Wars, Debt, and Inflation

Edwin Marcus 1941 cartoonWhat way of paying for expensive wars is most reliable, hardest to evade, and easiest to collect? If you’re thinking taxes, think again. The answer is inflation.

Now that the U.S. Treasury’s credit rating has been cut by one of the three major rating agencies, and the stock markets are in turmoil, we should think about how we got into such a state and where it may lead long-term.

Conventional wisdom, partly true, is that war spending does not have much of a role because it’s small relative to GDP (compared with past cases like WWII and even Vietnam). But I think wars have bigger economic effects than generally realized.

At the start of the Iraq War, I wrote that George W. Bush’s plan to CUT taxes in wartime was historically unprecedented and would lead to terrible economic consequences (The Real Price of War). Wars are super expensive, and more than a trillion dollars have gone down the drain in Iraq and Afghanistan since that book appeared. Or maybe several trillion dollars, depending how you count. Bush’s tax cuts and war expenses were a big part of driving up the federal debt.

The New York Times had a nifty graphic recently illustrating that of our current $14 trillion debt, more than $6 trillion accumulated during the Bush years. Another $2.4 came during the Obama years, but most of that was paying for Bush’s wars and stimulus to counteract Bush’s recession. So I don’t see the latest crisis as a “Tea Party downgrade” so much as a Bush Downgrade. The Republicans say to stop whining about Bush, and the public has a short memory as usual, but it’s like someone steals everything you have and burns your house down, then tells you a few years later that that’s ancient history and it’s your own fault you’re poor.

So we have a big debt. Who holds it? China is indeed the largest foreign government creditor at $1.2 trillion, but almost three times that amount is held by other foreign governments, and even more by private individuals, companies, and banks ($3.6 trillion). The largest holder of U.S. government debt, at about $6 trillion, is the U.S. government, mostly Social Security and other trust funds.

How will the USA ever pay it back? Historically, there is a way that countries pay huge war debts. They print too much of their currency and cause its value to fall, thereby letting themselves pay off debts with funny money instead of valuable money. This is a huge simplification but explains the core of what happens. My 1988 book Long Cycles showed that over five centuries recurrent spikes of inflation followed major wars. In the past decade U.S. wars have been far from major in historical terms, and the current quasi-recession holds down inflation for now, but over the coming years I consider inflation likely.

The Chinese and other holders of Treasury debt should not be too worried about default (a failure to make payments on time). Rather, they should worry that the money they get paid back in will be worth a lot less than the money they paid in the first place. The U.S. government is in the admirable position of borrowing in a currency whose value it controls.

Admittedly I have been worrying about inflation for quite a while and it has not materialized. But those of you young enough not to remember the 1970s (the last time the United States had double-digit annual inflation) might not even know what the word means. It would be worth learning it.

What happens next? James Lindsay at the Council on Foreign Relations makes a good case that the special bipartisan Congressional committee will fail to reach agreement this Fall. It seems likely that not much progress on governance will occur until the 2012 elections sort out what direction we’re going. Meanwhile the operative math is: 
Debt Deal of 2011 — $2.4 trillion.
Hearing the “socialist” Chinese leadership criticize the capitalist United States for its “bloated social welfare costs” — Priceless.

4 responses to “Wars, Debt, and Inflation

  1. I appreciate and enjoy your remark on the comment made by the ‘socialist`Chinese on “capitalist” America on social cut.It is witty and demands a ready laughter.But please sir, be a little learned about the socio-economic status of China which has long been ceased to be a socialist country. Judging from your style it appears that you have a very good grip on the economy, So make a little study on China or else “ghurai hasbo”(as is commonly expressed in Bengali dialect meaning “the horse even will laugh”
    with regards
    Asis

    • Thank you for the Bengali proverb, that’s great. Yes, I was being sarcastic about Chinese “socialism” — but even though the Chinese economy has moved on the leadership does still talk about “socialism with Chinese characteristics” (which seem to be capitalist characteristics!).

