Acknowledgement, Foreword, Introduction, Part I Military Industrial Complex – Power, Myths, Facts and Figures, 1. How the West’s Addiction to Arms Sales Caused the 2008 Structural Financial Crisis, 2. What is the Military Industrial Complex?, 3. The Culture of Militarism and Global North’s Power of Definition, 4. Europe and the Remaking of the Middle East, Part II Military Spending and Its Ill Effects, 5. Negative Effects of Conflicts on Global, Human Security, Refugees, Forced Migrations and Urbanisation, 6. War and its Ill Effects on Health, Environment and Development, Part III The Folly of Chronic Wars – For Profit, Resources and Domination – More Weapons – More Wars – More Profits, 7. Terrorism and Non-State Actors, and How to Make Them Stop, 8. China's Periphery – The Military-Industrial Mess That Could Destroy a Bright Future, 9. The Emerging Conflicts – Other Future Fault-lines of the World, Part IV A New Vision, A New Beginning In A New Millennium – A Practical Way Of Reducing Arms, Armies And Wars For The Survival Of Humanity, 10. Averting Disaster – What Type of Global Security Architecture Fits in Today’s World?, 11. Replacing Military Industrial Complex – Making the 21st Century the Century of Soft Power, Epilogue: The Path Ahead, Notes, Index.
ijay Mehta is an author and peace activist. He is Chair of Uniting for Peace and founding trustee of the Fortune Forum charity. His books include The Fortune Forum Code: For a Sustainable Future (2006), Arms No More (2005), and The United Nations and Its Future in the 21st Century (2005).
Excerpt. © Reprinted by permission. All rights reserved.
The Economics of Killing
How the West Fuels War and Poverty in the Developing World
By Vijay Mehta
Pluto Press
Copyright © 2012 Vijay Mehta
All rights reserved.
ISBN: 978-0-7453-3224-6
Contents
Acknowledgements, ix,
Introduction, 1,
PART I MILITARY-INDUSTRIAL COMPLEX – POWER, MYTHS, FACTS AND FIGURES,
1. How the West's Addiction to Arms Sales Caused the 2008 Financial Crisis, 9,
2. What is the Military-Industrial Complex?, 22,
3. The Culture of Militarism and Global North's Power of Definition, 41,
4. Europe and the Remaking of the Middle East, 57,
PART II MILITARY SPENDING AND ITS ILL EFFECTS,
5. Negative Effects of Conflicts on Global and Human Security, Refugees, Forced Migrations and Urbanisation, 73,
6. War and its Ill Effects on Health, Environment and Development, 83,
PART III THE FOLLY OF CHRONIC WARS – FOR PROFIT, RESOURCES AND DOMINATION – MORE WEAPONS – MORE WARS – MORE PROFITS,
7. Terrorism and Non-State Actors, and How to Make Them Stop, 97,
8. China's Periphery – The Military-Industrial Mess That Could Destroy a Bright Future, 108,
9. The Emerging Conflicts – Other Future Fault-lines of the World, 123,
PART IV A NEW VISION, A NEW BEGINNING IN A NEW MILLENNIUM – A PRACTICAL WAY OF REDUCING ARMS, ARMIES AND WARS FOR THE SURVIVAL OF HUMANITY,
10. Averting Disaster – What Type of Global Security Architecture Fits in Today's World?, 139,
11. Replacing the Military-Industrial Complex – Making the Twenty-first Century the Century of Soft Power, 149,
Epilogue – The Path Ahead, 159,
Appendix – List of Global Peace Organisations, 168,
Notes, 193,
Index, 227,
CHAPTER 1
How the West's Addiction to Arms Sales Caused the 2008 Financial Crisis
In 2008 Western capitalism collapsed.
