Keynesian Myths, Monetary Central Planning and The Triumph of The Warfare State – Conclusion

Presentation to the Committee For The Republic, Washington DC, February 2014  (6-part series)

Part 6 – Triumph of The Permanent Warfare State

After America’s earlier wars there occurred a swift and near total demobilization: the Union Army of 2 million had been reduced to 24,000 within months of Appomattox, and the 3 million called to arms by Woodrow Wilson was down to 50,000 within a few years of the armistice.

By contrast, the American Warfare State became permanent and self-fueling after World War II. So doing, it both catalyzed new extensions of Keynesian statism and monetary central planning and simultaneously flourished from their rise.

How Truman Lost the Battle To Contain the Warfare State

President Eisenhower famously warned about the dangers of the military-industrial complex in his 1961 farewell, but it was Harry Truman who first felt the sting of its political power. Truman was an old-fashioned budget balancer and made remarkable strides in the immediate post-war years toward traditional demobilization— cutting military spending from $70 billion to $15 billion by 1948 and balancing the Federal budget two years in a row.

Unfortunately, his government was still crawling with warriors—like Admiral Leahey and General Curtis LeMay and civilian hardliners like Secretaries Forrestal and Acheson—-who had thrived during WWII and were looking for new enemies to vanquish. Moreover, the unschooled haberdasher and machine politician from Missouri had made it far easier for them with his deplorable decision to drop atom bombs on an already beaten Japan.

There is now plenty of evidence from the archives of both sides that Truman’s brusque treatment of Stalin at Potsdam (July 1945) based on his “atomic secret” was the catalyst that began the Cold War. Thereafter, Tuman’s unwillingness to over-ride the brass and the hardliners and negotiate international control of atomic weapons—eloquently urged by the legendary statesman, Henry Stimson, in his last cabinet meeting after serving presidents for half a century—assured a nuclear arms race and perpetual cold war.

Indeed, upon Truman’s rejection of Stimson’s plea, another Cabinet participant presciently queried, “…. (so) the arms race is on, is that right?”

Truman famously agreed and insisted “but we should stay ahead”.  Except that he could not both continue the demobilization and stay ahead in the arms race and nascent cold war.

So by spring 1950 Truman had already lost the battle. His government had become increasingly populated with hardliners in response to alleged Soviet provocations.  In fact, fearful of encirclement yet again and Truman’s atomic diplomacy, Stalin was brutally collecting upon his eastern European territorial winnings from Yalta—even as the Republican Right went on a jihad about the “loss” of China.

In that context, the cold warriors led by Paul Nitze at State and the Keynesian professoriat represented by CEA Chairman Leon Keyserling effected a fatal alliance. In that truly insidious policy document known as NSC-68, they proclaimed a Soviet agenda to conquer the world, which was balderdash, and averred that a massive increase in cold war defense spending would levitate the American economy, which was lunacy.

The Pointless “Police Action” in Korea and Full Blast Rearmament

Soon an inconsequential civil war on the barren Korean peninsula between two brutal tyrants became a flash point in the Cold War, causing military re-mobilization and sending the defense budget soaring five-fold to more than $60 billion. Harry Truman, the resolute  budget balancer, avoided a torrent of red ink only by seizing on the moment of domestic fear, when the “chicoms” came flooding across the Yalu River, to re-impose FDR’s  onerous wartime taxes.

In my book, I gave Truman the hero award for insisting that an elective war be financed with current taxes.

But tonight I also give him a villains badge for succumbing to the war-mongers, and for invading Asian rice paddies that posed no threat to American security. Indeed, they might just as well have become a province of China’s “red capitalism”, which both the Keynesians and Wall Street now tell us is an economic cat’s meow.

Thereafter the “begats” went full retard, old testament-style. To be sure, the great General Dwight Eisenhower held-back the tide for a time and had no trouble seeing the folly of a land-war in Asia. So he did quickly end the hideously named “police action” in Korea after 58,000 American soldiers and upwards of a million civilians had been killed. He also had the strategic vision to see the folly of NSC-68, which called for massive conventional military capacity to fight multiple land and air wars all over the planet.

Instead, Eisenhower drastically downsized the army, shelved naval plans for a massive armada of supercarriers, and cut Truman’s bloated war budget from $500 billion in today’s money to $370 billion based on the gutsy doctrine of massive nuclear retaliation and the correct perception that the Soviets were not suicidal.

