The War in Iraq has already cost the US taxpayer over $500 billion and will cost over $1 trillion – that’s $1,000,000,000,000 – according to official estimates.
The war has been almost entirely deficit financed. It has added to the US’ already massive budget and current accounts deficits. The US economy can sustain its massive deficits because the rest of the World is willing to treat the dollar as its currency of note, and accept the value of the eurodollar.
Eurodollar is a term economists coined decades ago to denote dollars held outside the US. It is no longer that apt as most of them are held in Asia now. China alone holds about a trillion dollars – indeed there is a neat argument that China’s willingness to hold vast stocks of US paper has financed the Iraq war. Japan, perhaps surprisingly, also has over $400 billion.
How much money are we talking? Let me put it this way. China could buy all the real estate in London or New York – buy every property in the whole city – and have change. China could buy a controlling interest in every single company in the Dow Jones.
That, however, is not the danger. The danger is that China, Japan and others will come in time to doubt that these huge mounds of paper (OK, virtual paper) really hold the value that they are supposed to hold. They could start to diversify their holdings. The result in the US could rapidly tip towards extreme inflation, among other symptoms. Once the process starts it snowballs – the UK went through the economic trauma of slipping from being the key currency in the last century, largely as the result of expensive wars.
Confidence is a difficult thing, and the process could certainly be sparked by moves to switch major commodity trading to euros. The US is indeed jumpy about that, though the theory that this concern triggered the Iraq war is overblown.
Much of the trillion dollars war cost is redistributive within the United States. It is important to remember that to ordinary people – and to the unfortunate US taxpayer – the War in Iraq may look like an unmitigated disaster, but to easily identifiable groups the whole thing is a great success.
Record oil prices have resulted in obscene levels of profit for the oil companies. Armaments manufacturers have bulging order books and, given urgency of demand, have like the oil companies been able to increase not just profits but profit margins. The privatisation of war has brought massive contracts for those employing the many tens of thousands of mercenaries and the logistic supply contractors.
Like any war, increased career opportunities have opened up for the senior military. This one has been unique in the massive burgeoning of budgets, jobs and promotions within the security services also.
How the system works was outlined 100 years ago by the Liberal economist J.A.Hobson in his great book Imperialism – A Study. Written at the greatest extent of the greatest formal Empire the World has yet seen, Hobson proved, counter to the prevailing wisdom of both supporters and opponents of Empire, that the Empire had cost Britain money, not been a gain at the expense of the colonies. But while the net effect had been to make Britain poorer, the redistributive effect had made the ruling class, military and arms manufacturers much richer, at the expense of everyone else.
Hobson is now almost completely forgotten. In part this is because Lenin, a much lesser thinker, ruthlessly plagiarised Hobson’s work some years later and plastered it over with Communist claptrap. But for me Hobson’s Imperialism is in the same rank as J.S. Mill’s On Liberty, Adam Smith’s The Wealth of Nations and Tom Paine’s The Rights of Man, as essential reading on the foundations of modern political thought.