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Let's Play WarOne of the reasons why we are Libertarians (of the Absolute persuasion) is because we deeply dislike and distrust governments (we think we may have already mentioned this one or two times already…not sure). The problem with governments is that they waste our wealth while producing nothing. A typical example of such waste is military expenditure.

This type of expenditure is one of the worst because we get nothing in return. When governments spend in socialized medicine, or housing or schools or anything that may be remotely useful we at least get something (however expensive and inefficient it may be). With the military we get exactly zero. We don't get a service that may serve us and we don't get assets we can use. All we get is a horrifically expensive organization we hope we may never have to use. It's like life insurance with one crucial difference: we can't rely on it because we don't get any payoff.

THE DEFENSE BUDGET

All governments on earth have some sort of so-called "defense budget". Of course for reasons of political correctness, they don't call it "attack budget" but this is exactly what some countries use this budget for. And we are not just talking about governments with tin-hat dictators at the helm in unknown places throughout the earth. We are talking major powers including the usual suspects: US, Russia, China, and so forth.

Politicians tell us that our "defense budgets" are just about right. In order to demonstrate this point they often use the GDP as a benchmark, where military expenditures are typically in the order of 2.5%. Furthermore, they point to the fact that such expenditures have been going down consistently over the last 35 years. You can see it by yourself in the plot below:

MilEx as %GDP

See? Proof positive that politicians do not lie (take a look at the trend line in black). We are in good hands. They are spending just enough to keep us safe. It is not a waste.

Or would you like to know the truth?

THE REAL DEFENSE BUDGET

As we know the GDP is a figment of economic imagination ( GDP Keynessians Vodoo Economics ). Among other things, the GDP includes printed money (which is not wealth). But one of the things that the GDP does not include is debt or technically speaking, negative wealth. As the GDP is supposed to represent wealth, it is only fair that negative wealth also be included. If we now rework the previous plot by subtracting public debt from the GDP, things look quite different.

MilEx as %RealGDP

From the plot it is obvious that the average military expenditure is in the order of 7% Real GDP with a minimum of 4% and a maximum of 17%!!! Worse than that, it has been going up (see the trend line in black).

Many people will object to our calculation methodology, and so we need to explain ourselves. The point is very simple. When you are budgeting to purchase something expensive in instalments that you will need to support for a very long time, you don't just look at cash flow but you look at your total wealth. Cash flow fluctuates but your total wealth is the absolute limit. The 2008 debacle started in part because banks and other organizations were selling mortgages to people based on cash flow considerations only. Any responsible bank will enquire about your total assets before extending you credit. Sure, your income matters but what matters more is how much debt you already have. If you already have plenty of debt it is very unlikely you will be able to pay back what you own and so no new credit will be extended. In other words, lots of debt = no new purchases.

Of course, this is not the case of governments because governments use the unholy trinity (tax, borrow and print) to go beyond sane expenditure limits. And so, it is only fair to express military expenditure (and any other expenditure for that matter) as a percentage of Real GDP. And as you can see from the graph above, governments have been cheating enormously and continously. They have been maintaining (and increasing) their military budgets through borrowing. They are spending now and leaving huge debts for next generations to pay.

CONCLUSION

Yes, there is a price to be paid for all this "security" that we are supposedly getting. This price will be paid in the future with decreased standards of living; this means poverty and misery. Military budgets matter not only because they remove useful capital wealth from the markets hence depressing it, but because they are the apex of waste. We may as well take all that capital and burn it.

But then again, you may be of the opinion that we need to be "protected" from whatever it is that we are being "protected" from. That's all right. Just one reminder, you can't eat "protection".

Note: please see the Glossary if you are unfamiliar with certain words.

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