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War causes inflation

Discussion in 'U.S. Politics' started by Stalin, Aug 5, 2011.

  1. Stalin

    Stalin Well-Known Member

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    I am doing some data analysis, including statistical methods on the data, and would be interested on members take on this. I have put this here because I am working on US data.

    "..War causes inflation.

    Every major war in the past century brought inflation to some degree. And so did two upheavals in the Middle East, the Yom Kippur War of 1973 and the Iranian Revolution of 1979, which did not directly involve the United States, except through their effect on the price of oil. Why is this so? The big reason is that wars must be paid for, somehow. They require resources that civilians would otherwise use. Those resources must be diverted to the war effort. Usually, inflation is the easiest way. World War I was largely financed by inflation, and so were the Revolutionary and Civil Wars before that. So, though on a smaller scale, was Vietnam.

    Inflation applies the law of the jungle to war finance. Prices and profits rise, wages and their purchasing power fall. Thugs, profiteers and the well connected get rich. Working people and the poor make out as they can. Savings erode, through the unseen mechanism of the "inflation tax" -- meaning that the government runs a big deficit in nominal terms, but a smaller one when inflation is factored in.

    ..

    There is profiteering. Firms with monopoly power usually keep some in reserve. In wartime, if the climate is permissive, they bring it out and use it. Gas prices can go up when refining capacity becomes short -- due partly to too many mergers. More generally, when sales to consumers are slow, businesses ought to cut prices -- but many of them don't. Instead, they raise prices to meet their income targets and hope that the market won't collapse.

    ***

    Is there another way? The answer is yes, but it isn't easy.

    In wars past -- notably in World War II and Korea -- the job was done by steeply progressive taxes including taxes on excess profits, by "forced saving" (which was an essentially compulsory private holding of public debt), and by price control. Interest rates were frozen at 2 percent on government bonds -- and essentially at 0 on bank deposits. The principle was: No one profits from the war.

    This combination kept inflation down -- prices were stable from 1942 through 1945. Not many grew rich off that war. Instead, my generation grew up with series EE bonds to our names. They were the promise that those working to win the war would see some of the material fruits of their labor later, when peacetime production returned.

    Libertarian Congressman Ron Paul agreed in 2007:

    Congress and the Federal Reserve Bank have a cozy, unspoken arrangement that makes war easier to finance. Congress has an insatiable appetite for new spending, but raising taxes is politically unpopular. The Federal Reserve, however, is happy to accommodate deficit spending by creating new money through the Treasury Department. In exchange, Congress leaves the Fed alone to operate free of pesky oversight and free of political scrutiny. Monetary policy is utterly ignored in Washington, even though the Federal Reserve system is a creation of Congress.

    The result of this arrangement is inflation. And inflation finances war.

    Economist Lawrence Parks has explained how the creation of the Federal Reserve Bank in 1913 made possible our involvement in World War I. Without the ability to create new money, the federal government never could have afforded the enormous mobilization of men and material. Prior to that, American wars were financed through taxes and borrowing, both of which have limits. But government printing presses, at least in theory, have no limits. That's why the money supply has nearly tripled just since 1990.

    For perspective, consider our ongoing military commitment in Korea. In Korea alone, U.S. taxpayers have spent $1 trillion in today's dollars over 55 years. What do we have to show for it? North Korea is a belligerent adversary armed with nuclear weapons, while South Korea is at best ambivalent about our role as their protector. The stalemate stretches on with no end in sight, as the grandchildren and great-grandchildren of the men who fought in Korea give little thought to what was gained or lost. The Korean conflict should serve as a cautionary tale against the open-ended military occupation of any region.

    The [hundreds of billions] we've officially spent in Iraq is an enormous sum, but the real total is much higher, hidden within the Defense Department and foreign aid budgets. As we build permanent military bases and a $1 billion embassy in Iraq, we need to keep asking whether it's really worth it. Congress should at least fund the war in an honest way so the American people can judge for themselves.

    Blanchard Economic Research pointed out in 2001:

    War has a profound effect on the economy, our government and its fiscal and monetary policies. These effects have consistently led to high inflation.

