US military spending incurs huge costs as US debt totals $20 trillion

Instead of defense and military spending in Afghanistan, Iraq and elsewhere being accompanied by increased taxes or sale of bonds, taxes are about to be cut.

The U.S. government has been operating at a deficit since 2002 and the debt now totals $20 trillion. Yet the Republican tax plan is estimated to add $1.7 trillion to the national debt over the next decade.

Senator Jack Reed, of the Senate Armed Services Committee said: “We have to recognize that we have been borrowing for 16 years to pay for military operations. It’s the first time really in history with any major conflict that we have borrowed rather than ask people to contribute to the national defense directly, and the result is we’ve got this huge fiscal drag… that we’re not really accounting for or factoring into deliberations about fiscal policy as well as military policy.”

Pentagon cost estimates leave out important costs

The Pentagon's most recent estimate of what was spent on foreign wars since 2001 is also $1.5 trillion.

However many of the costs associated with the wars are not included. The Cost of War Project includes in costs security funding, care for veterans, and interest on the debt being created. Their latest report claims war-related costs from 2001 to 2017 come to over $4.3 trillion.

Interest on borrowing for war costs is humongous

Interest alone on borrowing to fund Overseas Contingency Operations has been so far $534 billion according to estimates of the Cost of War Project at Brown University.

Neta Crawford author of the report of the project and a political science professor at Boston University said: .“Even if the U.S. stopped spending on war at the end of this fiscal year, interest costs alone on borrowing to pay for the wars will continue to grow apace. By 2056, a conservative estimate is that interest costs will be about $8 trillion unless the U.S. changes the way that it pays for the wars.”

Congress committees pass $700 billion defense bill for 2018

The bill was passed by the Armed Service Committees of both the House and the Senate. The total amount is $85 billion more than the 2011 Budget Control Act allows.

Although Senator David Perdue (R-Georgia) claimed that the greatest threat to U.S. security was the national debt, he also argued that the Republican tax cuts were not increasing the problem. He called the cuts a short-term investment.

Perdue said: “You can’t fix this long-term problem unless you grow the economy and you’re not going to grow the economy unless you fix taxes."

Even if Democrats manage to block the Republican tax cuts the way in which U.S. overseas wars are funded still requires change.

Todd Harrison of the Center for Strategic and International Studies notes that earlier the U.S. had a relatively low debt but now that has changed and there will be downward pressure on defense budgets: “I think we’re in a different place now than we were in 2001. All of these factors did not exist then and now start to conspire to depress defense spending. They very well may weigh on the defense budget in the 2020s…Then when you combine that with tax cuts which are also going to make the deficit higher, it’s all putting downward pressure on defense budgets.”

Yet, US presence is continuing in both Iraq and Afghanistan and all signs are that borrowing will continue as before.

Published earlier in Digital Journal

Next fight and crisis will be about raising debt ceiling

With the fiscal cliff avoided, Obama now faces other challenges soon, including the need to raise the $16.4 trillion borrowing limit. He also has to deal with the more than $100 billion in automatic spending cuts that were delayed for just two months.

The spending cuts will probably be replaced by more targeted cuts that could be over a longer period as well. Speaking form Hawaii where he is on a family vacation, Obama said he is willing to consider more spending cuts and tax increases to help reduce the deficit.

On the debt ceiling, Obama claimed he would not compromise on the issue. Last time, the Congress had a standoff over the issue and the US credit rating was downgraded. Republicans want to use the issue as leverage to force the Democrats to make more spending cuts. Obama warned about any attempt to block an increase:

"If Congress refuses to give the United States the ability to pay its bills on time, the consequences for the entire global economy could be catastrophic. Our families and our businesses cannot afford that dangerous game again."

Immediately after the House finally passed the fiscal cliff deal, Obama said

: "I will not have another debate with this Congress over whether or not they should pay the bills that they've already racked up through the laws that they passed."

Actually the US has already reached the spending limit of $16.394 trillion. Since it cannot borrow money in the markets, "extraordinary measures" are being used to pay bills on time. This can go on only for a couple of months. The issue must be solved soon. Both Obama and Senate minority leader McConnell both agree that the debate on the issue should be resolved early and not at the last minute. To cover just a year of borrowing, the debt limit will need to be increased by almost a trillion dollars.

The Government Accountability Office estimates that the increased costs of borrowing during the standoff was about $19 billion in interest during the next decade. If the Congress did not approve an increase some analysts think that Obama could simply invoke the 14th Amendment to the US Constitution that says:

"The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned."

