Saturday, March 2, 2024

To Have Forever War, Hide The Price: "The Invisible Cost Of War In The Age Of Quantitative Easing"

We are approaching 25 years of the U.S. being at war in one place or another. Both fiscal and monetary policy, despite claims to the contrary, have been and are currently, pretty darn loose. Here's the Chicago Fed's Financial Conditions Index. Up is tighter, down is looser. The zero line is set to be "neutral conditions." We are not just experiencing loose financial conditions, they are getting looser.

nervi belli pecunia infinita” — the sinews of war are infinite money. 

A repost from two years ago.

Via Bitcoin Magazine, March 2, 2022:

....On February 24, 2022, Vladimir Putin ordered the Russian military to initiate a full-scale invasion of Ukraine. The Russian people, outside of a few thousand brave and quickly-punished protestors, had no way to prevent their government from going to war. It was the decision of a dictator.

Because there are no structural domestic checks and balances on Putin’s power, he was able to unilaterally push forward with an invasion that seems deeply unpopular with the Russian public. Within a few short hours, his decision detonated one-third of the Russian stock market, tanked the ruble to record lows and evaporated the value of Russian bonds, sending some to zero. Some of the harshest sanctions in history have now been set in place against Moscow, preventing its banks from settling in dollars. Virtually all Russians — whether they are on the frontlines or back home — will suffer as a result of Putin’s decision.

One of the hallmark features of democracy is that citizens should, in theory, have a way to prevent their government from waging and prolonging unpopular wars. Through elected representatives, free media and dialogue around public spending, the argument goes that citizens of democracies should be more directly involved in warmaking. And if more countries become democracies, there will be less war, as democracies do not historically fight each other.

The problem is that this concept, known as “democratic peace theory,” is in danger of failing. As a result of the current dollar framework — in which America’s post-9/11 wars in Iraq, Afghanistan and beyond have effectively been paid for by borrowing — the U.S. may have already lost one of the greatest benefits of democracy: its promise of peace.

This essay advances three arguments:

  1. The post-1971 fiat standard, in which central banking rests on fiat currency, enables even elected governments to fight wars without public consent, presenting a terminal risk for democratic peace theory and thus for liberal democracy.
  2. Expensive and unpopular U.S. military operations like the Iraq War would not be possible to sustain for decades without zero interest rate policy (ZIRP) and quantitative easing (QE), which carry significant negative externalities for the average citizen.
  3. An eventual shift from the fiat standard to a Bitcoin standard (where BTC acts as the global reserve currency) could help bring warmaking toward the hands of the public, and away from unelected bureaucrats.

The goal of this essay is to spark broader public debate about how we pay for wars. Many Americans — and of course, many individuals in countries like Iraq, Afghanistan, Yemen and elsewhere — have found America’s post-9/11 conflicts abhorrent. But few discuss the dimension of price.

For example, the U.S. government’s “final report” on the 2007 to 2008 Great Financial Crisis (GFC) does not mention Iraq, Afghanistan or the War On Terror: as if these items had zero impact on the state of the U.S. economy in the decade between 2001 and the publication of the report in 2011.

Marcia Stigum’s “Money Market” — a hugely important textbook on the dollar-dominated global economy, likely handed out to any money-market trader on the first day of the job or to any student of banking on day one of class — does not include the word “war,” or any other related military topic, in its otherwise sprawling index.

“The Deficit Myth,” a popular and influential 300-page book by Modern Monetary Theorist Stephanie Kelton also lacks mention of the words “Iraq,” “Afghanistan” or “War On Terror.”

Time after time in modern economic discourse, expansionary foreign policy is divorced as a concept from expansionary domestic fiscal and monetary policy. War — the single-largest discretionary expense of the U.S. government — is simply left out of the discussion. It becomes invisible.

I. The End Of Democratic Peace Theory

In her sobering book, “Taxing Wars,” U.S. Air Force veteran and law scholar Sarah Kreps writes that a key assumed difference between democracies and non-democracies is that “a democratic populace bears the direct costs of war in blood and treasure.”

“The more directly [citizens] bear those costs,” she writes, the more incentives they have to pressure their leaders to keep wars short, cheap or to not wage them in the first place. Dictatorships have very few checks on their warmaking. But democracies, so the theory goes, are less likely to fight without a clear, narrow and popular mission.

Democratic peace theory is not without critics, but is widely popular in political science, and remains one of the strongest arguments for a liberal democratic system. However, in “Taxing Wars,” Kreps advances a thesis concerned with a potentially fatal flaw of this theory:

“If individuals no longer saw the costs of war, would they be less politically-engaged with the cost, duration, and outcome?”

Her research, she writes, “suggests that the answer is yes.”

Kreps says that democratic peace theory is grounded in several assumptions: “that the direct, visible costs of war are passed along to the citizenry in a democracy; that bearing the costs of war is generally unpopular and will make the people judicious about the use of force; and that they have electoral recourse.”

But since the Vietnam War, the U.S. has been increasingly engaged in what Kreps calls “Hide-And-Seek” wars, where “leaders have shied away from asking the populace for fiscal sacrifice, thereby anticipating and sidestepping public constraints on their conduct of war by avoiding war taxes and seeking less obvious forms of war finance, especially borrowing.”

“Taxation is onerous,” Kreps writes, “and when citizens bear the burden of war in taxation, this creates tighter institutional linkages between the public and leaders’ conduct of war, as taxpayers have more incentives to hold leaders accountable for how the resources are being used.”

“In contrast,” she writes, “borrowing shields the public from the direct costs and insulates leaders from heavy scrutiny.”

Kreps’s book relies on historical tax, bond and spending data, as well as public opinion polling about war going back a century. One major takeaway, though seemingly obvious, is that taxed wars are less popular than untaxed wars.

“A war financed through higher taxes,” she observes, “decreases support by about 20% compared to the baseline scenario without taxes.”

American elected leaders know this, and since Vietnam have sought other ways to pay for wars. This was on display during the peak of the Iraq War in 2007, when Congressmen John Murtha and Jim McGovern proposed a war tax to finance the surge. It was based on a sliding scale, something that columnist E.J. Dionne called the “rare Democratic proposal that does not put the entire burden of taxation on the rich.”

But House Speaker Nancy Pelosi rejected the war tax, saying it was “not a Democratic proposal,” and hinted that the Democrats would suffer at the ballot box if they tried to push it through. As Kreps notes, “debate was perfunctory and questions about the potential effect of a war tax on support for the war were glossed over.”

Taxation was dismissed in favor of borrowing in a strong show of bi-partisanship.

In another example, in 2014 President Obama launched Operation Inherent Resolve, a now nearly eight-year war against the Islamic State in Syria, Iraq and Libya. The American public has been largely unaware of the scale and price of these operations. Kreps says legislators were “relatively silent on each of these fronts because their constituents [were] silent. The constituents [were] silent because they are shielded from the costs of war.”....


You could ask 100 Americans what Operation Inherent Resolve is and maybe, maybe one would know. But that one is probably unaware that it is going on right now.

As the philosopher said to the U.S. Generals: "When was the last time you bitches won a war?"