Chalmers Johnson: Why the U.S. Has Gone Broke

An excellent (but long) essay by Chalmers Johnson (originally published in Le Monde diplomatique) on how American military spending has helped to deplete American savings while, simultaneously, eroding away American commercial competitiveness. Some excerpts:

There are three broad aspects to the U.S. debt crisis. First, in the current fiscal year (2008) we are spending insane amounts of money on "defense" projects that bear no relation to the national security of the U.S. We are also keeping the income tax burdens on the richest segment of the population at strikingly low levels.

Second, we continue to believe that we can compensate for the accelerating erosion of our base and our loss of jobs to foreign countries through massive military expenditures -- "military Keynesianism" (which I discuss in detail in my book Nemesis: The Last Days of the American Republic). By that, I mean the mistaken belief that public policies focused on frequent wars, huge expenditures on weapons and munitions, and large standing armies can indefinitely sustain a wealthy capitalist economy. The opposite is actually true.

Third, in our devotion to militarism (despite our limited resources), we are failing to invest in our social infrastructure and other requirements for the long-term health of the U.S. These are what economists call opportunity costs, things not done because we spent our money on something else. Our public education system has deteriorated alarmingly. We have failed to provide health care to all our citizens and neglected our responsibilities as the world's number one polluter. Most important, we have lost our competitiveness as a manufacturer for civilian needs, an infinitely more efficient use of scarce resources than arms manufacturing.

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They agree that the Department of Defense requested $481.4bn for salaries, operations (except in Iraq and Afghanistan), and equipment. They also agree on a figure of $141.7bn for the "supplemental" budget to fight the global war on terrorism -- that is, the two on-going wars that the general public may think are actually covered by the basic Pentagon budget. The Department of Defense also asked for an extra $93.4bn to pay for hitherto unmentioned war costs in the remainder of 2007 and, most creatively, an additional "allowance" (a new term in defense budget documents) of $50bn to be charged to fiscal year 2009. This makes a total spending request by the Department of Defense of $766.5bn.

But there is much more. In an attempt to disguise the true size of the U.S. military empire, the government has long hidden major military-related expenditures in departments other than Defense. For example, $23.4bn for the Department of Energy goes towards developing and maintaining nuclear warheads; and $25.3bn in the Department of State budget is spent on foreign military assistance (primarily for Israel, Saudi Arabia, Bahrain, Kuwait, Oman, Qatar, the United Arab Republic, Egypt and Pakistan). Another $1.03bn outside the official Department of Defense budget is now needed for recruitment and re-enlistment incentives for the overstretched U.S. military, up from a mere $174m in 2003, when the war in Iraq began. The Department of Veterans Affairs currently gets at least $75.7bn, 50% of it for the long-term care of the most seriously injured among the 28,870 soldiers so far wounded in Iraq and 1,708 in Afghanistan. The amount is universally derided as inadequate. Another $46.4bn goes to the Department of Homeland Security.

Missing from this compilation is $1.9bn to the Department of Justice for the paramilitary activities of the FBI; $38.5bn to the Department of the Treasury for the Military Retirement Fund; $7.6bn for the military-related activities of the National Aeronautics and Space Administration; and well over $200bn in interest for past debt-financed defense outlays. This brings U.S. spending for its military establishment during the current fiscal year, conservatively calculated, to at least $1.1 trillion.

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In order for Japan to manufacture anything, it must import all required raw materials. Even after this incredible expense is met, it still has an $88bn per year trade surplus with the U.S. and enjoys the world's second highest current account balance (China is number one). The U.S. is number 163 -- last on the list, worse than countries such as Australia and the U.K. that also have large trade deficits. Its 2006 current account deficit was $811.5bn; second worst was Spain at $106.4bn. This is unsustainable.

It's not just that our tastes for foreign goods, including imported oil, vastly exceed our ability to pay for them. We are financing them through massive borrowing. On 7 November 2007, the U.S. Treasury announced that the national debt had breached $9 trillion for the first time. This was just five weeks after Congress raised the "debt ceiling" to $9.815 trillion. If you begin in 1789, at the moment the constitution became the supreme law of the land, the debt accumulated by the federal government did not top $1 trillion until 1981. When George Bush became president in January 2001, it stood at approximately $5.7 trillion. Since then, it has increased by 45%. This huge debt can be largely explained by our defense expenditures.

