Even the most strident hawks in Washington could not have anticipated the stunning costs of the wars in Iraq and Afghanistan. They have cost American taxpayers more than $314 billion so far, to the extent that the Bush administration’s open-ended commitment has raised concerns, even among war supporters.
At the rate the United States is spending, the military campaigns could become the most expensive operations in the past 60 years, far exceeding the costs of the Korean and Vietnam conflicts. One nonpartisan Washington think-tank estimates that the cost of the war in Iraq could exceed $700 billion – a remarkable sum considering that polls show that a majority of Americans believe that the war wasn’t worth starting and feel that they are no safer today than they were before September 11, 2001. Such mind-numbing spending on a scenario with no discernible exit strategy is all the more troublesome because it has occurred outside the normal budget process, with a series of pay-as-you-go supplementary appropriations. The stealth-funding approach has come without comparable reductions in other government programs, thus saddling the country with an enormous debt burden that exceeded more than $400 billion last year. President George W. Bush’s recent efforts to sell the war to the American people have never been accompanied by solid fiscal policy. The Congressional Budget Office estimated three years ago that the wars would cost between $1.5 billion to $4 billion per month, when in fact the campaigns are costing up to $8 billion per month. Given that the astonishing spending levels have done little to curb the insurgency that has claimed the lives of 1,763 US soldiers and wounded more than 13,000, it’s no wonder that many lawmakers in Washington are questioning whether the cost of these wars has grown too high. Republican Senator Chuck Hagel of Nebraska has termed the military spending priorities as “dangerously irresponsible.” That’s the only reasonable response to a war policy that lacks a coherent plan for bringing stability to Iraq.
At least the Bush administration should be forthright enough to include the cost of the Iraq mission in the budget. What is disturbing about the overreach of the US, aside from its unilateral and destructive policies, is that it may be a symptom of a nation, which no longer has the means to accomplish its objectives, however noble they may be deemed.
Problems ahead
Empires collapse usually due to a combination of military overreach and economic weakness, and judged by these criteria, many believe the US to be heading for a fall. Washington’s occupation of Iraq has been a disaster. Even after two years, the US Military has failed to subdue the Iraqi resistance. The war, more and more, seems “unwinnable.”
Developments on the economic front are even more dangerous for the US. Its power rests on two main pillars: firstly, military superiority, and secondly, the role of the dollar as the world’s reserve currency. Iraq is making a mockery out of the first, and the second is in jeopardy. America’s massive trade and budget deficits ($630 billion and $500 billion respectively) are driving down the dollar to such an extent that its status as the global reserve currency is imperiled. Since world trade is largely conducted in US currency, most countries have to export goods and services in order to earn these dollars, but all the US has to do is print more dollars. As economist James K. Galbraith has explained: “[The US gets] real goods and services, the product of hard labor by people much poorer than ourselves, in return for chits that require no effort to produce.”
The purchase of massive amounts of dollars by the rest of the world allows Washington to borrow cheaply, keep interest rates low, and run up a trade deficit that no other country could get away with. The world thus pays for US over-consumption and underproduction, as well as its wars. This arrangement, as economist Andre Gunder Frank has put it, is “a global confidence racket,” or a racket that can continue as long as other countries keep on buying dollar assets such as US Treasury Bills, thus financing Washington’s enormous deficits.
The global move away from the dollar portends economic devastation for the US. Stephen Roach, chief economist at Morgan Stanley, one of the world’s leading investor firms, has told clients that the US does not have more than a 10% chance of avoiding “economic Armageddon.” He points out that the $2.6 billion the US has to import every day to finance its trade deficit constitutes an incredible 80% of the world’s net savings. Obviously it’s an unsustainable situation. According to Roach, the dollar will keep falling due to America’s record trade deficit. To attract foreign capital and check inflation, the Federal Reserve Board’s chairman, Alan Greenspan, will be forced “to raise interest rates further and faster than he wants.” US consumers, already deep in debt, “will get pounded.” The record US household debt is now equal to 85% of the economy [the US national debt is $7.7 trillion, while total US debt is an unfathomable $43 trillion]. Americans already spend a record proportion of their income on interest payments, and interest rates have not even substantially increased yet. Thus the stage appears set for massive national bankruptcy.
Former Federal Reserve Chairman Paul Volcker has put the likelihood of a financial disaster at 75%, while the US comptroller-general (head auditor), David Walker, “makes no bones about the fact that the situation is dire.” For Martin Wolf, associate editor of the Financial Times, “the US is now on the comfortable path to ruin. It is being driven along a road of ever-rising deficits and debt … that risk destroying the country’s credit and the global role of its currency.” Paul Krugman, economics professor at Princeton University who writes a column for The New York Times, said: “We’ve become a banana republic … If you ask the question, ‘do we look like Argentina?’ The answer is: ‘a whole lot more than anyone is willing to admit at this point.’” Argentina defaulted on $100 billion of debt in 2001, with catastrophic effects: its currency plunged and the economy collapsed, bankrupting thousands of businesses within weeks. National income plummeted by 67%, pushing half the population below the poverty line.
