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by The ability of America to fight a war is dependent upon the money supply to fund it. Here is a (possibly simplistic) analysis from a non economist.
Given,
GDP = Money supply x Velocity = Ms x V
where Velocity (V) is the number of times a dollar is used each year, V is a variable which tends to be an outcome rather than something the government can control. If the Federal Reserve tries to increase GDP by printing more money, then V may fall and the strategy will fail. (Of course, in the real world, V is not constant over long periods of time, but it is useful to model it so.)
Money supply is like a huge water vessel filled to the brim and overflowing; the volume contained is constant, therefore the amount going in is equaled by the amount flowing out. In other words, Injections = Leakages, where:
Injections = Government income (which is all tax) T + Private savings S + Export earnings E
and
Leakages = Government spending G + Imports M + Foreign investment I
Due to the equilibrium, this results in: S+T+E = G+I+M, or, (T-G) + (S-I) + (E-M) = 0. In familiar English terms this is: "The Current Account plus the Savings Ratio plus the Balance of Trade equals zero."
Now, to gear up for a war means a huge increase in G for spending on troops, weapons, munitions, etc. What change does this cause in the equation? The larger G can be compensated for by a larger T or by increased savings with less foreign investment or by increasing exports and decreasing imports - all very difficult things to do.
Looking at the present state of the savings ratio we see Americans like living in luxury and funding it with debt. Asians tend to be different. In Japan, South Korea, Singapore, Taiwan and Malaysia, the instinct is to save for a rainy day and invest in blue chip American stock. It is the same in Germany and some other countries. The result is I is already much greater than S and much of our infrastructure and company assets are foreign owned. So, not much room to improve things quickly there. If the Asians panic and start selling low they can bring us down. The balance of trade is not bad, but it would be very difficult to increase E in the competitive world market. We can cut imports, but there go gas prices and lots of luxuries. Higher taxes seem inevitable. If this is not done, then the money supply will become worthless, the Asians will bail, and the economy will rapidly move into very bad shape.
When an American GI looks at a U.S. carrier battle group, or an armored division, he thinks, "Wow! What power! How could any piss ant Arab country, or even a group of them, stand up to that? Let's kick ass." When an Arab terrorist looks at the same thing he thinks, "Wow! What a gi-normous G! These crazy Americans are busting themselves. Allah is Good!"
We have a war fighting doctrine of massive overwhelming force, which means we put in more than we need to win in order to demoralize the enemy, win very quickly and keep casualties down. When we take that doctrine to a "War On Terror," we fill the country with weapons and people we can't use in the fighting and generally push G very much higher than it needs to be for such a lukewarm war.
In fact, our presence in Iraq is like the lid on a pressure cooker. We are reducing the oxygen supply and pressing the level of conflict down to a minimal level at which the terrorists can afford to play all day. In other words, the "War on Terror" is ensuring we will continue to have a war with terrorists. "Mess O'potamia," as Jon Stewart calls it.
So, my thesis is we have put ourselves in exactly the position in which our Arabs enemies want us: heavily committed financially and bleeding our economy dry, while they only have to arm a few fanatics with obsolete surplus small arms and home-made bombs. The longer this can be maintained the better for them because every individual American is going to be hurt badly in the hip pocket. Eventually economics may bring America down, as it did the Soviet Union.
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I strongly recommend anyone who is concerned about what Occam's is talking about here read Thomas Friedman's Lexus and the Olive Tree and The World is Flat. I also recommend Looming Tower: Al Qaeda and the Road to 9/11. Occam's is indeed correct that al-Qaeda believes they can topple us, as they (at least Zawahiri and bin Laden) have deluded themselves that they and their actions in Afghanistan alone toppled the Soviet Union, and that they can do the same to us. A far more relevant Arab contribution was the Saudi oil dumping to keep the price of oil low (the Soviets only had two things anyone wanted to buy from them--oil and guns. If they couldn't profit from the oil, there goes most of their exports and their economy).
That said, as LordDilly pointed out, despite the mantra and dogma of some of the politically biased in this country, the War in Iraq is really not impacting our economy at all. The defense budget is far lower than it had been in the Cold War era, and even well into the 90's as a fraction of GDP. If anything, it's stimulating the economy and technological development, but the big winners are not the mega-corporations, the Halliburtons and such that get all the press. It's small entrepreneurs, like iRobot and all the small vendors who are quickly coming up with counter-IED products, body armor, robots, etc.
If you are truly concerned about the future of the US economy, tend to the just expansion and development of globalization, free trade, and also to revitalizing our crumbling education system. I won't even talk about peak oil or climate change here, although they are also major concerns. Aside from them, the biggest threats and opportunities in the future are ensuring no-one gets left behind with rising levels of world-wide prosperity and quality of life--especially our own kids as China and India rocket forward. Our education system really sucks and we need to do something about it. Don't take my word for it, read the National Science Foundation's report Rising Above the Gathering Storm. I honestly believe it's primarily the fault of the parents, who as well as their kids seem to be in a state of denial that their children could possibly have a lower standard of living if they don't take their education seriously. The days of being a mediocre student and being mediocre at your job and having that tolerated are over. There are Indians and Chinese workers who would love to take that drudge work off your hands if you don't think it's worth your time. Friedman also says that this is not a zero-sum game, and that those people will also create new markets for goods and services, and bring great opportunity along with this threat. Which brings us back to the War in Iraq and the military. Our technological superiority is among our greatest national treasures, and that could be rapidly eroding. God help us and help the world if we get behind. If the Chinese get ahead, will they take the needs or interests of anyone else in the world under any consideration? Given their track record of human and political rights, would this not be a disaster for freedom and democracy around the world?