Beginning with the failure of giant banks such as Lehman Brothers and Bear Stearns, within a year European countries such as Iceland and Greece were teetering on the brink of bankruptcy. Stock markets crashed and gold markets soared as some of the most famous names in global commerce – AIG, Morgan Stanley, RBS (The Royal Bank of Scotland) – contemplated their own oblivion. Across the world, governments responded by spending trillions of dollars to support a financial system that was once synonymous with buccaneering free-market capitalism. To pay for these bailouts, many states decided to slash social expenditure even as the banks immediately resumed the payment of multi-million-dollar bonuses to their staff.
Much was written about the causes of the disaster. Some blamed the greed of individual bankers, whose poor decisions had exposed their institutions to a rash of failed loans, particularly in the US housing market. Some blamed the Western governments, either for failing to regulate the financial system or for imposing too much regulation, depending on the analyst's politics. Some said the investment scene had become too atomised and complex, a result of exotic new securities and derivatives representing diverse risks.
Doubtless these explanations were correct, as far as they went. But all were superficial. None addressed the underlying, structural causes of the economic cataclysm. They did not explain the presence of huge amounts of liquidity in Western capital markets, nor did they account for the astonishingly low interest rates set by the US Federal Reserve. Most importantly, few of the explanations linked what had happened to the financial markets back to the real economy, the place where base materials are cut from the ground, refined and entwined, marketed and sold.
A MYSTERIOUS BOOM
In 2003, a boom began in the United States. Its catalyst was a financial measure that many Americans thought they would never see in their lifetimes. In July that year the head of the US Federal Reserve, Alan Greenspan, slashed the benchmark US interest rate to just 1 per cent. This interest rate controlled the cost of borrowing across the American economy, but it also influenced decisions well beyond the nation's borders. Borrowing money had never been cheaper.
Banks began lending mortgages to people who would never have had access to such large loans in the past, a housing market that came to be known as 'sub-prime'. These mortgages were broken down into new types of security that could be traded among banks, which used complex derivatives to 'hedge' the very obvious risks that sub-prime lending presented. Across the Union, trailers were swapped for condos, beach huts sprang up on the shores of the Great Lakes, existing homeowners withdrew equity from their properties as if they were giant ATMs. The profits of retailers soared as Americans rushed to purchase their goods with what seemed like an unlimited line of cheap credit.
But where was the cheap money coming from?
The benchmark interest rate reflects how easy it is for a government to borrow money. Government bonds are one place that people with surplus cash can park their money to protect it from inflation. Savers tend to purchase government bonds in times of economic uncertainty, for instance during a recession. Bonds are seen as a safe bet – if the government runs out of money, it can simply print more. Capitalist theory dictates that when demand for bonds is strong the government does not need to offer an attractive interest rate (or 'yield') on the debt. This keeps the cost of borrowing low across the economy, which helps to boost investment and propel the country out of recession.
Conversely, during a boom investors prefer the quick gains to be made on the stock market. They tend to ignore stodgy, low-risk government bonds. So, to entice investors to purchase its debt, the government is forced to offer a higher rate of interest. This increases the overall cost of borrowing and cools the booming economy. On paper, the capitalist model should be a perfectly self-correcting, self-regulating system.
That, at least, was the theory.
By 2003 the US Federal Reserve no longer relied on this logic to borrow, if it ever had. This was because Washington had discovered an almost limitless new supply of cheap credit. It was this bottomless well of cheap money that had allowed Greenspan to cut his benchmark rate to record lows, and it was this bottomless well in which the US financial markets would drown in the financial collapse of 2008.
OVERLOAD
For over 25 years the People's Republic of China had been moving away from communism towards an export-led economic model. Following the return of Hong Kong to China in 1997 the Chinese economy began to accumulate reserves of foreign currency at an accelerated rate (see Figure 1.1). Foreign exchange reserves are a marker of a country that sells more to the outside world than it buys from it. As more and more container ships left Shanghai laden with plastic goods and cheap electronics, China rapidly became the world's workshop.
It was China that was providing the US with its seemingly endless quantities of cheap credit. By 2009 the gap between US sales to China and what it had bought from China had reached a staggering $227 billion. China used these leftover dollars to buy more US Treasury bonds, ensuring that US interest rates stayed low, and ensuring that American citizens spent more and more on Chinese goods. China and the US were locked in an economic death spiral, hurtling towards the 2008 collapse.