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In an important exegesis on Melman's relevance to the current American economic situation, Thomas Woods writes: "According to the U.S. Department of Defense, during the four decades from 1947 through 1987 it used (in 1982 dollars) $7.62 trillion in capital resources. In 1985, the Department of Commerce estimated the value of the nation's plant and equipment, and infrastructure, at just over $7.29 trillion ... The amount spent over that period could have doubled the American capital stock or modernized and replaced its existing stock."

The fact that we did not modernize or replace our capital assets is one of the main reasons why, by the turn of the 21st century, our manufacturing base had all but evaporated. Machine tools, an industry on which Melman was an authority, are a particularly important symptom. In November 1968, a five-year inventory disclosed "that 64% of the metalworking machine tools used in U.S. industry were 10 years old or older. The age of this industrial equipment (drills, lathes, etc.) marks the United States' machine tool stock as the oldest among all major industrial nations, and it marks the continuation of a deterioration process that began with the end of the second world war. This deterioration at the base of the industrial system certifies to the continuous debilitating and depleting effect that the military use of capital and research and development talent has had on American industry."

Nothing has been done since 1968 to reverse these trends and it shows today in our massive imports of equipment -- from medical machines like proton accelerators for radiological therapy (made primarily in Belgium, Germany, and Japan) to cars and trucks.

Our short tenure as the world's lone superpower has come to an end. As Harvard economics professor Benjamin Friedman has written: "Again and again it has always been the world's leading lending country that has been the premier country in terms of political influence, diplomatic influence and cultural influence. It's no accident that we took over the role from the British at the same time that we took over the job of being the world's leading lending country. Today we are no longer the world's leading lending country. In fact we are now the world's biggest debtor country, and we are continuing to wield influence on the basis of military prowess alone."

Some of the damage can never be rectified. There are, however, some steps that the U.S. urgently needs to take. These include reversing Bush's 2001 and 2003 tax cuts for the wealthy, beginning to liquidate our global empire of over 800 military bases, cutting from the defense budget all projects that bear no relationship to national security and ceasing to use the defense budget as a Keynesian jobs program.

If we do these things we have a chance of squeaking by. If we don't, we face probable national insolvency and a long depression.

Rice Inflation: When Did It Start?

The global food crisis has been getting a lot of well deserved press recently, and while several different crops have experienced varying levels of inflation, I thought I'd look at rice in particular. Although rice isn't a staple crop in America the way wheat and corn are, it's very much a staple crop here in Asia. Asian reactions to the price increases for rice have varied dramatically. Singapore, for example, has tried to reassure the public that there is plenty of rice while keeping price controls off and allowing companies to bring in additional supplies above and beyond what's normally imported to hedge against any future supply shocks. On the other hand, some other countries in this region (e.g., Vietnam, India and China) have temporarily banned the export of rice.

For this analysis, I used the price data for milled rice provided by the U.S. Department of Agriculture's Economic Research Service. This particular file has price information on a monthly basis since August 2005 for several types of rice in the United States, Thailand (the world's largest exporter of rice), and Vietnam (the second largest rice exporter). For my analysis, I've chosen two American varieties, Southern long-grain milled (LGM) and California medium-grained milled (MGM), and one Thai variety, 100% Grade B. (I've done some analysis on the Vietnamese data; however, the data set is incomplete so I'm not as trusting on that information as I am for the other three sets.)

As you can see on the above chart, rice prices had been relatively stable since August 2005, especially for Thai rice. The current upswings in prices began last summer, in July 2007 for both the Southern and California rices, and in September 2007 for the Thai rice. (For Vietnam, it appears that the upswing began in May 2007; however, there is three months' worth of data missing for October-December 2007, and it's conceivable that prices could have dropped in that time period.) Since that time, prices have risen at a compound monthly growth rate of 7.65% for the Southern LGM, 2.80% for the California MGM, 14.47% for the Thai rice, and 8.32% for the Vietnamese rice. Moreover, as the graph currently shows, there's no indication on the part of any of the varieties that prices are likely to change direction soon.

