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 (NYSE:BA), Lockheed Martin (NYSE:LMT) and Northrop Grumman (NYSE: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