Also, as LordDilly pointed out, a lot of the money going into Iraq is going into the infrastructure, which is absolutely critical in a counter-insurgency fight. Friedman also talks about the entire Middle East being part of that dis-infranchised part of the world, not connected by globalization. Thomas Barnett includes the Middle East in what he terms the Non-Integrated Gap in his book, The Pentagon's New Map. Despite oil wealth, these people are not enjoying commerce, a good quality of life, or political rights. Failure in Iraq would only exacerbate that, among many other very bad things alluded to in The Iraq Study Group Report.
So to summarize, it's arguable that we could better spend the money being spent on the War in Iraq, but it's much less than we had recently spent in peacetime. We could be spending it on serious high tech gear, such as the F-22 or the DDX, which would raise the state of the art, keep lots of scientists and engineers employed, etc. However, the Army and ground combat troops are arguably far more relevant for the forseeable future if we want to overcome conflicts in the Non-integrated gap, and ground troops have historically taken the leftovers when it came to technology development. Nobody is going to be stupid enough to take us on in the air or sea, or even in a conventional ground fight anymore--unless they can get an overwhelming local advantage long enough to achieve their objective and hope like hell they can maintain it. The War in Iraq is also about a lot more than ground combat--there is a lot of pulling to get them into the 20th century, and maybe eventually into the 21st. At the same time, there are a lot of far more serious threats to the US economically, militarilly, and "morally". I know a lot of people like to throw bricks at Rumsfeld, but he was right when he said the War on Terror is a war of ideas. Al-Qaeda is not using bullets alone to attack us, and neither are we. Meanwhile, the War in Iraq is no excuse for the real problems that ail this country and we have the resources to fix them. The economy is doing extremely well....for now. Now is the time to fix our crappy education system and maintain our technological and commercial edge. Now is the time to stop giving publicity to people trying to out-do each other in being the biggest dumb-ass and start rewarding good behavior. We need to inspire kids to want to grow up to be a scientist, or go do some work in Africa, or how about a *teacher* or something other than the current pantheon of counter-productive careers that are glamorized today. Find a way to get kids to love calculus and you will be my hero.
As a first semester economics assignment, and that is all he claimed, I would give Occams an A for the theory and thoughtful exploration of it. It is a valid topic for discussion here.
The equilibrium holds only if the velocity is constant but I think he covered that at the start.
I have assumed that there is a big war chest of gold held somewhere like Fort Knox that is outside of the money circulation equilibrium, and using that will insulate the economy.
If that is not the case then the war funding will have to come out of the current account as there is nowhere else. As he implies, the savings ratio is a national disgrace and does considerably increase our economic vulnerability, and we have already pushed our trade on the world as hard as we can.
That may mean an increased deficit. I do not share the common view that government debt is necessarily a bad thing. It is bad if it is not spent on productive things or if it cannot be serviced. War is not productive by definition, but most of what we spend on Iraq goes to American companies, and therefore into the money supply circulation raising the volume.
I agree that we have not faced a war before with quite the same environment regarding the savings ratio or balance of trade - and we certainly had a war chest for Vietnam and the cold war.
I fully agree with .ppt Samurai that we could spend the war money more usefully funding education, career opportunities, and infrastructure inside the USA. The opportunity cost of the war is therefore very high.
There was a lot of talk about a peace dividend in terms of lower taxes after the cold war. That must have been scary for the weapons manufacturers but now they need not worry because we have found another way to keep them employed.
Just so we understand the amounts we are discussing. This is the CRS estimate for Congress.
http://www.fas.org/sgp/crs/natsec/RL33110.pdf
For FY2008, DOD requested $481.4 billion for its regular or baseline budget and $141.7 billion for war costs. If Congress approves both the FY2007 and FY2008 war requests, total funding for Iraq and the Global War on Terror would reach about $752 billion, including about $564 billion for Iraq, $155 billion for Afghanistan, $28 billion for enhanced security, and $5 billion unallocated.
UN calculates the cost of terrorism By Edith M Lederer August 27, 2004 - 4:48PM http://www.theage.com.au/articles/2004/08/27/1093518081060.html?from=storylhs The Age is a major Australian newspaper.
The al-Qaeda terror network spent less than $US50,000 on each of its major attacks except the September 11 suicide hijackings and one of its hallmarks is using readily available items like mobile phones and knives as weapons, a UN report says.
The first report released yesterday by a new team monitoring the implementation of UN sanctions against al-Qaeda and the Taliban detailed just how little it cost al-Qaeda to mount operations - and how most of its attacks involved arms and explosives so unsophisticated they aren't covered by the punitive measures.
For example, the report said the March attacks in the Spanish capital, Madrid, in which nearly 10 simultaneous bombs exploded on four commuter trains, used mining explosives and cellphones as detonators and cost about $US10,000 to carry out. The blasts killed 191 people, Spain's worst terror attack.
The twin nightclub bombings in Bali, Indonesia in October 2002 killed 202 people, including 88 Australians, and cost less than $US50,000.
Only the sophisticated attacks in the United States on September 11, 2001 using four hijacked aircraft "required significant funding of over six figures",
The War in Iraq Costs so far
$435,491,333,666
AN APPRAISAL THREE YEARS AFTER THE BEGINNING OF THE CONFLICT
http://www.informationclearinghouse.info/article11495.htm
Three years ago, as America was preparing to go to war in Iraq, there were few discussions of the likely costs. When Larry Lindsey, President Bush’s economic adviser, suggested that they might reach $200 billion, there was a quick response from the White House: that number was a gross overestimation. Deputy Defense Secretary Paul Wolfowitz claimed that Iraq could “really finance its own reconstruction,” apparently both underestimating what was required and the debt burden facing the country. Lindsey went on to say that “The successful prosecution of the war would be good for the economy.”
Given that at the onset of the War, the country was already running a deficit, and no new taxes have been levied, it is not unreasonable to assume, for purposes of budgeting, that all of the funding for the war to date has been borrowed, adding to the already existing federal budget deficit. In the conservative scenario we assume that these funds are borrowed at 4% and repaid in full within five years. The moderate scenario assumes that the country continues to have a deficit over the next 20 years and therefore interest continues to accrue.
