Red = unemployment, blue = inflation, YOY percent change
The current situation most resembles the early 1950s, when the nation also carried a heavy debt load, though not altogether as heavy as today. Inflation shot up during the Korean War and then settled into about a two percent range for the rest of the decade. The wage-price spiral took off in the mid-‘Sixties, with repeated red and blue peaks spiraling upward until Paul Volcker snuffed out the big inflation in 1982.
Given that the massive Baby Boom generation remembers the Vietnam War and its inflation, and are trembling in their boots about having enough money for retirement, any hot war breaking out now might reignite a wage-price spiral quickly. With chaos abroad, the greenback would still look good as a reserve currency for a while. The Fed might tolerate a ~5 percent inflation for a few years in the interests of debt reduction and household balance sheet “rebuilding.” It helps to have a hot war to get an inflation going.
My inference: the U.S. economic situation promotes “war-seeking,” if we follow the old patterns of realpolitick. But there is no lasting reward following this path.
George Washington wrote: “I do not mean to exclude altogether the idea of patriotism. I know it exists, and I know it has done much in the present contest. But I will venture to assert, that a great and lasting war can never be supported on this principle alone. It must be aided by a prospect of interest, or some reward.”
Triggering an inflation might well destabilize the entire Bretton Woods fiat money system, and create a much worse situation than a “limited” war—a bigger war.
George Friedman of Stratfor.com, a well-informed hawk and follower of realpolitick, says we are squandering our treasure in Afghanistan. I agree. Let’s get out before it spreads out of control and triggers an inflation.
(thanks to Ted R. for challenging me to clarify this)
A war would be beneficial to the US if it destroyed potential economic competitors (this happened in WWII) or acquired natural resources such as oil. If it doesn't, then it is just a waste of time and effort. War also benefits countries who weren't harmed by it (for example Sweden after WWII and the US (besides Pearl Harbor, the US wasn't significantly harmed))
ReplyDeleteThe war in Afghanistan doesn't seem to destroy any economic competition.
@Aki_Izayoi ... Wow, I'll pretend you didn't say that.
ReplyDeleteAs for the war mongering- I don't see the economic correlation. The relationship of employment and inflation doesn't necessarily have an effect on American bellicosity.
Plus there are too many other wars where such correlation has not been observed.
The war-seeking behavior mention is merely in refrence to the myth of wars bring america out of depressions. Which we all seems to think is true but there is little evidence.
I didn't say anything advocating war... or giving war itself a positive normative light. I said war would be beneficial to the US under certain circumstances. If war is beneficial to the US, that doesn't make it morally right.
ReplyDeleteI just said that it would be unlikely to benefit the US. WWII benefit the US because it wasn't harmed in the war (its infrastructure at least) and it destroyed economic competitors such as Germany and Japan. (Also, world socialism isolated portions of the world and restricted the supply of labor in the global labor market.) Wars like the Vietnam War and the current Middle East campaign do not destroy economic competitors nor have any geopolitical consequences that would reduce the supply of labor in the labor market.
War is not in the best interest of the US now. I do not know any adversary that would provide such benefits. Maybe China if that was destroyed. Again, I am not taking about the morality of war.
War and inflation have been associated throughout history.
ReplyDeleteWars happen when nations fail at peace. I persist in believing humankind can get over that. Steven Pinker has found that human violence now is actually very low by historical standards. See his talk at http://www.ted.com/talks/steven_pinker_on_the_myth_of_violence.html