For our money, one of the better parts of President Obama's speech at West Point this week was his connection between a healthy economy and U.S. national security. To quote: "Our prosperity provides a foundation for our power. It pays for our military. It underwrites our diplomacy." We only wish Mr. Obama understood the link between the larger welfare state he is trying to build at home and the economic weakness that will undermine our military power.

The proof is right before his eyes in the U.S. struggle to get Europe to contribute more forces to Afghanistan. Mr. Obama has called on NATO to buttress the U.S. surge of 30,000 in Afghanistan with 5,000 or more European troops. Secretary of State Hillary Clinton is in Brussels today to round up promissory notes. But except for the usual stalwarts—Britain and Poland—the allies are having trouble meeting even this modest goal. Germany and France are reluctant to contribute anything more to defeat the Taliban.

This is by now a familiar story, and a big part of the problem is the relative lack of military spending. Among the Western Europeans, only France and the U.K. spend more than 2% of GDP on defense, supposedly the NATO-mandated minimum. Nearly everyone else is below that. Germany, the continent's largest economy, stands at 1.3%. U.S. defense spending has been above 4% of GDP since 2004, having fallen to 3% after the Cold War ended.

No amount of pleading and shaming has worked on the continentals. NATO launched the "Defense Capabilities Initiative" in 1999, only to abandon it a few years later. Various attempts to stand up European "rapid reaction" forces have floundered.

Most European countries also commit more than half of what little they do spend on defense to soldier salaries and benefits. Equipment and training are shortchanged. Belgium devotes 74% to personnel; the U.S. 30.6%. Europeans lack cargo planes and helicopters to enable troops to get to, and move within, far-off conflict zones. In 2007, the U.S. deployed 14% of its troops in overseas operations, Europe 4%.

Such relative strategic weakness has made the Europeans more dependent on the American security umbrella, even as they resent it. But it also makes Europeans more disposed to avoid confrontation with adversaries like Saddam Hussein or Mahmoud Ahmadinejad. As Henry Kissinger has put it, European leaders are no longer able to ask their people to make major sacrifices.

The overlooked culprit here is the rise of the modern welfare state. Since World War II and especially from the 1960s, Europe has built elaborate domestic income-maintenance programs, with government-run health care, pensions and jobless benefits. These are hugely expensive, requiring high taxes and government spending that is a huge proportion of GDP. The nearby table compares the so-called tax wedge across nations, which is one measure of the relative burdens to finance cradle-to-grave entitlements.

One consequence has been slower growth in Europe, relative to the U.S. and China, with less tax revenue to spend on everything. Another result is that welfare spending has crowded out defense spending. The political imperative of health care and pensions always trumps defense spending, save perhaps in a hot war. Europe may never again be able to muster public support for a defense buildup of the kind the U.S. undertook to end the Cold War in the 1980s, or even the smaller surge after 9/11.

The tragic irony of this year is that Democrats are rushing the U.S. down this same primrose entitlement path. With ObamaCare certain to eat up several more percentage points of GDP as it inevitably expands, we will take a giant step toward European social priorities.

For many Democrats, this is precisely the goal. Many Europeans, such as those at the Financial Times, will also welcome America's relative decline. But we doubt the American people fully understand what such a gilded entitlement cage means for our national vitality, or for our ability to defend U.S. interests at home and abroad.

The chart nearby shows the change in the share of U.S. federal spending on defense and domestic programs across recent decades. The upward blips in defense outlays occurred during Vietnam, the Reagan buildup and post-9/11. But the overall trend has been to spend less of the budget on defense. Add the stimulus, ObamaCare, a new entitlement for college and other Democratic plans, and the defense squeeze will only tighten. Higher taxes and borrowing may allow guns and butter to co-exist for a while. But over time, the welfare state will defeat the Pentagon here, as it has in Europe.

President Obama's domestic agenda may well mean that his successors lack the option to deploy 100,000 troops to Afghanistan, or to some other future trouble spot. This is the way superpowers lose their superiority.

The Foreign Office refused to discuss the funding but privately officials confirmed the money was cut amid vain hopes that the Americans would foot the bill instead...

“It was a highly successful mission and the Afghans were getting better every day,” a special forces source said last week. “The paltry sums involved were getting a pretty valuable return.”

Ed Butler, who commanded British troops when they first deployed to Helmand in 2006, said: “It strikes me as pretty counter-intuitive and verging on the ridiculous to cut this funding when the government is stressing the training of Afghan security forces as a way of withdrawing our troops.”

