Altes Elliott-Wellen-Forum - Deep in Debt, Deep in Danger / Artikel, engl.

Deep in Debt, Deep in Danger / Artikel, engl.

verfasst von JüKü, 31.05.2002, 21:10

<div>
http://www.mises.org/fullstory.asp?control=967
</div>
<div>
 
</div>
<div>
Deep in Debt, Deep in Danger
</div>

 

by Hans F. Sennholz

[Posted May 30, 2002]

[img][/img] Politicians
rarely suit their actions to their words. They may wax eloquent about budget
surpluses while they incur huge deficits. The president may"wage a war
to keep the peace," and senators and representatives may orate about
frugality and"national defense" but spend freely on items designed
to increase their popularity and re-electability. They may even use the
opportunity to cater to powerful special interests in their own states and
districts. For many, national defense is an opportunity. 

Outside the world of politics, the budget surpluses actually
are budget deficits that consume Social Security trust funds. While this kind
of deficit financing does not weigh heavily on present capital markets, it
shifts the burden of repayment to future taxpayers, or future loan markets, or
both, when the Social Security obligations fall due. Any manager of a private
trust fund who would dare to spend the funds entrusted to him and replace them
with his IOUs would face criminal charges. When the U.S. Treasury does it, it
is called"creative financing." 

Federal expenditures were financed"creatively" in
late 1995 when the Treasury encountered a congressional debt ceiling of $4.9
trillion. Treasury Secretary Robert Rubin's strategy nevertheless kept the
government funded until Congress raised the ceiling at the end of March 1996.
Now, six and a half years later, the debt of $5.95 trillion again has reached
the congressional ceiling and, in the footsteps of his predecessor Rubin,
Treasury Secretary Paul O'Neill is resorting to similar stratagems. It casts
serious doubt on the value of any congressional debt ceiling. 

The ever rising federal debt raises the gnawing question of
its ultimate solution. Will it ever be repaid? Will future administrations
curtail their expenditures or boost their tax exactions in order to cover the
deficits of their predecessors? Will future generations of Americans be
prepared to cover our debts, or will they follow in our footsteps? 

If they follow us, the federal debt is likely to rise ad
infinitum and, in time, reach $10 trillion and more. It is debt incurred to
finance not only national defense but also a myriad of programs such as
foreign economic and financial assistance; farm income stabilization and
commodity price support; commerce and housing credits; ground, air, and water
transportation subsidies; community and regional development aid; social
services; and numerous other support programs. No matter what the political,
economic, and social effects of these expenditures may have been, they
consumed potentially productive capital that would have served consumers,
raised the productivity of labor, and improved living conditions. 

Treasury bills, notes, and bonds are certificates of
capital consumed. As claims against the U.S.
government, they also function as evidence of individual or corporate wealth,
which enjoys the highest credit rating in all capital markets. The relatively
low interest rates of U.S. Treasury obligations reflect this rating; they were
relatively low even during the late 1970s and early 1980s when double-digit
inflation rates commanded double-digit Treasury rates. Such rates invariably
would return if and when inflation should soar again. 

We cannot plan the future by the past. But human nature is
the same throughout the ages, which allows us to speculate on the future of
the national debt. At the present, with the U.S. government debt at some 60
percent of gross national product (GNP) and the rates of interest at 40-year
lows, the U.S. Treasury undoubtedly can and will meet its obligations. 

But how reliable and trustworthy would it be if, in a dollar
crisis, interest rates would return to double-digit levels and interest costs
alone commanded the lion's share of federal revenues? After all, interest
rates reflect not only the debtor's credit worthiness but also the quality of
the money owed.

At double-digit inflation rates the purchasing power of the
national debt would shrink rapidly to insignificant levels. But even if the
inflation rate were held at the moderate level of just 3 percent while the
debt would rise merely 2 percent, its purchasing power in time would fall to
trifling amounts. The ever shrinking purchasing power of the national debt
encourages the politicians' love and habit of deficit spending. 

The present political wrangle over the debt ceiling casts a
shadow on international credit markets. Throughout the late 1990s, when
President Clinton was"mouthing" about budget surpluses and debt
repayment, the U.S. dollar was soaring above all other currencies, and
American investment markets soon became a"safe haven" for
international funds. Equity prices rose to unprecedented levels. 