From my perspective, the inflation for rice is mostly of the cost-push variety, with oil and fertilizer costs as primary culprits. The discussion of the inflation being driven by demand-pull is nonsense, in my opinion. Demographic changes are far too slow to account for such a rapid increase inside of one year's time, and there's not been any sudden desire for people to eat more rice or that rice has become a substitute in place of another grain.

When might we expect to see rice prices declining? Based on current futures prices for rough rice at the Chicago Board of Trade, the May 2008 futures are selling at a price of $23.80 (as of this time). Futures peak with the July 2008 contracts ($24.18), before falling slightly to this year's low of $21.78 (November 2008). For 2009, prices are expected to increase slightly ($22.38 in May 2009), before falling to a low of $18.25 for November's contracts. In other words, prices are expected to drop by almost a quarter, but only in another year and a half's time.

Gold and the U.S. Dollar

A good article over at Afraid to Trade.com with a long-term analysis (since 2000) of the relationship between gold and the U.S. dollar. Some excerpts:

Notice the shift that occurred at the ‘turn of the century’ where gold prices were at their lowest levels of the last decade and the US Dollar Index (along with the Stock Market) was making new highs. The market shifted in 2001 (as the recession began) and the price of gold (per ounce) has never looked back.

The US Dollar, on the other hand, is another story. The Dollar index peaked at 120 and is now 41% lower than it was at its peak. Gold, on the other hand, rose from $250 (per ounce) to a peak above $1,000 an ounce, rising 400% in the same 8 year period.

This also means that the value of a US dollar is worth much less in terms of gold prices than it was in 2,000. In 2000, if you were offered $1,000 in gold that you stored away, if you cashed in today, you would get back $4,000 (if converted into dollars). Of course, those dollars are worth less today than they were then, so it may be better to keep the investment in gold!

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If the US Dollar Index reverses trend, then expect gold’s trend to pause or reverse as well. Until that happens, the current trend remains in force.

Check out the whole article!

HT: The Bonddad Blog

Southeast Asian Petroleum Consumption Forecasts, 2007-2012

The following is an executive summary of a report detailing the forecasted petroleum consumption of Southeast Asian nations for the years 2007-2012. To purchase the full report (US$20), please e-mail me at jjtmdunne@gmail.com.


On a per-capita basis, Southeast Asian consumption of petroleum is expected to rise from the 2006 total of 2.7153 barrels per person to between 3.0979 barrels to 3.1109 barrels per person in the year 2012. In terms of the number of barrels of petroleum for the region, this comes to 1.8656 billion barrels to 1.9132 billion barrels, or 5.097 million barrels to 5.227 million barrels per day (b/d).


Most of the countries examined have tight to very tight correlations between their petroleum consumption and their GDP, meaning, the more petroleum the country consumes, the higher their GDP rises. Of the eight countries where such analyses can be made, five have correlations greater than 0.94 (where 1.0 indicates a perfect, positive correlation). However, Cambodia has shown a long-term negative correlation since 1984, where that country’s GDP has increased while its petroleum consumption has decreased, and the Philippines have shown a negative correlation since 1998.

The Economist: Gender Gulf

The April 10th edition of The Economist has an article about the problems Muslim women in the Middle East and the banking/financial services industries have in meeting each other. Much of this problem is due to gender segregation, but another problem is that many of these companies haven't thought about the benefits of targeting their marketing toward women and the practical ramifications of being able to market directly to these women; for example, hiring women who are able to meet clients and customers without needing a husband or other male relative to chaperone. I also like how the one company mentioned in the article, Forsa, avoid the "pink-ribboning." Unfortunately, this type of cosmetic change to a company's marketing scheme is all too common and is very superficial. "Oh, look! My credit card has a picture of a rose on it. I'll bank with you." Yeah, right.

But many women still avoid face-to-face meetings with unrelated men. That makes the male-dominated world of banking particularly hard to penetrate.

