Forget the downgrade
Forget the downgrade. It really is a non-event given the decline in U.S. government bond rates. If the world is still willing to buy USG paper, why should anyone worry about how S&P rates it? Though I hasten to add that I think S&P had a point: the Tea Party has demonstrated it will stop at nothing, including default, to try to ensure that President Obama is not reelected.
The downgrade did not cause the fall in stock markets. It is the shrinking prospects for growth that did that. The debt deal is clearly deflationary. It will reduce aggregate demand by reducing government expenditures. Reduced demand means less growth.
Among the more interesting but little noted things that happened yesterday was the European Central Bank purchase of Italian government bonds. This kind of central bank support for government finance is verboten in Europe. The Fed calls it quantitative easing, and it is precisely what the Germans think should not happen in monetary policy. They’ve got to be pretty desperate to go along with it.
Some of you will know that I spent 10 years in Italy, whose government paper is now declining sharply in value. That’s a problem because a lot of it is held by European (and American) banks. The big worry is that depositors will think the banks shaky and decide to withdraw their funds. A “run” on the banks–in Italy or elsewhere–could be catastrophic. As in: need a lot of government funds, potentially dwarfing the U.S. bank bailout.
So what does all this have to do with peace and war issues? Tight budgets and potentially large bailout costs make it hard for many governments to think about, much less execute, operations abroad. We are broke. The Europeans are broke. Some will welcome a major retrenchment; others will think it a really bad idea to pull troops from commitments in Afghanistan, Iraq and elsewhere. But the pressures for retrenchment are going to be enormous.
The right approach is to see this as an opportunity to define our priorities more clearly. Triage is necessary: which commitments really do serve our national security interests? which don’t? are there alternative (and cheaper) ways to meet our goals? are there others who should pitch in more?
The United States has traditionally depended on its military to execute much of its foreign policy. Military spending has doubled since 9/11, not counting the costs of the wars in Afghanistan and Iraq. Are we using an effective but expensive military instrument in the best ways we can? is it the appropriate instrument for the purposes for which it is being used? are there alternatives?
The questions are obvious. The answers are not. I’ll be trying to offer some answers over the next few months, as this is precisely what the book I am writing is about. So stay tuned: we are going to explore American foreign policy in a century that is still young but is already challenging us think hard about national priorities and the instruments of foreign policy.
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