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The Ominous Message in 2 Centuries of Global Public Finances | CYNICONOMICS

The Ominous Message in 2 Centuries of Global Public Finances | CYNICONOMICS.

Posted on February 26, 2014 by ffwiley

After our recent article showing the history of non-defense budget balances for large, developed countries, some readers wondered how our results might change with defense spending included.

Here’s a new chart showing total budget balances:

 

fiscal balance with defense

As in the first chart, we started in 1816 with four countries (the U.S., U.K., France and Netherlands) and then added seven more at different points in time, while weighting each country by its GDP. (Click here for data sources and more details.)

New chart, same story

The message is basically the same, regardless of whether you isolate non-defense budget balances as in the earlier chart or look at total balances as above.

That is, current fiscal risks are unlike any the world has ever seen.

Echoing our thoughts from the earlier post:

The [growing deficits of the past 50 years] suggest that we’ve never been in a predicament comparable to today. Essentially, the world’s developed countries are following the same path that’s failed, time and again, in chronically insolvent nations of the developing world.

Look at it this way: the chart shows that we’ve turned the economic development process inside out. Ideally, advanced economies would stick to the disciplined financial practices that helped make them strong between the early-19th and mid-20th centuries, while emerging economies would “catch up” by building similar track records. Instead, advanced economies are catching down and threatening to throw the entire world into the kind of recurring crisis mode to which you’re accustomed if you live in, say, Buenos Aires.

The diminishing ability of wars to explain public finances

The new chart shows more clearly how the purposes of public borrowing have evolved. In the 19th and early-20th centuries, governments borrowed mostly to fund wars. In fact, any military history is incomplete without consideration of warring nations’ access to capital. You can argue that government borrowing not only enables wars, but that the ability to borrow heavily is a major determinant of whether your army wins or loses, more important in many cases than military prowess.

(Niall Ferguson claims exactly this in his bestseller, The Ascent of Money: A Financial History of the World

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. Are you interested in the Napoleonic Wars, U.S. Civil War and World War 1 – three periods of significant public borrowing as shown in the chart? Ferguson links the ultimate outcomes of each of these wars to the victors’ superior access to government bond investors.) 

Fast forward to today, and deficits have broken free of the costs of tanks, bombs and warplanes. Considering current public finances, it’s hard to imagine another widespread war that doesn’t lead to financial mayhem. A surge in military spending would surely end any hopes that large, developed nations won’t eventually be forced into defaults and/or wealth confiscation.

Worse still, it’s looking more and more as though we’re headed for disaster even without a future spike in military spending. The risks of a severe fiscal crisis are obvious in our earlier chart showing non-defense budget balances, and they’re just as apparent with defense spending added back in.

Bonus chart

The chart below separates budget balances into two pieces – the non-defense portion (as in the earlier post) and defense spending. We’ll add more detail in the future, including a country-by-country breakdown of the underlying data.

fiscal balance ex-defense 2

The Ominous Message in 2 Centuries of Global Public Finances | CYNICONOMICS

The Ominous Message in 2 Centuries of Global Public Finances | CYNICONOMICS.

Posted on February 26, 2014 by ffwiley

After our recent article showing the history of non-defense budget balances for large, developed countries, some readers wondered how our results might change with defense spending included.

Here’s a new chart showing total budget balances:

 

fiscal balance with defense

As in the first chart, we started in 1816 with four countries (the U.S., U.K., France and Netherlands) and then added seven more at different points in time, while weighting each country by its GDP. (Click here for data sources and more details.)

New chart, same story

The message is basically the same, regardless of whether you isolate non-defense budget balances as in the earlier chart or look at total balances as above.

That is, current fiscal risks are unlike any the world has ever seen.

Echoing our thoughts from the earlier post:

The [growing deficits of the past 50 years] suggest that we’ve never been in a predicament comparable to today. Essentially, the world’s developed countries are following the same path that’s failed, time and again, in chronically insolvent nations of the developing world.

Look at it this way: the chart shows that we’ve turned the economic development process inside out. Ideally, advanced economies would stick to the disciplined financial practices that helped make them strong between the early-19th and mid-20th centuries, while emerging economies would “catch up” by building similar track records. Instead, advanced economies are catching down and threatening to throw the entire world into the kind of recurring crisis mode to which you’re accustomed if you live in, say, Buenos Aires.

The diminishing ability of wars to explain public finances

The new chart shows more clearly how the purposes of public borrowing have evolved. In the 19th and early-20th centuries, governments borrowed mostly to fund wars. In fact, any military history is incomplete without consideration of warring nations’ access to capital. You can argue that government borrowing not only enables wars, but that the ability to borrow heavily is a major determinant of whether your army wins or loses, more important in many cases than military prowess.

