Operation Enduring Inflation
In a little-noticed announcement, the Center for Strategic and Budgetary Assessments has made a stab at estimating the direct costs of this splendid little war against Afghanistan. In the past this group has provided a very useful service in telling us exactly what the Pentagon is loath to talk about: how many taxpayer dollars our military central planners are plowing through on any given day. The Center has an excellent track record. This time they have come up with a pretty scary figure: $1 billion per month.
That number is based on past costs of deployments of warships, aircraft, and special forces in the Gulf War and the War in Kosovo, relative to the number of sorties flown and the number of troops actively deployed. They cross-checked their estimates with a bottom-up and a top-down method of calculation, while freely admitting that the estimate could be off by a few hundred million here and there (and government is always more expensive now than in the past).
For example, cruise missiles launched via ship, plane, or submarine cost between $1 million and $2 million each. Each GBU-28 "bunker-busting" laser-guided bomb carries a price tag of $125,000. CBU-72 unguided cluster bombs cost about $5,000 each. Even if you love to watch things blow up, remember this isn’t just any Fourth-of-July show. These costs are astronomical, and that’s just to pay for the thing that destroys, to say nothing of the things destroyed (hotels, hospitals, houses, and the like).
Moreover, the estimate does not include the costs of deploying 41,000 reserve personnel for purposes of "homeland defense." Neither does it include the costs of rebuilding after the destruction, the costs of bribes paid to governments to toe the U.S. line, and unexpected costs of destroyed planes and helicopters, not to mention the unseen costs of alternative uses of resources that have been foregone as a result of the war. One can easily imagine all this adding up to double and triple the stated estimates.
Now, two very interesting questions present themselves: who pays and how? The first is easy to answer: you and I. The government spends no money that it does not take from the pockets of the people. Whether government is sending welfare to bums, paying off big businesses, or dropping bombs in strange lands, we are the only source of its spending. This is because government produces nothing on its own; even if you love the things government does, it is impossible to deny that it is a parasite on society.
So when you see those bombs falling all over this pathetic, impoverished country, remember that it comes at the expense of someone’s college education, someone’s new house, someone’s contributions to a charity, or some other worthy use that might have been dreamed up for the money, had the government not decided that it is more important to bomb the Taliban for demanding actual evidence against bin Laden.
The more interesting and complicated question is: where is the government going to get the money? These days, there’s the surplus, but everyone knows that the government will burn through that pretty quickly. There’s always taxation, but there’s been no talk about raising taxes. In fact, some folks are even talking about cutting taxes as part of a more expansive "stimulus" program.
Still on the fiscal side, the government can run up more debt and market it among the investing public. The idea of war bonds, for example, has variously come up. But Keynesians don’t like that idea for fear that it will cause people to save more money just when they believe people should be spending more to keep the economy’s head above water.
Now we move to the most likely scenario of all, the tried and true way in which government funds itself: inflation. I know that talking about inflation now is like warning of a bad winter in the middle of a hot summer. With the price of oil falling and interest rates being forced lower and lower, no one seems to think that there is any danger that general price increase will get out of hand.
But there’s a centuries-old definition of inflation that you will find in your dictionary: expansion of the money supply. Over time, the definition was changed to describe the effect and not the cause, the price increases and not the monetary expansion itself. This served to distract people from the real source of the fall in the purchasing power of the dollar.
In the old days of precious-metal money, kings would assign their minions to clip coins and save the clippings for themselves. As a way of signaling that their coins contained the full weight and had not been clipped, private coinage companies were the first to put ridges or "reeding" on the edges of coins. How silly that they still have them today, even though our coins are made out of the cheapest possible metals.
Today, the inflation process is more complicated and shadowy. The Fed can permit banks to keep fewer reserves on hand, thus allowing them to expand loans in return for a promise to bail them out in times of trouble. It can also buy government debt with freshly created money (right out of thin air) and put that debt on the asset side of its ledger.
Then it can lower the interest rate it charges its member banks for overnight loans. This is a rate the Fed entirely controls, and lowering it induces more loans (they hope!) and injects new credit into the economy.
The government benefits from this credit-expansion process because it has a ready buyer for its debt, which is now "monetized," which is to say, bought with money that didn’t exist before. Yes, the people pay, but not just yet. It takes a while for the new money to filter out through the economy and (all else equal) increase prices across the board.
If you understand this, you might begin to understand the business pages a bit better, for example when the headlines announce with glee that the Fed has pushed short-term rates down to the lowest level in forty years. If there is no cost to this action, it would have been done long ago. But there is a cost, two costs in fact. The first is that it risks igniting price increases. The second is that it distorts production processes by leading business to believe that there is a stronger basis for producing for the future than there really is.
In the weeks since September 11, the Federal Reserve has zoomed the money supply (as measured by MZM) at an astounding rate of 35 percent (annualized)--an amazing fact when you consider that the economy has actually shrunk during this time. The demand for dollars has gone up due to higher savings, but not enough to permanently sop up all that extra cash sloshing around the world today, thanks to an incredibly irresponsible policy.
So, yes, you will pay for this war, and you will pay through the arteries. Wave your flag and whoop it up while the party lasts, but never believe that the only thing being destroyed are mud huts and their inhabitants. The hangover will arrive right here at home, and the destruction will be all too evident for everyone to see.