This"safe haven" actually is a very dangerous
harbor carrying the biggest debt on earth. At the end of 2001, the United
States had a net external debt consisting of direct foreign investment and
investment in financial paper of some $2 trillion 700 billion. Americans
import much more than they export, suffering current account deficits of some
$400 billion a year or 4 percent of GNP. At the
present rate of deficits, the U.S. external debt may soon surpass the federal
government debt; it is the most dangerous of all because it casts a dark
shadow over the U.S. dollar. 

The present hassle about the Treasury debt ceiling may
remind foreign investors that the safe harbor is heavily mortgaged and sinking
ever deeper into debt. If a few fearful foreign investors should suddenly
liquidate their dollar investments for any reason, American capital markets
would come under severe liquidation pressure. If a few Arab oil sheiks should
add their weight to the pressure, they could precipitate a panic run. The U.S.
dollar would plummet, interest rates would soar, and equity markets would
crash. It could shake the world financial and economic structure. 

During the 1990s when several international currency crises
shook world capital markets, the American haven was remarkably safe and the
U.S. dollar extraordinarily strong, although it lost some 2 to 3 percent in
purchasing power every year. As the primary reserve currency of the world, it
enjoyed worldwide acceptance and demand. It played the pivotal role that gold
played throughout the ages, and placed the United States in the same position
formerly played by gold-producing countries. 

When gold was discovered in California in 1849 and mined in
substantial quantities, commercial banks used it to expand their notes and
credits. Goods prices rose, exports declined, and imports expanded. Most of
the gold was shipped abroad in settlement of adverse balances of international
payments. Today, with the U.S. dollar in the role of gold, the Federal Reserve
System substitutes for the gold mines, and its dollars are shipped abroad in
settlement of adverse balances of trade. Although both monetary systems
function in a similar fashion, a crucial difference forebodes future
difficulties. 

Gold is a precious metal used in jewelry and decorations,
and as a plated coating in a wide variety of electrical and mechanical
components. Its mining and refining impose considerable costs. People
throughout the world cling to it as a store of value. The U.S. dollar, the
production of which requires little effort or cost, is a medium of exchange
the value of which depends entirely on the belief in its trustworthiness. Just
like gold, it is subject to the economic principle of supply and demand, but
in contrast to gold, its stock is a many-layered quantity of claims of unknown
reliability. It resembles an inverted pyramid, with Federal Reserve notes and
reserves at its base and many-layered bank credits resting on the base. 

Commercial banks and non-bank credit institutions lend,
securitize their loans, sell them, and lend again in a continuing process of
credit expansion. Offshore banks in the Bahamas, the Cayman Islands, Hong Kong,
Panama, and Singapore create more dollar credits, building their pyramids on
U.S. dollars flowing from the chronic current-account deficits of the United
States. They and 174 central banks like to hold their dollar reserves in the
form of U.S. Treasury obligations paying interest. Total dollar holdings by
foreign central banks alone now exceed $1 trillion. 

How safe is the dollar pyramid? Last year the Federal
Reserve System lowered its rates 11 times in just 12 months, to the lowest
level in more than 40 years, in order to stimulate the sagging economy. It
allowed money in the broadest sense (M3) to expand by some $1 trillion. The
effects of this huge burst of credit expansion are bound to be the same as a
huge strike of gold would have been during the 1850s. Current-account deficits
are bound to rise, possibly to 5 or 6 percent of GDP. 

While the gold mined was real wealth, which is in
someone's possession even today, 150 years later, the U.S. dollars sent abroad
in payment of a flood of imports are mere claims against the United States.
But since these claims merely guarantee the right to more dollars, some owners,
ever eager to earn profits, may choose to trade them for other national
currencies that are believed to increase in exchange value. 

Fearful of the ever rising U.S. government debt and external
debt, they may prefer to hold euros rather than dollars; that is, the new
European currency used in 12 countries and soon also by another 12 waiting to
adopt it. As the dollar declines in foreign exchange markets, other dollar
holders may follow suit, which in the end, may become a run by foreigners and
Americans alike. The dollar-euro exchange rate will tell the story. 

Only a strong dollar can avert an international run >from
the growing mountain of American international debt. Unfortunately, the Fed is
playing a dangerous game by keeping its rates far below market rates and
expanding credit at record rates. Sooner or later, signs of price inflation
will appear and force the Fed to raise its rates lest it stoke the fires of
inflation. It may retreat gradually from its current expansionary stance to a
more neutral policy when market rates will return not only to the basic time
rate but also add the anticipated inflation rate. 