There are ways of getting round the problem. Saudi retail banks have set up segregated branches that only women can enter. “Ladies' banks” are also cropping up in the UAE. Segregation is a controversial issue, but the facilities at least allow women to manage their finances independently of prying fathers, brothers or husbands. Rising divorce rates give added motivation for women to hide away some money, skeptical of the help they will get from mostly male judges.

Increasingly, wealth managers are also realizing that women in the Gulf region are sitting on fortunes in cash, land and even jewelery. According to Amanda McCrystal of Bramdiva, a London-based wealth-consultation service for women, a few years ago there was a boom in online share-trading by women in the Gulf, since they could do it from the privacy of home. Many were singed by a regional crash in 2006. Some will not return; many of those who do may seek professional advice.

Sandy Shaw, who heads Middle Eastern operations at Coutts, a private bank based in London, says about a quarter of her clients are female, and are keen to keep control of their affairs, especially to ensure that their estates will pass to their children when they die. Aware of this, a small number of Western female bankers now travel regularly to the Gulf to hold meetings with female clients. Again, one of the attractions is privacy; they can visit a Saudi woman at home without her husband present, which a male banker normally could not do. Women may require different products from men, too. In Saudi Arabia and Qatar, for example, they have more of an appetite for lower-risk, capital-protected investments. But this is likely to change as they become more experienced investors, says Ms Shaw.

In the UAE, Dubai World, a government holding company, has set up Forsa, an investment company run by women for women. Its staff scorn what they call “pink-ribboning”: superficial changes to market products to women, like making a credit card pink. Across the region, more such firms would be helpful. This is not only because women need opportunities to work. The finance industry needs them, too: it is growing so fast that it is struggling to recruit and retain staff.

The message has sunk in in Bahrain, where a third of finance-sector employees are female, and in Kuwait, where, including property, the figure rises to 40%. Some employers there say they find female bankers work harder than men. Yet in Saudi Arabia, official statistics indicate that just 5% of Saudis working in finance and property are female. And across the region, it remains hard for female businesswomen to get loans, especially if they are not from prominent families. Even in Bahrain, where nearly one-third of businesses are registered by women, “sometimes women can only get a business license in their husband's name, especially if they have less capital,” says Aamina Awan, who is researching female entrepreneurship in the region.

The Three

I'm a fan of The Economist and, although I don't get the chance to buy and read it every week, I do like a lot of its content. If I were to create my own magazine, I'd try to model it somewhat on The Economist. In the meantime, these are the three articles in this week's edition that you should take the time to read.

The Long Hangover - America's economy is in recession. Don't expect a quick recovery.

Tightening Belts - As commodity prices rocket and America's economy sickens, food companies and retailers are racing to adapt.

Spring Postponed - The hopes kindled by the saffron revolution have faded fast.

UN Blames Falling Dollar and Investment Funds for Rising Food Prices

A story from Reuters on why world food prices have been rising dramatically in recent weeks. The fact that prices have been rising due to the falling dollar is not a surprise as this topic has been discussed with respect to rising oil prices. However, the fact that investment funds have been helping to raise food prices is news to me, although perhaps not as surprising as it should be.

Global investment funds and the weak dollar are largely to blame for high world food prices, a senior official of the United Nation's Food and Agriculture Organization said on Thursday.

"The crisis is a speculative attack and it will last," said Jose Graziano, the UN food and farm organization's regional representative for Latin America and the Caribbean.

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Across the globe foods from bread to milk have become more expensive and in some countries helped fuel inflation. High prices for rice, beans and other food staples provoked food riots in Haiti this week.

"The lack of confidence in the (U.S.) dollar has led investment funds to look for higher returns in commodities ... first metals and then foods," Graziano told a news conference in the capital.

Investors have speculated in commodities including wheat, corn and rice because stocks in recent years have been drawn down by rising demand in emerging markets and supply shortages due to adverse climate in key producer nations, Graziano said.

"Speculative attacks become possible when you have low reserves," Graziano said.

Stocks of some food crops have fallen to their lowest levels in three decades, according to Brazilian farm experts.