War finance 101

Warfare on the Installment Plan

How to fund warfare - excerpts:

1. Borrow from a subservient central bank, which prints the money to pay your soldiers and arms producers in return for IOUs called Treasury bills. This is easy to do, but the resulting monetary expansion nearly always leads to inflation.
   
2. Sell bonds to the public, which effectively diverts its savings into government debt.
   
3. Sell Treasury bills, bonds and other financial assets to foreigners.
   

Conclusion:

The fiscal problem today, as Mr. Hormats acknowledges, is not so much national security as Social Security--to say nothing of Medicare and Medicaid. Between them, these are the programs that threaten to undermine the long-term fiscal health of the U.S. as the baby boomers retire. In other words, the danger today is not external but internal overstretch. I support the reform measures that Mr. Hormats calls for, such as a "national drive to develop new sources of domestic energy" and an end to the use of supplemental appropriation requests to fund the Iraq war. But I am left wondering how he would tackle the vast unfunded liabilities of the Medicare and Social Security systems, which are the real hole in the boat.

Good quotes:

George Washington called on Congress "to discharge the debts which unavoidable wars may have occasioned, not ungenerously throwing upon posterity the burdens we ourselves ought to bear."

"Under conditions of high peacetime prosperity," Eisenhower declared in 1956, "we can never justify going further into debt to give ourselves a tax cut at the expense of our children." His farewell address was a paean of praise to sound finance: "We cannot mortgage the material assets of our grandchildren without asking the loss also of their political and spiritual heritage. We want democracy to survive for all generations, not become the insolvent phantom of tomorrow."

My comments: I personally am concerned about government deficit spending and the unfunded commitments (Social Security and Medicare) "which are the real hole in the boat"!