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Lloyd Sez: Hmmmm! Prof Sennholz was working from old
debt figures! The new figures makes his prediction all the more likely!
http://www.appoozone.com/economic-forecasts/deep-in-debt-caught-in-a-net.html
Deep In Debt, Caught In A Net
Dr Hans
Sennholz - Wed 05 Nov, 2003
"...What happens to empire when personal debt and
public deficit run unchecked? Dr Hans Sennholz predicts decline and fall
first...followed by the rise of a new Caesar..."
"Deep
in Debt, Caught in a Net"...This old English proverb concisely describes
the financial condition of many Americans. Household debt is rising at an 8.8
percent annual rate, home mortgage debt at 14.2 percent. Total debt in the
The Federal government, which sets the pace, reported a $555 billion deficit
for the 2003 fiscal year; its total debt is given at $6.783 trillion. For the
next two years the budget deficits are estimated at $566 billion to $644
billion each, which should increase its total debt to more than $8 trillion, or
some $27,000 for every man, woman, and child.
Economists make an important distinction between "productive" and
"consumptive" debt. Although the difference may not always be clear
and exact and, therefore, may give rise to much controversy, it is significant
as to motive and effect. A debt incurred for productive purposes, e.g. a
commercial or industrial investment designed to earn future incomes, may cover
its interest costs and even yield entrepreneurial profits. In contrast, new
debt in the form of a second mortgage on a home may finance the purchase of a
vacation home, new furniture or another automobile, or even a luxury cruise
around the world. The debtor may call it "productive," but it surely
does not create capital, i.e. build shops or factories or manufacture tools and
dies that enhance the productivity of human labour.
Similarly, a debt incurred for the purpose of expanding Medicare may improve
the health and looks of many elderly and, therefore, be deemed "productive,"
but it does not create capital that makes workers more productive and raises
the levels of living of all. It actually may consume capital and thereby
depress standards of living.
Private debtors may find it difficult to pay for bread that has been eaten. It
is likely to become ever more difficult in the future as the cost of debt is
likely to double and triple. At the present, interest rates are far below
market rates due to massive monetary and fiscal stimulation by both the US
Treasury and the Federal Reserve System. The basic Fed rate stands at one
percent, three-month money market instruments at 1.11 percent, one-year paper
of 1.78 percent, and two-year government notes at 1.77 percent.
For a while, government may ignore and even outlaw market prices, market wages,
and market rates of interest and mandate its own. But price and rate edicts
invariably disrupt the smooth functioning of the market order. They cause
business misdirection and maladjustment that lead to ever more business losses
and failures. In economic disarray, the Fed may have no choice but to raise its
rate to market heights that enable businessmen to readjust to the judgments and
wishes of the people.
Public debtors may view their debts in a different light. They may call them "a
national bond" which, in Franklin D. Roosevelt's words, is "owed by
the nation to the nation". In reality, it is unlikely that future
generations of taxpayers will willingly bear the bond of debt. Like so many
before them, they may choose currency depreciation, which offers the most
advantageous escape from a burden of debt. It depreciates all debt and, in
terms of purchasing power, may even reduce debt faster than new deficits are
added. In the end, no matter how large the budget deficits may be, debt depreciation
may outpace the deficits, which benefits all debtors, public and private, and
defrauds all creditors.
Many creditors are exposed to yet another danger. The currency depreciation may
accelerate if foreign creditors should begin to question the quality of the
American dollar and liquidate their dollar claims, seeking refuge in other
countries and other currencies. While many domestic credit institutions are
legally barred from investing in foreign currency claims, foreign creditors
usually have no such limitation; they are free to shed dollar investments at
any time and search for profitable opportunities elsewhere.
Every such liquidation would reduce the demand for dollars and aggravate its
depreciation. Moreover, it would cast doubt on the special position of the
American dollar as the world's primary trade and reserve currency. For many
years this special position has allowed the Federal Reserve System to provide
the world with ever more of its notes in exchange for ever more goods and services.
If the world should ever lose its trust in the US dollar and convert some of
its holdings, more than $7 trillion of American assets and claims, the
consequences would be too calamitous to contemplate.
Our debt generation is a sad generation misguided by false notions and
doctrines, and preoccupied with its own needs and wants. When economic
conditions begin to deteriorate it may grow ever more egocentric and wretched,
which tends to aggravate the social tension and strife. Clinging tenaciously to
its transfer claims and rights, the unhappy society thus may deteriorate into a
militant assembly of diverse pressure groups feuding and fighting each other.
When the political conflict finally explodes into violence, the transfer
society urgently needs a peacemaker who is prepared to suppress violence with
superior violence. In the end, a society that can no longer work together in
peace must submit to the dictates of a strong president armed with an array of
emergency powers.
In other places, at other times, he would be called Caesar.
Regards,
Hans Sennholz
For the Daily Reckoning
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