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SRA Comment: So How Will America Pay For The War?

Sanders Research Associates Founder's Comment

A Word from Our Founder

So How Will America Pay For The War?

April 7, 2003

"Paradoxically, our attempts to prevent a Eurasian anti-American alliance may make that outcome more likely."

- Christopher Fettweis, Sir Halford Mackinder, Geopolitics and Policymaking in the 21st Century , in Parameters, US Army War College Quarterly, summer 2000, pp. 58-71

"W stands for the wonder and pain
With which we regard our infirm and insane
Old aged generals who run this campaign
We are waging in Mesopotamia"

- From "Alphabiet" quoted in A.J. Barker, The Bastard War, Dial Press, New York 1967, p.189

So How Will America Pay For The War?

President Bush submitted a supplemental budget appropriation March of $74.7 billion, of which $60 billion is meant to "cover the current cost of fuelling our ships and aircraft and tanks, and of airlifting tons of supplies into the theatre of operations."

Crucially, it is also intended to "replace the high-tech munitions we are now directing against Saddam Hussein's regime." The administration has sensibly adopted a pay as you go approach to finance its war.

One informal but informed estimate shared with us is that this money will serve to cover some six to eight weeks of fighting. This is a breathtaking thought. At that rate, a year of combat would, all else being equal, add some $360 billion to the Federal deficit and implies a huge increase in America's current account deficit. Everything is not equal of course. This sort of spending rate cannot last indefinitely, nor can it be expected to have no impact on either other federal programs or, for that matter, the credit markets. Someone is going to have to put up the cash.

Putting up the cash necessarily means either raising the savings rate or getting the international community to pay for it. It is highly unlikely that the latter will be done willingly. And as for the former, the administration is racing as fast as it can in the opposite direction.

Congress is well on the way to passing the President's official budget for the coming year. The House of Representatives rubber-stamped the White House financial plan without a whimper, giving its imprimatur to $750 billion or so in tax cuts.

The Senate, evidently wishing to portray at least a semblance of thoughtful consideration, passed an amended bill that cut that figure in half. It makes little difference. The point of this most political of documents is that it is intended to reassure the electorate, and in particular the richest 1% of the electorate, that however unpleasant things get in the Middle East, they will not have to pay for it.

A Sure Bet Turns Into A Real Contest

The last thing on anyone's mind about this war is that Iraq actually might win it. It is a long shot, but not impossible. Finance is key.

Consider that the US embarked in the early '60s on its Vietnam escalation with a Federal government budget that was balanced, most of the world's gold reserves, and a fairly balanced external payments position. Even so, the US still lost the war, which caused a balance of payments crisis, a dollar collapse, and a deep recession.

The United States began this ill-considered and reckless adventure with nothing like as strong a fiscal and monetary position. The "world's only hyper power" is, in truth, the world's most irrationally hyped power. Theodore Roosevelt's admonition to "walk softly and carry a big stick" appears to have been replaced by the Bush doctrine: shout loudly and hope someone else pays. There is little doubt that the US can prevail over the Iraqi armed forces during the conventional phase of the current war. It is not at all a foregone conclusion that the US can prevail in a protracted unconventional struggle if that follows.

The problem is both strategic and tactical.

A Conceptual Problem...

The strategic problem is conceptual. Anglo-American strategic thinkers since Mahan and Mackinder have been obsessed with control of "the world island" to which central Asia is deemed to be the key. This was basic to the American strategy outlined by Zbigniew Brzezinski in his book The Grand Chessboard, in which he outlined the manner in which the US lured the USSR into Afghanistan to its defeat.

Brezinski appears to think that the US as a consequence faces a period of some 80 years or so as unquestioned sole superpower, having secured dominance of the Eurasian heartland with the collapse of the Soviet Union. This is far from obvious to us.

On the contrary, it seems more likely that however long America might enjoy sole superpower status, that period will inevitably be much shorter as a consequence of the American leadership's obsession with hegemony. America's campaign in Afghanistan threatens Chinese energy security and flanks China with forward American bases from its Pacific coastline to Kazakhstan.

It threatens Russian security by placing American forces right on Russia's doorstep in a position to divert Caspian oil and gas by pipeline away from Russia. The campaign in Iraq threatens the world's energy security in general, and Europe's in particular. Indeed, American conduct seems intended to underline the point, rather than to minimise it. American companies are to be awarded all the post war contracts. An American garrison and regime will stay in place indefinitely after the war.

Having manufactured a common cause for enmity from the China Sea to the Atlantic, the US appears to be intent on widening its war. The theoreticians of this campaign such as Richard Perle, Michael Ledeen, and others speak about Iraq as one battle in a campaign that will include Syria, Iran and Saudi Arabia before it is over. One wishes that these people were a lunatic fringe. The alarming truth is that they are at the centre of power. That is no guarantee of their staying there, but the damage that they can do before they go is considerable.

...Aggravated By A Tactical Problem...

The tactical problem is that whether they stay or go, the pressure to widen the war may become intense. Iraq has long and porous borders that have defied control for centuries. For the US to stop the resupply of irregular forces from either Iran or Syria seems a daunting task. That will not stop commanders tasked with the equally impossible job of controlling a hostile and sullen population from asking for permission to try.

It was highly symbolic that last week the New York Stock Exchange revoked the credentials of the Arab news and broadcasting firm, Al-Jazeera. Al-Jazeera was also refused credentials by the NASDAQ. In the battle for hearts and minds, a clearer message could scarcely have been sent to the Muslim Middle East. It remains to be seen who has the last laugh, however. The markets are not discounting a long war or a wider one. Nor are they discounting the possibility that Iraq will find material support from the international community.

...Means Trouble For Markets

The bull markets of the 80s and 90s were built on the fundamental premise of market and trade liberalisation and freely mobile international capital. It is a safe bet that the 30 and 40 somethings who run the markets today have not contemplated a valuation structure based on a different set of premises: war, capital controls, and trade barriers. It is a safe bet too that the man in the White House has not contemplated this either, which is why we still think that he is going to be a one term president.


©- Copyright Sanders Research Associates Ltd. 2003. The contents of the following, either in whole or in part, may not be reproduced, stored or transmitted in any form or by any means, electronic, photocopying, recording or otherwise without the written permission of Sanders Research Associates. While considering the contents to be reliable, SRA take no responsibility for the information set forth herein.


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