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How Weapons Sales Caused the 2008 Financial Crisis


I just read an interesting new book called "The Economics of Killing: How the West Fuels War and Poverty in the Developing World" by Vijay Mehta.  I especially recommend the first chapter, which argues that the U.S. economy has become very heavily dependent on weapons sales (to the U.S. government and foreign governments) but refuses to sell weapons or "duel use" high-tech products to China, even as U.S. consumers buy everything they consume from China.  This trade balance results in China buying up U.S. Treasury bonds, which results in low interest rates and lots of personal debt and eventually financial crisis.  Mehta's conclusion: either we sell China our weapons (which would be a short-term fix, as China would quickly shift to manufacturing the same products itself) or we shift our economy toward production of non-military products.  A similar argument is found in this article:

Arms Sales and the Wall Street protests: By Vijay Mehta

Published on 26. Nov, 2011, TopStory

Arms Sales and the Wall Street protests: By Vijay Mehta

Commenting on the Occupy Wall St protests recently, the anti-war activist Matthew Good complained that protesters were wasting their time camping in downtown Manhattan. They should, he argued, be gathering around the Pentagon. After all, the 700 billion dollars that US spent bailing out the bankers is a pittance when set against the annual one trillion dollar US defence budget.

His analysis assumed that the issues of rogue banks and outlandish defence spending were separate. Yet our recent financial crisis was largely created by the global trade in weapons. The acute financial distress and unemployment facing many Europeans and Americans today have their origins in the West’s economic reliance on exporting death.

Over the past 20 years, the stand-out feature of the global economy has been the ever increasing amount of dollars lent by China to the United States. China’s dollar surplus mirrors the enormous trade imbalance between the two countries. The US has an insatiable appetite for plasticky Chinese goods, but it has yet to find anything to sell the Chinese in return.

Actually, this is not quite true. Ask any Chinese official to explain the trade imbalance between China and the US and he will tell you the same thing: the US refuses to sell China what it actually wants to buy. Namely, the kind of high-tech, high-value weaponry and “dual use” items that balance America’s trade with other countries. The US does not wish to arm its rival.

For this reason, China had little option but to recycle its vast dollar surplus back into Western capital markets. Over the past decade this endless source of cheap credit kept US interest rates at record lows, creating a booming financial sector. Alas, it also inflated the various asset bubbles that burst so disastrously in 2007 and 2008, pitching the West into an acute recession from which it has yet to fully emerge.

Manhattan’s Zuccotti Park is therefore a very natural place for anti-war activists and de-militarists to congregate. The arms industry, assisted by lavish government defence spending, has become so fundamental to US exports that refusing weapons to a major trading partner like China causes a global financial crisis. Only until the two countries back away from their arms race and devote tax-payers’ money to more productive goals will the world economy reach a sustainable balance.

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Vijay’s Mehta is an author and a peace activist. He is the chair of Uniting for Peace UK and Founding Trustee of Fortune Forum Charity. His book The Economics of Killing will be published by Pluto Press in February 2012. He can be reached at vijay@vmpeace.org

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