...The Conservatives said it “beggared belief" that the Foreign Office should withdraw funding from what was clearly an important project.

Even the smallest of counter-insurgency programs prove too much of a strain for the British military to sustain.

The next article, U.S. Seeks 10,000 Troops From Its Allies In Afghanistan, shows America’s other allies cannot sustain token troops in Afghanistan, let alone increase force levels.

The United States is scrambling to coax NATO allies to send 10,000 additional troops to Afghanistan as part of President Obama’s strategy for the region. Those countries appear willing to provide fewer than half that number, American and allied officials said Wednesday.

The British government is facing opinion polls showing that around 70 percent of the public favors an early withdrawal...

Germany and France have balked at committing any more forces to a war that has so little public support that they can barely maintain current troop levels...

The Netherlands and Canada have begun discussing plans to pull out. Canadian defense officials told reporters traveling with Defense Secretary Robert M. Gates in Halifax last week that they had no intention of sending troops in the future, and that they remained committed to withdrawing by the end of 2011...

Waning public opinion plays an important role in most NATO members’ reluctance to remain in Afghanistan, but I believe the heart of the matter lies in two important facts: Europe can no longer afford to send troops abroad; and they know the US will pick up the slack.

As sun sets in the west, it also rises in the east. China,Japan Boost Defence Ties illustratesas western power quickly retreats once staunch allies are running for cover and seeking other benefactors.

Japan and China yesterday agreed to conduct their first joint military training exercise as ties warm up between the Asian neighbors, which have long argued over a range of issues and have been suspicious of each other

Top defence officials and military officers from both sides will also meet regularly...(and) The joint exercise will be held next year, according to the Japanese Defence Ministry.

Japan knows the Pax America that kept peace across the Pacific for half a century is coming to an end and China’s rising power is fed from America’s and Europe’s decay. They are smartly moving out from under one shadow to another.  US Navy and Air Force power in the region is atrophying, and China is quickly rising, as seen the article Admiral Says PLA's Strength, Intentions Should Be Displayed.

Beijing should not be shy of displaying the full breadth of its growing military power and intentions to the world, a senior naval officer wrote in comments published yesterday.

In a commentary in the Global Times, a newspaper published by party mouthpiece the People’s Daily, Naval Rear Admiral Yang Yi said Beijing should expand its military power and need not hide this from the world.

“We should confidently and overtly tell the US and other countries that China needs to expand its overseas military power because of the continuation of national interests abroad,” wrote Yang, director of the Strategic Studies Institute under the People’s Liberation Army’s National Defence University

...Yang said Sino-US strategic relations were moving from the level of “common interest” to “ balance of power”.

 “The Taiwan issue has been the most sensitive and explosive problem,” he wrote. “This is a friendly reminder to the US – please be careful, careful, careful, and don’t think Beijing won’t dare to declare war with Washington.”

Anthony Wong Dong, president of the International Military Association, an independent grouping of observers based in Macau, said the article was a candid assessment.

These articles show the West can no longer sustain low-intensity combat operations against an enemy clearly bent on their destruction. At the same time, China is drawing traditional allies from the US orbit and brazenly challenging America as the sole military superpower.

They have the money and leverage to do so. We, on the other hand, have vaults full of IOUs and a congress full of fools.

I don’t like the odds.

 

 

In H.G. Wells 19th Century science fiction classic “The Time Machine” a Victorian gentlemen invents a time machine. He hurdles forward thousands of years to the distant future and finds a world where mankind degenerates into two distinct species, Eloi and Morlocks. The Eloi live in a decaying Garden of Eden in a life of complete ease. The Morlocks dwell in the subterranean darkness, tending the dirty industries which feed and cloth the Eloi. For payment the Morlocks took only one thing…the flesh of the Eloi.

 

Let’s examine how H.G. Wells describes each race and their relationship to each other.

Wells writes of the Eloi: I could find no machinery, no appliances of any kind. Yet these people were clothed in pleasant fabrics that must at times need renewal, and their sandals… were fairly complex specimens... Somehow such things must be made.

 

Now compare this to America by simply going to your local Wal-Mart. The car your drive there was probably built overseas or built in America with foreign parts. Once you arrive at Wal-Mart, try to push your way past the hordes of illegal immigrants (doing “work Americans won’t do anymore”) to buy anything made in America. Good luck. On the way home don’t forget to fill up that car with Arab gas. The world sells us most of our finished goods, cars, clothes, electronics, energy, and an ever growing portion of our food. We only make “services” with which to service each other, and even this sector is slipping away.  