  2. I believe that the concept of “socialism with capitalist characteristics” developed by the communist party of China must be taken very seriously. For it in short tells the secret of the present rise of China. Most importantly, it affirms the unity of opposites and immediately recalls the traditional Chinese figure of yin-yang, the ultimate (geometrical) equation telling the equivalence and internal unity of the opposites. E=mc2 is a more well known (mathematical) equation that states the equivalence of mass and energy though being opposites or different to each other, being essentially one.

    What follows is a revolutionary implication that what the Chinese Communist Party has achieved, the success of socialism with capitalist characteristics, finds its affirmation not just from its own traditional Daoist-Confucian legacy, but from the latest development in physics that is known as the scientific revolution of the early twentieth century, of which E=mc2 has become a symbol. The yin-yang Daoist geometric figure of yin-yang was similarly the guiding light of the Chinese tradition.

    The Chinese Communist Party is the inheritor of this tradition, but is not aware of it, or may be reluctant to own it, for it implies far reaching theoretical changes in some of the fundamental beliefs which have hitherto driven the Chinese Communist Party. It would need a creative re-understanding, a virtual resurrection of Marx. The unity of opposites apparently defies Marx where one devours the other, socialism rising on the ruins of capitalism. It has been the guiding thought of the whole modern mind, whether Marxists or liberals and other non-Marxists) and it has been the sole cause of all the violence unleashed since the Enlightenment. We are still carrying the scars of exclusiveness of the opposites, epitomized in either capitalism or communism, either modern or non-modern, either political or non-political, science or religion, with us or against us, the war cry of both Bush and Osama. The very logic of this belief involves violence.

  3. The discovery of the equivalence of the opposites in physics will provide the CPC with the strength and courage to own its own legacy. To say the truth, the scientific revolution of the early twentieth century broke with the scientific tradition which had given birth to modernity and its two faces, Marxism and liberalism. It undermined the philosophical foundations of the science which believed not in the unity but estrangement of the opposites. For however friendly they become, they remain anti-thesis of each other, after each other’s throat. Violence, then, is the practice of this belief from which the revolution symbolized by E=mc2 broke and from which CPC needs to break, only to affirm the legitimacy of its own tradition.

    One of the great wonders achieved by socialism with Chinese characteristics is the thirty year old Industrial revolution of China that brought it from 32 to 2nd position in global economy,. A comparison of the two industrial revolutions, of England (1800-1850), that propelled Europe to world domination but brought much misery to its people, and China (1979-2010), relieving thousands of millions of human beings from abject poverty would make a fascinating study.

    But perhaps even more important hypothesis that I have proposed to be explored is a comparison of the two scientific revolutions, of the sixteenth-seventeenth centuries and the early twentieth. For if the whole of modern thought is founded on the exclusiveness and not the unity of opposites that the former established, then the discovery of the unity of opposites by the latter revolution points to some new social structures, to replace the modern social structures raised on the exclusiveness of opposites, which legalizes violence.

    Perhaps no other institution in the world than the Chinese Communist Party is in the better position to do so. What they have realized, the unity of opposites, of communism and capitalism, was unthinkable thirty years ago. They must carry on thinking unthinkable for another thirty years and the world would see that China has led it out of the legacy of colonialism, which inflicted on it ‘a century of humiliation,’ into a post-colonial era. Its failure is unthinkable. For if it fails to realize what it has realized, the unity of opposites, and what it implies, a radical change in direction, it is bound to repeat the failures of modernity which our planet is simply unable to sustain.

    Let me conclude my comment with a saying of Lao Zhu, which makes the essence of his little book, Dao de Ching, a masterpiece of brevity, which he achieved through uniting the opposites, making it, relative to its volume, the most influential book of all time.

    The myriad creatures carry on their backs the yin and embrace in their arms the yang and are the blending of the generative forces of the two.