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tion caused by war reparations rather than direct war spending then in the 1970s with the huge debt burden associated with the vietnam war now there s much debate about how government spending causes inflation i ascribe to the simple belief that spending on military hardware and government run programs typically produces the most inflation right wingers would argue the entitlements do more to drive up prices they may be right medicare costs have risen dramatically but the so called discretionaries only make up 1 6th of government spending according to the economist article below so as a inflation multiplier they can only do so much harm combined with military entitlements like va health benefits at as much as 1 2 our budget total government spending on our wars past and present will cause far more inflation no matter how much social spending causes inflation it s clear there the benefits of spending migrate down to the lowest income tiers which serves a societal good not so true with military equipment although right leaning economists who are frequently ultra nationalist militarist will argue that high paying jobs associated with the defense establishment offer stability in employment in my opinion there s little difference between a factory that relies on big government contracts and a company owned and run by government it s the same hand the taxpayers or to be more accurate future taxpayers that feeds both in time both the government run bureaucracy and the corporate entity that subsists on government contracts will grow less efficient than private sector companies which must compete wars and the inefficient contract system they support are perhaps the best example of government bloat i d argue the military spending is a back door entitlement for the wealthy who invest in the mil ind companies in a quid pro quo with politicians to whom they donate campaign contributions profiteering during war is typical it motivates a continuance of hostilities militarism and apparently ceaseless adventurism will inevitably result in inflation the right wing is mollified with ultra nationalist themes as the war machine and the state grow in regard to military spending right wingers are growing the size of government a trend which they vociferously oppose when it comes to health care without wars patriotic ultranationalist accompaniment those on the right would question the economic benefits of increased government spending article spotlight i just read a good piece on the falling dollar in nov 21st issue of the economist titled dealing with america s fiscal hole the economist article compares america s debt relative to its gdp currently publicly held federal debt constitutes 44 of gdp and will double in the next decade according to the article we re not alone japan s debt is bigger than ours relative to its gdp rather than sound an alarm as so many web based sources seem prone to do the economist expresses concern particularly over uncertainty over how taxes may be raised to shrink deficits the english magazine advocates reducing the deficit it makes the valid point that income is taxed heavily in the us while consumption is not the europeans among others have adopted a vat tax that makes goods more expensive if adopted in the us a vat would reduce demand up to now traditional american economic policy emphasizes increased spending and consumption by raising prices a vat would encourage the opposite worse the vat would be implemented alongside regular income taxes meaning americans would have to pay more to buy things and thereby probably buy less not necessarily a bad thing unless you have to work in one of the industries dependent on consumers discretionary demand historically one of the worst taxes ever imposed was by george bush sr on yachts and luxury goods back in 1990 or so turns out a good chunk of the american economy depends on the consumption patterns of the rich the people building yachts weren t rich but felt the taxes impact as fewer rich people bought yachts needless to say the tax was later discarded as was bush i the economist article acknowledges that a vat could too easily become a politically convenient way to vacuum up more money and expend government as we re not in an immediate crisis it may be extremely tempting to relegate a solution to the growing deficits to a later point especially considering the impact hasn t been felt this procrastination is after all what s gotten us to the situation we re now in representative obey d wis did suggest a war tax recently as a means to pay for all this it would be nice to see the war expenditures manifest as a direct tax to give war supporters an idea of how much their wars cost i suspect much of the outward rah rah support for these wars would die down at least among those who shouldered the burden should a war tax be implemented one reason we haven t felt the grip of increased government borrowing is the fact interest rates are so low and thus interest payments not so hard to cover demand for us government issued debt remains high despite the low rates probably due to the risk associated with owning debt from other issuers or holding equities in this respect the credit crisis of last year and ongoing instability serve the interest of government by making debt highly marketable on a risk adjusted basis the economist article brings up worries over rising interest rates which could easily push the total amount of us government spending on interest alone to 700 billion a year by 2019 according to a congressional budget office report the cbo report makes a point to compare obama s budget and forecast revenues with cbo s as you might expect the differences between the two projections grow over time the reason politics often subject economic facts to a wide range of interpretation the source of the disparities isn t based on politics alone despite politics predilection for twisting data to serve specific political aims if 99 economists were to look at the same numbers there d probably be 99 different conclusions drawn that s the nature of economics it s not nearly as exact as is thought over the next ten years the cbo anticipates the annual deficit to be two to three times higher than the president s projected budgets either our government will spend a lot more than obama s people have projected or revenues will be lower or both rather than dive into the numbers i m content with the conclusion that we will owe far more than we will be able to pay off we ll have no choice but to let the dollar deflate we do this by simply printing up what we owe monetizing the debt holders of dollar denominated debt will suffer although in nominal terms the inflation will increase the amount of dollars they hold it s just like the analogy of 1 million dollar being air dropped to every person in america people would be overjoyed initially by the wads of hundreds that floated down from the skies like mana from heaven before the recipients could spend their money stores would have jacked up their prices and if you were one of the poor folks who d invested and saved behaviors our consumption driven government has never rewarded you d be robbed since the new dollars would make the old dollars worth a heckuva lot less showering people with government spending is hardly a solution it might cause a immediate pop in the polls but only because many people don t understand how inflation affects them by the time a second