An email asks; How can the U.S. military spend $900 billion fighting in Afghanistan and not have inflation?

How can the U.S. waste so much money [$900 billion] fighting in Afghanistan and elsewhere and not have hyperinflation? Wouldn’t the U.S. be better off spending $900 billion building its highways?

John

Interesting questions. Let’s answer them, but we need to keep in mind that not every dollar is the same.

Any nation with the reserve currency has certain obligations
  1. That nation must run perpetually structural Balance of payments and current account deficits

As we detailed in the past, any nation whose currency is the reserve currency must run consistent balance of payments and trade deficits. This is clearly the case with the United States, as most industry has been purposely off-shored, so the dollar could be spread far and wide.

2. Countries, whose currency serves as the global reserve currency, must fight wars all over the world. This works to spread that currency to all areas of the globe, while helping to sterilize them from the domestic economy.

Nations with the reserve currency must “waste” money fighting overseas

Any nation, whose currency serves as the global reserve currency, must be able to develop a formidable military to fight outside its borders on an ongoing and permanent basis. This requires that nation to possess the manpower, economic might, and military technology to pull it off. Currently, only one nation can perform this task; the United States.

The U.S.’s military might and the dollar reserve status are a function of one another. It’s not as if the U.S. must develop a military to defend the dollar’s role in global trade. Rather, they both support each other in an organic matter, by definition, and once the relationship is established it functions as naturally as the sun setting in the west every evening.

When it comes to federal government spending, not every dollar is the same. A dollar spent on the domestic economy bids up goods and services in that nation. If the United States earmarked $900 billion towards infrastructure improvements this would be highly inflationary, as these dollars would immediately bid up materials and labor costs inside its borders. This would place the entire domestic debt-backed monetary system in jeopardy; inflation and interest rates would rise to the point that they would eventually place government spending at risk of default.

Instead, the U.S. must spend these dollars outside its borders. This will allow the domestic general rate of inflation to remain subdued, while at the same time, this military spending will supply the world with the dollars it needs.

A huge percentage of the trillions of dollars that are spent on military action around the world stays in the regions that serve as the hosts of these wars. Thus, a huge percentage of the dollars spent fighting in Afghanistan stays in Afghanistan and Middle East. They then trickle around the world to other nations and only a relative few find their way back into the United States. The more firm in value the dollar remains, the less dollars that flow back to the United States. Foreigners will wish to hold on to them.

The whole irony is this; the more wars the U.S. fights, the more the dollar will become the accepted reserve currency for all sorts of transactions.

So, if any nation wishes to possess the global reserve currency, they must run perpetual balance of payments deficits and fight wars all over the world. This will ensure their currency is spread far and wide. Like I said before, there is currently no other nation capable of being up to the task, nor would any other nation want to be.