Potential Dollar Scenarios
Dr. Sennholz is President of The Foundation for Economic Education, Irvington-on-Hudson, New York and a consultant, author and lecturer of Austrian Economics. His web site is www.sennholz.com
Never before in recent history have monetary and fiscal policies been as 'stimulative' as today, and yet, the American economy remains weak and vulnerable. The Federal budget deficit for the 2003 fiscal year was posted at $555 billion, some six percent of GNP; it may continue to rise in coming years when new tax reductions add their weight. The Federal Reserve System has opened its flood gates and reduced all interest rates to their lowest levels since the 1950s. Its basic rate now stands at just one percent permitting the stock of money in all its forms to soar at frightening rates. Government and Federal Reserve officials are convinced that this combination of stimuli is bound to facilitate an annual growth rate of 3.75 to 4.75 percent, just like that of the late 1990s.
The fact that this opinion is widely held by many officials and economists is no evidence that it is accurate; indeed, in our age of inflation and economic manipulation, an official pronouncement is more likely to be political than sensible. With the gates wide open, the rush of liquidity is bound to inflict serious harm not only on the American economy but also on global conditions. The Federal Reserve's utter disregard of the market rate of interest, which guides the efficient employment of all factors of production according to consumer choices, is bound to do great harm to the economic structure. It causes severe maladjustments and imbalances which market forces sooner or later are bound to correct.
Record-low interest rates encourage present consumption and generate massive debt. In just five years, total financial as well as non-financial American debt has surged by 51 percent or $10.9 trillion to more than $32 trillion, three times the annual Gross National Product. The Federal government itself is chafing under $6.8 trillion debt and adding $1.6 billion a day every day. At present interest rates, this debt alone commands charges of $300 billion a year, or more than $1,000 per man, woman, and child. It may be no concern for officials and politicians who, like Franklin D. Roosevelt, reassure us that internal debt merely is a debt by the nation to the nation and interest payments just are payments to ourselves. But it frightens this observer. It may soon distress millions of households which, tempted by low mortgage rates, converted their housing equities into consumer goods and new debt. During the last quarter alone American households added $397.6 billion in mortgage debt and another $40 billion in credit card debt. The annualized rate amounts to more than $1.5 trillion or approximately fifteen percent of GNP. If it is true that the living standard of Americans has been stagnant for years, we must draw the startling conclusion that this boost in debt was needed to maintain it. If the rate of new indebtedness should ever decline, or the people should choose to repay some debt, living standards would surely plummet.
Facing the mountain of debt, even President Roosevelt would be frightened today as nearly one-half of the U.S. Treasury debt is held by foreigners. The Bank of Japan alone owns $440 billion of Treasury securities, the Bank of China some $122 billion and more every day. Other Asian governments hold $166 billion. They have become major creditors because U.S. trade deficits, which are a direct consequence of the super stimulation, now exceed $500 billion a year. Yet, U.S. dollars do not readily plunge in foreign exchange markets, as other currencies would, because they are special, they are the primary reserve currency of the world. Central and commercial banks and millions of individuals all over the world hold and use them; some central banks eagerly purchase them in order to assist their own export industries. In Keynesian fashion, they promote employment by weakening their own currencies. ...Article Continued
Friday, October 24, 2003
Potential Dollar Scenarios
A fair and balanced article. I can't say I support a restrictive gold standard as a solution, but Dr. Sennholz has written, an otherwise, very fair and accurate article. I would sooner see a "units of production" standard backing the world's currencies... I still applaud him for his candor.