On the opportunity cost see.
http://nationalpriorities.org/index.php?option=com_wrapper&Itemid=182
Education.
Instead, we could have provided 21,111,687 students four-year scholarships at public universities.
I fully agree with .ppt Samurai that we could spend the war money more usefully funding education, career opportunities, and infrastructure inside the USA. The opportunity cost of the war is therefore very high.
I think you misconstrued what I said then. I said we could argue whether the money would be better spent elsewhere, and I certainly think the collapse of our infrastructure, education system, and all the things that enable our technological edge and economy are absolutely critical. However, we have the money for those things, and are currently not using what is already available for those things unwisely. All that is lacking is political will...from both political parties. The war in Iraq is a giant Red Herring on this subject because first of all, a lot of the improvements that need to be made don't involve money--just better action. Secondly, the improvements that want money are within our reach or would be enormous investments (bridges, electrical grid, etc.) even if Saddam had calmed down ala Qaddafi decades ago.
There was a lot of talk about a peace dividend in terms of lower taxes after the cold war. That must have been scary for the weapons manufacturers but now they need not worry because we have found another way to keep them employed.
That is always the scary boogeyman that is dragged out in these things. The mighty "military-industrial complex". As I mentioned in the last post, Boeing, Lockheed, and all the big guys you know the names of actually are losing out because of the war in Iraq because Congress is calling into question the relevance of big ticket projects, such as the F-22, DDX, etc. Small businesses are the big winners. In either case, this development is vital in maintaining a technological edge in the world, and the technology makes its way out to products used by the public--such as jet engines. Innovation has simply openned up in other directions usually neglected in the past due to the war in Iraq, such as body armor, unmanned aerial vehicles, robots, etc. The potential for civilian applications for all of this is staggering. Body armor, for example, depends heavily on materials research to make them very light and strong. This, plus the economy of scale, could well lead to lighter, more fuel efficient, and safer vehicles and aircraft than we make using materials available today.
As for the end of the cold war and the peace dividend, don't read your newspaper, because it looks very much like some people in Russia are working hard to bring it back.
The economy is doing extremely well....for now.
No, the US economy is in very poor shape indeed right now.
Perhaps the War on Terror is not the main cause. I don't know, but it seems like this guy agrees with my assessment that a financial crisis is near, and that the trigger may be foreign investment.
My research on this subject has frightened me. I am depending on US equities for my retirement.
Things are as I suspected but I didn't think there would be so much evidence that we are close to the brink.
source:
Trade Gap, by Paul Blustein, Washington Post: Newark, Del.:
A $700 billion $ per year current account deficit sounds incredibly huge. How is this going to end?
Paul Blustein: This is a good question ... Some think it will be a "hard landing"--a financial crisis in which foreign investors dump U.S. securities en masse. Some think it will be a "softer" landing, in which foreigners just gradually insist on higher rates on their U.S. investments. And some people think the landing will be softer still, with the dollar just gradually easing down and trade flows reversing over time. ... I have to admit I find myself nodding my head when I hear economists say that the risks of a bad outcome are unacceptably high.
PLEASE SOMEONE PROVE ME WRONG.
Occams,
I think you have made your point rather too well.
It does look very serious.
We have been in this situation before, but then the Administration put the brakes on spending and got us out of it.
This time we have such a level of commitment to the war in Iraq that the brakes are broken.
Hold on for a hard landing on share prices!
I said at the start of this thread that I am not an economist.
I am finding that many wise pundits are saying that the US economy is in good shape, while others are describing very bad situations regarding the current account deficit, the savings ratio and the balance of trade.
So, I am asking if both can be true?
Is it possible for the main economic indicators: inflation, unemployment, interest rates etc. to be good, and at the same time for there to be a high risk of a disastrous stock market crash and devaluation from the money supply taking a dive.
I thought these things were inextricably linked. If personal wealth is about to take a big dive, can we still say that the economy is in good shape.
Can we still afford the War on Terror?
I am finding that many wise pundits are saying that the US economy is in good shape, while others are describing very bad situations regarding the current account deficit, the savings ratio and the balance of trade.
I found a similar problem when researching. Oddly, I noticed the divide of opinions tended to fall along political/ideological lines. Do you concur?
Perhaps, but I am not sure about the alignment of some of the sources, although I found some purely academic papers that I assume are unbiased affirming the negative picture.
While the growing deficit seems to be an accepted fact, the major newspapers do not seem to be very concerned about it.
It may be that the conservatives are suppressing the danger, but I would not have thought that to be possible, or even in their personal interest as they probably have more to lose.
One would expect this to be a major issue in the run up to an election. I find the silence most puzzling.
Messed up my login again. That last anon was me.
I've just read a metric butt-load about the money spent, and the opportunity cost of spending it fighting terror; but nothing about where it is going. I contend that we are recycling a great deal of it back into our own economy by hiring more US (not all but alot) contractors to support the machine, buying more equipment from American (again, not all but alot) manufacturers, recruiting more soldiers with better benefits, pay, and bonuses, etc.
My limit in economics is Econ101 years ago. I remember something about a national debt owed to a states own population being healthy for the economy. Please correct me if I am wrong.
In my own little world, the economy in the American Southwest is booming. The increase in the size of the Garrison at Fort Bliss is causing a steady, gradual increase in housing prices, and there is construction across the city.
If there is a hard landing at the end, then history tells me that is normal following industrial era conflict. A boom in the economy in the middle and end of the war followed by decreased government spending and a sluggish economy.
I've just read a metric butt-load about the money spent, and the opportunity cost of spending it fighting terror; but nothing about where it is actually going. Focus not on the spending but the borrowing.
Well then, it may be time to blow it out that southern orifice and then try to focus your eyes on the money flows. Look upstream not downstream.
