In the ongoing discourse surrounding the intersection of economics and military strategy, this conversation between former diplomat Ian Proud and economist Michael Hudson offers significant insights. They explore how economic management and planning are integral to warfare, the effects of financialization on the real economy, and the emerging trend in Europe that resembles military Keynesianism. The discussion unveils the complexities of these issues, raising important questions about their potential effectiveness in current geopolitical scenarios.
IP – The adage that “wars are won by economies, not armies” encapsulates a critical perspective on modern conflict. Given the evolving context in Iran, I would argue that it’s more accurate to say “wars are won by economics, not military force.” What’s your assessment?
MH – I align with the perspectives reportedly shared among military officials who have cautioned Trump about the futility of invasion without significant sacrifices. Since the Vietnam War led to the end of conscription, the U.S. has relied on allied forces in the Middle East, such as Israel and various factions in Syria. In truth, an invasion is implausible, even regarding Kharg Island, which Trump mentioned. Moreover, the air force is anxious about engaging Iran, which is now heavily fortified with missiles. Iran’s recent threats to target American ships underscore this concern. The military’s advice to Trump has been to avoid direct attacks and instead continue sanctions and disrupt oil trade through the Strait of Hormuz. The subsequent rise in stock markets suggests that investors believe sanctions might yield a resolution without escalating into full-scale war, which could provoke Iran to retaliate against oil supplies from Arab nations and target U.S. bases.
Consequently, it appears that financial markets are betting on diplomatic rather than military solutions.
IP – However, I remain skeptical about the efficacy of ongoing sanctions against Iran. Sanctions have been in place since 1979, and Iran has built a reserve through its trade surpluses. Ultimately, it seems that the greater burden may fall on consumers in America, Europe, and beyond due to rising prices.
MH – It’s not just consumers who are impacted; governments and debtors will bear the consequences, and this could precipitate a grand depression if economic measures persist. Sanctions are causing shortages in vital supplies like oil and fertilizers, adversely affecting crop yields and industrial processes. This has a domino effect on the economy, as oil and gas are more interconnected than previously assumed. If the global economy lacks access to these resources, it will suffer significant losses in investment, employment, and production.
Furthermore, the financial ramifications could be severe. Trump has acknowledged that a blockade could starve not just Iran but the entire world economy. While the U.S. claims self-sufficiency in energy, this assertion overlooks its financial interdependencies. If other nations cannot balance their payments, defaults will cascade through the financial system, affecting the U.S. as well, which is heavily intertwined with global finance.
Historical parallels exist with the 1929 stock market crash, indicating that the U.S. will encounter significant challenges, despite the idea that higher oil prices will drive inflation. However, the resulting economic slowdown could lead to deflation, especially if production cuts and unemployment rise.
IP – Beyond oil pricing, will the U.S. face escalated costs on non-oil imports due to supply chain disruptions linked to events in Iran?
MH – It appears likely. The U.S. has been tapping into its oil reserves to manage gasoline prices during air traffic reductions. Yet, these reserves are counterbalanced by a surge in U.S. LNG and oil exports. Essentially, the government’s attempts to control prices may paradoxically lead to increased exports, benefitting domestic producers.
IP – What are the medium-term implications for U.S. debt servicing given this potential deflationary spiral?
MH – The U.S. debt is primarily in its own currency, so the government can simply print more money to meet obligations. This isn’t necessarily inflationary, as those who receive payments seldom spend it on goods and services, instead using it to make new loans or trade in financial markets, further increasing debt.
Mainstream economic models fail to recognize that finance is detached from the real economy; lending for industrial growth is often left for other sectors, like stock markets. Additionally, a significant portion of U.S. consumption growth has benefitted the wealthiest citizens, who also tend to invest heavily abroad, further draining domestic economic potential.
IP – So, it seems that wars primarily enrich the banking sector?
MH – Yes, and through the current monetary dynamics, banks and traders are benefiting, while industrial sectors become encumbered by debt. This year, we’ve seen large financial institutions generate profits by trading rather than interacting meaningfully with the industrial economy. For instance, recent struggles of commercial airlines underscore the pressures facing industries grappling with rising interest rates.
The implications of military spending are vast and the collateral damage far-reaching. This cycle of financing wars without addressing genuine economic needs may have dire consequences globally.
IP – The broader challenge stems from a lack of discourse on the economic trade-offs involved in military spending. Unlike the past, when economic discussions accompanied wars, today we observe a consensus among both major political parties to support ongoing conflicts without scrutiny.
MH – Unlike during the Vietnam War, today’s anti-war sentiments are not mirrored in policy discussions. The absence of significant resistance to military expansions fails to consider the economic ramifications growing from such militaristic policies. The rise of various populist movements signals public disapproval of these engagements, yet politicians often ignore this due to the concentrated media landscape that favors a militarized economy.
In conclusion, the dialogue highlights that while military strategies dominate, the true victor in modern conflicts may well be rooted in robust economic policies. Rising powers such as Iran are navigating these complexities, illustrating that self-sufficiency amid adversity often leads to long-term resilience against sanctions. As nations seek alternatives, the future of global economic alliances may be reshaped by the very wars intended to enforce control.