Nuclear schizophrenic

President Eisenhower, who has been called a “nuclear schizophrenic” for his role in both enabling the gigantic growth of the military industrial complex and his prescient warnings about it, knew that the notion of guns and butter was patently false as he said in his famous speech to the newspaper editors in 1953.

"Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed.
This world in arms is not spending money alone. It is spending the sweat of its laborers, the genius of its scientists, the hopes of its children. The cost of one modern heavy bomber is this: a modern brick school in more than 30 cities. It is two electric power plants, each serving a town of 60,000 population. It is two fine, fully equipped hospitals.
It is some 50 miles of concrete highway. We pay for a single fighter with a half million bushels of wheat. We pay for a single destroyer with new homes that could have housed more than 8,000 people.
This, I repeat, is the best way of life to be found on the road the world has been taking. This is not a way of life at all, in any true sense. Under the cloud of threatening war, it is humanity hanging from a cross of iron. These plain and cruel truths define the peril and point to the hope that comes with this spring of 1953."

Even though Eisenhower ended his term by warning about the unchecked influence of the military, it was probably too late. Military spending had come to be seen as a jobs program by every congressman and the big military contractors spread their plants into every state in order to curry influence. As we will see, this could last only as long as the country had a current account surplus with the rest of the world.


Fast forward to 2007.
As James Grant explains, they were leveraged to the gills.

"For every dollar of equity capital, a well-financed regional bank holds perhaps $10 in loans or securities. Wall Street’s biggest broker-dealers could hardly bear to look themselves in the mirror if they didn’t extend themselves three times further. At the end of 2007, Goldman Sachs had $26 of assets for every dollar of equity. Merrill Lynch had $32, Bear Stearns $34, Morgan Stanley $33 and Lehman Brothers $31. On average, then, about $3 in equity capital per $100 of assets. “Leverage,” as the laying-on of debt is known in the trade, is the Hamburger Helper of finance. It makes a little capital go a long way, often much farther than it safely should. Managing balance sheets as highly leveraged as Wall Street’s requires a keen eye and superb judgment. The rub is that human beings err."

So we had the perfect storm: A U.S. Government needing to borrow $50 billion a month; a banking system needing to replace perhaps $1.2 trillion in capital losses;rapidly rising delinquencies in consumer mortgages, credit cards and auto loans. This could not end well.




The chart above, of the 2007 discretionary budget, could not make our priorities more clear. In an era of global liquidity and easy money, we might, like the condo-flipper of 2006, have been able to avoid the hard choices between guns and butter. But the next two years and beyond will not afford us that luxury. As our country’s most important bond manager, Bill Gross has pointed out, the only exit strategy from our current economic nightmare is an old fashioned Keynesian stimulus plan.

"To provide a stable recovery path, government spending needs to fill the gap – not consumption. Public works programs, badly needed infrastructure repairs, as well as spending on research and development projects should form the heart of our path to recovery."

But that stimulus will not be possible as long as the Military continues to hog 56% of our discretionary budget.

We are engaged in a global commercial competition of such scale that unless we are able to rebuild our schools, our health care system, our energy system, our transportation and digital networks we will surely become a second class power.

In 1997 the Yale historian Paul Kennedy, author of "The Rise and Fall of Great Power" wrote,

"The United States now runs the risk, so familiar to historians of the rise and fall of Great Powers, of what might be called ‘imperial overstretch’: that is to say, decision-makers in Washington must face the awkward and enduring fact that the total of the United States’s global interests and obligations is nowadays far too large for the country to be able to defend them all simultaneously."