We may have the most powerful military that the world has ever seen, but this proud nation is at present a very weak and vulnerable country. Ironically it is military spending that has most helped to make us so. We are surviving only because the US dollar is a convenient medium of exchange around the world, and that is because the world used to be confident that the US economy was being well managed to keep value in the dollar. But now it is not, and they know it.
Those fiscally frugal foreigners are watching us hedonistic Americans pour hundreds of billions of their loaned dollars down the Iraq toilet, and they are wondering why they should fund it with their pension future.
The massive structural imbalances created by chronic US balance of trade and government deficits have been well known for many years. The situation will last for as long as others (e.g. the famous Belgian dentists and Japanese pension funds etc) will let it last. The danger is that a run on the US dollar could panic the markets and bring about a recession.
The counterbalance to this is the fact that the US$ has become such a fundamental reserve currency/medium of exchange that foreign demand for it looks likely to keep up for a while to come. Also, the fundamental strength of the Chinese economy and the fact that China is happy to go on accumulating dollars in reserves is another factor keeping the present system going. A downturn in the Chinese economy could trigger the end for us. Therefore our fate is in the hands of a communist country, and much more so than ever during the Cold War.
if America sneezes the rest of the world catches cold. A sharp US downturn will affect other markets but China couldn't withstand a major US downturn either.
My limit in economics is Econ101 years ago. I remember something about a national debt owed to a states own population being healthy for the economy. Please correct me if I am wrong.
That was right in WWII when war bonds were sold to citizens, but it is wrong now because the money for all this war spending is being borrowed at interest rates (at least 5%) from overseas. Have you been invited to any war bonds rallies lately? I think you may be confusing spending on Americans with borrowing from Americans. The government's debt funded investment is not returning money to the US treasury to pay off the escalating debt.
Many of us know that in the depths of the 1930s depression FDR's New Deal primed the economy with government spending. That money was spent on things that would return value to the dollar: infrastructure like roads, dams, power stations and railways. That is not what our government is doing now except in Iraq where there will be no financial return to the USA.
Congress has to keep raising the statutory debt ceiling so that the Administration can pay its debts - including wages for civil servants and military. It has done so more than 70 times in the last 50 years.
In my own little world, the economy in the American Southwest is booming. The increase in the size of the Garrison at Fort Bliss is causing a steady, gradual increase in housing prices, and there is construction across the city.
Do you inderstand what will happen if the government reacts by printing more money?
Do you think this Administration (and the DEM Congress) is smart enough not to make that mistake?
More matter, less art.
The first half of that sounded like an Ann Coulter/ Al Frankum novel; all scarry talk about doom, but no data. Or rather a rant from an econ professor that hasn't been off campus lately. I look forward to the day willwaddell starts doing it. Which foreign investors are you talking about? Foreign Affairs and The Economist sound much cheerier than you. And by the way, I'm not sure how it is that you concluded we are any more hedonistic than any other European or some Asian states.
I'm not sure I understand where you are going with the rest of it. A run on the US Dollar could bring about a recession at any time, regardless of where the money is spent. There was a slump in 90-95 when the cold war spending dried up, there was another in 80-81 due to the infaltion of the dollar, and another during the energy crises in 73-75. Despite all of that between 1960 and 2004 the GDP went from 500 billion to 12,000 billion. Amazing. Reference.
What's the issue with borrowing from Americans? Your argument about money leaving the treasury sounds vaquely mercantilist. It may be that we aren't building infrastructure, or something with a tangible return; however an investment in American citizens will eventually have a return.
I understand what will happen if we print more money, and I further understand that it happened in 80-81 (see above) and we recovered nicely. And despite your opinion about the administration I think there are probably also some people in the administration with an education and grasp on the problem. Mybe you should give Dr. Bernanke a call, I'm sure he hasn't considered any of this.
Botynyk,
Thanks. I hope you are right.
all scarry talk about doom, but no data.
The data is the state of the current account, savings ratio, and the balance of trade. Sources have been given throughout this thread and now we are discussing them so I won't quote them again.
The simple fact is that this government has saddled the country with a huge debt that will not disappear with this administration but which will be around until it is paid off.
I agree with you that the economic fundamentals of the United States are such that we have the resources and productivity to get over this. I think where we disagree is in the notion that we can ignore it and things will get right on their own. They will, but the correction will be devastating for those of us who have our wealth tied to the US dollar.
I am trying to show that there is another option. Tax. If you look at the big zero sum equation in the original topic post you will see that government spending can only compensated for by tax because the other levers are already at their extreme ends. We all hate tax but perhaps we hate more having the value of our savings wiped out.
I admit that I have been a doom and gloom merchant on this subject. That is because the reaction is always that the economy is strong and America is rich and powerful so we will be alright. I was trying to stir up a debate that would help some more Americans to think that things may not be alright, and to wonder why this issue is not getting more spin in the run up to an election.
The subject of the topic was really "Can we afford the War on Terror". I think that by all the traditional standards for the management of an economy by a government we certainly cannot afford to spend a couple of hundred billion dollars each year in that way while running such a big deficit, and one that is growing by $700 billion each year.
What's the issue with borrowing from Americans?
My comment there was a reaction to a previous poster who said that his economics 101 class was taught that this was OK. I agreed but showed that we were not doing that for this war.
Conservatives are always saying that they believe in a balanced budget, but right now it is extremely unbalanced and all the bad things that go with that are descending on the USA. For example, another ON thread is bemoaning the fact that many oil suppliers are demanding payment in Euros rather than dollars.
an investment in American citizens will eventually have a return.
Hopefully, but the question is: will that return be more than the cost? If the return is not in money that will go back into the current account (and it isn't) then we have to make up for it in tax.
