Monday 2 April 2007

Pic of the day: Regular readers will guess from the picture of ruin and destruction that I am once again writing about the American economy.

Bush's war tax

Wait, what war tax? Yeah, that's the exact point. Wars have unfortunately been part of our history since before we started to write it down, and even longer, since before we started to keep tax records. (There are signs that writing developed for administrative purposes before it became used to record history, poetry or religious texts.) And for as long as we have records of wars, we have records of their expenses, just not in the same public places where the victories are celebrated. For everything has a price.

In ages past, much was done to reduce the cost of the armies. They would requisition food and lodging from the local farmers (a process that often included killing said farmers, especially on foreign soil). Kings would let their nobles shoulder as much of the burden as possible when it came to outfitting the army. And of course the populace would meet the twin measures of war taxes and debased coin. But that was then. This is now. Mysteriously it seems that George W Bush and friends have managed to send a substantial part of the superpower's army to a far-off continent, fighting a war and then occupying the land for a few years, at no extra cost. Did I say mysterious? Suspicious may be a better word.

It isn't exactly that the administration has pretended the war was free; it has repeatedly asked Congress for huge extraordinary transfers of money. If anything, there have been times where the money seems to have been thrown too freely at the Iraq problem. But the bill was never passed on to the taxpayers. Neither did the central bank, the Federal Reserve, print more money for the government to spend. (Not that anyone expected them to: The Fed is known to be fiercely independent from the executive branch of the government.) Actually, Bush has relentlessly lowered the taxes, especially for those who paid the most before. And the Fed has raised the interest rate for a while now, keeping the dollar strong. So where does the money come from, when the old tricks of the trade are not used?

The short answer is: Borrowing. China in particular, but many other countries (especially in East Asia) have enormous sums in US bonds. These countries are also eager to keep the dollar strong, to make it easier to export their own goods to America, and to avoid competition from there. And the American government, much like its citizens, has generally acted as if borrowed money was a gift, spending it all with no plan for paying back. In fact, you don't even see them worry about it. "Hmm, perhaps we should start thinking about what we will do when the bills fall due, or just in case we can no longer borrow as much as we like." Nope, no sign of that. On the contrary, the prevailing opinion seems to be that the world is doing USA a disservice by throwing more money at them than they can use. Ben Bernanke referred to this as a "savings glut" before he became chairman of the Fed. (In fact, this could be one of the reasons why the President picked him for the job, although unlike some friends he did have the professional credentials too.)

But much like the law of gravity, the economic laws are also unyielding. What goes up must come down, and what is borrowed must be paid. But who cares as long as it is far enough in the future? The war tax has been postponed to the children. When it falls due, with interest and compound interest, it will be Someone Else's Problem. Or that seems to be the plan.

In practice, the world is getting increasingly nervous about American lack of readiness - or even willingness - to pay their debt. This causes the dollar to slide in value. (I'll be happy to explain the mechanism behind this, if I haven't already in other grey entries, but for now there is no need to: It has already begun, so is firmly within the realm of observable fact.) A weaker dollar means that even though you pay back the same amount, it is less worth. In other words, you have received a gift from the lender (or swindled him, depending on how obvious it was before the deal was done). In light of this, the upcoming slide of the US$ represents the largest case of foreign aid since the age of colonialism. And it goes to one of the richest nations.

Even so, it won't simply rain money on the Americans. As usual, it is the serfs who have to pay. All imports will become much more expensive. This includes not just finished goods but raw materials, as well as much of the fuel that powers factories and transport. Everything will become more expensive. This, as the adult reader will remember, is called inflation. And the almost automatic reaction of central banks to inflation is to increase interest rates. If the inflation is dramatic, so also will the interest rates be. People will no longer be able to afford using credit cards, or take out a mortgage to buy a new home.

It isn't a problem for me yet. I am Norwegian, and what I notice is that American books are becoming ever cheaper. My American readers probably don't buy Norwegian books. You may be buying our fish and oil, though, and if so you may have noticed that these are getting mighty pricey recently? This is not entirely because we are greedy bastards, though of course we do pocket some extra money when the chance is there. But in part the higher price is because your currency is simply not worth as much as it used to. This is the beginning of Bush's war tax. Get used to it: It has barely even begun.