Business Spectator 7:11 AM Feb 29, 2008. Commentary by: Alan Kohler
A new book by Joseph Stiglitz, the Nobel-prize winning economist and former chief economist of the World Bank, makes a persuasive case that the credit crisis and US economic downturn is, at heart, a result of the Iraq war.
Stiglitz, and co-author Linda Bilmes, have estimated the cost of the war at $3 trillion – more than 50 times the original estimate.
They point out that most of this money has been borrowed, since President George W Bush cut taxes at the same time, and assert that it was the hidden cause of the credit crisis because the Alan Greenspan Federal Reserve colluded with the Bush Administration by flooding the US with cheap credit to keep interest rates down.
Stiglitz and Bilmes, whose book is called The Three Trillion Dollar War, argue that as a result of the cost of the war, “Greenspan looked the other way as lending standards were lowered, thereby encouraging households to borrow more – and spend more.”
And whatever the purpose of the war, cheap oil has not been the result. During the five years that Iraq has been going on, the price of oil has climbed from $US25 a barrel to $US100.
From calculations based on the futures market, Stiglitz and Bilmes conclude that a “significant proportion” of this rise is directly due to the disruptions and instabilities caused by the war in Iraq.
The US imports about five billion barrels of oil a year, so the price rise has cost the US an extra $US25 billion; projected to 2015 that adds, according to Stiglitz and Bilmes, $US1.6 trillion in cost to the US economy. Against this the recent $US125 billion Bush stimulus package is a “drop in the bucket”.
The authors detail astounding waste and cost in Iraq. For example a contractor working as a security guard gets about $US400,000 a year, as opposed to a soldier who gets about $US40,000.
Then there’s the Bush Administration’s insistence on “sole source bidding” rather than tenders, which led to Halliburton Inc receiving $US19.3 billion in single-source contracts. US Vice President Dick Cheney had been an executive of that company and in 2004 received “deferred compensation” including stock options.
Daily military operations have already cost more than the 12-year-long Vietnam War and twice as much as the Korean War. The US is spending the entire annual budget of the United Nations ($US16 billion) every month on running costs alone.
In a speech yesterday to the London think tank, Chatham House, to promote the book, Stiglitz pointed out that when the war began the then chief economic adviser, Larry Lindsey, said it would cost between $US100 billion and $US200 billion.
“For that piece of quasi-honesty he was fired. (Then defence secretary Donald) Rumsfeld responded and said ‘baloney’. The number the administration came up with was $US50 to $US60 billion.”
Stiglitz’ and Bilmes’ estimate of $US3 trillion includes long term healthcare and social benefits for injured servicemen. “The ratio of injuries to fatalities in a normal war is 2:1. In this war they admitted to 7:1 but a true number is something like 15:1,” Stiglitz says.
About 100,000 returned soldiers have been diagnosed with serious psychological problems; the ones who have done the most tours of duty have not yet returned.
By 2017, the interest America will have paid on the money borrowed (largely from China) to finance the war, will total $US1 trillion.
So according to Stiglitz and Bilmes the legacy of the Iraq war is an American Government so bankrupt it cannot bail out its own banks – banks like Citibank that are now in trouble having lent too much during the Greenspan credit explosion that followed the war.
It is relying upon China and the Middle Eastern oil exporters to recapitalise the banks, and to finance the Federal budget deficit as well as finance the national current account deficit.
As a direct result of this the US is now subject to a classic capital flight, with increasing strains on the balance of payments. The dollar is falling (it is now at a record low against the euro), bond yields are rising (ie bond prices are weak) with a steepening yield curve, despite a weakening economy.
That’s because the falling dollar and rising commodity prices – especially oil – is having the perverse effect of increasing inflation at the same time as the economy weakens (stagflation).
So in the fifth year of the US$3 trillion Iraq war, America is in grip of large-scale deleveraging and credit retrenchment, combined with a capital flight that is exacerbating its balance of payments deficit, increasing inflation and devaluing the currency.
The tragedy is that there were no weapons of mass destruction. Meanwhile the Iraqi economy has also been ruined.
In their book, Stiglitz and Bilmes list what just one of those three trillions could have paid for: eight million housing units, or 15 million public school teachers, or healthcare for 530 million children for a year, or scholarships to university for 43 million students. The $US3 trillion could have fixed America’s social security problem for half a century.
Stiglitz points out that America is currently spending $5 billion a year in Africa, and worrying about being outflanked by China there: “Five billion dollars is roughly 10 days’ fighting.”
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