(Niall Ferguson claims exactly this in his bestseller, The Ascent of Money: A Financial History of the World

img

img

. Are you interested in the Napoleonic Wars, U.S. Civil War and World War 1 – three periods of significant public borrowing as shown in the chart? Ferguson links the ultimate outcomes of each of these wars to the victors’ superior access to government bond investors.) 

Fast forward to today, and deficits have broken free of the costs of tanks, bombs and warplanes. Considering current public finances, it’s hard to imagine another widespread war that doesn’t lead to financial mayhem. A surge in military spending would surely end any hopes that large, developed nations won’t eventually be forced into defaults and/or wealth confiscation.

Worse still, it’s looking more and more as though we’re headed for disaster even without a future spike in military spending. The risks of a severe fiscal crisis are obvious in our earlier chart showing non-defense budget balances, and they’re just as apparent with defense spending added back in.

Bonus chart

The chart below separates budget balances into two pieces – the non-defense portion (as in the earlier post) and defense spending. We’ll add more detail in the future, including a country-by-country breakdown of the underlying data.

fiscal balance ex-defense 2

Global Defense Spending to Grow After Years of Decline – Bloomberg

Global Defense Spending to Grow After Years of Decline – Bloomberg.

Photographer: Julian Abram Wainwright/Bloomberg

The U.S. remained the top spender last year, at an estimated $582.4 billion, followed… Read More

Defense spending globally will increase this year for the first time since 2009 military budgets surge in Russia, Asia and the Middle East, according to an annual defense budget review by IHS Jane’s.

Four of the five fastest-growing defense markets last year were in the Middle East, the study found, according to a statement by the company. The defense budgets of Russia and China combined will exceed total defense spending of the European Union by 2015.

“Russia, Asia and the Middle East will provide the impetus behind the growth in global military spending expected this year and will drive the recovery projected from 2016 onwards,” Paul Burton, director of IHS Jane’s Aerospace, Defence and Security, said in the statement.

Russia, which is projected to increase defense spending by more than 44 percent in the next three years, now ranks as the third-largest military spender, pushing the U.K. into fourth place, the study showed.

The U.S. remained the top spender last year, at an estimated $582.4 billion, followed by China, with $139.2 billion. Russia spent $68.9 billion.

No region has seen a faster surge in defense spending than the Middle East, where Oman and Saudi Arabia have increased their military budgets by more than 30 percent in the last two years, the study said. Saudi Arabia’s budget has tripled in 10 years.

“We have seen a rapid acceleration of defense spending in the Middle East since 2011,” said Fenella McGerty, a senior IHS analyst, in the statement.

China’s Spending

China, already the No. 2 spender, will spend more than the U.K., France and Germany combined by 2015, McGerty said. China is forecast to spend $159.6 billion that year, compared with $149 billion for the three largest markets in Western Europe.

Total global defense spending this year is projected to reach $1.547 trillion, a 0.6 percent increase from last year’s $1.538 trillion, after adjusting for inflation, the study said.

That increase is the first since 2009.

“The decline in global defense spending over the past five years or so has been heavily influenced by the decline of the U.S. defense budget,” which was cut as part of the drawdown from the Iraq and Afghanistan wars, said Guy Eastman, a senior analyst.

“Combined with decreases in Western Europe, the portion of global defense represented by the West has and will continue to decrease over the near term,” Eastman said in the company statement.

U.S. Contractors

Major U.S. defense contractors, including Lockheed Martin Corp. (LMT), Boeing Co., Northrop Grumman Corp. (NOC) and Raytheon Co., are expecting to increase their international sales — especially to the Middle East — for everything from jet fighters to missile defense, said Kevin Brancato, a Bloomberg Government defense analyst.

Even so, the global market for these companies may be unchanged or decline slightly this year, particularly if Russia and China are driving the overall growth, Brancato said.

The study also identified long-term opportunities for defense companies in sub-Saharan Africa, where military spending rose by 18 percent last year. Angola’s spending grew 39 percent last year.

While the African market is expanding, “it still accounts for less than 2 percent of defense spending globally, so growth will need to continue in order for more opportunities to arise in the long term,” McGerty said.

IHS Jane’s is part of IHS Inc. (IHS), based in Englewood, Colorado.

To contact the reporter on this story: David Lerman in Washington at dlerman1@bloomberg.net

To contact the editor responsible for this story: John Walcott at jwalcott9@bloomberg.net

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