According to this view, Obama could then simply order the Treasury Secretary to keep borrowing to pay bills. The White House has claimed that it would not use this strategy. It is regarded as risky politically. Joseph Minarik, a former chief economist at the White House Budget Office said

:"It is hard to imagine any Treasury secretary, or any president, allowing himself -- or herself -- to be the first to default on the public debt. That having been said, no one knows what other options lurk in the file cabinets of the attorneys in the Treasury. They aren't talking."..

While Obama may not want to have a long debate that would involve trading off spending cuts for a hike in the spending limit, he may not have any choice. Mitch McConnell put the matter bluntly:"The president may not want to have a fight about government spending over the next few months, but it's the fight he is going to have, because it's a debate the country needs." In a Yahoo op-ed McConnell said that Obama must deliver a serious plan to cut government spending. Unless the Republicans see some significant movement on that front there will probably be no agreement about raising the debt ceiling let alone the delayed multi-billion dollar spending cuts.

Jeffrey Garten: The Dollar's Scary Decline

Actually there are considerable advantages to a dollar decline. US debt in dollars will be paid off in less valuable dollars. This is what worries countries such as China that hold a lot of US currency. Exporters also benefit since their goods are cheaper in the global market. But for the average working person it means that prices of imported goods will increase as well as goods manufactured in the US that use foreign imported inputs. However, the points Garten makes are for the most part sound and no doubt many would agree with him. This is from the Daily Beast.


The Dollar's Scary Decline
Jeffrey E. Garten on the dollar’s coming decline—and the terrible ripple effects ahead.

Most analyses of the president's State-of-the-Union speech Wednesday night have dwelled on its potential impact on his electoral fortunes in 2010 and 2012 in the face of widespread angst in the country and political gridlock in Washington. But among the longer-term consequences of our political meltdown is something that could overshadow the fate of the stimulus, financial reforms, the wars in Iraq and Afghanistan, and the next presidential election itself: the slow but inexorable decline of the U.S. dollar. For over 60 years, the greenback has been the world's key currency, underwriting a good deal of American prosperity and influence in the world. Over the next decade, it will decisively lose its exalted status.

A permanently weaker dollar means that military commitments and foreign assistance will become much more expensive in real terms.
The dollar will be depreciating for a number of reasons. Foremost is our soaring budget deficit, well over $1 trillion annually; our ballooning national debt, which increased last year by a third to reach $7.6 trillion; and the inability of the political system to deal with the problem, which will only get much worse as 75 million baby boomers become eligible for Social Security and Medicare. On Wednesday night the president talked of freezing some domestic spending, but given how dramatically budget outlays have expanded these past few years, his initiative was at best symbolic. Mr. Obama said he would create a presidential commission to examine policy alternatives, but the recommendations will not bind the Congress. A day before, Congress refused to create a commission with teeth, the Republicans saying it was a stalking horse for higher taxes, the Democrats saying that the commission would aim to cut social programs.

The problem with a continuation of this farce, which has been going on in some form for years, is that our debt repayments will eventually be debilitating, causing us later this decade to borrow nearly a trillion dollars a year just to pay interest. We could of course throw ourselves into severe austerity to honor our debts, slashing spending and raising taxes to levels as yet not even being discussed by our politicians. But a politically easier way would be to devalue the dollar—perhaps by allowing more inflation—so we can pay our creditors in currency that is less valuable than it was when the debt contract was made. It is hard to believe there is any other outcome for our gutless political system than to choose the second way out.

Another reason why Washington will push the dollar south is that a weaker greenback will stimulate sales abroad by making them cheaper in world markets. In his Wednesday night address, the president pledged to double exports over the next five years, a massively ambitious goal. Unfortunately, the U.S. has little choice but to try, because the big surges in consumer demand are no longer in America but in countries like China, India and Brazil.

Beyond what the U.S. will do to depreciate the currency, some of our biggest creditors will also be looking to reduce their holdings of dollars—dumping them on markets and further eroding their value—because they will not want to hold a deteriorating asset. China, the single largest lender, has already been vocal about its concerns, but so has Pimco, America's largest fund specializing in bonds. The problem is that we need these lenders not only to keep up their lending but to vastly expand it.

Why does all this matter? A permanently weaker dollar means that military commitments and foreign assistance will become much more expensive in real terms. Everything we import from abroad—from oil, to food, to autos—will have a higher price tag, as foreign suppliers demand more dollars to compensate for its decline vis-a-vis their currencies. Since imports are so woven into the fabric of our economy, that, in turn, could unleash serious inflation. On the other hand, we could see a massive wave of foreign acquisitions in the U.S. as foreign companies, some government owned, will be able to purchase American companies and real estate at bargain basement prices.

