Is the US military-industrial complex a ponzi?
Military expenditure, John Keynes and NATO. World Domination 101.
“In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist.”
— Dwight D. Eisenhower
During the Cold War, and fuelled by WW2 sentiment, there was within the US a spirit of military development and global supremacy.
At the time, public debt to GDP was steadily below 40% and the economy was in the early stages of a boom that’s still going after >60 years.
A booming economy means increasing tax revenues and that makes it easy for the treasury to balance the budget — but since the early 1980s public debt to GDP has been on a steady uptrend (i.e. they spent more than they made).
Last year I wrote an essay discussing US history through the angle of the global monetary system and the supremacy of the US Dollar. In the piece I argue that US global hegemony has ended — and I associate it with the decline of the US Dollar as the reserve currency of the world and the decline in the US share of global GDP.
In this essay I will focus on the US military industry and its reliance on the federal government’s ability to continue borrowing (and at subsidised rates).
As I wrote in Peak American Empire:
“For now, the Fed could intervene whenever required to calm markets in times of crisis, keep the rates down and make it easy for the US treasury to continue borrowing cheaply. But can that go on forever? Not really.”
The Military Budget & Subsidisation
The US spends $1 trillion a year in National Defense Consumption and Gross Investment — call it military expenditure.
Arguably, the US gets a lot in return for this massive expenditure.
1) Military supremacy and 2) the ability to project power anywhere in the globe which 3) enables the US to strike deals with other countries as well as 4) sell them arms, propping up their own economy in the process but also making a profit from it.
As a minimum, I consider the (bulk of the) military expenditure to be a kind of subsidy for the US economy as the US relies on the kindness of strangers to sustain it (i.e. be able to keep running a budget deficit).
What will happen when, like all subsidies it inevitably ends?
Arms Deals & NATO
The US is the biggest arms exporter in the world. Countries line up to buy weaponry from the US and are reliant on them for their national security. India and Japan buy weapons due to their conflict with an ascending China. Countries like Saudi Arabia and Qatar are also spending lavishly on armaments — and because of their fossil fuels they can afford to.
Don’t forget NATO, a military alliance with 31 members + Sweden today, that was founded in 1949. By spearheading the foundation of NATO and expanding it over time, the US achieved something incredible. It isolated non-friendlies and with Article 5 of the NATO charter — it made sure that anyone that attacks a NATO member will be reciprocally attacked by the whole of NATO back.
“Article 5 provides that if a NATO Ally is the victim of an armed attack, each and every other member of the Alliance will consider this act of violence as an armed attack against all members and will take the actions it deems necessary to assist the Ally attacked.”
Since the 2014 annexation of Crimea by Russia, NATO agreed to a 2% spending target. That means all NATO countries must spend 2% of their GDP in defence — another boon for the US military industry! Not all countries have achieved the target but there is definitely progress from previous years.
Note here that the fiscal situation of the collective west is in dire straits. Decades of Keynesian policies and endless budget deficits has brought government balance sheets to a pivotal moment.
Japan is a case in point of this and you can get more historical context on Japanese macro with my presentation below.
NATO and the US are asking the collective west (basically, NATO countries) to spend even more on defence when arguably they are already bankrupt.
The US Budget…
For now, the US is still allowed to run these massive budget deficits and spend $1 trillion in military expenditure. But we are seeing early signs of an acceleration in the decline.
For example, the interest expense on the US public debt is also approaching $1 trillion a year — how many trillions?!? The problem with interest payments is that they can’t be easily reduced — in fact they will probably reset to more expensive rates over time.
What else is the US spending money on?
By category, relative to the federal budget, the US spends:
22% on Social Security,
14% on National Defence
13% on Net Interest Payments
12% on Medicare
9% on Income Security
4% on Veterans Benefits and Services
and 15% on other miscellaneous
Which of the above is the Senate exactly going to reduce? To simply balance the budget, they will need to shave off $1.6 trillion in expenses. There are no categories where they can cut costs from that wont’t result in a reciprocal extremely negative outcome for the economy.
Simply eyeballing the budget one can see that all expenses are either military, interest expense or benefits and social programs. And so the US faces an intractable problem.
Game Theory & World Domination
Do you remember Pinky and the Brain? I do.
Now assume that there is indeed an alliance of countries that wants to take over the world, specifically take it from the US. This alliance of countries, let’s call it the “East” — isn’t stupid. This is a battle for world domination.
They know the things discussed above, and they know the US is fragile in many ways. The East could be threatened by NATO expansionism, trade wars/trade controls, economic sanctions, chip wars / the AI race and a whole host of things — that’s beside the point.
So the East sits down and ask, how do we take the West down and create a bipolar world as opposed to a unipolar one?
I will revisit this theme.
Sincerely,
Philo