Swimming in the Ocean of Debt

Dr. Hans Sennholz

In recent years, many communities have been affected by soaring U.S. trade deficits driven by Federal Reserve easy-money policies and mounting U.S. Treasury budget deficits. As trade deficits rose to more than $500 billion annually, that is to more than five percent of GDP, American manufacturers of many consumer goods faced growing pressures of foreign competition and were forced to contract. Many communities soon experienced economic declines and rising unemployment, especially in parts and sections of town occupied by the laboring population. While the construction of mansions continued at full speed, and middle class refinancing generated new life in old neighborhoods, heavily-populated urban areas occupied by welfare recipients and unemployed laborers ceased to grow.

Throughout the industrial Northeast many communities, large and small, endured real depressions, as militant labor unions relentlessly boosted production costs and unemployment soared to deplorable levels. The strongholds of labor unions, such as coal mining, the steel industry, the automobile industry, the aerospace industry, trucking, and shipyards, stagnated throughout most of the 1980s and 90s. In Grove City, Pennsylvania, ugly labor strikes, too numerous to count, finally drove the largest employer out of town and state. In Youngstown, Ohio, high unemployment and deep depression settled on the community when the last steel mill was forced to close its gates.

National forces may at times overshadow the local demand-and-supply factors that often drive the real estate market. They surely were overwhelmed during the Great Depression of the 1930s and the six recessions that descended on the country since then. Another recession could do it again. If foreign central banks should tire of financing U.S. trade deficits the U.S. dollar would plummet in foreign exchange markets, American goods prices would rise, and interest rates would readjust. An international flight from the dollar undoubtedly would delimit the Fed’s power to manage interest rates. Rising rates would impact on the housing market and reveal the maladjustments that resulted from many years of rate manipulation. Rising rates would expose ill-designed housing built in wrong quantities, wrong qualities, and wrong neighborhoods. Of course, the monetary authorities would do everything in their power to flush the troubles away. Unaware of any inexorable principles of economics and infatuated by the coercive powers of government, they are likely to compound the difficulties and make matters worse.

Even if foreign creditors should never tire of financing American trade deficits and U.S. Treasury debt, the maladjustments are calling for correction. The ocean of debt in which many Americans are swimming cannot brook a major rise in interest rates; it may soon force a readjustment. Similarly, the financial bubble engendered grossly inflated price-earnings ratios, which call for early readjustment to unimpeded levels. In short, powerful forces consisting of the value judgments and choices of the people, are working tirelessly to correct the maladjustments also in real estate.

It is well nigh impossible to estimate the magnitude of income and wealth, which false interest rates and misleading credit markets redistribute every day. It is unearned lucre that is taken from millions of savers and creditors and bestowed on all kinds of debtors, including millions of mortgagers. Surely, most Americans are both creditors and debtors but rarely equal in both accounts. Most may be vaguely aware of the transfer process; some may take advantage of it, but only a few may be knowledgeable of the causes that drive the process. Economists are keeping their eyes on the prime movers, the Federal Reserve System and the U.S. Treasury which wield vast powers over American money and credit. But their voices are barely audible in the din of official pronouncements.

Most Americans trust their political leaders and their media spokesmen who wax eloquent about the wisdom of Federal Reserve policies and the benefits of Federal spending. They sense the growing importance of government and especially its primary role in the allocation of inflation lucre. Discerning the important role of politics in their economic lives, many Americans now participate in party politics and join in bitter feuds about government favors. They all would redistribute the lucre, few would abolish it. They may even favor and support inflationary policies that blow bubbles in real estate and create incomparable opportunities. Unfortunately, they pay little heed to the great economic and social harm done by such policies.

Dr. Hans Sennholz is president emeritus of The Foundation for Economic Education(FEE) in Irvington, NY.

Hans F. Sennholz is one of the handful of economists who dared defend free markets and sound money during the dark years before the Misesian revival, and to do so with eloquence, precision, and brilliance. From his post at Grove City College, and his lectures around the world, he has produced untold numbers of students who look to him as the formative influence in their lives. He has been a leading public voice for freedom in times when such voices have been exceedingly rare.

This much is well known about him. But there are other aspects to his life and career you may not know. Sennholz was the first student in the United States to write a dissertation and receive a PhD under the guidance of Ludwig von Mises.

His essays and articles have appeared in over thirty- six major German journals and newspapers, and 500 more that reach American audiences. Dr. Sennholz is also the author of 17 books covering the Great Depression, Gold, Central Banking and Monetary Policy.