In summary, most Americans who have the nous to understand the problem seem to be using intuition, hope, and faith to put out of their minds the evidence that their Administration is spending like a drunken sailor - and, like a drunken sailor, he will probably get mugged.
Your comment about the economists in the Administration understanding all this is a good one because I am perplexed. I think the significance of this goes beyond any attempt to protect the President, so it can't be a conspiracy. I can only attribute it to a desire not to panic the nation and foreign investors into bringing the crash on. That does not explain the silence in the media so I am interested to hear your take on that.
I agree with you regarding the bulk of that, my contention amounts to this: It's not soley on this administration, nor is the war on terror a new thing that we canot afford. This administration's war on terror is the previous administrations NAFTA, or military adventuring in Africa, etc, or the LBJ's Great Society program. I don't pointing the finger at one fiscal destination is the answer, rather a shift in budget focus.
I don't pointing the finger at one fiscal destination is the answer, rather a shift in budget focus.
In reference to the cause of the budget blowout, I agree.
However, the responsibility to take effective action to reduce the budget is the responsibility of every administration. The last time the Federal budget was balanced was in Clinton's time.
George W created a huge deficit in Texas and then he came here and did the same. It was not all acts of omission. Much of the initial deficit was caused by unjustified tax cuts.
Hold on, I remember George senior getting quite a bit of flak for trying to raise taxes after his 'read my lips'' fiasco. Once in office he realized the problem and had to raise taxes to address the deficit. This is not a problem that has been soley bolloxed by the current administration.
Bush's Tax Cuts A Form of National Insanity By ROBERT FREEMAN
Clinton showed how the deficit should be addressed.
When Bill Clinton took office he intentionally reversed the Supply Side formula, raising taxes on the wealthy and reducing them on the lowest wage earners. Supply Side true believers predicted the arrival of the Apocalypse. Bob Dole said the stock market would collapse. Newt Gingrich said the world would fall into another Great Depression.
What actually happened?
Between 1992 and 2000, the U.S. economy produced the longest sustained economic expansion in U.S. history. It created more than 18 million new jobs, the highest level of job creation ever recorded. Inflation fell to 2.5% per year compared to the 4.7% average over the prior 12 years.
Jimmy Carter's last budget deficit was $77 billion. Reagan's first deficit was $128 billion. His second deficit exploded to $208 billion. By the time the "Reagan Revolution" was over, George H.W. Bush was running an annual deficit of $290 billion per year.
Yearly deficits, of course, add up to national debt. When Reagan took office, the national debt stood at $994 billion.
Now George W has a national debt of $8 trillion.
W reduced the tax on dividends fore purely political reasons.
At the same time, he took us to a war without having the means to pay for it
This is grossly irresponsible behaviour for a President with a deficit that is currently growing by $700 billion per year towards $ 10 Trillion by the time he leaves office.
What has he done to reduce the deficit? I can't think of anything.
The Economist sound much cheerier than you.
Bortynk,
Believe it or not, I truly hope I am wrong about this.
I tried your links but could not find much that was pertinent. As I have said often, this issue is not getting much press. There is plenty of talk about an improvement of half a point on budget predictions here or there, but little about the seriousness of the predictions per se.
Please have a good read of this speech by Roger Ferguson, Vice Chair of the FRB. We will need to extrapolate another 15 months onto the economic trajectory at that time. The graphs at the end are helpful for this.
I saw much in the speech to reinforce my conclusions, and I was tempted to do a lot of cutting and pasting here. However, I concede that you could do the same. We would both do better to take it all in and think it through.
I concede that the full story is clearly much more complex than I have been portraying, but I am not so clear that my fundamental conclusions are wrong.
The deficit has balooned since that time so things are more serious now.
I take heart from his final statement, even though it contradicts what I have been saying.
However, my sense is that the implications of current account adjustment for U.S. economic growth and inflation will most likely be benign.
Let's hope that he is right.
LorDilly
It seems we are not alone in seeing an inconsistency in the reporting.
The Real State of the Economy - Good or Bad? By Stephen Morgan
Government Bankrupt! Why does it take a Brit to tell us this?
It seems like this state of affairs is not commonly accepted. This is what Americans believe. A perception is dawning, but no sense of urgency there.
You would think that the Government being virtually bankrupt would be big news if it is true.
Is this President responsible?
Nay:
- He started with a deficit
- Katrina was not his fault
Aye
- he gave big tax cuts - (mostly to corporates and the wealthy)
- He took us to the war in Iraq (justified or not doesn't seem to matter in this context)
I would conclude that he is only partially responsible, but he has not done enough to dig us out of it, or even to warn us, before the collapse that it seems will come soon.
Could it really be that the significance of this is being kept out of the media because of election sensitivities. Why are the Democrats not putting the boot into the Administration? Perhaps because they don't have an answer.
The most likely reason seems to me to be a fear that discussing it will bring it on - which may very well be true. If that is true it gives me a new respect for the American media, but I just can't believe that they have sufficient control to keep the lid on.
What should we do to protect our savings? Move our investments into gold?
I feel like chicken little - but the point is that eventually the wolf did come.
Wait a minute, why is reducing taxes on the wealthy and corporations a bad thing? If we are fighting a war, certainly giving them the fiscal freedom to expand and support it can't be a bad thing. If the company that makes body armor can hire more people (perhaps US Citizens) and buy more equipment (perhaps from US Manufacturers) because they pay less in taxes might that not be better in the long run?
If the war in Iraq is putting money back into our economy maybe it was worth the expense. Personally, I and several soldiers and officers I know were abole to get out of debt and achieve a level of comfort because of increased combat pay.
It is a very bad thing because the Government was already heavily in debt. Tax is its only income and to take a pay cut when you are heavily in debt is irresponsible.
Spending on unproductive things does not benefit the country even though in the short term there may be a benefit on the companies that get the contracts. Overall it is very bad for the economy for the Government to run a deficit that gets out of control.
