The Economics of the War on Terror

The cost of the global war on terror since the attacks of 9/11? Almost $4 trillion.

That’s almost half of what the U.S. has added in debt since 2001:


Without the war on terror, America’s national balance sheet would look much healthier.

So has it been worth it?

America’s free spending national security hawks, frothy at the mouth, might say yes.

But the deeper reality seems to be that terrorism is a relatively small — and some would say negligible — threat:

The chronic exaggeration of U.S. national security threats also extends to the security of individual Americans. Since 9/11, a total of 238 American citizens have died from terrorist attacks, or an average of 29 per year. To put that in some perspective, according to the Consumer Product Safety Commission, the average American is as likely to be crushed to death by televisions or furniture as they are to be killed by a terrorist. A recent study from Duke University found that, since 9/11, eleven Muslim Americans were involved in active terrorist plots in the United States, which killed thirty-three Americans. Over that same time period, there have been nearly 150,000 murders and over 300,000 suicides.

So should we declare war on people being crushed to death by televisions and furniture?

Most tellingly, from 1980 to 2005 only 6% of all terrorist events in the U.S. was Islamist in nature:

The spectacular imagery of 9/11 blinded American policymakers. Whether it was a case of guilt as a result of their failure in spite of the warnings to protect America, or whether it was that the events of 9/11 became an excuse to exercise preconceived (and in my view ill-conceived) foreign policy objectives, policymakers matched the spectacular image of 9/11 with an equally spectacular spending spree.

And yes — America has not been hit by a spectacular terrorist attack since. But it hadn’t really been hit by a spectacular terrorist attack before. 9/11 was  — whatever your wider view of the incident — a black swan event: high impact, and unprecedented. And the problem with black swan events is that very often they are not repeated, and so spending money to prevent future occurrences is more or less a waste of money.

America faces a whole swathe of real risks far far bigger than international terrorism including derivatives contagion, global trade fragility, climate instability, and electromagnetic pulses. We don’t know what the next calamitous black swan event will be. But I’m pretty sure that a whole boatload of money will be spent on preventing it after it has happened, just as trillions have been wasted on preventing jihadist terrorism after it has already done the damage.

And the biggest problem here is the spending. $4 trillion of productivity was wasted. Keynesian multipliers are irrelevant — the money would surely otherwise have still been spent, and on more productive and useful endeavours. That’s a pretty big opportunity cost.

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When Will it be Time to Bomb Iran?

Jeffrey Goldberg — having stated the case for war with Irandoubles back on himself:

The nuclear experts I respect most, including Bruce Blair, of Global Zero, and David Albright, of the Institute for Science and International Security, both call a Middle East in which Iran possesses a small number of nuclear weapons a dangerously unstable place. Here is what Albright told me Monday about Iran’s particular challenges in an escalating confrontation — the no second-strike conundrum: “In a crisis, you don’t want to go first, but you don’t want to go second, either. It ends up in an unstable situation. Miscalculations can result in nuclear weapons being used. Iran may feel it doesn’t have second-strike capability and so would, in an escalating crisis, feel it has to use what it has first.” Iran, he explained, will be hampered, for many years after it crosses the nuclear threshold (assuming it is allowed to cross), by a small arsenal of comparatively modest bombs.

The Israelis, on the other hand, have a much larger arsenal than the Iranians could hope for for many years, and much more varied and sophisticated delivery systems.

So, what to do? Not attack. There’s plenty of time for war. Right now, the focus should be on convincing Iran, through sanctions, and a promise, if it gives up its nuclear ambitions, to rejoin the international community. Will this work? Probably not, but it has to be pursued. Here’s Bruce Blair on the efficacy of a preemptive attack: “The liabilities of preemptive attack on Iran’s nuclear program vastly outweigh the benefits.”

That’s a nice turnaround. I am all for containment through diplomacy, although lukewarm on sanctions as they seem to punish the people for the actions of a government. But I think all the posturing about the possibility of a nuclear war in the middle east is fantasy. Let me absolutely clear: it is exceedingly unlikely Iran will initiate a nuclear strike — of any kind, either direct or via a terrorist proxy — while Israel retains a Second Strike capability. Why? Because doing so would necessitate the destruction of their civilisation.

All of that Israeli rhetoric about never permitting a second holocaust isn’t merely rhetoric. It’s backed by the fiercest of passions, the fiercest of intellectual traditions, and the weight of six million dead Jews, slaughtered in Eastern Europe during World War 2.

To quote Moshe Dayan:

Israel must be like a mad dog, too dangerous to bother. Our armed forces, are not the thirtieth strongest in the world, but rather the second or third. We have the capability to take the world down with us. And I can assure you that that will happen before Israel goes under.

That’s why Israel developed a Second Strike capability. Any middle eastern state that hits Israel will be obliterated by Israeli plutonium. It’s as simple as that, and Ahmadinejad knows it. Iran is not developing nuclear weapons as a tool of destruction. We have to look at the context; non-nuclear states like Libya and Iraq have been subject to Western-backed regime change, while far more brutal nuclear-armed dictatorships like North Korea have not. Simply, the Iranian theocracy is not pursuing nuclear arms to attack Israel, and thereby guarantee their destruction. They are pursuing nuclear arms to guarantee their survival.