    David Hackett Fischer is a Professor of History and Economic History at Brandeis. [H]is book, The Great Wave, Price Revolutions and the Rhythm of History ... finds that ... periods of high inflation are caused by, and cause, a breakdown in order and a loss of faith in political institutions. He also finds that war is a triggering influence on inflation, political disorder, social conflict and economic disruption.

    The type of inflation that is associated with wars usually arises from increases in aggregate demand. In time of war, government spending for military purposes stimulates demand throughout an economy, at the same time that a shift of workers from productive labor into war production causes a decline in aggregate supply.

    War also causes the type of inflation that results from a rapid expansion of money and credit. "In World War I, the American people were characteristically unwilling to finance the total war effort out of increased taxes. This had been true in the Civil War and would also be so in World War II and the Vietnam War. Much of the expenditures in World War I, were financed out of the inflationary increases in the money supply." (See "American Economic History," Scheiber, Vatter and Faulkner)

    more at http://www.globalresearch.ca/index.php?context=va&aid=22616

    Comrade Stalin
     
  2. steveox

    steveox Well-Known Member

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    How come WWII Got is out of the Great Depression? You see YOU NEVER GO TO WAR ON A GOOD ECONOMY!! BLAME BUSH for Attacking Afgainstan & IRAQ. Plus ITS ALL CLINTONS FAULT TOO!!! If Bill Clinton done his job like hes supposed to do 9/11 wouldnt happen. We had Bin Laden right on target all he had to do was give the Excutive order to kill Bin Laden. You see Democrats are so soft on Al Queda and Hamas. Like the first WTC attack in 1993,,WHAT DID CLINTON DO?? NOTHING!!! US Embassy Bombing in Somalia 1997 ,,WHAT DID CLINTON DO?? NOTHING!!! the USS Cole attack in 2000,,WHAT DID CLINTON DO?? NOTHING!!! All Clinton did was attack KOSOVO and Milovich DIDNT EVEN HAVE WMDs And Milovich wasnt a threat to the US. He Bombed the chinese embassy and bombed an aspirn factory. But George Bush SR and JR did something aboiut saddam and Terrorist. Even Reagan Bombed Lybia Twice! And Go Futher back,, Jimmy Carter didnt do anything getting the Hostages out of IRAN. So if youre gonna blame the economy on someone BLAME THE DEMOCRATS!!
     
  3. Lagboltz

    Lagboltz Well-Known Member

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    The reference you site shows inflation to 2007. This site shows it a little longer.

    The inflation rate for the current wars does not seem to be as high as other wars. Why do you think that is?
     
  4. GenSeneca

    GenSeneca Well-Known Member

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    It's the printing of money that causes inflation. What that printed money is spent on is not the cause of the inflation, therefore claiming that "war causes inflation" is false.

    During the Great Depression, the FDR administration put out propaganda films declaring that the government was going to pursue a vigorous policy of inflation and even attempted to explain why it was a good thing. They made several specious claims about all the wonderful benefits that would result from inflating the nations currency but were very careful to avoid addressing any of the negative ramifications of such a policy. We were not at war at the time, we were spending that printed money to build the welfare state, but I don't see anyone claiming that the welfare state causes inflation.
     
  5. ProudLefty

    ProudLefty Well-Known Member

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    Inflation is the adjustment in pricing because of changes in the supply/demand equation. Increasing demand with stable supply drives prices up. Falling demand with stable demand drives prices down. Huge gains in productivity result in huge increases in supply with no increase in wages and therefore prices fall. That is what has happened during the past 20 years.

    Taking all of that in to account, the coincidental changes that you have seen between war and inflation are easy to explain: We have diminished supply because we divert production from nylons to parachutes, so the supply of nylons falls off, yet more working women are getting paid, so their demand for nice things like nylons rises and the price for nylons becomes exorbitant.

    However, an interesting aspect of this whole issue is that government can manipulate the markets so that there is a 2% to 2.5% rate of inflation, and that inflation acts like lubricant to keep the economy going. I believe that is a much more interesting story than the war causes inflation idea. Think through what an average 2% rate of inflation means tot he economic well-being of a normal America couple and their whole adult life. Its a fascinating thing when you first realize the magic of what that 2% does for them.
     
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