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Sunday, April 12, 2009

Is the US Military Budget Increasing or Decreasing?

In this post on the Picket Line, David Gross says "Inflation-adjusted US military spending has doubled over the last ten years." If you use the CPI as your deflator, you get the wrong conclusions. David Gross's conclusions are wrong, because he is using the CPI as his index of inflation.

The CPI is biased. The CPI severely understates true inflation. What are the conclusions if you use the price of gold as the inflation index?

According to this page, US military spending was $295B for FY 2000.

According to this article (cited on The Picket Line), US military spending is projected to be $700B for FY 2010. That's a 137% increase. (Presumably, when you correct for inflation using the CPI, that leads to a doubling.)

On January 1, 1999, the price of gold was $290.25 an ounce. On January 1, 2009, the price of gold was $874.50 an ounce. That's a 201% increase.

Converting dollars to ounces of gold, the US military budget was 1.016B ounces of gold in 2000. The US military budget is projected to be 0.800B ounces of gold in 2010. That's a 21.3% decrease.

Compare this to per capita GDP. In 2008, per capita GDP denominated in gold was 53.56 ounces of gold. In 1998, per capita GDP denominated in gold was 109.13 ounces of gold. This is a cumulative decline of 51%.

Given that the overall US economy is shrinking, US military spending should also decrease.

David Gross is wrong. If you use gold as your inflation index, then US military spending is decreasing. However, military spending as a percentage of total GDP has increased.

The absolute military budget has shrunk, but not as fast as the rest of the economy.

My favorite quote from a Pentagon official in the past few months was "The biggest threat to the US military is no longer terrorism. It is a shrinking economy which cannot support such a large military."

"The budget of the State, quoted in real money (gold) is decreasing!" That's a favorable trend.

1 comment:

fritz said...

You make a good point using gold as a value index. It almost seems that if our military continues to grow at its present rate. And if our GDP continues to decline at a similar rate. Than in no time we are headed for a totally military state.

more realistic would be another form of national bankruptcy or another reason for the state to
raise taxes.

Because we all know that a giant military is needed to temper the world and protect us from terrorists ( at least thats what they will tell us)

Slightly off topic, but I would like to thank you. Since reading your blogg I am seeing fnords everywhere. I didn't even know what they were before I read FSK's guide.And I work in a restaurant and see couples together. I can easly tell with in a few minutes which one or identify both as parasite or productive type.

Its fun,enlightening,and a demonstration of unconscious human nature. Thank you.


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