From The Guardian, February 2003, media mogul Rupert Murdoch, stalwart cheerleader for Mr Bush and Mr Blair and their war of choice in Iraq, provides a reminder of just how misguided our political leaders and opinion formers were regarding the economic implications of war:
“The greatest thing to come out of [the Iraq war] for the world economy, if you could put it that way, would be $20 a barrel for oil. That’s bigger than any tax cut in any country.”
Today a barrel of Brent crude costs $31.68 while US light crude costs $34.53. During the last war on Iraq in 1991, the price of oil doubled to $40 a barrel. A $10 increase in the cost of oil is seen as the equivalent of a 0.2% cut in economic growth in America and Europe.
The economic argument that war is costly, wasteful and inflationary was not even permitted an airing in polite society in 2003. Any assertion that war might lead to debt, dislocation and inflation – as war has throughout history – would invite denigration as anti-American, defeatist, pacifist and Arab-loving. (Read the rest of Mr Murdoch’s comments in the link above for a refresh on the technique.)
It is worthwhile to revisit Mr Murdoch’s misguided views in the cold, hard light of this sixth year of violent occupation of Iraq as the world’s financial system confronts the perils of soaring deficit finance, credit market collapse and inflation – and escalating tensions with Iran.
If oil at $20 a barrel would have been “bigger than any tax cut” then is oil at $140 a barrel the equivalent of the greatest stealth tax increase in history?
If $10 incremental cost of a barrel implies a 0.2% reduction in growth in America and Europe, then does the $110 increase in the cost of a barrel imply a 2.2% reduction in growth – or even more?
If it was deemed essential to American and British national security by Mssrs Bush and Blair to occupy and control Iraqi oil reserves when oil was at $30 a barrel and peak oil theory was fringe, is the case for continued Iraqi occupation and even expansion of the war to seize Iran or Venezuela’s oil reserves stronger with oil at $140 and peak oil theory mainstream?
If financing war for oil justified Mr Greenspan’s expansionary credit policies and below-inflation Fed Funds rates, will the need to finance more war for more oil justify even greater Bernanke credit excess? (At least Mr Greenspan later honestly admitted, “the Iraq war is largely about oil.”)
Once again, as ever before, war has led to debt, dislocation and inflation.
More wars would be more worse.
Arguably greater than economic damage, the war in Iraq seems likely to cost America and Britain any ideological credibility from winning the Cold War. It is hard to defend “free markets” and Anglo-American capitalism as western economies are re-nationalised by stealth at a shocking pace and swathes of the democratic electorate are dispossessed of jobs and homes.
The main result of the financial crisis so far is a stealth nationalisation of impaired financial assets via central bank liquidity facilities and dollar-peg sterilisation operations. Trillions of dollars worth of impaired assets, including a substantial proportion of the $9 trillion of foreign-owned US dollar debt, are being transferred from private investors into central banks worldwide as market makers and dollar holders of last resort. Sovereign Wealth Funds are effectively nationalising large corporations and banks – under foreign government owners. Now we are entering a second stage of calls for government intervention in markets on a scale rivaling planned economies behind the Iron Curtain. Governments and lobbyists are working overtime to craft new mechanisms for stealth socialisation of losses through industry bailouts and subsidies. Few CEOs now assert a strident defense of “free markets” when peddling their case for further regulatory, tax, subsidy, trade and monetary concessions that will enhance their fragile solvency.
The net result of all this nationalisation of impaired assets is a confiscation of wealth from the taxpayers of the world to the benefit of a relative handful of corporate and financial oligarchs. The current trends reflect poorly on capitalism as promoting the optimisation of welfare of the many over the few or democracy as protecting the middle class from tyranny by either rich or poor.
Substantiating the loss of our Cold War laurels, Alexy Miller, CEO of Gazprom, the world’s largest energy company and so a major beneficiary of the oil price boom, has this week predicted that oil could go as high as $250 a barrel “in the foreseeable future”. Indeed, so changed is the world economy after this disastrous war that Gazprom is planning to sell its gas for newly floated roubles, strengthening the role of the rouble as tradable currency backed by resource wealth.
What does Mr Murdoch have to say about that?
Perhaps capitalists need to rethink pacifism as being a proximate condition of capitalism. If war leads to debt, dislocation, inflation, nationalisation of assets and reduction of personal and economic liberties, then perhaps peace promotes prudence, growth, strong currency, free markets and the preservation of personal and economic liberties. The Swiss economy may not be exciting, but it is notably democratic, stable and prosperous.
For a rational exposition on why war can never increase prosperity, even of a conqueror nation, capitalists could do worse than read Sir Norman Angell’s The Great Illusion: A Study of the Relation of Military Power in Nations to Their Economic and Social Advantage (London, 1910), which contributed to his being awarded the Nobel Peace Prize in 1933. Sir Norman explains that the “delicate interdependence of international finance” which depends on fiat currencies, credit-based banking systems and contract-based commercial dealings among developed economies inherently inflicts losses on all parties to a military conflict. A loser loses more but a winner loses as well. His great insight was observing that war debases credit and undermines commercial contract via confiscation. As he put it in the synopsis, for commercially developed nations it is an “economic impossibility for one nation to seize or destroy the wealth, or for one nation to enrich itself by subjugating another.”
Wall Street economists and Main Street businessmen who style themselves capitalists should start thinking through the connection between capitalism and pacifism now rather than waiting for the next war to learn the lessons history keeps trying to teach them.
For those who might not catch the humorous intent in the title, enjoy this YouTube of a classic Fawlty Towers.