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History of US debt is history of US wars

(Shanghai Daily)

08:22, August 17, 2011

THE global economy risks the prospect of a double-dip recession, again because of the debt issue in the US.

The 2008 world recession started with the sub-prime mortgage crisis in the US. This time it is Uncle Sam's own debt crisis - about US$14.5 trillion so far and still increasing by US$2.7 million every minute according to the national debt clock - that is causing nerve-racking reactions around the world.

Regardless of if and how politicians in Washington will resolve the debt ceiling issue, it might be noteworthy to review how America's national debt has bloated to such an astronomical figure and reflect on any lessons that may be learned from the debt history.

It's fair to point out that Uncle Sam's debt is not the worst compared with many other countries' at this point. Wikipedia has a web page that provides a list of countries by public debt to GDP ratio, and the US ranks 37 on that list - even below the world's average among all countries.

Topping the list is Japan that has a sovereign debt that is 225 percent of GDP. Many European countries, PIGS (Portugal, Ireland, Greece, Spain) countries in particular, fill the front rows in terms of the debt to GDP ratio.

But the US is where China and many other countries store their caches of dollar assets. So we need to talk about the debt issue in the US.

In the beginning, there was the debt - US$75 million of war debt during the Revolutionary War - upon which the United States of America was founded, other than the Declaration of Independence, Bill of Rights and all that kind of thing. Alexander Hamilton, the first United States Secretary of the Treasury, once famously said, "A national debt, if it is not excessive, will be to us a national blessing."

And what a blessing it is after 200 years.

The key words here are "not excessive." The country did indeed heed the call of the founding fathers when it comes to managing public money in its early days. The war debt was paid off quickly and the country enjoyed several years of budget surpluses.

The War of 1812 forced borrowing and once again the government slipped back into debt. Over the next 200 years, the theme of big wars accompanied by big deficits would be recurring again and again.

The Civil War shot the federal deficit through the roof into the unheard of US$3 billion range. World War I was the next debt booster, pushing it to US$25.5 billion. The 1920s was a good time when Washington was lush with an excess of tax dollars. But the period of the next 15 years was a bad stretch, hit by both war and the Great Depression.

World War II and President Roosevelt's New Deal pushed the debt up to US$260 billion by 1950. Then the country had a brief period of balanced budgets in the late 1950s, but went back into debt in a big way in the 1960s, a time when President Johnson was financing both the Vietnam War and his Great Society.

President Reagan was the next big spender on war - the Cold War this time - in the defense build-up against the former Soviet Union. In the last 20 years, the federal budget saw every year in red, barring the years from 1998 to 2001 when the economy was roaring. Under Bush and Obama administrations, the wars in Iraq and Afghanistan and the brutal recession that is still lingering today finally pushed the nation debt to over US$14 trillion.

This brief review of the debt history reveals the relationship between war and debt in the US. War is expensive. War creates debt, and debt creates taxes, and taxes are funneled to the war machinery. The only beneficiary turns out to be the military-industrial complex, which has enormous lobbying power in Washington.

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