Defense Sector Will Suffer Due to Economic Collapse, Budgetary Constraints

While the Obama regime pays lip-service to the concept of “balancing the budget” some time in the distant future, the reality is that the enormous size of the U.S.'s structural deficits (and even more enormous “unfunded liabilities”) means that the composition of U.S. government spending will have to undergo a major overhaul simply to delay formal default.

First, for the benefit of those without familiarity with this term, a “structural deficit” is a deficit which exists each year even during the peak of economic cycles. In other words, it represents the minimum annual deficit – which grows larger the moment economic activity dips below a peak-level.

The problem with coming up with a good estimate of the U.S.'s structural deficit is that the U.S.'s “official deficits” never even come close to the actual increase in debt. For example, during the eight years of the Bush regime, George Junior announced annual deficits totaling roughly $2.3 trillion.

However, the U.S. national debt actually increased by $4.5 trillion over that time span. In other words, the “official deficits” only reported half of the direct increase in national debt. This is something which was never reported by any member of the U.S. corporate propaganda-machine, and never pointed out by the Democrats, the supposed “opposition” party.

Similarly, now that the Democrats hold the White House, while the Republicans can and do criticize Obama for the sustainability of his deficits, they never question the official estimate of the deficit, itself. Clearly this means the U.S.'s two-party dictatorship has an unofficial agreement to never tell the American people the truth about how much debt is being incurred each year – as I pointed out in a commentary shortly after Obama took office (see “Interpreting Obama deficit-numbers using the 50% rule”).

Of course, even this lying only represents the tip of the iceberg. The U.S. is the only major economy in the world which has invented the concept of “unfunded liabilities”. This is where the U.S. government takes its largest future obligations, and simply removes them from its bookkeeping and pretends they don't exist.

Fortunately, once a year, the Treasury Department visits the planet Earth, and calculates the annual U.S. deficit using GAAP accounting – the same accounting rules which all U.S. corporations (even the Wall Street oligarchies) are bound by. This calculation includes the annual increase in the U.S.'s unfunded liabilities, as in the real world you are not allowed to ignore expenses just because you have no possible way of paying for them.

Over the last several years (before the beginning of the current collapse), the annual deficits according to this full accounting have averaged roughly $4 trillion per year. This means that the “official deficits” reported by the Bush regime represented as little as 5% of the actual increase in debts/obligations.

Once again, these numbers are never reported to the public by either the U.S. propaganda-machine or whichever political party is in opposition. There is no way to interpret this as other than a deliberate conspiracy to hide the truth from Americans.

These annual deficit calculations are now so divorced from reality that for years the U.S. government has been stealing hundreds of billions of dollars from the U.S. Social Security “trust fund” - and then reducing the “official deficit” dollar-for-dollar with everything they steal from this fund. This is the equivalent of someone transferring money from their savings account to their chequing account – and then claiming they suddenly got wealthier simply from transferring money from one account to the other.

Sifting through this endless mountains of lies, thanks to the added trillions of debt over the last decade, and the continued deterioration of the U.S. economy, the “structural deficit” is now somewhere around $1 trillion per year. This means that in its current structure, the U.S. government's annual operations will produce at least $1 trillion per year of new debt as a best-case scenario. When the economy is sliding, or (in the case of today) plummeting downward, that number rises dramatically. Keep in mind that this number does not include one penny of the unfunded liabilities – which are now increasing by somewhere around $4 trillion per year.

The realities are as follows. Annual deficits of $1 trillion per year would be guaranteed to bankrupt the U.S. economy over the long term – given that even using the farcical GDP estimates of the U.S. government, the economy can only grow by a maximum of about $0.5 trillion per year. Thus, even if the U.S. had no “unfunded liabilities” it is still insolvent over the longer term.

While in theory, the U.S. government could eliminate all of its “unfunded liabilities” by simply slashing entitlements, slashing $4 to $5 trillion per year in benefits would have a virtually identical impact to increasing taxes by that amount – i.e. it would cripple the U.S. economy far more than the current Greater Depression.

In addition, the AARP is the most powerful lobby group in the U.S. outside of the Wall Street oligarchs, and with this demographic group rapidly growing in size, it gets more powerful every year. Furthermore, this demographic group will soon be dominated by the Baby Boomers – a generation who has gone their entire lives expecting a level of benefits which they refused to pay for. Politically, there is no possibility of any large cuts being made in these benefit-streams – until the U.S. formally defaults.