US officials blamed this vicious cycle on China for pegging its currency, the Yuan, to the dollar at a fixed rate. Were the Chinese currency allowed to float freely, they argued, it would appreciate in value, making it more expensive for Americans to buy Chinese goods and thereby correcting the trade gap. There were two major problems with this argument. China's currency was artificially cheap in all its export markets, not just the US – yet it was only China's trade with the US that became so dramatically unbalanced. Secondly, from 2005 onwards China allowed the Yuan to appreciate by more than 20 per cent. The trade imbalance with the US continued to grow unabated. Many economists conceded that monetary reform was a sideshow; something else was going on.
What was it about the structure of US exports that was causing the imbalances? Why did China end up investing so much money in US Treasury bonds? Why did the economic imbalances become so lethal, and why was the situation allowed to culminate so badly?
It is wrong to suggest that China deliberately created a crisis in Western capitalism. In fact, Beijing would have much preferred to invest its surplus dollars in a very different way. When it came to its leftover trillions, China had three choices. It could buy US Treasury bonds. It could purchase US goods and services. Or it could acquire US corporations. Options two and three would have reduced the trans-Pacific imbalances which inflated the various bubbles that burst in 2008. However, there was a problem. The US refused to sell China the goods, services and corporations that it wished to buy, because what China wanted to buy was the US military-industrial complex.
WHY IKE WAS RIGHT
January 2011 saw the 50th anniversary of President Dwight D. Eisenhower's farewell address to his nation. The anniversary reinvigorated discussion of what the former Supreme Allied Commander meant when he warned his countrymen to 'guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist.'
Half a century later commentators on both the left and right of the political spectrum have lined up to dismiss and downplay Eisenhower's warning. In the conservative National Review, Vincent Cannato claimed that the political Left has been especially eager to appropriate the Republican general's words for political purposes. He concluded that Eisenhower was merely urging fiscal restraint, a warning against wasteful Pentagon spending and procurement policies, rather than pointing towards a construct with autonomous political power.
How the West's Arms Sales Caused the 2008 Financial Crisis 13 Some liberal pundits were equally dismissive. David Greenberg argued in Slate that Ike's address had been completely misunderstood, calling fulminations against the military-industrial complex lazy, hackneyed, and histrionic. Greenberg condemned what he called the 'mad embrace' of Eisenhower in recent decades by anti-war leftists and so-called realists. While he conceded that the president had worried America could become a garrison state, Greenberg mocked those who saw the military-industrial complex as a conspiratorial, demonic system. Instead, he claimed that Eisenhower's military-industrial complex merely represented an outsize special interest which promoted extravagant military spending.
DEFINING OUR TERMS
Given such scepticism, it is important to define the exact nature of the military-industrial complex. The United States is a useful case-study. Until World War II the US relied almost entirely on an arsenal system. An arsenal was a state-run system of arms factories and warehouses under direct military control. In wartime the government designed and procured munitions and weapons from these arsenals. Once the war ended the arsenals and the military demobilised. Because the US did not have a large standing army, it did not need a standing military-industrial complex.
After World War II, the system changed. The US abolished the old arsenal system and replaced it with a network that fused science, industry and the military. Over three generations thousands of firms, large and small, emerged to equip the military. Other companies were founded to supply these firms, creating a gigantic supply chain that competed domestically but also sought overseas orders. However, the government continued to wield huge power over the complex. In 1993, for instance, industry leaders were called to the Pentagon by Defense Secretary William Perry for dinner – a meeting that came to be known as 'the Last Supper' – to tell their industry to consolidate. In less than a decade, 50 major companies consolidated into six global giants.
The observations in the last two paragraphs are not the words of one of David Greenberg's anti-war leftists or so-called realists. They were made in 2011 by US Deputy Defense Secretary William J. Lynn III on-board the USS Intrepid aircraft carrier, now a military museum in New York, to an audience of defence executives. He was quick to assure them that no new 'Last Supper' was on the horizon. If Greenberg and Cannato are correct in their assessment, it seems that someone forget to tell the US government.
