Site Presented By
Saturday, Jul 11, 2009
Historically, war causes inflation. The Bush administration's myopic deficit spending will only make matters worse.
Apr 20, 2004 | Well, it may be that the laws of economics remain in force. And one of them says: War causes inflation.
Every major war in the past century brought inflation to some degree. And so did two upheavals in the Middle East, the Yom Kippur War of 1973 and the Iranian Revolution of 1979, which did not directly involve the United States, except through their effect on the price of oil. Why is this so? The big reason is that wars must be paid for, somehow. They require resources that civilians would otherwise use. Those resources must be diverted to the war effort. Usually, inflation is the easiest way. World War I was largely financed by inflation, and so were the Revolutionary and Civil Wars before that. So, though on a smaller scale, was Vietnam.
Inflation applies the law of the jungle to war finance. Prices and profits rise, wages and their purchasing power fall. Thugs, profiteers and the well connected get rich. Working people and the poor make out as they can. Savings erode, through the unseen mechanism of the "inflation tax" -- meaning that the government runs a big deficit in nominal terms, but a smaller one when inflation is factored in. GNP rises with the national debt, but living standards do not.
Are we seeing the start of this once again? It is too early to tell for sure. At only about 1 percent of GDP, the Iraq war remains small so far. (However, one might add another percent or so for military spending increases not directly related to Iraq. Notably, these include President Bush's ballistic missile defense -- militarily useless but sure to absorb construction materials on a tight market.)
In March, the Consumer Price Index hit 7.4 percent at an annual rate, up from only 1.4 percent over the previous year. No doubt there will be ups and downs in the months ahead. But one may well fear that a general trend toward higher inflation lies ahead. And this is true even if (as seems likely) there is no general wartime boom. That is partly because in a global economy even small price effects can be magnified in several ways, some of which we are now seeing. Here's why.
First, oil and gas prices -- a fundamental price in our economy -- are already high and still likely to rise. With gasoline averaging $1.80 around the country and hitting $2.49 at the hottest spots, transportation costs for all commodities are rising too. With oil at $37 per barrel -- up $10 in the past six months -- fertilizer and therefore food costs will be affected in the months ahead. Yes, as Bob Woodward reports in his new book, "Plan of Attack," the Saudis may try to rescue Bush by cutting prices this summer -- a feel-good gesture. And after the election, what do you think will happen?
Next, we find that inflation is breaking out in China -- a consequence of that country's boom and rising demand for oil, steel and other commodities it must purchase on the global market. There will be pass-through to the price of Chinese imports to the United States. So there goes the major brake on inflation in the prices of our manufactured goods, something American consumers have benefited from for many years.
