hardened substratum is not without repercussions. What has spurred the agricultural miracle in the San Joaquin Valley over the last century mirrors the factors that have underpinned American financial markets and government debt during the same timeframe: cheap credit and abundant liquidity.
Salting the Economy to Death
In the San Joaquin Valley, extensive irrigation systems transport water over great distances to irrigate the desert land. As surface water travels through the California aqueduct, it accumulates mineral deposits and becomes increasingly salty. Upon its application for irrigation, these residual salts accumulate in the soil.
Over the years, the salt concentration in the soil has risen to levels that inhibit plant growth. To mitigate this issue, excessive irrigation is necessary; the irrigation water—though salty—is still less saline than the salt-laden soil. By applying this surplus water, the soil around the plants can be temporarily refreshed, allowing crops to flourish.
Ironically, this over-irrigation accelerates the introduction of even more salt into the soil. In this paradox, the very action keeping the farmland viable is also the source of its demise.
Similarly, the U.S. economy finds itself in a comparable predicament. After seven years of enlarging their balance sheet and injecting cheap credit along with excess liquidity into financial markets, the Federal Reserve has created a similar conundrum.
They must continue to expand the money supply to keep the economy afloat, yet this approach ultimately contributes to its ruin. This explains why it is inconsequential whether the Fed raises the federal funds rate next month. The current system faces inevitable decline regardless of their decisions. Financial experts are slowly waking up to this reality.
Sincerely,
MN Gordon
for Economic Prism
Return from Salting the Economy to Death to Eternity to Economic Prism