By decisively throttling the Warfare State, President Eisenhower gave brief reprieve to the old time fiscal religion.  He balanced his budgets repeatedly, refused to reduce Truman’s war taxes until reductions were earned with spending cuts, shrunk the total Federal budget in constant dollars for the last time ever, and over his eight year term held average new public borrowing to a miniscule 0.4 percent of GDP.

The Detestable Dulles Brothers and the Origins of Cold War Imperialism

Yet in his endless quest to economize, Eisenhower carried a good thing too far by delegating cold war fighting to the seemingly low-cost cloak-and-dagger operations of the detestable Dulles brothers. Unfortunately, to this very day the Warfare State flourishes from the bitter harvest planted by the Allen’s CIA and Foster’s bully-boy diplomacy throughout the developing world.

The untoward legacy of the 1953 coup against Mossadeq in Iran is obvious. But it was no less stupid than the Dulles brothers’ senseless assault on Nasserism, which brought the Soviets into the Middle East and turned it into a permanent armed camp.

But the most abominable Dulles legacy was the insanity of Vietnam. Not only did it saddle America with culpability for an outright genocide, but it set-off a string of economic calamities that spelled the final doom of the old time fiscal religion and extinguished what remained of sound money doctrine at the Fed.

In quick sequence, Kennedy gifted Washington’s politicians with the Keynesian gospel of full-employment deficits; Johnson’s guns and butter then engendered a flood of red ink;  and thereafter the White House broke the will and integrity of the great Fed Chairman, William McChesney Martin, thereby busting the financial discipline of the Bretton Woods gold standard with a battering ram of unwanted off-shore dollars.

It was Nixon who committed the final abomination of Camp David in August 1971 by defaulting on the nation’s obligation to live within its means and redeem dollars for gold at $35 per ounce. Adhering to the canons of sound money, of course, would have caused a deep recession after a decade of fiscal excess —and that, in turn, might have spared the nation of Nixon’s horrific second term.

Instead of post-Vietnam Peace, Friedman’s Folly

It also would have put the Democrats’ peacenik wing in power, thereby exposing the Warfare State to an existential challenge at just the right moment— to wit, when it was on its heels from the Vietnam fiasco. But instead of serendipity, we got Milton Friedman’s Folly—-that is, floating fiat money and a central bank unshackled from the anchor of  gold.

Ironically, the great libertarian’s monetary recipe amounted to statist management of our massive capitalist economy. This would be accomplished through the wisdom of 12 monetary eunuchs ensconced in the Eccles Building where they were to occupy themselves playing scrabble and reading book reviews, while occasionally adjusting the money supply dials exactly in accordance with the Friedmanite formula.

It didn’t work out that way. The cowardly Dr. Arthur Burns quickly became a mad money printer and we were presently off to the 1970s races of double-digit inflation. And soon enough there arose the hoary legend that this calamity of central banking was actually caused by high oil prices and the machinations of the former camel-drivers who had recently conquered the oil-rich lands of eastern Arabia.

Thus, thanks to the abominations of Camp David, the Warfare State got two massive boosts which have carried it far toward its current trillion dollar girth.

First, instead of a house cleaning by the likes of Frank Church, Nixon’s re-election eventually brought the Yale skull and bones back to the CIA. There, during his brief but destructive tenure, Poppy Bush rummaged up the neo-con “B team” and paved the way for the massive Reagan defense build-up a few years later.

The B team’s report falsely painted lurid imagery of an Evil Empire bent on a nuclear war-winning strategy, when, in truth, the Soviet Union was already a beached whale of decaying state socialism.

Secondly, Washington went into the misbegotten business of fighting so-called high oil prices by massive policing of the Persian Gulf. This soon evolved into rampantt meddling meddling in the region, including military alliances with an endless stable of corrupt sheikhs, princes, emirs, dictators and despots—-with the despicable royal family of Saudi Arabia in the lead.

By the late 1970s, moreover, Washington had become so mesmerized by the Keynesian predicate—that is, the notion that the state must constantly maneuver to levitate the GDP—that it didn’t even know that American prosperity did not depend on carrier battle groups cruising the straits of Hormuz or alliances with despots.

The simple and pacific solution was free market pricing—the sure fire route to new supplies, alternative energy and more efficient consumption. The truth is, there never was an OPEC cartel—just the Saudi royal family, whose greed and intoxication with decadent opulence apparently knows no bounds.

If they threatened to hold-back production, we should have let the global market price work its magic, meaning probably less GDP in 1974 and more by 1994. The intra-temporal distribution of GDP is a matter for the market to decide, not the state. Accordingly, it should never have been an excuse to arm and ally with the sordid despots of Riyadh, nor to keep them on the throne to avert a Shia uprising in the eastern oil provinces.

