Can We Afford the War We Want? – I
Partial Transcript of AEI Seminar "Can We Afford the Military We Need?"
"Someday this war’s gonna end …"
Calculated Risk commenter AllenM’s signature line, borrowed from Apocalypse Now (1979)
For many years, this blogger has felt that the greatest threats to the security of the Western world were economic, not political. Others have shared this concern. For example, MarketWatch’s Paul B. Farrell recently summed up [1] the difficulty as follows.
"Foreign banks are dumping dollar reserves, while we gorge on cheap toys and bad pet food. Actually, our biggest "terrorist" threat is internal: Distorted values are downgrading our nation’s ‘creditworthiness.’ We’re like out-of-control kids with stolen credit cards, spending our future with no plans to repay."
Farrell framed his theme around an interview with Robert D. Hormats, Vice Chairman and Managing Director of Goldman, Sachs. Hormats is promoting a book [2] titled "The Price of Liberty: Paying For America’s Wars," where he argues for fiscal prudence as a precondition for America’s national security. Other venues where the author discussed his thesis were major seminars at The Council on Foreign Relations [3] and The American Enterprise Institute.[4] The CFR event site includes a transcript, but the AEI one has only an audio file of the 2 hour long proceedings. Doom is in the process of creating a transcript of this last effort. Today we present a preliminary transcript of the first 82 minutes (up to the beginning of the Q&A).[5]
The AEI event was timely when it was held in late June, and is even more timely today. America’s fiscal situation is becoming increasingly fragile, due in large part to the evolving subprime mortgage crisis that Doom’s readers are all too familiar with. Ironically, AEI’s own banking analysts are among the best informed researchers in the country on the implications of subprime, yet they were not in evidence at this seminar. Participant Tom Donnelly hints at some sort of divide at AEI’s 11th floor. Looks like even high-end think tanks can suffer from "stove-pipe syndrome."
Over the next few weeks we hope to provide some commentary on Hormats’ book to go along with a complete transcript of the AEI seminar. If you read the partial Doom transcript presented today you will see that the participants never considered the possibility that present economic challenges might very shortly curtail America’s ability to prosecute its present war at anywhere near the pace that’s happening now. Had they taken advantage of the presence in the very same building of AEI Fellows like Pollock and Wallison, they might have learned that their most pressing order of business was to plan an orderly redeployment. The alternative is to risk a fiscal shock-wave overtaking America’s military, with the possibility of a disorderly event.
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Notes and References
[1]: "Goldman Sachs guru warns of war-debt failure: Is America becoming a global credit risk? How to get back on track", by Paul B. Farrell, MarketWatch, July 23, 2007.
[2]: "The Price of Liberty: Paying for America’s Wars", by Robert D. Hormats, Time Books, May 1, 2007.
[3]: "The Price of Liberty: Paying For America’s Wars", Event around the Robert D. Hormats book, Council on Foreign Relations, May 16, 2007.
[4]: "Can We Afford the Military We Need?", Seminar, American Enterprise Institute, June 26, 2007.
[5]: Part 1 – Transcript of ‘Can We Afford the Military We Need?’ ", Stand-alone Web Page, HousingDoom blog, July 28, 2007.
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“The alternative is to risk a fiscal shock-wave overtaking America’s military, with the possibility of a disorderly event.”
1. The biggest danger to the current “status quo” is the American People realising that it is only a “status quo” by name. I.e. we can’t afford to engage in worldwide warfare the way we are doing it now.
2. More debt does not equal more prosperity, even if those freshly printed dollars are put to work by enlightened members of the government/”people’s representatives”. In the ’60s an additional USD of debt created 64 cents of incremental GDP. This decade an additional USD of debt has only managed to increase GDP by a mere 15 cents.
In former decades debt has been used mainly to finance long-term productivity (and hence GDP) increasing investments (e.g. technological investments and global scale expansions in the corporate sector). Over the course of the last decade, however, a seemingly unlimited supply of overly “cheap” funny money provided by the Fed through way too low an interest rate and “institutional investors chasing yield” has lowered the bar for the actual return ON credit.
As so many times before in history it has been proven once again: when money can be obtained “on the cheap” it will be “invested” sub-optimally, ultimately destroying the value of money itself.
Easy credit has funded short-term consumer spending (and speculation) and excessive (military and other) government outlays, instead of having been used for long-term fundamental investing in capital goods.
The consumer could tap even tap the resulting asset bubbles for even more funny money (e.g. home equity). Corporations could tap “easy” debt markets and profit from ever increasing equity prices from all the funny money flowing into the stock markets. The government could borrow its deficits at interest rates not even covering the true annual increase in inflation.
This can only go on for so long. It seems that we are currently witnessing the end of Greenspan’s “new conundrum” aka “the goldilocks economy”. The U.S. is being forced to go to rehab for its addiction to (unproductive) credit.
“You cannot escape the responsibility of tomorrow by evading it today” (Abraham Lincoln)