A Brief Diversion

I’ve written extensively on topics concerning the US economy over the past several weeks. Today I’d like to step off of that path for a little side trip. If we stipulate, for the sake of this argument, that the US economy is going to suffer an irreversible decline, then what would be the potential effects in the world? For a moment I’m going to think some great thoughts.

First of all, as I believe I’ve shown already, the US dollar would cease to be the global reserve currency. That means that the nations of the world will do business with each other by exchanging some currency other than the US dollar. That is easy to say, but what exactly would that mean to the average American? Initially the US economy would follow a path that could be described as “inertial”. That is, what is in motion will try to stay in motion. So we’d continue to consume, as individuals, and we’d continue to spend, as a nation, as though we had all the money we wanted. But eventually we’d come to recognize that the US dollar wasn’t getting the proper respect we think it deserves. Oil from the Middle East will cost more than it used to. Trinkets from China will cost more than they used to. Cars from Japan will cost more than they used to. The world will be less and less eager to accept US dollars in exchange for the tangible goods and services that it has to offer. Of course, this leads to price inflation in the US. It leads to higher interest rates on US government debt. The US economy, 70% dependent upon consumerism, will slow down even further. Tax revenues will drop. The deficit will grow. It is a vicious cycle that reinforces itself. There will be tremendous political pressure on the US government to mitigate the impact of these negative forces. Not only that, the current administration has the mindset that it can, and should, try to mitigate these “bad things”. So things will continue to get worse, for awhile. Nevertheless, reality will set in.

At some point, however, the US government will be forced to acknowledge that they must reign in spending. More accurately, they will discover that they must reduce the magnitude of the deficit spending. The first step will be to increase taxes, because they are ideologically unable to reduce spending. But higher taxes, along with the global economic changes that are outside of their control will eventually force them to abandon massive social spending, and we’ll eventually see a federal budget that is lower, year-over-year. By the time we get to that point it will be far too late.

One of the areas of the federal budget that I expect will see the most active trimming will be in defense. In fact, I believe we’ll see real defense budget declines from the start. It won’t have to wait until the crisis hits. But I don’t see the defense budget going to zero. I do see the budget shifting away from deployment, away from production, away from an active military. I expect that we’ll continue to spend on R & D. Think about it (that is what this is all about, after all). Congress will resist any decrease in spending that will impact their district. At the same time, the administration will recognize that defense dollars are just about the last federal spending category that creates high-value US jobs (you know, the ones that result in tax payers). There are literally millions of tax-paying workers that are supported by the US defense budget. So I do not expect the defense spending to go to zero. I do expect to see fewer and fewer programs transition into production (production is threatening, R & D isn’t). I do expect to see less and less US troop deployments around the world. I do expect to see more and more US troops pulled back from foreign stations.

These things will happen because of economic necessity and because they are in perfect alignment with the ideological leanings of the current administration. This is the closest we’ll come to a sure thing. But what will it mean, globally? That answer will have to wait until my next posting.