The weakness of the dollar and the huge deficits are symptoms of the decline of US manufacturing. “Americans don’t produce enough and don’t save enough,” said Schiff. US manufacturing is only 13% of GDP and, according to Roach, “manufacturing employment currently stands at only about 13% of the US’ private non-farm workforce – down sharply from 23% … in the mid-1980s.” Since 2000, the US has lost close to three million manufacturing jobs. Between 1989 and 2004, the US savings rate fell from 6% to 1%. Foreigners now produce most of the goods Americans are consuming and lend Washington the money to buy these goods, leading to skyrocketing deficits.
American companies clear out
An important factor behind the manufacturing decline is the abandonment of the US by its own corporations, many of which have relocated operations to Asia from where they export to the US. John Chambers, chairman of Cisco, said recently: “What we’re trying to do is outline an entire strategy of becoming a Chinese company.” Cisco is the leading US supplier of networking equipment for the internet. The company manufactures $5 billion worth of products in China, where it employs 10,000 people.
In fact, the US economy has been in decline for more than three decades, accounting for a plummeting share of world economic output. The first dollar crisis occurred at the end of the 1960s when then US President Lyndon Johnson’s escalation of the Vietnam War led to increasing public deficits. This coincided with the rise of Western Europe and Asia as strong exporters, to whom Washington lost its manufacturing lead. To retain its global domination, the US then depended on its military superiority and the dollar’s role as the world’s reserve currency.
As America’s deficits rose due to the Vietnam War, France demanded gold in exchange for the dollars it held, since at the time the greenback was backed by Washington’s gold reserves. Other countries followed suit and, as US gold reserves were drained, President Richard Nixon de-linked the dollar from gold and floated it against other currencies. This coincided with the oil crisis of the 1970s, when crude prices shot up 400%. Suddenly, oil became the most important traded resource, and Nixon linked the dollar to it. In June of 1974, US Secretary of State Henry Kissinger made a deal with Saudi Arabia (the biggest OPEC oil producer) stipulating that oil could only be bought in dollars. In return, the US agreed to militarily protect the Saudi regime. In 1975, OPEC (following the Saudi lead) officially agreed to sell oil only in dollars. The age of the petrodollar was thus born. As long as oil was traded in dollars, so would other goods, and the dollar would remain the world’s reserve currency. This arrangement allowed the US to continue its dominant imperial role despite its crucial economic weakness: the inability to compete with the European and Asian countries in manufacturing and export capacity. But now America’s position became highly vulnerable to the whims of the oil-producing countries and to the fate of the resource itself. The first challenge to the petrodollar system came with the Third World debt crisis.
Awash in petrodollars, Western banks loaned hundreds of billions of these to developing countries, which could not repay the loans when Washington raised interest rates to nearly 20% in 1979 to save the falling dollar. It was crucial for the future of the petrodollar system that this money be recycled back to the West, and so the US used the World Bank and IMF to ensure this would happen. The loans were repaid several times over (the payments continue), and the petrodollar system was saved, but at the cost of decimating Third World economies with structural adjustment programs that devastated their industry, employment, and health and education sectors.
America’s petrodollar hegemony “was based on ever-worsening economic decline in living standards across the world as IMF policies destroyed national economic growth.”
Downward spiral
The collapse of the dollar and that of the US economy could end America’s superpower status as Washington becomes incapable of financing a colossal military machine that currently occupies 725 bases around the world with 446,000 troops. Economic power will center on the European Union, China and India, which are already creating new global structures that exclude the US. These endeavors show that the U.S. is already, to some extent, a “has-been” global power whose desperate military aggression only makes it weaker on the world stage. As the Financial Times has explained: “A new world order is indeed emerging – but its architecture is being drafted in Asia and Europe at meetings to which the Americans have not been invited.” In contrast to Washington’s endless military ventures, Europe and China emphasize economic might as the main instrument of foreign policy. As Newsweek pointed out, “the strongest tool for both is access to huge markets.”
No single country has posed more of a challenge to Washington than China, which recently replaced the US as the leading consumer market in the world. Beijing has economically displaced the US all over Asia and is now doing so in the latter’s so-called back yard, Latin America. China is now Chile’s largest export market and Brazil’s second biggest trading partner.
In November 2004, Chinese President Hu Jintao went on a tour of Latin America and agreed to invest $30 billion in the region. Most importantly, China and Venezuela signed a bilateral energy pact in December 2004, under which the latter agreed to supply Beijing with 120,000 barrels of fuel oil a month. China pledged to invest in 15 Venezuelan oil fields. China has become the world’s second largest importer of oil after the US. Venezuela is America’s fourth largest oil supplier, and the deal with China cuts into one of Washington’s “few remaining relatively stable sources of crude.” China intends to make a similar move towards Canada, America’s biggest oil supplier. What can Washington do about such incursions into its “vital interests?” Not much, since Beijing could cripple the US economy simply by stopping its purchase of American Treasury Bills. If Bush continues on Napoleon’s imperial path, so the theory goes, America will follow the fate of Napoleon’s empire. Regardless of the Bush administration’s vainglory, the US cannot afford hundred-billion-dollar-a-year and protect itself as well. Eventually, financial reality will set in, and the US would have to withdraw from the Middle East or risk running into serious trouble.