or third shower of dollars came down the money would be wallpaper problems ahead as much as we d like to think the dollar s decline won t affect us we can t escape the inevitable consequences of fiat money invariably such currencies decline in value our dollar buys now only 5 cents of what it could in 1913 the year the federal reserve began and debasement began in earnest yet for as long as the government can borrow it will so understanding the macroeconomic environment is essential in determining the point at which the monetary system will break down it s not too different from a huge ponzi scheme make it a point to withdraw your investment before the herd comes for theirs which will have been spent in time the government will enter into direct competition with the private sector the rules of the game favor government largely because it can simply print up what it owes however one consequence of irresponsible fiscal management is that people will move to barter and alternative stores of value in this regard government can t function in a vacuum it must maintain the stability of the monetary base on which the private sector depends one area where the real economy can suffer is when the cost of borrowing rises crowding out is a phenomena where investors plow money into government debt instead of that issued by corporations right now we don t have crowding out but if foreign creditors demand more interest from our government that wil mean private corporations will have a much harder time finding the money they need to grow in a downward spiral less growth in turn means fewer jobs a weaker economy and a lower tax base which will force the government to borrow more cut spending or just print money borrowing through the issuance of debt is easy to do now but as the financial stability of the united states government declines with growth in debt creditors largely foreign government sovereign wealth funds will demand more interest it doesn t matter whether or not corporate debt is riskier at this point interest rates are relative government issued debt is considered risk free though it really isn t like any issuer of debt governments are rated on their ability to repay if tax receipts are rising the government s ability to repay looks quite good therefore when an economy weakens its fiscal strength weakens as tax receipts are down the best example of this are local governments many of whom have seen a dramatic decrease in tax revenues unlike state and local governments national ones can sell their debt based on the balance of payments the net sum of exports of goods and services less imports if a country exports a lot more than it imports it will a mass a pile of currencies from the nations that purchase its exports china has massed a big pile of dollars see this graph from mintlife visualizing the us china trade relationship to see how it works china can choose to hold or spend them on something like us government debt over time has done just this and over time assembled trillions of dollars in us treasuries in effect financing the us government s deficits up til now the chinese appear to have been willing to receive nothing other than paper ious which is what dollars essentially are in exchange their investment then came the cash for clunkers and the general migration away from dollar denominated deposits all of a sudden the dollar wasn t good enough we had to come up with something real in this case vehicles for scrap steel by imposing payment demands on us china is exercising an unprecedented level of clout chinese control over our national debt poses a threat to the independence of our foreign policy if the chinese think we should do something they can pressure us by threatening to sell off our debt or simply not to buy more which would force interest rates higher with the size of the chinese dollar holdings they d be committing financial suicide to sell them but they d be hurting us as well china couldn t sell off us bonds if it made its intentions to divest known in a crisis they d be unable to sell dollar denominated debt at all no one would offer anything for them other than dollars they could in the process decimate the value of us government issued debt although as the 1 hoarder of that debt they d suffer the most financial harm as a result the chinese would also have to contend with rapid dollar devaluation meaning they have to intervene massively buying dollars to prop up the fixed rate of exchange they have with it now rather than working at cross purposes selling dollar denominated debt while buying the dollar the chinese would likely let their currency rise this would greatly spike the price of chinese imports turning wal mart into tiffany s almost overnight neither china nor the u s wants this kind of change we re tied to each other at the hip at the same time the chinese have made it clear that they re not willing to observe the status quo indefinitely labels debt dollar fiscal insolvency inflation war spending posted by jbpeebles 8 58 pm 1 comments tuesday november 10 2009 escalation a liability for obama barack obama has been consistent in one thing his policy in afghanistan while obama promised change from bush era policies for a lot of things he was always a hawk on afghanistan swayed by barack s charisma many of his followers wrongly assumed that change meant reason in afghanistan obama did promise a departure from iraq if his hawkish position on afghanistan is a constant we can hope he ll be equally consistent on iraq without change the outcome is clear more devastation in iraq and afghanistan afghanistan is occupied by a rapidly growing american military force while iraq s appears to be gradually declining without an exit though thanks to the bush era sofa agreement with iraq the us military has basing rights and plans to keep 50 000 troops there indefinitely the constitutionality of sofas in general is questionable as they re de facto treaties with other countries which must be approved by the senate iraq s wasn t the base where a battle a few months ago in a remote base that took 10 american lives has been abandoned if they died protecting it why abandon it a hallmark of our vietnam experience was taking then giving up territory look at the movie hamburger hill for an idea of the impact on morale that kind of fighting strategy made killing from afar is far easier than confronting the enemy up close starting in the gulf war our military was criticized for fielding a nintendo type force using high tech weapons far from their targets we ve expanded the 9 11 retort to include pakistan who s ravaged by drone attacks by anonymous triggermen presumably american operatives in some faraway location these strikes are said to target terrorists but we have no way of knowing just how many civilian deaths are caused in this sense anonymous drone attacks are a convenient accountability dodging method one the cia probably would have loved to have during vietnam vietnam was marked by low morale and led to fragging intentional friendly fire i can think of no more visible sign of distress within a military than when they start killing each other we had the modern equivalent of a fragging occur down at fort hood the other day the alleged shooter hasan can t be justified in murder except perhaps in some twisted sense that he was protecting muslims many of the casualties were coming back not going out so i don t think he can claim to be protecting muslims there have been numerous i...