Whoever you are, I have always depended on the kindness of strangers.
Blanche DuBois – A Streetcar Named Desire by Tennessee Williams
The United States has one of the world’s largest and most well-equipped militaries. A truism about military might: it requires a lot of money and a sound budget. But we are unable to finance our trade deficits from domestic sources and have imperiled our international standing. We now rely on the kindness of foreign financing and have created a self-defeating “Achilles Heel” in our US foreign and military power.
Projecting Power Throughout the World
Through its system of international bases, large annual military budgets and sophisticated weapons systems, the US projects global American power. These expenditures dwarf expenditures of other countries:
The 2009 U.S. military budget is almost as much as the rest of the world’s defense spending combined and is over nine times larger than the military budget of China (compared at the nominal US dollar/Renminbi rate, not the PPP rate). The United States and its close allies are responsible for about two-thirds of the world’s military spending (of which, in turn, the U.S. is responsible for the majority).
The Iraqi army learned that direct confrontation with American armed forces is a losing strategy. Unfortunately, we are undermining this American military supremacy by owing massive amounts of money to foreign creditors.
Owing your Banker
There is a wise old shibboleth: “If you owe a bank thousands, you have a problem; owe a bank millions, the bank has a problem.” Over the next ten years, new estimates project cumulative budget deficits of 9 trillion dollars. Health care proposals will swell even that projection. Who is going to finance this deficit? With traditional funding sources, pension funds and private investment under pressure, the answer has to be foreign investment. Despite promises to the contrary, the US dollar has been in a controlled decline. Our fiscal and monetary policy is punishing our foreign creditors by reducing the value of their dollar holdings.
The Intersection of Economics and Politics
Can we keep up our level of spending and direct military intervention in light of the ever-cheapening dollar? More importantly, how will our foreign creditors react to American intervention? If we embrace the realistic probability that countries like China and Russia do not wish us well, deficits have handed these antagonistic creditors a counterweight and serious threat to our military power.
Let’s assume you are the foreign minister of mainland China. Taiwan has always been a thorn in the side of the Beijing government. Assume also that you wish to minimize loss of Chinese lives and destruction of military hardware. Why not reach an understanding with the US that your government will not dump its hoard of cheapening US treasury securities and for goodwill purposes China will buy even more. The quid pro quo: no United States opposition to the peaceful reuniting of Taiwan and the mainland. Such a diplomatic initiative in a Congressional or Presidential election year would present a quandary to both political parties. Electoral political expediency would enable China to reunite. In this scenario, the nukes remain in their silos, our expensive military hardware remains unused, and T-bills become more powerful than hydrogen bombs.
Bad Habits Always Catch Up With You
Bad economic habits weaken the global position of the United States. But where is the fiscal and monetary discipline in Washington? While we focus on bailing out bankers and making JP Morgan and Goldman Sachs richer, our enemies are thinking about how to take advantage of our economic disarray. Is it smart to continue to rely on the kindness of strangers?
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