Twenty million everyday Saudis would have been every bit as eager for the oil revenues as 2,000  gluttonous princes.

Reagan’s Presidency: Final Apotheosis of The Warfare State

Regrettably the Reagan Presidency brought on the final apotheosis of the American Warfare State. The massive $1.5 trillion defense build-up launched without shred of analysis in February 1981 was not only an unnecessary and utter waste, but it also left four legacies that enabled today’s trillion dollar Warfare State, and which now propel the nation on its appointed path toward fiscal bankruptcy.

First, the only politician of modern times who honestly campaigned against Big Government and the national debt was reduced to enunciating pure fiscal babble once in office. Ronald Reagan was so mesmerized by the brass and so bamboozled by the neo-cons’ scary bedtime stories about the Soviets that he not only gave the Pentagon a blank check, but he then proclaimed that there was no deficit problem because the flood of red ink on his watch amounted to necessary and excusable “war debt”.

Secondly, when the national debt skyrocketed from $1 trillion to $3.5 trillion during the Reagan-Bush era, the GOP interred the old time fiscal religion once and for all and proclaimed the modest debt fueled boom of those years as a victory for tax-cutting and the gospel of painless growth. So with two fiscal free lunch parties now in incumbent in the machinery of governance, the Warfare State was unleashed like never before.

Indeed, in due course the fatuous Dick Cheney proclaimed that Reagan proved deficits don’t matter, and then charted the most reckless fiscal course in modern history: massive tax cuts and a doubling of the defense budget during the midst of a Fed induced credit boom that was destined to collapse.

When it did, the Federal deficit surged to nearly 10 percent of GDP—even before Obama’s Keynesian witch doctors got their hands in the public till.

The War Machine the Gipper Built: Armada of Invasion and Occupation

Thirdly, the massive Reagan defense buildup did not go to countering the alleged strategic nuclear threat posed by the Evil Empire because there wasn’t one in the first place, and there was not much to spend it on anyway—-except the rank fantasy of Star Wars which even the Congressional porkers couldn’t abide.

Instead, the Pentagon poured hundreds of billions into a vast conventional war machine, including  the 600-ship Navy and its 13 lethal carrier-battle groups; 12,000 new tanks and armored fighting vehicles; 16,000 fighters, bombers, attack helicopters, close air support and transport planes; and a blizzard of cruise missiles and electronic warfare suites.

All of this soon proved well suited to wars of invasion and occupation in the lands of the unwilling and among the desert and mountain redoubts of the mostly unarmed.

In short, the wherewithal for the pointless invasions of 1991, 2001 and 2003 and all the lesser American aggressions in-between and after was requisitioned during the Reagan defense spending binge to thwart an enemy of liberty that had already failed by eating its own cooking.

Finally, if the truth be told the Reagan White House could not get rid of Paul Volcker soon enough. Doing so in 1987, it removed from what was already a rogue central bank the last vestige of sound money discipline and fearless independence from Wall Street.

Treasury Secretary Jim Baker, a policy descendent of John Connally, wanted low interest rates, a weak dollar and a politically pliant  disposition at the Fed.  Alan Greenspan 2.0 accomplished all of the above and much more, turning the Fed into a pliant tool of GOP triumphalism and Wall Street speculation—even as he spent 19 years in the Eccles Building  institutionalization the destruction of  the very doctrines of sound finance and gold-backed money about which Greenspan 1.0 had written so eloquently before he came to Washington.

Now caught up fueling a repetitive and destructive cycle of financial bubbles and busts, the Greenspan-Bernanke-Yellen Fed has taken monetary central planning into the deep waters of wanton monetization of the public debt.

Under these circumstances there is no fiscal governance—-just an inexorable drift toward monetary catastrophe. In the interim, our senseless and dangerous trillion dollar Warfare State rolls on.

Keynesian statism and monetary central planning  have triumphed, meaning that the American Republic has no remaining fiscal defenses, nor immunities from its extractions.

The good Ben (Franklin that is) said,” Sir you have a Republic if you can keep it”.

We apparently haven’t.


Keynesian Myths, Monetary Central Planning and The Triumph of The Warfare State – Part 1

Keynesian Myths, Monetary Central Planning and The Triumph of The Warfare State – Part 2

Keynesian Myths, Monetary Central Planning and The Triumph of The Warfare State – Part 3

Keynesian Myths, Monetary Central Planning and The Triumph of The Warfare State – Part 4

Keynesian Myths, Monetary Central Planning and The Triumph of The Warfare State – Part 5