This file is a short single-author monetary-economics essay, dated April 1999. Its scope is narrow but ambitious: Sennholz reads the late-1990s weakness of the dollar as a symptom of a deeper fiat-money and credit problem beneath the apparent success of low consumer-price inflation.
The recent decline of the U.S. dollar versus the Japanese yen and the European euro is a stern reminder of the precarious position of the dollar.
The essay’s central thesis is that the dollar’s strength rests on unstable foundations: Federal Reserve credit policy, global dollar demand, foreign central-bank support, securitized leverage, and speculative confidence. Sennholz rejects the view that subdued CPI inflation proves monetary stability. Instead, he shifts attention from consumer prices to asset prices, credit aggregates, debt markets, and the “world dollar standard.”
Nevertheless, the Federal Reserve has cast the dollar in a precarious position.
Structurally, the argument moves from the dollar’s exchange-rate weakness to monetary statistics, then to securitization and leverage, then to the wealth effect in stocks, then to foreign financing, and finally to the Fed’s policy trap. A key conceptual move is the widening of “inflation” from money supply narrowly measured to the broader expansion of credit and claims. Sennholz argues that official focus on M1 and currency misses the more important process by which banks, non-bank intermediaries, and securities markets generate purchasing power and asset inflation.
While the Fed may point at moderation in its own credit creation, the financial institutions which it oversees and guides in all their operations are fueling a bubble on Wall Street and other asset markets throughout the world.
Sennholz’s discussion of securitization is especially relevant in retrospect. He treats it not as neutral financial innovation but as a mechanism for multiplying leverage outside conventional monetary measures. The essay’s examples—asset-backed securities, credit-card receivables, Long Term Capital Management—make its warning concrete: the danger lies not only in central-bank balance sheets but in the credit architecture they sustain.
Securitization is a high-powered fuel that is about to overtake the banking system as a credit source, totaling some four trillion dollars.
The moral center of the essay is its contrast between real saving and paper wealth. Rising equity prices, falling savings, and accelerating borrowing are interpreted not as prosperity but as signs of distortion. Sennholz’s Austrian-inflected framework treats savings as the real resource that permits sustainable expansion; without it, credit growth produces “maladjustments” rather than durable capital formation.
How long can the American economy grow without real savings that facilitate the expansion?
The international dimension is equally important. Sennholz argues that the U.S. expansion is sustained by foreign capital inflows and by foreign central banks that accumulate dollars to support export strategies. This converts domestic credit excess into a global monetary problem.
The flood of foreign capital springs from two sources: individual investors seeking safe haven in the United States and foreign central banks seeking, in old mercantilistic fashion, to promote their own export industries by holding the dollar up and depressing their own currencies.
The essay also attacks late-1990s technocratic confidence: faith in Greenspan, mathematical finance, and computing power. For Sennholz, models cannot repeal monetary causality, and financial sophistication may deepen rather than prevent systemic error.
Unfortunately, the popular faith in sophisticated computer systems and speculation models is no substitute for basic economic knowledge.
The conclusion frames the Fed as trapped. Lower rates may support asset prices but weaken the dollar; higher rates may defend the dollar but trigger deflation and recession. The work’s relevance lies in this formulation of global dollar fragility: a reserve-currency system can appear stable precisely while it is accumulating imbalances.
Whatever it chooses, wherever it turns, it cannot for long prevent the bursting of the international bubble of overvalued assets and excessive credit.
This work was divided into 1 sections when it entered the library's research corpus—an apparatus for search and citation, not necessarily the author's own table of contents. Each title opens its summary.
Put a question to this work; the Librarian answers from its 1 sections and cites the passage.
Ask the Librarian