If Israel were a defenceless nation, neoconservative hawks who wish to see Washingtonian intervention might have a stronger case. If a nuclear-armed second-strike-capable Iran were threatening to obliterate a non-nuclear Israel, Israel could truly claim that there was an existential threat to her. But back in reality, that is just not true.

Even Meir Dagan, the former head of Mossad recognises that Iran is not an existential threat to Israel.

From the Guardian:

Upon leaving his post, Dagan publicly warned against Israel attacking Iran to stop it from acquiring nuclear weapons.

In his latest comments, he said that if Israel attacks Iran, it will find itself at the centre of a regional war that would endanger the state’s existence. Dagan’s intervention is dangerous for Netanyahu because it comes from the right wing of Israeli opinion rather than the left, where the prime minister would expect criticism.

Dagan has been in charge of aggressive Israeli actions abroad in recent years, that have included assassinations in Lebanon, Syria and Dubai and an air attack on a suspected nuclear reactor in Syria. He also criticised Israel’s failure to offer any initiative to resolve the conflict with the Palestinians .

The absence of any workable plan, he said, will leave Israel in a dangerous and weak situation.

This really echoes my thinking: the real threat to Israel, and America is not inaction on Iran, but excessive force. Iran poses little threat, but military intervention to effect regime change in Tehran runs the risk of huge and widespread blowback throughout the Muslim world: terrorism, guerrilla warfare, and deeper intergovernmental hostility, a breakdown of regional trade, and even a wider land war involving Eurasian nations who wish to protect Iran, including China and Russia.

The real threat to world peace — and to Israel — is Western paranoia, leading to pre-emptive warfare. 

The Edge of Bankruptcy

We are like a man who used to be rich and is in the habit of paying for everybody’s meals and announces at a lavish dinner that he will pay the bill, only to then turn to the fellow sitting nearby and say, “Can I use your credit card? I will pay you back!”

— Ron Paul

I have in the past very briefly made the case for why it is not time to attack Iran:

The truth is that Iran (and more explicitly a strong and united Eurasia) is only a threat to America if America chooses to continue the absurd and destructive path of a world-dominating petrodollar superpower, dependent on foreign oil and resources, and with a foreign policy designed to (essentially) extort these things from the rest of the world.

Today, I want to go a little further: While — unlike some readers — I believe that Islamic terrorism is a real (though minor) threat, I believe that America’s neoconservative foreign policy is the greatest threat to American interests.

Neoconservatism holds that American and Western civilisation has a unique moral role in policing the world. That means military commitment, and very often war. That, in turn, means spending:


Spending has meant huge deb acquisition:

There are many historical antecedents of empires convinced of their own special role in history, and determined to impose it on the rest of the world by force. Look at Rome — driven into the ground by the cost of imperialism, and its “bread and circuses” welfare state.

A greater example still is Britain:

This graph is a tale of imperial overstretch, a tale of debt acquired by a colonial power playing world policeman, and trying to maintain the status quo.

Imperial Britain’s debt load hit its peak at the very point when its empire crumbled into the sand. This is not a co-incidence, and the good news for America is that once Britain ended its global role, growth soon returned, and Britain’s debt-to-GDP ratio fell back to a sustainable level.

Of course, America’s debt position might be more sustainable if she was still the world’s greatest industrial powerhouse. But she has instead exported much of her productivity to her hostile creditor, China:

The deindustrialisation of the West has allowed newly industrialised nations, especially China, to build up huge monetary wealth. This is a map showing the net of each nation’s reserves, minus external debt:


And neoconservatives continue to believe that America — dependent on foreign goods and resources, hugely indebted to hostile nations, and war fatigued — is somehow in a position to expand her empire, and to attack more countries?

Time to Attack Iran?

I have already completely debunked most of the hawkish arguments on attacking Iran:

Far from plunging the middle east into the throes of war, an Iranian nuclear weapon would stabilise the region under the shadow of mutually-assured destruction — the same force that stabilised relations between the Soviet Union and America. A middle east totally dominated by a nuclear-armed Israel ensures that Israel can drag its heels in reaching a lasting peace agreement with the Muslims. If Iran gets the bomb, they would finally come to the negotiating table as equals.

The big difference, though is that with Iraq there was no threat that any “liberal” interventionism would spill over into a wider regional war.

Of course, that hasn’t stopped the slavering “liberal” hawks from dreaming up more ill-conceived military interventions.

From Matthew Koenig of the CFR:

Skeptics of military action fail to appreciate the true danger that a nuclear-armed Iran would pose to U.S. interests in the Middle East and beyond. And their grim forecasts assume that the cure would be worse than the disease — that is, that the consequences of a U.S. assault on Iran would be as bad as or worse than those of Iran achieving its nuclear ambitions. But that is a faulty assumption. The truth is that a military strike intended to destroy Iran’s nuclear program, if managed carefully, could spare the region and the world a very real threat and dramatically improve the long-term national security of the United States.

