Financing wars is expensive

There's never a good time for a war, and right now, as the global economy is slowing, it's perhaps the worst time in decades financially for yet another war to break out. The financial cost of war is huge - the Watson Institute for International and Public Affairs, part of Brown University, estimates the costs to the US of its wars between 2001 and 2022 is $8 trillion (£6.6 trillion). The Sydney-based Institute for Economics and Peace says that armed conflict cost about $14.4 trillion (almost £12 trillion) in 2019, about $5/day for every person on the planet. The conflict between Israel and Hamas in Gaza has already cost the Israeli government at least 27 billion Shekels, around $7 trillion. Wars are wasteful and not just of human lives.

The US is now facing two proxy wars, in Ukraine and the Middle East, at a time when its debt-to-Gross Domestic Product ratio is 122% - i.e its debts are around a fifth greater than what the US economy produces. Its fiscal position - the balance between government spending and tax take - is the worst since 1945, with a deficit of almost $1.7 trillion (£1.4 trillion) in the fiscal year of 2023, a 23% jump from the previous year. President Joe Biden recently gave a national televised address in which he said both Hamas and Russia wanted to "annihilate a neighboring democracy", and asked Congress to approve a fresh spending package, estimated to be as much as $100 billion (some £82 billion), largely to be used for military aid for Israel and Ukraine. Can the US afford such lavishness? According to Janet Yellen, US Treasury Secretary, "absolutely". Mind you, her record when it comes to making grand statements about the US economy is unenviable; she publicly expected inflation (before it peaked at more than an annualized 9% in June 2022) was not going to be a problem. That turned out to be badly mistaken.

Running out of road

There's no doubt the US can fund both wars, for the time being. How could it? It could issue more debt, although the appetite for US Treasury bonds may be diminishing; on 12 October yields on the benchmark 10-year Treasury, (and yields rise when prices fall), went up by 0.11 percentage points to 4.71%. That day the US auctioned $20 billion (around £16 billion) of 30-year bonds, with dealers, who are required to buy up any supply not taken directly or indirect bidders, taking more than 18% of the offering, against an average in such auctions of almost 11%. Weak demand for US bonds may be a sign that the market is starting to become alarmed about America's ability to pay off its national debt, now approaching $34 trillion (£28 trillion). In any case higher yields put upward pressure on the federal government's borrowing costs, which spell higher inflation. Last year the US had to pay a gross $879 billion on its national debt, a record and 23% more than the previous year.

Growing investor skepticism will eventually bring this cavalier US federal borrow-and-spend circus to an end; there are various projections as to how much road is left. The Congressional Budget Office (CBO) projects that the gross federal debt will rise steadily to 129% of GDP by the end of 2033 and thereafter speed to 192% of GDP by the end of 2053. Is that unsustainable? Perhaps not, so long as the Dollar is the world's reserve currency. As the debt grows, financial markets will quite reasonably demand higher returns; those higher borrowing rates will make the debt grow even faster, "potentially producing a downward spiral in the price that the government can sell debt" says a budget model from the University of Pennsylvania.

Long before 2053 however the outlook will have changed dramatically. Many 'black swan' incidents can pop out, such as the generalized adoption by governments of Central Bank Digital Currencies (CBDCs), which would severely disrupt debts, payments, and monetary control to name just a few. Economic growth forecasts for the next couple of years are quite gloomy; the slowdown is happening almost everywhere. And next November the US public looks like voting an isolationist President into the White House, who may decide that it is no longer in America's interests to be the world's policeman. Wars drag on but the ability to fund them.