This file is a short economic essay or chapter. Written in February 2004, it addresses a specific policy controversy: whether the United States, after the stock-market recovery from the early-2000s decline, faced renewed prosperity, deflationary depression, or inflationary crisis. Sennholz’s thesis is double-edged. He grants that the deflationists understand bubbles, overvalued assets, and needed market readjustments better than mainstream optimists do; but he argues that they underestimate the dollar’s reserve-currency position, continuing Federal Reserve expansion, fiscal deficits, and the likelihood of interventionist government policy. The likely result is not pure deflation but dollar weakness, rising prices, stagnation, and controls.
Most American economists are singing "Happy days are here again."
The essay opens by staging a contrast between consensus optimism and a minority deflationist view. The optimistic camp sees rising stocks, profits, and commodities as signs of a coming boom. Against them stand analysts who expect falling asset prices, recession, and even depression.
A few economists are marching to a different drummer.
Sennholz treats this second camp seriously. Its argument is that the 1990s boom created “excess capacity,” amplified by technology and globalization, while China and India intensify competitive pressure. Deflationists also analogize the present to the late 1920s and to Japan after 1990: in both cases, they say, bubbles burst and monetary authorities could not restore genuine prosperity.
Yet the core conceptual move of the essay is selective agreement followed by reversal. Sennholz accepts the bubble diagnosis but rejects the inference that deflation will dominate.
This writer readily concurs with the deflationists’ analysis of economic bubbles.
His objection is historical and monetary. Deflationists, he argues, are too governed by inherited analogies.
They plan the future by the past, by the Great Depression and the Japanese recession.
Sennholz then shifts from asset deflation to the international dollar system. He emphasizes the dollar’s sharp fall, attributing it in prose to Federal Reserve inflation, credit expansion, and government deficits, and notes that foreign holders of dollar assets have already suffered large losses. The stabilizing force is not U.S. strength but Asian official support.
If it were not for Asian central banks, mainly in Japan and China, which are absorbing the rapid outflow of dollars and investing them in U.S. Treasury securities, the U.S. dollar would plunge even deeper.
This dependence is precarious. If Japan and China tire of exchanging goods for U.S. paper, or retaliate against American protectionism, the dollar could fall sharply, interest rates could rise, and financial markets could break. Even if frightened Americans reduce debts and increase saving, Sennholz argues that import prices, energy costs, protectionism, and prior monetary expansion would overwhelm deflationary pressures.
No matter how the American people would react, the inflation forces would reign supreme in international money markets and besiege the dollar.
The essay’s historical section challenges standard explanations of the Great Depression. For Sennholz, the credit bubble of the 1920s required readjustment, but not a decade-long catastrophe. The depression became “Great” because policy prevented adjustment: Smoot-Hawley trade barriers, tax increases, agricultural restriction, labor legislation, union violence, and expanding state burdens on business.
It did not give rise to the Great Depression, which was the tragic handiwork of the Hoover-Roosevelt New Deals.
Japan serves the same analytical function. Its 1990s stagnation, in Sennholz’s telling, was not proof that central banks are helpless before deflation, but proof that governments can prolong maladjustment by protecting failed banks and businesses, running huge deficits, and suppressing interest rates.
In short, the Japanese government labored strenuously to prevent a needed readjustment to true market conditions; it succeeded in protecting the maladjustments and prolonging the recession.
The relevance of the essay lies in this fusion of Austrian-style business-cycle reasoning with a warning about global imbalances. Sennholz criticizes both complacent prosperity talk and deflationist fatalism. Booms create false capital structures, but depressions become prolonged when governments obstruct liquidation and reallocation. In 2004, his immediate fear is that the United States will meet a dollar crisis not with market adjustment but with a new political “Deal” of controls, spending, deficits, and protection.
We are bracing for fervent controls and dreary stagflation to come.
This work was divided into 2 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 2 sections and cites the passage.
Ask the Librarian