The military-industrial complex, or what Lynn called in his speech the 'defence industrial base', produces not only weapons. Increasingly, it also produces 'dual use' items, high-value, hi-tech hardware that commands astronomical prices in overseas markets. Selling these items overseas has become fundamental to the West balancing its trade with developing countries. Were developing countries to decide against buying the output of the West's military-industrial complexes, the balance of world trade would be overturned.
THE CHINA PROBLEM
It is at this point that we begin to understand the events of 2008. US officials are not only convinced of the existence of a US military-industrial complex, but of a Chinese equivalent that must be thwarted in the interests of US national security. For decades China has tried, by fair means and foul, to acquire military-industrial secrets. The examples of this strategy are almost too numerous to mention.
In January 2011, for instance, a US court jailed a 46-year-old man, Zhen Zu Wu, for shipping radar components to the Chinese military. In 2010 Noshir Gowadia, an American engineer, was convicted in a US court of helping China to design a cruise missile based on US designs. He was jailed for 32 years. In 2009 a court in Tennessee sentenced a retired college professor, John Reece Roth, to four years for selling US Air Force drone technology to a Chinese national. In 2008 Gregg William Bergersen, a weapon systems policy analyst with the Defense Security Cooperation Agency, pled guilty to passing information to China about US-Taiwan military cooperation. In 2007 a US court convicted Chi Mak of sending to China details of a quiet energy propulsion project for US warships.
China does not distinguish between military technology and industrial technology. Its strategy exists to acquire both in order to modernise its own military-industrial complex. Those who deny the existence of such complexes need only to read the 2009 Report to Congress of the US China-Economic and Security Review Commission. The report says that Chinese espionage 'is driven by the state-owned research institutes and factories of China's military-industrial complex'.
Dr James Mulvenon, an expert on the Chinese military-industrial complex, argued that profit-driven companies are spun off from Chinese government-controlled defence industrial research institutes and are encouraged to acquire foreign technology in an 'entrepreneurial' fashion. FBI Director Robert Mueller warned that 'China is stealing our secrets in an effort to leap ahead in terms of its military technology, but also [its] economic capability'. Clearly, the US does not see the threat purely in terms of guns and rockets.
THE CAUSES OF A CRISIS
China steals US military-industrial secrets because it cannot purchase them legally. Since the Tiananmen Square massacre of 1989 the US and European Union have enforced an arms embargo against China. At first glance, this embargo does not appear to make much difference to the yawning $227 billion gap between what America sells to China and what it buys from it. After all, even if the US sold as much weaponry to China as it sold to the rest of the world in 2009/10 this would have represented only about one-fifth of the bilateral trade deficit.
However, not only does the US refuse to sell China weapons, it refuses to allow China to invest in US companies which manufacture equipment of a military, strategic or hi-tech nature. It prevents other nations from selling China weapons with US-made components and it is quite possible that, were it allowed to, China would outspend the rest of the world combined on US weapons. Put simply, the US government shuts China out of the part of the US economy most of interest to the Chinese: the military-industrial complex.
The American state has been highly active in blocking Chinese investment in the US. In July 2010, for instance, national-security objections prevented Emcore from selling its fibre-optics business to China's Tangshan Caofeidian Investment Corporation. The companies cited 'regulatory concerns' emanating from Washington for withdrawing their filing with the Committee on Foreign Investment in the United States (CFIUS).
A few months earlier another Chinese entity, Northwest Non Ferrous International Investment, was prevented from taking a controlling interest in a Nevada mining company which had access to tungsten, a metal used heavily by the arms industry. Officials at the Treasury Department, which oversees the CFIUS panel, did not disclose the reason for their concerns beyond the proximity of some of the target company's installations to US military installations.
(Continues...)
Excerpted from
The Economics of Killing
by
Vijay Mehta
. Copyright © 2012 Vijay Mehta. Excerpted by permission of Pluto Press.
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