The Great Depression Online




Great Depression Online Archive Issue:

The Wrath of Excess Liquidity

Great Depression Online
San Francisco, CA
August 03, 2010

Inside This Issue You Will Discover…

*** Hardly a Sign of Depression
*** The World’s Richest Agricultural Valley
*** The Wrath of Excess Liquidity
*** And More

“I left my heart in San Francisco, high on a hill it calls to me.
To be here little cable cars climb halfway to the stars.
The morning fog may chill the air, I don’t care.
My love waits there in San Francisco, above the blue and windy sea,
When I come to you, San Francisco, your golden sun will shine for me.”
-- Frank Sinatra

Hardly a Sign of Depression

Here at the GDO we never stop working on your behalf.  Even when we take time off from the day job we still sweat and toil to bring you our latest anecdotes of the economic maelstrom as it whips around before our eyes.

For example, today we’re in San Francisco with our wife and son riding the cable cars up and down Powell Street and traversing through its sundried districts like Chinatown, North Beach and Fisherman’s Warf.  Looking around we see hardly a sign of depression.  People are bustling about, the hotel rooms are dearly priced, and the restaurants are full.

Nonetheless, there are plenty of itinerants milling and panhandling about.  Hardly a bus bench or stair stoop goes unloitered.  But it’s San Francisco, after all, the city government offers what must be the most generous handouts for the homeless in the nation.  In good times or bad, the homeless stick to San Francisco like white on rice.

~~~~~~Day of Reckoning Looms~~~~~~

The biggest balloon in the world is deflating.  This balloon had been inflated with a quadrillion dollars, which is to say: This balloon was filled not with air but with debt from around the globe.  What will happen as this global debt winds down?  In two words: Deflationary Depression -- the likes of which could be unprecedented in history.

How to Prosper in a Deflationary Depression

~~~~~~~~~~~~~~~~~~~~~~~~~

What to make of it…

Perhaps the economic recovery is real.  Perhaps the green shoots are on their way to becoming redwoods.  Or, perhaps, we’re just waiting for the other shoe to drop.

The World’s Richest Agricultural Valley

Driving north on Interstate 5 yesterday we got to do something we hardly ever get to do…we got to think.  Ordinarily we are much too busy to do much real thinking.  Instead we go about our day like an ant goes about burrowing out an anthill.  We keep our head down and our chin up, put one foot in front of the other, and push our way through obstacle after obstacle as it appears before us.

So what did we think about?

Naturally, we thought about farming.

Dropping down the backside of the grapevine, from the Tejon Pass, and into the San Joaquin Valley, one is greeted by an endless view of agricultural fields.  These are not family homestead farms rooted in the 19th century nor are they in the yoeman farmer tradition envisioned by Thomas Jefferson; rather 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, that anything – aside from cactus and scrub – can 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,” notes 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.

Still, a barren desert waste and parched conditions didn’t stand in the way of what was to come.  For with a little imagination, 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.”

Unfortunately, endlessly dumping chemical fertilizers, pesticides and herbicides, and imported water, is not without consequences… 

The Wrath of Excess Liquidity

What has stimulated the productive miracle of the San Joaquin Valley over the last century is the same blend of factors that has stimulated the productive miracle of the U.S. economy over this same time…

Namely, cheap credit and excess liquidity.

For example, in the San Joaquin Valley vast irrigation networks convey water thousands of miles to make the desert bloom.  But as surface water’s conveyed it becomes saltier.  And 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 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 decades of applying cheap credit and excess liquidity to leapfrog over every economic puddle, residual debt has now collected into a vast pool the size of the San Francisco Bay…a National Debt over $13.2 trillion.

Simple wisdom says that when you’re in a hole, the first thing you should do is stop digging.  But in this spectacular comedy and tragedy, to do so would bring an abrupt economic collapse.  For in this grand folly, elaborately constructed by the work of men, the fresh flood of excess credit based liquidity that’s keeping the economy alive is the wrath of the debt that’s killing it.

Sincerely,

M.N. Gordon
Great Depression Online

P.S.  A thousand trillion in debt can’t be wished away or swept under the rug.  No one can “forgive” the debt.  The consequences of unwinding this debt could be as massive as the dollar figure itself.  De-leveraging will likely lead to a deflationary crash -- a “day of reckoning.”

Read more.

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