Let Them Eat Cake

As the Bureau of Labor Statistics reported its June 2011 employment data, I found myself nodding off in complete boredom as the pundits and economists recoiled in now predictable shock. Their much heralded recovery, it seems, was neither heralded or a recovery. Rather it was Mary Poppins-esque, you know, “if you say it loud enough, you almost sound precocious.” And yes, the several-week run up in stocks that we’ve seen is, well, in a word, a fattening for the coming slaughter. There is no data on any front that suggests that U.S. equities - save the defense industry - are ideally situated to weather the reckoning but, alas, we’re heading for a most intriguing convergence. As I have stated on several occasions, with all the haranguing about the debt ceiling, we seem to be overlooking the fact that, once issued, we need to have a buyer for the debt. There’s no question that the shuffling of a few trillion in assets in late July or early August is going to trigger another sweep by the keepers of the house as the giant roulette wheel of sovereign default continues its frenetic dervish impression.

I was intrigued by the acquiescence to national security-inspired socialism represented by the ‘no big government’ advocates who had nary a whimper when, this week, they passed the Defense budget which, for those of you who didn’t read it, is organized around the following four themes: 1) taking care of people; 2) rebalancing and enhancing military capabilities; 3) efficiencies and reforms; and 4) supporting our deployed troops. While even the most casual observer realizes that much of this $650 billion budget goes to fund pensions and health care (uh oh, sounds like pesky entitlements to me) while another significant component goes to supporting employment in key conservative Congressional districts (can anyone say ‘pork’?), it is somewhat ironic to see this budget for our ‘security’ when put in the context of the present and future enemies we seek to defend against.

With the migration of our campaign against ‘terror’ moving eastward with all eyes now on Pakistan, we are confronted with the recognition that, according to the most aggressive estimates, including all Saudi, Pakistani ISI, U.S. CIA and other covert support from the late 1990s to the mid-2000s, our official ‘terror’ enemies have a budget between $2.5 and $3.0 billion. Pakistan’s total budget – spent in part with U.S. defense contractors – is about $6.4 billion. Iran’s budget estimated at slightly over $8 billion (not including the contingent funds they may have on reserve to purchase nuclear devices from Pakistan or other armed states) is in line with other regional defense allocations. Rounding out the all Bush-proclaimed Axis of Evil states, we’re looking at a total combined threat of less than $30 billion. And in spite of our willingness to out spend our enemies by 20 times, we still seem to be philosophically and actually losing our campaigns.

To put our $650 billion in context, the People’s Republic of China’s budget is just over $100 billion with France ($62 billion), the United Kingdom ($57 billion) and Russia ($52 billion) rounding out the top five. In point of fact, if you take the top 20 nations ranked by military expenditure, the U.S. accounts for 51% of the total global budgeted defense expenditure. And, our defense industry contractors, subsidized as they are by a very generous Congress and White House, supply a considerable amount of the defense hardware and systems for the top twenty nations’ militaries. So I was particularly intrigued to see that, in the face of protected government concessions insuring their on-going profitability, the defense industry has actually been one of the top employment terminators for the 6 months ending in June. According to the Challenger, Gray & Christmas report, the defense industry has been the third most job-cutting trailing only the government/non-profit, and retail sectors.

Among the G-20, there’s no question that military expenditures have been a significant component of the economic engine in modern economies. In the past two hundred years, the largest spikes in economic activity have included expansion of defense spending. However, there is a growing chasm of uncertainty around what is happening as we see Timothy Geithner’s August 2 looming on the horizon.

One of the last times the world saw conflict-fueled indebtedness at current scale was the Napoleonic Wars. France and Great Britain took economically divergent paths to fund their campaigns with far-reaching consequences. While both France and Great Britain went deeply into debt to fund their conflicts, Great Britain’s willingness to impose austerity and tax increases, combined with their commitment to maintaining a metal standard currency, made their debt a desirable investment at home and abroad. In contrast, France’s profligate indebtedness combined with its revolutionary ‘tea-party-like’ revulsion to taxes, put its debt in dubious desirability and, in the end, resulted in greater taxation and ultimate sovereign bankruptcy.

Where does this all come together? Well, for starters, we need to understand that the fiscal conservatism which seeks to achieve financial controls with the reduction of social programs while continuing to debt-finance ‘national security’ at a rate that is ten fold greater than the sum of all of our present and contemplated foes is, in a word, disingenuous. The notion that we can stabilize our war-thirsty budget without revenue increases has, as its historical justification, Napoleonic logic. Who would have thought that our Tea Party friends would be so 19th century French? On, or about August 2, 2011, the only winners will be those who fate and ignorance have protected. However, their win will be short-lived. The very dollars they seek to control will, shortly after the 2nd, erode in value and, in the end, their role in distracting fiscal discipline may lead the public to conclude that our fears made us less secure. Congress and the White House have looked at the American people and said, “Let them eat bullets.” That’s likely to be as popular as it was for Louis XVI and his lovely bride, Marie. And, after our current monarchists have been disarticulated, our economy will be well-suited for Napoleon and his economic genius. Here’s a thought. Let’s wake up and care BEFORE this happens!