The following is a guest post by my friend “Joe Harvard”. For a listing of all of Joe’s posts, click here.
Human history can be best summarized by the following: Countless episodes of gory blood letting warfare, and death interspersed by periods of intermittent peace brought to us via the courtesy of the winner(s) of the blood letting contests. These epochs of peace, Pax Sinica/Romana/Britannica, and most recently Pax Americana are all product of an overwhelming military might supported by a giant every growing economy.
But like all good orgies, they come to an end. In the case of the Romans, excessive frivolous government spending on things such as 120 days of gladiator games (game days in Rome are public holidays) coupled with lack of economic growth (Rome ran out of places to plunder) and inflation (Rome printing coins with ever declining silver content), led to severe reduction in military funding, and finally resulting in total economic collapse and ass kicking by the barbarians at the gate.
Unfortunately, I think Pax Americana is heading toward a similar fate as our party loving Roman brethrens. First, the US economy, the sole source funding for US military, is structurally floundering at its core. The US dollar has been the world’s reserve currency for the past 60+ years. As a reserve currency, all major global financial transactions (e.g. oil, gold, copper trades) are carried out in US dollars. The dollar’s special status confers upon it unprecedented global financial power. The US is the only country that does not need to keep a foreign reserve, thus enabling it to run much higher budget deficits than any other country. The US currency also influences interest rates across the globe enabling the country to affect monetary policies, and thus, the world’s economy.
But the US reserve currency status is under tremendous threat. In fact some experts have argued that US dollar has already lost its venerable status, and that the Euro is the new reserve currency. For the better part of past 10 years, the US has, in effect, been printing money (running large budget deficit) at an alarming rate. As a result, the US dollar’s value has been depreciating at an ever increasing rate. This depreciation has led to inflation in the US economy and the need to increase interest rate to counter this trend. Moreover, with the depreciating dollar, the Federal Reserve needs to increase bond interest to attract reluctant lenders to continue to fund US deficit. The effects of these rate hikes are higher cost of borrowing, and slowing of the US economy.
But this is not the end of the bad news. With majority of the oil purchases done in US dollars, OPEC nations now offset this dollar depreciation by inflating oil prices by the same amount. In fact there has been move by some oil producing nations to carry out their oil sales in currencies other than the US dollars so as to avoid currency depreciation. If enough countries follow suite, there is a definitely chance that the US dollar will lose its reserve currency status outright. This will lead to the US needing to keep a large foreign reserve in order to purchase basic commodities such as oil and gas. To fund this foreign reserve, the US’ ability to run large deficits will be substantially reduced. And its ability to influence global interest rates (thus world’s economy) will be vastly diminished.
Finally, US military power is based upon the country’s economic power. Aircraft carrier battle groups, international military bases, and leading edge high tech weaponries are all extremely expensive. In 2007, the US spent $626.1 billion in its military budget, accounting for almost 50% of worldwide military spending. In order to maintain its military preeminence, US must have a first class economy to match. But with a declining economy, the US needs to avoid frivolous military adventures like Iraq in order to preserve its limited resources, or it will be confronting a potential collapse much like Rome.