Hans F. Sennholz, “A New Era” (2000)

This file is a single-author economic essay: a short, topical intervention on the late-1990s stock-market boom, the Internet economy, Federal Reserve policy, and the likelihood of an Austrian-style correction. Sennholz’s thesis is that the “new economy” contained genuine technological change but that Wall Street converted it into a speculative bubble, sustained less by profits than by faith, credit expansion, and policy accommodation.

The 1990s will be remembered as the most fabulous decade in the history of Wall Street.

The essay’s structure is comparative. It begins with valuation and trading measures that make the 1990s look more extreme than 1929 or Japan in 1989, then turns to the 1920s analogy: new technologies, rising productivity, stable prices, easy money, and official reassurance. The “new era” rhetoric of the 1990s is therefore not treated as unprecedented but as a recurring form of speculative imagination.

The proven rules of stock valuation seem to be outdated.

Sennholz grants that the Internet did alter commerce by reducing information and transaction costs, especially in financial and inter-business services. Yet this concession sharpens his criticism: technological improvement is not the same as sound valuation. Many Internet firms had losses, weak institutional foundations, and no clear route to monopoly profits in open, fast-changing markets. In this setting, investors ceased asking about dividends, earnings records, or tangible assets and priced stocks by hopes of future dominance.

But expectation often fails, and most often, where it promises most.

The conceptual center of the essay is the distinction between psychological explanations of bubbles and the monetary conditions that make them financeable. Sennholz does not deny herd behavior or mutual-fund recklessness, but he treats these as secondary. The economist’s task is to identify the credit structure underneath speculative prices.

Economists must search for the monetary framework that permits the financing of the lofty price structure at the stock exchange.

From this point the argument becomes explicitly Austrian. Greenspan’s Federal Reserve, while claiming price stability, expanded money and credit faster than output. Because Internet-driven competition restrained consumer prices, the inflation appeared in asset values instead. Thus the apparent miracle of strong growth without consumer inflation concealed a distortion in relative prices and capital allocation.

It helps to explain the “new” combination of stable consumer prices and soaring asset inflation, which characterized both the 1920s and 1990s.

Sennholz also emphasizes debt. Rising household wealth from stocks encouraged consumers to borrow, while margin debt surged and foreign capital financed large U.S. trade deficits. These conditions made the boom vulnerable to reversal: falling equities could weaken consumption, credit confidence, the dollar, and corporate earnings together. The danger was not merely that prices might fall, but that policy-created maladjustments would have to be liquidated.

This is why we look upon the equity market as a bubble area which will last as long as the common faith in the “new era” sustains it and the Fed provides the necessary funds for it.

The closing sections reject precise prediction while insisting on economic causality. Sennholz argues that the market correction is unavoidable, though its timing and severity cannot be known. What most worries him is not only the bubble but the likely response to its bursting: rescue credit, anti-recession policy, and political pressure may prolong the readjustment as in the 1930s United States or 1990s Japan.

Nine years of credit expansion have created countless maladjustments which the market sooner or later will correct.

The essay’s relevance lies in its timing and framework: written in 2000, it reads the dot-com boom as a historically familiar “new era” bubble before the full consequences had played out. Its core move is to separate real innovation from speculative capitalization, then to show how stable consumer prices can coexist with dangerous monetary inflation when credit flows into assets. Sennholz’s final warning is terse: central banks may delay correction, but they cannot abolish market law.

Market principles are not the less true although they elude most observers.