You can debate all you want about the advantages and disadvantages of a declining dollar. But the question is no longer whether it will happen but rather when, and how. Thus, it pays to prepare. A change from a dollar-centric world to something else could create financial instability everywhere. To prevent that from happening, the U.S. should be working on designing a new rule-based global monetary system, in which the dollar plays a strong role alongside the euro and eventually the Chinese RMB, plus a new currency issued by the International Monetary Fund. Many American companies will do well to expand their operations overseas, where their earnings in foreign currencies can make them stronger and more profitable. Investors will need to diversify their assets internationally to a much greater extent than most have.

I'd much prefer to be predicting a strong dollar, one befitting a great nation on the rise. Right now, however, that seems like a hallucination.

Jeffrey E. Garten is the Juan Trippe professor of international trade and finance at the Yale School of Management.

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Uncle Sam, Your Banker will see you now.

Roberts is usually interesting. For someone from the Reagan administration he is often very radical. Interesting that he thinks that American people are quite stupid, easily misled would be kinder. But there certainly seems to be a giant hubris among many Americans but much less I expect than in some of their leaders.
I doubt that China wants to cause a disaster for the US economy. After all, the US is a huge market for China. Nevertheless it might use its position to pressure the US as Roberts suggests.

Uncle Sam, Your Banker Will See You Now

By Paul Craig Roberts

08/08/07 "ICH" --- - Early this morning China let the idiots in Washington, and on Wall Street, know that it has them by the short hairs. Two senior spokesmen for the Chinese government observed that China’s considerable holdings of US dollars and Treasury bonds “contributes a great deal to maintaining the position of the dollar as a reserve currency.”

Should the US proceed with sanctions intended to cause the Chinese currency to appreciate, “the Chinese central bank will be forced to sell dollars, which might lead to a mass depreciation of the dollar.”

If Western financial markets are sufficiently intelligent to comprehend the message, US interest rates will rise regardless of any further action by China. At this point, China does not need to sell a single bond. In an instant, China has made it clear that US interest rates depend on China, not on the Federal Reserve.

The precarious position of the US dollar as reserve currency has been thoroughly ignored and denied. The delusion that the US is “the world’s sole superpower,” whose currency is desirable regardless of its excess supply, reflects American hubris, not reality. This hubris is so extreme that only 6 weeks ago McKinsey Global Institute published a study that concluded that even a doubling of the US current account deficit to $1.6 trillion would pose no problem.

Strategic thinkers, if any remain who have not been purged by neocons, will quickly conclude that China’s power over the value of the dollar and US interest rates also gives China power over US foreign policy. The US was able to attack Afghanistan and Iraq only because China provided the largest part of the financing for Bush’s wars.

If China ceased to buy US Treasuries, Bush’s wars would end. The savings rate of US consumers is essentially zero, and several million are afflicted with mortgages that they cannot afford. With Bush’s budget in deficit and with no room in the US consumer’s budget for a tax increase, Bush’s wars can only be financed by foreigners.

No country on earth, except for Israel, supports the Bush regimes’ desire to attack Iran. It is China’s decision whether it calls in the US ambassador, and delivers the message that there will be no attack on Iran or further war unless the US is prepared to buy back $900 billion in US Treasury bonds and other dollar assets.

The US, of course, has no foreign reserves with which to make the purchase. The impact of such a large sale on US interest rates would wreck the US economy and effectively end Bush’s war-making capability. Moreover, other governments would likely follow the Chinese lead, as the main support for the US dollar has been China’s willingness to accumulate them. If the largest holder dumped the dollar, other countries would dump dollars, too.

The value and purchasing power of the US dollar would fall. When hard-pressed Americans went to Wal-Mart to make their purchases, the new prices would make them think they had wandered into Nieman Marcus. Americans would not be able to maintain their current living standard.

Simultaneously, Americans would be hit either with tax increases in order to close a budget deficit that foreigners will no longer finance or with large cuts in income security programs. The only other source of budgetary finance would be for the government to print money to pay its bills. In this event, Americans would experience inflation in addition to higher prices from dollar devaluation.

This is a grim outlook. We got in this position because our leaders are ignorant fools. So are our economists, many of whom are paid shills for some interest group. So are our corporate leaders whose greed gave China power over the US by offshoring the US production of goods and services to China. It was the corporate fat cats who turned US Gross Domestic Product into Chinese imports, and it was the “free trade, free market economists” who egged it on.

How did a people as stupid as Americans get so full of hubris?

Paul Craig Roberts was Assistant Secretary of the Treasury in the Reagan administration. He was Associate Editor of the Wall Street Journal editorial page and Contributing Editor of National Review. He is coauthor of The Tyranny of Good Intentions.