The 2008-09 financial crisis was a warning Washington has not heeded. We have continued in our profligate ways, increasing our federal deficit and national debt. Far from bringing back Glass-Steagal and adding new measures to keep banks from pursuing risky business, we have de-regulated them while offering new incentives for moral hazard. Seemingly secure in the knowledge they can buy enough Members of Congress to privatize profits while socializing losses, banks and other financial companies are doing everything that brought on the previous crisis. The party is still roaring, the champagne is flowing, and everybody is still wearing a lampshade. But in the east, the sky is beginning to brighten.
The Big One is coming, and I think soon. What is the Big One? An international debt crisis. When it hits, everything will change, including for the Department of Defense. DoD will no longer have spare trillions to throw around.
History has seen debt crises many times, and they follow a similar course. First, lenders start to worry that a state’s ever-increasing debt may not get paid back. That leads them to demand higher rates of interest. As interest rates rise (and no, the Fed does not control long term rates), so does the percentage of the state’s budget that goes to paying the interest. Soon, the state finds itself borrowing money to pay the interest on money it borrowed earlier. That makes lenders really nervous and rates rise to the point where the state cannot afford to borrow more (or lenders simply refuse to lend). At that point, the state does not have enough money to pay its obligations: not only interest on the existing debt, but the salaries of its employees, including the military, pensions, welfare payments, the cost of whatever it is procuring, and so on. The cupboard is bare, and the state is in the grip of a full-fledged debt crisis.
For the U.S. military, which at present requires enormous financial inputs for not much output — we should be able to buy failures for less than a trillion dollars a year — everything will change. The vast armies of contractors and DoD civilians will have to go. Expensive procurement programs will be terminated. Force structure will shrink — and the bureaucracy will seek to save itself by cutting what few actual fighters we have. So enormous has that bureaucracy become that we could find ourselves with a “military” that has hundreds of thousands of people but no combat forces whatsoever. If you think that can’t happen, take a look at Europe’s militaries today, including the Bundeswehr.
A state has two ways out of a debt crisis (kings had a third way, repudiating the debt, but republics find that difficult). The first is to cut expenditures until they are below tax revenues and use the surplus to start paying back the debt. If you want to see what that brings, look at Greece. The other way, assuming a state has its own currency (Greece does not; it’s on the Euro), is to inflate that currency and pay the debt back in worthless paper money. Which way is easier in a democracy? Obviously, inflation, so that’s what we will get. Inflation soon becomes hyperinflation and the middle class, or what is left of it, is wiped out.
States and individuals living above their incomes are not just an American phenomenon. I think the international debt crisis is less likely to begin here than in China or even Europe. But wherever it starts, it will hit here too, and quickly. In 2008, we were within hours of, as Fed Chairman Ben Bernanke put it, “not having an economy” as all lending abruptly stopped. Since we did not heed the warning, this time that will happen. Overnight, we will find ourselves in a world depression. Economists will say you cannot simultaneously have inflation and depression, but that is as disconnected from reality as most of what economists tell you. Look at Venezuela.
Now take a new Great Depression, hyperinflation, and a complete loss of what legitimacy Washington still possesses and add in the fracturing of America we already see on religious, cultural, and racial lines. What do you get? Fourth Generation war, here — the worst possible outcome. If you want to see what that looks like, read Thomas Hobbes’ new book, Victoria.