We are now in serious danger of a stock market crash that will wipe out the fortunes of millions of citizens and cause the dollar to devalue tremendously. Then we will all be very much worse off than if we had paid a bit more tax.
The tax cuts I referred to there were cutting the tax on share dividends for the very wealthy and big corporations. The had no benefits for ordinary people and should have bee the last tax cut when the government has a spiralling out of control deficit.
Tax cuts like that look good to people who understand little about economics and win favor for unscrupulous politicians. It is extremely dumb and dangerous government.
We are now in serious danger of a stock market crash that will wipe out the fortunes of millions of citizens and cause the dollar to devalue tremendously. Then we will all be very much worse off than if we had paid a bit more tax.
Tax cuts like that look good to people who understand little about economics and they win favor for unscrupulous politicians. It is extremely dumb and dangerous government.
Precisely.
We need to keep pushing on this one, because most Americans don't understand the danger they are in. This gross financial irresponsibility can do more harm to America than a whole bundle of WMD.
America is living in the Twilight Zone. All is not as it seems.
The next President will have to spend all his term trying to claw back debt in a declining economy.
Future generations of Americans will be mortgaged with debt we have created.
You don't hear a single candidate running for any office from either party talking about the economy. You didn't in the last election either. Why? Because unless you cherry pick financial analysts, the consensus is that the economy is running along quite well. Yes, the deficit is scary and we need to bring it down. Yes, the trade gap is bad--personally I'd love to drive a stake into the heart of the oil market. All of this has gone on for decades now, but it's still bad.
I think it's highly unlikely anyone will dump US investments en masse, because to do so would entail wholesale rejection of the global economy and a return to 19th Century trade. Anyone with a global trade economy has a huge stake in the health of the US economy. The whole thing is interlinked. Look at how bad things got back in the 90s when the South East Asian economies collapsed. That was just SE Asia. Look at what would happen to the economy of, say Europe and China if the US economy went into a major slump. This is to say nothing of Canada. Canada's economy, for all intents and purposes is so intertwined (BEFORE NAFTA) as to be nearly indistinguishable from the US.
I'm not an economist, but I agree that worldwide dumping of US securities would hurt us, but it would hurt everyone else a whole lot more. We are blessed with a lot of domestic natural resources and talent and would fare a lot better than most of the world would after the Global Great Depression hit.
Yes, I think the ominous silence on this debate indicates you are probably mostly correct about that.
The campaign spin doctors do not see the economy as a winning strategy, but that does not mean that the debt is unimportant. Our political and business media should not be letting those guys control the agenda.
I can't think of any issue that could be more relevant to an election campaign than a ten trillion dollar national debt (by then). It certainly would be so in any other western country. Have we become so blaze' about America's richness and military power that we feel that we don't have to be concerned about such things?
I differ in that I think there is probably no sympathy out there now for what happens to the US dollar. There is fear of going down with it. That is real, but the Euro is gaining ground in terms of being a reliable alternative trading currency and it will probably only get stronger. The Asians won't want to crash the dollar but they are fiscally conservative (or they wouldn't have such high savings) and they have demonstrated how nervous they can be. If there is any sign of a stampede they will bolt to cut their losses.
Yes the USA will survive a slump but if it breaks millions of us that will be a huge social shock to the nation, and one that our government should try to avoid. Our financial situation is a serious vulnerability in our Homeland Security.
What sticks in my craw is that our Administration seems quite happy to behave in a manner that would not (could not leagally) be tolerated by any company board - spending on when the current account is grossly overdrawn. He probably thinks that he got away with it in Harken Energy, so what's the problem - he'll be leaving soon anyway and it will cripple Hillary.
Actually we have not been in that condition for decades. The budget was balanced during Clinton's term.
If we don't fix the debt collectively then eventually it will fix us individually and I don't think that is the way we really want it to happen.
It is like the Twilight Zone. Everything looks normal, but lurking somewhere close, visible only to the stranger is a danger that no local will acknowledge.
Full of Sound and Fury, Signifying Nothing. by LordDilly :: NR8 :: on 16 June 2007
Occams, what you've written is one of the most insanely idiotic things I have ever read. At no point in your rambling, incoherent post were you even close to anything that could be considered a rational thought. Everyone in this forum is now dumber for having read it. I award you no nerd-points, and may God have mercy on your soul. Just kidding, I really wanted to quote Billy Madison.
Now, I am no economist, but it appears that you know as much about the US military's counter-insurgency doctrine as I know about economics.
We are reducing the oxygen supply and pressing the level of conflict down to a minimal level at which the terrorists can afford to play all day.
Except that the average Iraqi civilian-- even the Sunni-- are tired of the terrorists and want them gone. The kidnapping and brutal executions of Iraqi soldiers and police has caused most Sunni Arab tribal and religious leaders to open negotiations and make deals with the Iraq government, or Coalition commanders directly. It is becoming common to see Sunni tribal gunmen fighting it out with terrorist forces.
Thanks to those plucky terrorists who are so smart as to take on the Imperialistic American war machine with some pea-shooters and homemade bombs going around Iraq and murdering civilians (helluva strategy there, folks,) that hot bed of Sunni insurgency Anbar province saw most of their tribes uniting under the banner of Sahawah Al Anbar, or Anbar Awakening, pledging to fight Al Qaeda.
We are also not just rolling around the Iraq country-side, shooting terrorists or being targets for IEDs. We are building infrastructure. There is a steady increase in the Iraqi economy every year since Saddam's fall.
So, my thesis is we have put ourselves in exactly the position in which our Arabs enemies want us: heavily committed financially and bleeding our economy dry...
