War Is Always Inflationary

Authored by Michael Wilkerson via The Epoch Times,

While the United States is ostensibly not at war with anyone, our government is spending taxpayers’ money as if it were.

This year, the budget for the U.S. Department of Defense is $844 billion. The United States spends nearly three times more on defense than does China and 10 times more than does Russia. At the same time, the depletion of U.S. military stockpiles and other reserves is accelerating through multiple conflicts such as in Ukraine and the Middle East. The defense contractors, their shareholders, and bought politicians benefit, but who pays? In the end, it is the American taxpayer, who never voted to send their hard-earned tax dollars abroad or to have their militaries engage in wars in all but name, that foots the bill. These citizens are paying twice: first in their tax dollars, and second, and most perniciously, in their diminished purchasing power and real (after inflation) wealth.

This is taxation without representation, in that these decisions are made without appropriate congressional oversight.

Wars are always inflationary.

This is a rule without exception.

We will continue to see high inflation in the United States to the extent these current engagements remain unchecked or others are allowed to mushroom from them.

When examples are given of runaway inflation, the hyperinflation of Weimar Germany following the First World War is the most often cited of the twentieth century. While it certainly was among the worst suffering nations, Germany was not alone. Every European country engaged in the continental war suffered massive inflation. When Germany entered the war in August 1914, the currency stood at 4.2 Reichsmarks to one U.S. dollar. In the wake of war and its aftermath, the German currency depreciated to a near infinite level of 4.2 trillion Reichsmarks to the U.S. dollar in December 1923, when a new currency was introduced, and hyperinflation eventually brought to heel. All of which came at great political and social cost.

Russia, like Germany, saw its currency become worthless and its government violently overthrown.

Other belligerents, including Great Britain, France, Austria, and Hungary saw prices double or triple and their currencies substantially devalue in dollar terms.

In the United States, the history is the same.

Prices rose during the Revolutionary War between 350–700 percent depending on the colony and their own fiscal and monetary policies (there was no central government with tax-levying power). During the Civil War, prices rose by over 60 percent, and by much more in the South. Prices rose nearly 70 percent in the United States during World War I, and well over 50 percent during World War II. Price levels rose by 35 percent during the decade-long Vietnam War, but the real inflationary effects were delayed until the 1970s, when high inflation kicked in following the oil crises. Inflation lags monetary expansion by years.

Governments go to great lengths to hide the true cost of war from their citizens. They do this in a number of ways, but one of the most common is by ensuring that the links in the chain between cause and effect are made long, plentiful, and as invisible as possible. It would be too obvious to levy a “war tax.” So instead, governments fiddle with interest rates, allow inflation to run hot while manipulating the statistical headline rates of prices, and blame greedy corporations and evil villains when inflation is too obvious to ignore. For example, recall President Joe Biden’s reference to “Putin’s price hike!” to explain U.S. inflation in 2022, in order to find someone else to blame and to divert the attention of Americans from the unprecedented $7 trillion of deficit spending that had occurred without congressional restraints over the previous two years. Inflation is a tax, but it is a hidden tax, initially unseen to most as it creeps along year by year, slowly devouring savings and purchasing power.

When currencies were backed by gold, governments were restrained from perpetuating wars and state-sponsored violence by the fact that wars were very costly and specie was limited. Leaders sued for negotiated peace and wars were ended when government coffers started to run low. However, after each of the world’s leading powers abandoned the gold standard in the twentieth century, and moved instead to a fiat model (i.e., paper currencies backed by nothing more than the faith and credit of the issuing government), this natural restraint on war was removed. So long as the printing press could run, deficits could grow, new debt could be raised, and paper money (or its digital equivalent) issued to pay for ongoing conflict. The massive economic costs are quietly borne by the same patriotic working and middle classes who send their sons and daughters to sacrifice their lives and bodies.

Today, the United States stands at a crossroads.

While not technically at war, the country is deficit spending at war-time levels. It would be one thing if the fiscal and monetary position of the nation was healthy at the starting point. But it is not. The U.S. government has over $34 trillion in debt growing by the trillions just from debt-service (interest) costs. The government continues to deficit spend as if the party can go on forever. But it cannot. The risk of a widening war grows with each passing month.

The U.S. government’s ability to finance a major conflict is slowly but surely being eroded as those foreign nations and other investors who would otherwise subscribe to our debt grow wary of fiscal disaster.

The remaining option will be monetization of the debt (when the Federal Reserve steps in as buyer of last resort), galloping domestic inflation, and an eventual currency crisis.