Wednesday, April 2, 2008

USA in Iraq: Recession in the Crosshairs

USA in Iraq: Recession in the Crosshairs

By Jean-Louis Denier

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The exorbitant cost of the war in Iraq risks plunging the United States a little further into a recession catastrophic for it ... and the rest of the world!

If one effects a comparative analysis with other conflicts, one realizes that the binomial, quagmire/occupation of a large territory is not economically neutral. The longer this kind of war lasts, the more it costs; the more it costs over a long period, the more it disturbs and distorts the economic machine, notably by the inflation and monetary depreciation it generates. The consequences of Operation Iraqi Freedom on the American economy seem, in appearance at present, to limit themselves to the sole question of the United States' federal deficit, since the increase in military expenses, including those related to Iraq (total US federal budget for 2009: $3,100 billion, with a 7.5 percent increase in the Pentagon's budget, which represents $515 billion, in addition to which a special supplement of $70 billion is reserved for Iraq and Afghanistan) has consequences.

The effects of this headlong rush:

  • A $410 billion deficit for the 2008 fiscal year (2.9 percent of American GNP) and another deficit of $407 billion for 2009 which the new administration will inherit next January. You will note that these sums are twice the size of the $162 billion deficit recorded for fiscal 2007 and approach the record $413 billion deficit recorded in 2004.
  • Dark dealings in the federal budget, such as the 22 percent reduction (to $2 billion only) in the amount available to help poor families pay their heating cost, or the 34 percent reduction in investments accorded Amtrak, the national passenger railway company.

But one should not trust appearances, for the deficit in American public finances interacts with the global economy as a whole. Since the American taxpayer does not have enough money to pay all the expenses of his federal government, that government turns abroad to borrow money and bring capital back to the USA. In this way, the savings of foreign countries are solicited - notably through the purchase of American Treasury bonds or other dollar-denominated assets - to cover purely American expenses. No comment up to there. Except that the foreign countries exporting capital to the USA are primarily Asian - with China in the lead - which countries profit from the financial flows created to align their currencies to the dollar - to undervalue it even - and thus put their own international trade competitiveness on steroids through that exchange rate chicanery. Moreover, overindebted and consequently overexposed vis-à-vis their creditors, the Americans are happy to reimburse them with worthless currency and consequently ... to depress the dollar exchange rate - by reducing US interest rates - notably vis-à-vis other currencies, including the euro, but also against the British pound sterling.

And the Rest of the World in All This?

This vicious spiral (deficit plus dollar fall plus undervaluation of other currencies, like the Chinese yuan and the Japanese yen) has been ongoing for several years, but is especially dangerous:

  • For the USA's creditors: The dollar's nosedive entails the progressive devaluation of assets denominated in that currency; those who hold those assets find themselves less rich now than they were the day they bought them for more.
  • For the USA itself: How long will the USA's creditors trust the USA and continue to cover its unbridled spending if the federal government seems too exposed through its abysmal debts? Moreover, the rise in foreign capital equates to increased dependence, even submission to foreign financial power. Finally, if $1,300 billion of subprimes generate $1,000 billion to $2,000 billion of losses and suffice to plummet global exchanges, what will happen when the markets realize that the war in Iraq could cost between $1,000 billion and $3,000 billion in the middle of a complete American economic recession, consequently with fewer fiscal revenues for the US federal government, consequently with more deficits?
  • For the Europeans, including the French: The depreciation of the dollar will never stop, since it results from a deliberate American strategy of lightening the federal government debt burden, a strategy that condemns the euro to an unremitting rise and European products to no longer being produced or even conceived in the euro zone, transforming said zone into an economic and social desert over the long term. More than ever, Europeans could hear: "The dollar is our currency; it's your problem."

Conclusion:

The Vietnam War, through its length and its cost, provoked the abandonment of the gold standard for the dollar, as well as strong American inflation, provoking a temporary crisis in the exercise of American hegemony over the world. The war in Iraq is taking the same path, with two exceptions, only worse: it combines with a mixed (American household and the federal government itself) overindebtedness and recession in the American economy against the background of a rampant global banking and financial crisis.

Consequently, all the ingredients for a crash followed by a wide-ranging and long-lasting depression (like the one of the 1930s) are potentially brought together. And this time the revision of American hegemony will not be temporary only. Will Osama bin Laden have won not only "his" war, but the war?

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