I also have wonder at you "economic" reasoning. We spent a helluva lot more in both blood and treasure fighting longer in Vietnam without going bankrupt. And, since you mentioned the Soviets, you do realize that they fell because we massively out-spent them building up our military during the Reagan years, don't you? We survived that, and at the time there was no end in site. Also keep in mind that our total dollar amount spent on the military dwarfs every other nation on Earth, our expenditure is 3.7% of our GDP, making us 26th in the world comparatively speaking, and low for the last 60 some years. It's possible that shoots your economic disaster theory all to hell, but again, I'm no economist.
And why do you insist on calling them our "Arab" enemies? We are fighting Islamic terrorism, which is made up of many ethnic groups, including Persians, Pakistanis, and Afghanis, none of whom are Arab.
RE: Full of Sound and Fury, Signifying Nothing. by Anonymous :: NR0 :: on 16 June 2007
Thanks Dill
First Let me congratulate you for an apt, but humble and self deprecating title for your post.
The purpose of the topic is to gather opinions on how close the war is taking us to our economic collapse. You have given one, and your point about Vietnam is valid. Government spending even on weapons can boost the economy for a short time but debt tends to catch up eventually. It would be useful to know how robust the rest of our economy was in the late 1960s, and what effect the Vietnam war had on inflation and the stock market in the early 1970s, which was a volatile era. Perhaps someone can enlighten us.
Out spending the Russians is another valid point but I suspect that there were many other factors to the collapse of the Russian economy -you know, all that stuff about the dead hand of socialism and the benefits of the invisible hand of free markets.
Some of us believe that the out spending on the military during the Reagan years had more to do with the selfish interests of the military industrial complex having undue influence on an almost senile President.
Is it not reasonable to ask questions about how much the out spending tactic will hurt ordinary Americans?
The idea of readiness for a war being measured in terms of the potential available in the economy to respond to the financial demands is as old as Sun Tzu. It should be the first thing that a government thinks about.
On the trivia:
I was referring to Iraq -a quintessentially Arab country. Sure, there are probably other ethnic groups represented among the terrorists, but it would be awfully pedantic to give them all credits in a piece like this. I still prefer to blame Arab culture more than Islam, but that is just me. That is a topic that has already been well thrashed out with Will. Of course there is a strong relationship, but if you want precision blaming Islam captures more of the uninvolved than "Arabs".
I am afraid that the rest of your response was the usual off target emotional and personal personal rant - quite unworthy of omnes nerdi. I did not say we should pull out of Iraq this time. I gave an opinion that our presence was sustaining terrorists. I know you don't agree with that because we have discussed it before. It is relevant in this discussion because we are discussing a drain on the American economy as a possible strategy of the terrorists.
Our arming of the Sunnis to fight the insurgents is about the dumbest piece of policy that any US Government has come up with since the Little Big Horn. Even the French were not that stupid. Anyhow it is quite off topic and you are leading me off target again. This thread is about the economic effects of the War on America.
The impact of the war on the economy of Iraq is irrelevant. I imagine that after Saddam and our intervention it had nowhere to go but up anyway, and if it has, that is consistent with my pressure cooker metaphor. Which does not mean that you or I are right there.
Perhaps America is not close to the edge. I certainly hope not, as I am intending to live on superannuation for a long time.
We have not been in quite the same situation as this before, and it is worth thinking about in terms of an economic model as well as in the usual armchair general manner.
I think we are mature enough to handle that without personal abuse.
RE: Full of Sound and Fury, Signifying Nothing. by LordDilly :: NR8 :: on 16 June 2007
Out spending the Russians is another valid point but I suspect that there were many other factors to the collapse of the Russian economy -you know, all that stuff about the dead hand of socialism and the benefits of the invisible hand of free markets.
Yeah, that's why out-spending them worked. My larger point was the massive military build-up sans a hot war, with no end in sight didn't bankrupt us. Also, some of us think the Cold War Reagan-era military build up was because Reagan knew what the hell he was doing, but I can see how some people would want to denigrate the accomplishments of the best president of the last half of the 20th century.
Is it not reasonable to ask questions about how much the out spending tactic will hurt ordinary Americans?
Except we aren't trying to out-spend anyone this time around. We're fighting two-- count'em -- two counter-insurgency wars using highly trained, technologically-savvy personnel (which costs more than just grabbing conscripts off the street, like in China). It costs money. How will the spending hurt ordinary Americans? Odds are, it won't. Like most things about this war, it won't affect the vast majority of Americans (probably, again, I'm no economist, but I am a thinker.) Which, in the opinion of someone who was affected by the war, tends to make the bitching of people who have never sacrificed a damn thing or likely ever will ring a little hollow, but I try not to think like that, as it skews too close to the stupid "chicken-hawk" non-argument.
I am afraid that the rest of your response was the usual off target emotional and personal personal rant - quite unworthy of omnes nerdi. I did not say we should pull out of Iraq this time. I gave an opinion that our presence was sustaining terrorists. I know you don't agree with that because we have discussed it before. It is relevant in this discussion because we are discussing a drain on the American economy as a possible strategy of the terrorists.
Let me see, I gave examples of how the Anbar tribes are uniting against terrorism, mentioned rebuilding infrastructure, and addressed the economic angle. Yup, entirely off- target, you got me. As for the personal... you do realize the opening paragraph was a joke, right? I mean, I even said it was. I also never said anything about a pull out (since you didn't.) It is possible that the enemy has an economic strategy (I believe that one was called 9/11) but the main strategy of the terrorists is to keep US body-counts in the news (since they know our media tend to not report things like enemy casualties or any sort of operational context in which American casualties occurred) because they know that if the American people are fed a steady diet of bad news, the opportunistic politicians will start blathering on about timetables and troop withdrawals, and all the terrorists have to do is wait us out and make sure to step up attacks right before any important dates, and then declare victory when we leave. But you knew that.
Our arming of the Sunnis to fight the insurgents is about the dumbest piece of policy that any US Government has come up with since the Little Big Horn.
Okay, I looked through the links provided, and I never found anything about us arming Sunnis. I know I didn't mention it. The Sunnis have their own arms-- that's why they were/are often part of the insurgency.
