America's Economic Problem? Too Much Debt

Debt Culture and Military Waste: The Fundamental Cause of the Recession

The mainstream financial media has been treating the financial crisis itself as the problem to be solved in order to avoid continued recession or serious economic depression and there remains widespread optimism that the Obama administration will somehow find a way out of it. What is misunderstood is that the financial crisis is in fact a symptom, not the cause of a sick American economy. No matter how much effort our government spends to patch up the financial system, via assumption of debt, Keynesian spending measures, tax incentives, and good-old-fashioned money printing, we will at best only defer economic hardship. And like a festering wound that is merely bandaged over without proper disinfection, the underlying conditions will continue to worsen.

My upcoming documentary film, China: The Rebirth of an Empire, discusses how America’s ailing economy has fundamentally resulted from decades of excessive military spending and is intimately tied to America’s trade imbalances (particularly with East Asia and China) and public debt (as an example, the Chinese hold more than 500 Billion USD in treasury bonds). The fact that our entire society is in debt is perhaps why the mainstream media focuses so much on credit markets and referring to them as the “lifeblood of the economy”. When governments, firms and individuals have money in the bank it is possible to ride out a recession by spending down savings, but when a country, its companies and its people are penniless, they must borrow to keep consumption at safe levels or risk a downward spiral into depression.

The United States owes at every imaginable level. The national debt is now at 10.7 Trillion USD, or about 77% of GDP and this may double when the dust from the financial crisis settles. As recently published by Bloomberg, the total cost of the financial bailout is now projected to reach approximately 10 Trillion USD, most of which is not yet captured in the current federal debt. Unfortunately, just like our government, America’s consumers have lived beyond their means for several years. For a good portion of this decade the average individual savings rate has been near or even below zero. How has America’s spending binge been supported? Through the diligent work and precious resources of foreigners, in the form of continued trade deficits with almost every major country in the world. And where does all this value go? Although some of it was undoubtedly squandered through over indulgence at the individual level, we must also look at what our government spends its multi-trillion dollar annual budget on in order to ferret out the real waste.

At approximately 6% to 7% of GDP, the country’s trade deficit is about the same as the roughly 7% of GDP, or nearly 1 Trillion dollars that the US spends annually on warfare, weapons and national “defense” as calculated by Dr. Chalmers Johnson, author of Blowback, The Sorrows of Empire and Nemesis. (This figure includes the published national defense budget, additional costs of the wars in Iraq and Afghanistan, nuclear weapons, debt service on money previously used for defense spending, veterans affairs, actual nation defense, i.e. the Department of Homeland Security, etc). Although one can probably not blame all of America’s debt problems on this spending, it is one key aspect of America’s economy that sets it apart from every other country in the world (as an example, China spends less than a tenth of this amount.) As such, it becomes the marginal factor that explains the source of the American economy’s structural weakness.

Now that a recession is upon us and the Keynesians are out in force, there is little appetite for reducing government spending of any sort. There will also undoubtedly be an unending stream of claims from military contractors such as Boeing (BA), Lockheed Martin (LMT) and Northrop Grumman (NOC) that the weapons systems and services they supply are vital to the nation’s security and economy as are the tens of thousands of workers that they employ. However, we must now, more than ever, see our nation’s incredible military expenditures for what they are: they directly add to national debt, are by their nature non-market, and therefore non-Pareto efficient, divert resources from productive uses, and create perverse trade incentives (for example acceptance of continuous trade imbalances in exchange for access to foreign capital or permission to maintain foreign military bases abroad.)

Solving America’s economic problems for the long term, as opposed to simply slapping on a Band-Aid, requires tacking our huge government debt and the trade imbalance. However neither of those can be solved without first reigning in military spending. As difficult as this may be, it is vital that we do so. If not, we may never get out of the current slump.

Disclosure: Positions in Gold, Japanese Yen

Comments

[PassingBy55:]

How are we going to protect this country against the other 5.7 billion people on this planet without a STRONG military. You're missing the point of an empire! Conquest and pillage!

Feb 19 09:53 AM

[Firat Ünlü:]

Yes, America spends more than most countries on its military but that's down to its role in the world and other countries 'free-riding' on American defense. Take away American help for Europe and East Asia and all of a sudden quite a few countries will find themselves left exposed.
The 'alpha' always needs to take extra-care of his security as there's always someone that wants to push him off that role.

Feb 19 10:56 AM

[Rokjok777:]

Thank you for this article, it covers what I've been railing about for years. We spend as much on military as every other nation in the world combined. We spend $700 billion to $1 Trillion, depending how you count, and the #2 country China squeaks by on $60 billion. Ike was right: beware the military-industrial complex. In a more troubling view, consider the textbook definition of fascism: an unholy alliance between government, industry, and the military...
JFK noted this and created the space race to channel all those public funds and R&D to a (at the time) peaceful cause, 50 years later we are still benefitting in everything from materials science to transistors. Obama really blew it when his "stimulus" package didn't do the same, channel money going to Raytheon etc into alternative energy. How would it affect our national security if we no longer needed MidEast oil?
Instead he decides to send more troops to Afghanistan, where there is no defined mission, soldiers using million dollar missiles to kill a bunch of goatherders. With 139 military bases around the world, but an empty Treasury, the US is a dead man walking...look out below

Feb 19 02:54 PM

[Thomas J. G...:]

There are some things to think about here. Some of the 10.7 trillion gov't debt is owed to the federal reserve and is therefore not real. We are also the world's reserve currency which allows us to deficit spend more than others. passinby's comment is true. We must be really paranoid to spend 10 times+ what others do on defense. I would argue the military advantage of the u.s. over other countries may be the greatest in the history of the world. I am not sure about consumer and corporate debt. Some things I read say consumers and corporate debt is at historic levels, other things I read say it isn't. ... Flash

Feb 19 10:02 PM

[Ferdinand E...:]

Since when did debt as such become a problem? Ronald Reagan's government borrowed more than had been borrowed altogether since the Revolutionary War, and even an intelligent man like Mitt Romney mouthed off about the "Reagan Revolution".

The commentor who has it right though is Rokjok777. Today's military spending is absurd. Both the army and the marines are critically short of infantry, and somehow Mr Bush forgot to tell his subordinates to solve that problem with the help of the pile of money that he gave them. As for continuing with the war in Afghanistan, what that comes down to is war for war's sake. Economically and politically meaningless.

Feb 20 10:23 AM

[Mad Hedge F...:]

Here is another thought about Obama’s mortgage bailout plan. It is so small, and helps so few people, it isn’t really a bail out at all. It doesn’t help those with mortgages over $625,000, a second home, investment properties, and those who have no mortgages (20% of the US total). Those who do qualify will have to run a gauntlet of qualifications and paperwork. No wonder the market for mortgage backed securities completely shut down! The plan does enable Obama to satisfy the left wing of the Democratic Party crying out for some government relief of their constituents, like Nancy Pelosi. It also makes a nice headline.

Feb 20 11:02 AM

[svkoho:]

I was part of that military spending in the late 60's,70's(SE Asia,Europe) where we invaded distant countries to protect the US..Whaaaat?... Sure we need a military to defend the US. We don't need our military in 700 bases overseas to defend us here. Duh.The military establishment with the corporate procurement establishment is part of the government and it controls the government and in fact is the government. There are dozens of good reasons to change the way we spend military dollars and we can do it for 10 to 25% of the current cost.

Feb 20 11:32 AM