Instead of short-term rates just returning to 3 or 4 percent,
they may rise to 5 or 6 percent. If the Fed then should remain
"neutral," the economy would soon face new readjustment symptoms.
But once again, as soon as a new recession comes in sight, the Fed can be
expected to abandon its neutral stance and return to its"accommodating"
ways. It is likely to continue thus until an international run on the dollar
may overwhelm it. 

The Fed obviously is the world's primary monetary juggler
seeking to keep afloat both the American economy and the American dollar. The
economy, according to official dogma, presently calls for easy money and
credit. The dollar, on the other hand, requires due restraint in order to
carry the mountain of American international debt. At this time, the Fed
apparently chooses to ignore the debt problem and to concentrate on economic
revival. Many corporations burdened with much debt are suffering losses which
do not encourage new investments. Consumer debt as a percentage of income is
the highest it has ever been.

 As interest rates have come down, people have built
and bought homes. The effect has been felt throughout the economy, especially
in construction, materials, labor, furnishings, etc. Low
interest rates have given rise to a bubble in the housing market with home
prices rising continually ever since the early 1990s. But
while they are appreciating at some 5 to  7 percent a year, the
percentage of home- owner equity has gone flat. For every $1,000 in home
appreciation, the home owners are taking at least $500 out to finance
consumption. As many home buyers own just 20 percent or less of the market
value of their homes, they would face great difficulties if housing prices
should ever decline. There would be a financial calamity should interest rates
rise and recession descend on the industry. 

Inexorable economic principle assures us that interest rates
are bound to rise as human nature always prevails over the machinations of
political authorities, including the Federal Reserve governors. They may
falsify the rates temporarily, but the undesirable consequences of their
machinations are bound to overwhelm them in the end. Interest rates then will
soar, seeking their natural levels in addition to an anticipated currency
depreciation rate. At that time, the housing bubble is bound to burst. 

Fearful of the soaring external debt and a looming dollar
crisis, some investors may prefer to hold gold, the money of the ages. They
may not rely on the intention and ability of the European central bankers to
maintain the value of the euro nor trust any other fiat currency. They may
even be distrustful of the return to economic growth, which, in their view,
merely amounts to continuous growth of consumer, corporate, and, especially,
federal debt. And fearful of fiat inflation, which is the favorite way for
government to rescind old debt, they may choose to purchase and hold gold in
any form. 

Gold is not only an asset that at any time may be converted
into legal tender currency but also an alternative investment. When stock,
bond, and commodity markets disappoint, gold may shine above all others. When
the economic recovery fails to materialize and the debt pyramids begin to
crumble, gold may emerge as the most reliable possession. 

Despite its massive international indebtedness, the United
States is playing the global role as a warrior against terrorism and guardian
of peace. U.S. armed forces are stationed in more than 100 countries and,
since September 11, are building new bases in Afghanistan, Pakistan, and
several former Soviet republics. In the coming months they may wage a new war
against Iraq without much international support. 

While the United States undoubtedly has the military might
to reach into every country and assert its global empire, its precarious
financial and economic foundation may crumble under the burden of rising
international debt. Even if we ignore the geopolitical overreach and the
growing Muslim suspicion of everything American, the pyramid of American debt
calls for caution and repair. There would be no greater irony and tragedy than
for American troops to enter Baghdad and the American dollar to fall from loss
of international support. Many a victory has been suicidal.

<hr align="left" width="33%" SIZE="1">

Hans F. Sennholz, emeritus professor of economics at Grove
City College, is an adjunct scholar of the Mises Institute. Send him MAIL.
See also his Mises.org Articles
Archive and his Personal
Website.



<center>

<HR>

</center>

Thread gesperrt

gesamter Thread:

Deep in Debt, Deep in Danger / Artikel, engl. - JüKü, 31.05.2002, 21:10
- Re: Deep in Debt, Deep in Danger / Artikel, jetzt deutsch - SchlauFuchs, 01.06.2002, 02:30
  - Danke! (owT) - Tofir, 01.06.2002, 08:27
  - DANKESCHÃ-N!!! owT - spieler, 01.06.2002, 08:28
- Mir ist, als hätte ich den schon vor einigen Monaten gelesen - Diogenes, 01.06.2002, 11:28