US Economic Vulnerability 9


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.

http://www.boston.com/news/nation/articles/2007/08/01/analysis_says_war_could_cost_1_trillion/

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.


9 thoughts on “US Economic Vulnerability

  • Sabretache

    Craig

    A sound exposition if I may say so.

    Market trading is my day job – mainly stock index futures in both Europe and the US. Useless occupation I know but I don't make the rules and it pays the bills. Anyway, I can tell you that relatively minor variations of your description of the US economy have been the stuff of the independent market commentators for at least a couple of years now. It has been the job of the Wall St cheerleaders and their colleagues, the financial entertainers of CNBC and Bloomberg, to rubbish them (when was it any different?). Following the internet stocks collapse of 2000-2001, they have successfully blown the biggest credit bubble in history with cheap, no-underwriting-required, mortgage and loan finance into both the US housing market and the corporate LBO market through private Hedge Funds. The former has pushed US housing affordability off the scale, the latter has ramped the stock market (with a little help with record corporate profits) Since the Iraqi invasion the Dow Jones Aerospace and Defence Industries Index has risen from 170 in March 2003 to 526 today – that's over 200% in 4 years! The lesson? War is good for business. Meanwhile the US current account stands at nearly 6% of GDP (Spain is worse actually at nearly 8%); that's about $800 BILLION of external finance required every year. As you say, China, India and Japan, who have been financing the lions share of it, are begining to question the wisdom of what amounts to throwing good money after bad and have not been participating in recent US Treasury Auctions. Guess who's taking up the slack? – Got it in one – their latest financial Patsie – the UK no less with our US Bond holdings tripling in 12 months.

    It's like King Canute telling the tide to go out though – and the markets are beginning to confirm as much.

    Stand by for some seriously ugly financial happenings and a major recession – or worse in the US.

  • Chuck Unsworth

    Yes, a series of very important points – particularly with regard to China and India.

    What's critical here is the timeline and the relationship of fiscal to political events. I'm not convinced that the predicted crash will occur this year, but it 'may' next year. Brown will wish the downturn (with any collateral damage) to take place after the next elecetions.

    In passing, some American companies have also moved production south of the border where total labour and overheads can be astoundingly low – even when compared with outsourcing to India and China.

  • Randal

    I suspect one of very few plausible scenarios by which US dominance can be overturned in the relatively short term would be via a loss of confidence in the dollar, perhaps triggered by a turn away from dollar oil financing by the countries that are the main victims of said US dominance – Iran and other US whipping boys such as Venezuela, and Russia.

    Sadly, China has too much to lose to collaborate actively in such a process.

    Even more sadly, the moral criminals responsible for the immense suffering that will follow (the US militarists, the US leaders who lack any sense of financial responsibility, and the elites who enable them) will, of course, largely escape direct personal consequences (in this life, at any rate).

    "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. "

    The idea that state policies can be simultaneously disadvantageous for the nation as a whole but beneficial to the rulers is a given of anarchist thinking. Marxism confused this sinple reality with all sorts of nonsense about class.

    It is not just ruling groups that benefit from war – it is even more the state itself (in other words, the apparatchiks and empire-builders within the state structures). The British nation has never recovered from immense increases in state power that resulted from the two world wars, particularly with the Cold War that followed. The simple truth is that "war is the health of the state".

  • Randal

    Sabretache:-

    " Guess who's taking up the slack? – Got it in one – their latest financial Patsie – the UK no less with our US Bond holdings tripling in 12 months."

    Thanks a lot for that – that's really cheered me up no end! Yet another way in which "my" government is complicit in the maintenance of US dominance and all the evils that go with it.

    "Stand by for some seriously ugly financial happenings and a major recession – or worse in the US."

    Not just the US, either.

    I've seen plenty of cogent arguments why the US dollar collapse isn't going to happen (iirc, Anatole Kaletsky in the Times was the latest, but I might be mis-remembering). Of course, we humans aren't nearly as competent to understand these complex issues as we generally think we are. If and when it does happen, it may be a "Black Swan" of calamitous proportions for most of us in the west in particular, and for many others. But it's an ill wind indeed that blows nobody any good……

  • Sabretache

    Aye, an ill wind indeed. No doubt you've heard the name Jim Cramer. If you want a good laugh – but also (in consideration of the fact that he's an ex-Goldman Sachs insider and large Hedge Fund manager) just how rattled the Bond and Stock market insiders are right now, tune in to this link: http://tinyurl.com/2gvtae.

    Jim Cramer loses it on CNBC. Talk about financial entertainers, it's priceless.

  • Randal

    "Jim Cramer loses it on CNBC. Talk about financial entertainers, it's priceless."

    Priceless, indeed! Thanks for that bit of entertainment, Sabre.

  • Randal

    A straw in the wind, perhaps?

    Muslim countries finance U.S. wars by trading in dollar: Mahathir

    KUALA LUMPUR ? Muslim countries are inadvertently helping the United States kill fellow Muslims in Palestine, Iraq and Afghanistan by trading and investing in the U.S. dollars, former Malaysian Prime Minister Mahathir Mohamad said Tuesday. The 82-year-old, who is well-known as a strident U.S. critic, is championing the return to the gold standard through the use of a gold dinar instead of the U.S. dollar, which he said is actually "worth nothing."

    Japan Today, 24th July 2007
    http://www.japantoday.com/jp/news/413133

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