The impact of the war on the economy of Iraq is irrelevant.
Maybe to this discussion, but the more Iraqis that can find work and earn some money, the less likely some poor schlub will be out planting IEDs because Al Qaeda or Al Sadr is paying him to. Economic prosperity tends to encourage stability.
I think we are mature enough to handle that without personal abuse.
No abuse on my part, just a healthy dose of snark. Impervious Integument Implied.
RE: Full of Sound and Fury, Signifying Nothing. by scottb :: NR7 :: on 18 June 2007
Okay, I looked through the links provided, and I never found anything about us arming Sunnis. I know I didn't mention it. The Sunnis have their own arms-- that's why they were/are often part of the insurgency.
Um, the US arming the Sunni insurgents has been in the news rather a lot, lately.
Now, I'm no military strategist, but this sounds like a pretty stupid idea, to me.
RE: Full of Sound and Fury, Signifying Nothing. by LordDilly :: NR8 :: on 18 June 2007
Obviously, I missed that bit of news.
RE: Full of Sound and Fury, Signifying Nothing. by Occams :: NR6 :: on 16 June 2007
Sorry, my login must have timed out. That Anonymous post was of course me.
I did not realise that Dilly was joking as it seemed quite consistent with his other posts.
RE: Full of Sound and Fury, Signifying Nothing. by LordDilly :: NR8 :: on 16 June 2007
I did not realise that Dilly was joking as it seemed quite consistent with his other posts.
I resent that! Or possibly, thank you.
RE: Full of Sound and Fury, Signifying Nothing. by Occams :: NR6 :: on 17 June 2007
Lordilly,
OK thats cool then.
Please look at my recent posts showing the state of the current account deficit. It is difficult to avoid the conclusion that we cannot afford this war because we are borrowing heavily to fund it, and continuously asking congress to increase its limit on the deficit.
RE: Full of Sound and Fury, Signifying Nothing. by Occams :: NR6 :: on 18 June 2007
Lordilly,
OK thats cool then.
Please look at my recent posts showing the state of the current account deficit. It is difficult to avoid the conclusion that we cannot afford this war because we are borrowing heavily to fund it, and continuously asking congress to increase its limit on the deficit.
How close to the edge are we now. by Occams :: NR6 :: on 17 June 2007
These reports are a couple of years old now. I haven't found anything more recent, but the trend is clear so we can extrapolate. I think there is evidence that we are closer to the edge of the economic cliff than the nerds who have reacted to this topic so far want to believe.
This tends to indicate that the complacent view that, we made it through the Cold War so we can handle Iraq, is starting to look a bit naive.
These first quotes come from the SanFrancisco Chronicle
http://www.sfgate.com/cgi-bin/article.cgi?file=/c/a/2005/07/17/MNG5GDPEK31.DTL Sure, they are just opinions, but they come from credible sources.
"Osama (bin Laden) doesn't have to win; he will just bleed us to death," said Michael Scheuer, a former counterterrorism official at the CIA who led the pursuit of bin Laden and recently retired after writing two books critical of the Clinton and Bush administrations. "He's well on his way to doing it."
The Center for Strategic and Budgetary Assessments, a nonpartisan Washington think tank, has estimated that the Korean War cost about $430 billion and the Vietnam War cost about $600 billion, in current dollars. According to the latest estimates, the cost of the war in Iraq could exceed $700 billion.
(I presume that the statutory debt limit has been raised again a few times more since these reports.)
Put simply, critics say, the war is not making the United States safer and is harming U.S. taxpayers by saddling them with an enormous debt burden, since the war is being financed with deficit spending.
One of the most vocal Republican critics has been Sen. Chuck Hagel of Nebraska, who said the costs of the war -- many multiples greater than what the White House had estimated in 2003 -- are throwing U.S. fiscal priorities out of balance.
"It's dangerously irresponsible," Hagel said in February of the war spending.
In the last 50 years, the United States has raised its debt ceiling more than 70 times, and budget watchers say lawmakers have become expert at delaying or disguising this politically perilous task.
"The antics they go through are incredible, and they've gotten worse,'' said Maya MacGuineas, president of the nonpartisan Committee for a Responsible Federal Budget in Washington, D.C.
For instance, in his Dec. 29 letter, Snow said that while the debt limit "will be reached in mid-February 2006," he could delay default for a month using "available prudent and legal actions."
These actions, MacGuineas said, would include putting IOUs instead of cash into federal retirement accounts -- a tactic that Clinton administration Treasury Secretary Robert Rubin first employed in 1996, when Republican lawmakers balked at raising a debt ceiling then at $4.9 trillion.
Ferocious agreement. by Suebarron :: NR5 :: on 28 June 2007
LorDilly,
Here's me late again.
Occams, what you've written is one of the most insanely idiotic things I have ever read. At no point in your rambling, incoherent post were you even close to anything that could be considered a rational thought. Everyone in this forum is now dumber for having read it. I award you no nerd-points, and may God have mercy on your soul.
Perhaps you were kidding, but I would have been intimidated by a response like that to a genuine attempt to start a debate on an important subject.
I think that Occams pressure cooler metaphor is original and entirely consistent with our troops in Iraq achieving their objectives and behaving very professionally.
Our strategy seems to be to keep the peace while the new Iraqui Government gets on its feet. So our aim is to suppress the violence - ideally to a level that the Iraq Government can deal with.
So your view that most everything is going according to plan is compatible with Occams', and I think he deserves an apology for your intemperate attack on what proved to be a good start to very thought provoking discussion.
I think that through all the posts on this thread he has made a convincing argument on the debt burden of America now being such as to make continuing the war in Iraq unfundable. In fact, he showed that this Administration cannot afford just about any big expense. It is a shame that it ended wout having a professional economics nerd view, although there were some authoritative sources quoted.