This leaves the U.S.'s grossly bloated annual military spending as the only possible area where enough annual spending could be cut to significantly delay default. Today, we witnessed the first step in the dismantling of the U.S. war-machine: the announcement that the U.S. is scrapping its plans for a “missile shield” for Eastern Europe and southwest Asia.

According to a Reuters article, the U.S.'s European “allies” were told of this “only hours” before the announcement. This means this was either a spur-of-the-moment, panic move to reduce the military budget, or part of a long-term strategy to reduce the size of the U.S. military. Given how the government's revenue estimates have to be revised every few weeks – because they are hopelessly optimistic – the odds favor this being a panic-response to a worsening fiscal crisis.

Currently, the U.S.'s military budget is woefully inadequate to provide proper medical care for returning veterans of its two “wars of choice”. Estimates for the costs to replace/repair used and damaged equipment from those wars exceeds $100 billion, and unless there has been a recent escalation of this massive “refit” for the U.S. military, maintenance of its war machine continues to fall further and further behind.

This leaves few options for the Obama regime – and all of them bad, if you are a supporter of U.S. military imperialism. If the Obama regime simply wants to keep the war machine at its current size, and continue the war-without-end in Afghanistan, this would leave the U.S. government utterly incapable of funding any new, wars. Essentially, the U.S. war-machine would be “all dressed up, with nowhere to go.” While it would seem insane to maintain a war-machine which you couldn't afford to use, this scenario is the most-likely option at the present.

Alternately, all other options involve deciding where the U.S. will find the hundreds of billions per year in reduced spending – the amount necessary to delay national default for even a decade, while still retaining a fully-functional military. Today's announcement would appear to signify the beginning of a policy of reducing the U.S.'s military footprint in the world. In other words, the least-objectionable option for U.S. military hawks who still dominate decision-making in this area appears to be to reduce its military presence (the U.S. has some degree of military presence in over 100 countries) in order to keep the war-machine intact in its present form (at least for the moment).

Regardless of how the U.S. government chooses to scale-back military spending, this is bad news for the U.S.'s defense contractors – who represent the largest chunk of the U.S.'s greatly diminished manufacturing sector. Furthermore, for decades, the key to U.S. economic might was to plough vast amounts of government spending into military research-and-development projects – and then to spin-off these technological advances to its broader manufacturing sector (at least those advances which were not so sensitive that they remain totally “classified”).

In other words, over the longer term, the decline of the U.S. military will translate into waning technological supremacy for the U.S. This, in turn, will reduce the amount of opportunities for new, high-tech industries to evolve – which are the only forms of manufacturing which can sustain the higher wages which used to be taken for granted in Western economies.

The longer the U.S. insists on maintaining a war-machine for which it is utterly incapable of paying, the sooner and the more certain is the U.S. transformation to a “Third World” nation.

Comments

[shadowstalker]

I agree that we cannot continue to pay for our current military operations. Let's see: two open ended wars, one in afghanistan! Providing military protection to multiple countries. Economic and political policies that weaken the country, currency that is on a bobsled ride. Does anyone remember the collapse of the Soviet Union? Does this trail look familiar, Kemohsabama?

We ain't the big dog anymore. Back off.

2009 Sep 18 08:10 AM

[Canadian Guy]

Part of this military spending is directly used to protect the oil suppliers in the middle east and the oil tanker routes on the oceans.

I believe that the Pentagon produced a report a couple of years ago stating that the U.S. taxpayers were paying just over $100 a barrel in defence taxes to protect their oil supply in addition to whatever the cost of oil was at the time on the world markets.

This is one of the reasons that the Pentagon has become one of the largest promoters of renewable energy as a means to attain U.S. energy independence.

If the U.S. can become more independent of imported oil then defence costs can be reduced.

2009 Sep 18 09:07 AM

[ArtfulDodger]

BeWhew!! Have a lovely weekend!

2009 Sep 18 09:28 AM

[bubbster]

Do I hear something of the Post-Vietnam past bubbling up? I guess you haven't taken a history class in a while. Those who have not learned are bound to repeat it. I agree we spend way too much for the federal budget. Name one nation in history who did not have the military might to back up it's policy and I'll show you a nation that is in decline. And no, the Garden of Eden doesn't count. By the way how did Reagan bring down the wall in Berlin?

2009 Sep 20 05:17 AM