Is War Causing the Recession – Pt 2

Back here in Part 1, we were talking about this

And when there is competition for money, the cost goes up. The cost of money is figured in the interest rate that must be paid to get the money.

[ snip ]

What I want to focus on is not how much the government is spending but where it is coming from. And it is my contention that financing any external event (Iraq & Afghanistan wars) with borrowed money can lead to a recession.

The word on the street is that today the Fed is expected to cut interest rates at least 75 basis points, that is 3/4 of a percent, and maybe as much as 100 basis points or a full one percent. Now, one would think that cutting the short term interest rate would make credit cheaper. But just the opposite is true. Mortgage interest rates are based on the 10 year Treasury bill rate. As the Fed cuts interest rates, the value of the dollar declines causing the price to be paid (interest) to buyers (foreign government, very large financial institutions) to increase to compensate for the long term loan.

Where is the money coming from? Well, if the government is running a $175 billion a month deficit, all the money the government spends is not coming from tax payers. It is NOT your money. Not today. However, it is your responsibility to pay back all the borrowed money.

Anyway, a substantial amount of the money is coming, not from your taxes, but from the government printing presses. The United States is not on the “gold standard.” Actually, we do not have any precious metal backing our money. Just “the full faith and credit of the United States government.”

And therein comes inflation which Wikipedia defines as

Mainstream economists believe that high rates of inflation are caused by high rates of growth of the money supply.^[2] Views on the factors that determine moderate rates of inflation are more varied: changes in inflation are sometimes attributed to fluctuations in real demand for goods and services or in available supplies (i.e. changes in scarcity), and sometimes to changes in the supply or demand for money.

Short definition: Too much money chasing too few goods.

Now if all this ‘funny’ money was being spent in the United States, it would be recycled in our own economy. Funny money recycled in essentially a closed loop (think United States during the 1930s), may or may not cause problems out in the future. It has not been tried on a large scale, just in economic simulations. But when large quantities of money escape the closed loop (think: Iraq), it is causing an increase in interest here at home (we are doing the borrowing) with out a commensurate increase in income to service the debt.

So, the rational conclusion is that government borrowing and large expenditures in Iraq have contributed significantly to the on-going recession in the United States.

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