Sunday, November 23, 2008



By Kevin A. Stoda

Readers need to connect these dots, so they present this analysis in teach-ins.

Earlier in January of 2008, Dr. Paul Krugman (this year’s Nobel Laureate inn Economics) began the year by claiming, “One thing I get asked fairly often is whether the Iraq war is responsible for our economic difficulties. The answer (with slight qualifications) is no. Just to be clear: I yield to nobody in my outrage over the way we were lied into a disastrous, unnecessary war. But economics isn’t a morality play, in which evil deeds are always punished and good deeds rewarded”

Was the Nobel Laureate correct?

In order to answer this question, let’s look back over the past 10 months (or even over the past 8 years) and discover if there aren’t good clues that the current global recession has, in fact, been significantly adversely affected by the U.S. federal governments strategy of the past 8 years—(a) wage war,(b) under utilize the tax system, (c) privatize the military and (d) spend-spend-spend system.
Let’s us consider these four points.

First, the price of oil began to rise in the run-up to the Gulf War in 2002 and continued to rise through mid-2008. During this time, American borrowers had to pay higher fuel costs—money that could have been used to pay off (or to pay down) their mortgages. Is there a possible connection with the greatest financial crises of the last 70 years?

Yes, there is.

Second, the federal government refused to taxes (or to sell & raise specific war bonds) for the three front wars on terror between 2001 and 2008.

This double-failure meant that potentially the government’s borrowing significantly increased substantially over the past 8 years (as did the printing of money—even electronic money--, i.e. which is normally inflationary). This federal borrowing then would normally have led to inflation in the USA, which would have likely dampened the level of borrowing across the board in the USA over the past 6 to 8 years.

However, the Bush Administration and the federal reserve sought to counteract all the negative potential increases in interest on borrowing in the USA by intentionally lowering the federal lending rate—now to record low levels. This war-cover-up policy created an even greater disincentive to save than was the case decades ago.

Didn’t this attempt to cover-up inflation, in fact, help create the biggest Real Estate bubble in decades?—I.e. as borrowers for both homes and cars went wild borrowing, even as the country continued dancing year-after-year on the edge of recession?

I think, “Yes”.

Krugman did, in fact, share last January the following caveat to his overall rejection of blaming war in leading to an American (and then global recession):
In January Krugman admitted, “[H]igh oil prices are a drag on the economy, and the war has some — but probably not too much — responsibility for pricey oil. Mainly high-priced oil is the result of rising demand from China and other emerging economies, colliding with sluggish supply as the world gradually runs out of the stuff. But Iraq would be exporting more oil now if we hadn’t invaded — a million barrels a day? — and that would have kept prices down somewhat. Overall, though, the story of America’s economic difficulties is about the bursting housing bubble, not the war.”

I beg to differ with Dr. Krugman’s January analysis.

The bubble in oil prices continued unabated for so many years, not only because of the rise of the Chinese economy, but because speculators needed to find other ways of making money than by investing in the USA during an 8 year period when a housing bubble was rising and likely to burst.

In this case, many dollars have fled the American economy to chase petroleum and energy investments world wide. This was because the military and war-making were helping to under-serve the core industries in the United States. That is, too little homegrown investment in alternative energy production was being undertaken as banks and scammers were encourage to go for the gold in housing and financial markets because the Bush Administration was so interested in getting Americans to spend during war-time, rather than to save and invest in key national industries.

In short, war-making was covered up by a spend in crises philosophy in Washington, with the hallmark being low interest rates while the federal government was throwing money around only marginal sectors of the economy or in marginal regions of the global economy, like Saudi Arabia and Russia.

Couldn’t this be partial cause for the sudden deflation in oil prices only months after the bubbles in the USA collapsed and the government of China began to curtail energy consumption in 2008 by reducing price guarantees in its local economy?

I believe “Yes”.

This is what has happened, and if the U.S. hadn’t been so closely embedded with the Gulf Sheikdoms over the past 8 years over endless war, even the U.S. government could have persuaded or signaled the Gulf States to help reduce fuel prices two years ago already, i.e. when the housing market first collapsed and showed that U.S. consumers no longer could afford the record global prices. (The historical precedent for both Bush and the Oil Sheikhs to observe was that the Carter Administration in 1978-1980 had similarly seen such a negative impact on the U.S. economy from higher oil prices, but the high federal interest rates had put a damper on energy consumption, on investment, and on oil prices within a two to four year period.)

Finally, the ongoing cost of a three-front war on terror will continue to tie the federal government’s hands for years to come. This means that government will continue to borrow and increase spending for both (a) war and (b) non-war items. This would normally lead to inflation at some point next year—unless the Fed keeps interest rates at their historical lows.

However, that sucking sound for unheard of war deficits in a state in the midst of Depression are coming from the USA.

This means that (1) there will continue to be disincentives to save money in the U.S.A which (2) will lead to further borrowing sooner than later.

This could lead to a bubble again in various investment markets—and then we have a repeat recession or stagflation if the new Obama government allows the Federal government to incentivize savings or creates high-interest bonds to pay off the current war debts.


The lesson is don’t try and hide the elephant in the room.

If endless wars are sucking up money, let everyone know the facts, so we can handle the debacle before it gets way-out-of hand.

America must avoid any more suicidal melt-downs like the Soviet Union faced in the 1980s, i.e. when that former federal state overspent on wars on multiple fronts over decades, without paying attention to growing and building a strong home market.
China will likely learn from this crises of the WEST in order to build up and serve its own local (sometimes) pent-up demand.

Will America and Western economists (and statesmen) be that shrewd in 2009 and onward?


Krugman, Paul, “An Iraqi Recession”,



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