Genre and scope: this is a short single-author economic essay, dated November 2000. Sennholz’s main thesis is that America’s record current-account deficits should not be read through mercantilist fear of imports or blamed chiefly on Asian financial turmoil. They arise from the dollar’s exceptional role as world money, from Federal Reserve credit expansion, and from foreign willingness to hold dollar assets. The danger is not an accounting “deficit” as such, but dependence on continued global confidence in the fiat dollar.
Sennholz opens by contrasting individual accounting with national balance-of-payments statistics. For an individual, income and outgo disclose economic position, but double-entry bookkeeping means the accounts necessarily balance.
There can be neither surplus nor deficit in an individual’s balance of payments.
National balances, by contrast, are treated as ideological artifacts inherited from mercantilism. They translate individual exchanges into aggregates called “national” gains or losses, thereby encouraging governments to police trade, money, and exchange rates.
While individual balances of payments may be informative and educational, national balances are vital tools in the armory of collectivism and nationalism.
The essay then clarifies the structure of balance-of-payments accounting: current account, capital account, and money account. Its conceptual move is to separate a current-account deficit from any imagined overall imbalance. Imports exceeding exports must be financed by capital or monetary flows; therefore the alarmist term “unfavorable” belongs to an older bullionist vocabulary.
The accounts may differ, but there can be no surplus or deficit on the overall balance.
After noting the scale of the U.S. deficit—$331 billion in 1999 and an estimated $425 billion in 2000—Sennholz rejects the claim that the Asian crisis caused America’s problem. Thailand and South Korea, he argues, were too small relative to the United States to explain the phenomenon. The explanation must instead be domestic and monetary.
In order to fathom the American deficit phenomenon, we must search for American causes and analyze American policies.
The core of the essay is its analogy between gold-producing countries under the gold standard and the United States under the dollar standard. Since the dollar has replaced gold as the principal reserve and settlement medium, America can “export” money claims and import goods. But unlike gold mining, fiat-dollar creation is politically managed and cheap.
The Federal Reserve “mines” the U.S. dollar.
This analogy allows Sennholz to reinterpret trade deficits as a monetary effect. A growing money stock raises domestic spending power and prices, encouraging Americans to buy more abroad, while foreigners accumulate dollar claims. Yet the analogy also has limits: gold had market-based monetary qualities, whereas the dollar rests on law, central banking, and lack of a superior alternative.
Although the U.S. dollar has taken the place of gold in international commerce and finance, it is not gold.
The essay’s warning follows from this distinction. A fiat world money can finance deficits only while foreigners trust it. If confidence breaks, the flow reverses: the dollar falls, capital leaves, and the current account may become “favorable” in the destructive manner of inflationary crises.
As long as the financial world maintains its trust in the value of the dollar, the dollar standard will remain secure.
Sennholz finally turns to capital inflows. Foreign purchases of U.S. stocks, bonds, corporations, and real estate are not incidental; they are the accounting counterpart of the trade deficit. The booming technology sector, deep capital markets, high returns, and low inflation make the United States attractive, but they also mask rising indebtedness.
The deficits are made possible by large surpluses in the capital account.
The relevance of the essay lies in its Austrian, hard-money critique of globalization-era American finance. Sennholz does not deny that the American economy attracts investment, but he insists that this attraction is inseparable from dollar hegemony and Federal Reserve expansion. His conclusion is cautious but severe: the larger the debts and deficits, the greater the risk that disappointment in U.S. returns will trigger higher interest rates, a falling dollar, and equity losses.
The risk of a painful readjustment of both the American economy and the global economy is growing rapidly with the growth of American debts and deficits.
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