The truth is that Iran (and more explicitly a strong and united Eurasia) is only a threat to America if America chooses to continue the absurd and destructive path of a world-dominating petrodollar superpower, dependent on foreign oil and resources, and with a foreign policy designed to (essentially) extort these things from the rest of the world.

The nature of such a foreign policy is inherently aggressive. Let’s be honest — who is threatening who?

Close the bases, bring the troops home, invest successfully in energy independence and global diplomacy, and trade and share technology and ideas with the world, and we in the West would have the national security we crave. Continue on the path of the overstretched hyper-power and we — the people of the West, not just our leaders — will end up with our faces in the dirt.

China is Not Ready to Pull the Plug on America

A very interesting article on alt-market asks a question I have been contemplating these past few weeks. In my view, America’s economic health is totally dependent upon two things: the flow of dollars to the middle east in exchange for oil, and the flow of dollars to China for consumer goods. Any disruption to either or both of these flows would result in sustained and significant disruption to America’s economy. That’s why America — absent of any real plan to move its energy generation, and its supply chains back to America — spends so much money policing the world.

So, that brings us onto the question: What would happen if China liquidated its dollar and bond holdings and moved its wealth into harder assets? And is China on the verge of doing just that?

From alt-market:

There are two mainstream market assumptions that, in my mind, prevail over all others. The continuing function of the Dow, the sustained flow of capital into and out of the banking sector, and the full force spending of the federal government are ALL entirely dependent on the lifespan of these dual illusions; one, that the U.S. Dollar is a legitimate safe haven investment and will remain so indefinitely, and two, that China, like many other developing nations, will continue to prop up the strength of the dollar indefinitely because it is “in their best interest”. In the dimly lit bowels of Wall Street such ideas are so entrenched and pervasive, to question their validity is almost sacrilegious. Only after the recent S&P downgrade of America’s AAA credit rating did the impossible become thinkable to some MSM analysts, though a considerable portion of the day-trading herd continue to roll onward, while the time bomb strapped to the ass end of their financial house is ticking away.

The debate over the health and longevity of the dollar comes down to one very simple and undeniable root pillar of economics; supply and demand. The supply of dollars throughout the financial systems of numerous countries is undoubtedly overwhelming. In fact, the private Federal Reserve has been quite careful in maintaining a veil of secrecy over the full extent of dollar saturation in foreign markets in order to hide the sheer volume of greenback devaluation and inflation they have created. If for some reason the reserves of dollars held overseas by investors and creditors were to come flooding back into the U.S., we would see a hyperinflationary spiral more destructive than any in recorded history. As the supply of dollars around the globe increases exponentially, so too must foreign demand, otherwise, the debt machine short-circuits, and newly impoverished Americans will be using Ben Franklins for sod in their adobe huts. As I will show, demand for dollars is not increasing to match supply, but is indeed stalled, ready to crumble.

We know from insiders in the Chinese government that China are looking at “liquidating more of our holdings of Treasuries once the US Treasury market stabilizes”, and “buying stakes in Boeing, Intel, and Apple and these types of companies… in a proactive way”, and of course gold. But does that mean China will be liquidating as soon as possible? After all Bernanke won’t stop printing, the dollar won’t stop being devalued, and America won’t stop burning through its productive capital on military spending.

I don’t believe they will. Wen Jiabao’s subtle and supportive public remarks during Joe Biden’s recent visit suggests that China wants a controlled and managed transition away from the dollar as the global reserve currency. Withdrawing support for the dollar right now would send China’s remaining dollar pile crashing into the earth.

From the Council on Foreign Relations:

China has accumulated a massive stock of U.S. dollar reserves in recent years. Statements of concern from China regarding the risk that U.S. economic policy might undermine the future purchasing power of these assets has fuelled the market’s concern that China may shift away from dollar purchases. Yet in the 12 months ending in July 2009 China accumulated more dollar-denominated assets, mainly U.S. Treasuries, than foreign assets in total. Despite its rhetoric, China has thus far taken no actions to wean itself off of the dollar.

And as I have noted numerous times, China has no interest in upsetting the global balance — under the current circumstances it is very rapidly strengthening, whilst America falters. And why change something that is working for China?

So when will China pull the plug? There are a few relevant pictures to watch:

  1. China’s gold reserves: currently at 1,000 tonnes, these would have to go significantly higher.
  2. China’s acquisitions of American industry: this would signify Chinese dollar-outflows.
  3. China’s holdings of U.S. debt: if Bernanke keeps printing, these would have to remain stable, or more likely tip-toe lower.
  4. Flotation of the yuan: if China wishes to curb domestic inflationary pressures, they will float the yuan on global markets. A successful yuan flotation would cut the relative value of China’s dollar holdings, lessening the incentive to hang onto U.S.-denominated assets

I expect all of these developments to take place over years, not months. And, in my view, the greatest threat to the dollar’s status as global reserve currency is a global oil shock, triggered by a new middle eastern war, or some black swan. And it is an oil shock that is precisely the event that might force China to accelerate offloading its dollar hoard.