Wells writes of the Eloi: ...I soon discovered about my little hosts...was their lack of interest. They would come to me with eager cries of astonishment, like children, but like children they would soon stop examining me and wander away after some other toy…  

Wells couldn’t describe us any better than he does in this passage. American’s are known for their short attention span and even shorter memories. We flip from one diversion to another, easily distracted. We play video games, obsess over sports and are addicted to reality television. We invented the disease ‘ADHD’.  With terms like ‘failure to launch’ true adulthood is delayed for a growing portion of our ‘20- and 30-somethings.’ We’re becoming a society of fickle, spoiled children.

The only thing Wells didn’t foresee was video games. If he had, he might have described the Morlocks taking away the docile, fattened and stupid Eloi for slaughter while they still clutched their Wii remotes in their pale, pudgy hands. Speaking of ‘pale and pudgy...’ 

Wells continues to describe the Eloi: …I perceived that all had…the same soft hairless visage, and the same girlish rotundity of limb. Seeing the ease and security in which these people were living…there is no necessity - for an efficient family, and the specialization of the sexes with reference to their children's needs disappears. 

America is getting more “rotundity of limb” every year, our families are disappearing, and we’re definitely not addressing our children’s needs. We’re also witnessing the blurring of the sexes with the acceptance (no, embracing) of homosexuality, metrosexuality, radical feminism, and the transgender/sexual movement.

Homosexuals are adopting children and the need for traditional male roles is openly discouraged by our culture. More child rearing responsibilities are being foisted upon the state every year.  Senator Hillary Clinton once said, “It takes a village to raise a child.” No, it takes a village to raise an Eloi.

So what of the dreaded Morlocks, denizens of the underground industrial labyrinths? Can I make a fair comparison between them and the modern Chinese?  

Wells writes of the Morlocks: So, in the end, above ground you must have the Haves, pursuing pleasure and comfort and beauty, and below ground the Have-nots, the Workers getting continually adapted to the conditions of their labor…I wondered vaguely what foul villainy it might be that the Morlocks did under the new moon… the Morlocks made their garments, I inferred, and maintained them in their habitual needs, perhaps through the survival of an old habit of service…clearly, the old order was already in part reversed. The Nemesis of the delicate ones was creeping on apace. Ages ago, thousands of generations ago, man had thrust his brother man out of the ease and the sunshine. And now that brother was coming back changed… Great shapes like big machines rose out of the dimness, and cast grotesque black shadows, in which dim spectral Morlocks sheltered from the glare. The place, by the by, was very stuffy and oppressive, and the faint halitus of freshly shed blood was in the air. 

This passage brings to mind a recent 60 Minutes segment about American companies outsourcing computer recycling to China. It was this story which made me first think about the similarities of the Time Machine to today’s American/Chinese relationship.  Read the passage below from the article. then re-read Wells’ passage above.

This is a story about recycling - about how your best intentions to be green can be channeled into an underground sewer that flows from the United States and into the wasteland. 60 Minutes followed the trail to a place… in southern China - a sort of Chernobyl of electronic waste - the town of Guiyu…Women were heating circuit boards over a coal fire, pulling out chips and pouring off the lead solder. Men were using what is literally a medieval acid recipe to extract gold. Pollution has ruined the town. Drinking water is trucked in. Scientists have studied the area and discovered that Guiyu has the highest levels of cancer-causing dioxins in the world. They found pregnancies are six times more likely to end in miscarriage, and that seven out of ten kids have too much lead in their blood.

"These people are not just working with these materials, they're living with them. They're all around their homes. The situation…is actually pre-capitalist. It's mercantile. It reverts back to a time when people lived where they worked, lived at their shop. Open, uncontrolled burning of plastics. Chlorinated and brominated plastics is known worldwide to cause the emission of polychlorinated and polybrominated dioxins. These are among the most toxic compounds known on earth…We have a situation where we have 21st century toxics being managed in a 17th century environment” 

“The air I breathe in every day is so pungent I can definitely feel it in my windpipe and affecting my lungs. It makes me cough all the time," one worker (said)…the 60 Minutes team passed by a riverbed that had been blackened by the ash of burned e-waste.

While not a subterranean realm, it’s still an abysmal, man-made industrial hell. It is a malignant place where there is no sunshine and “great shapes rise out of the dimness and cast grotesque black shadows. A place stuffy and oppressive which changes there very people which live and work there. 

What of the evolving relationship between America and China?  

In 2005, “The Big Picture” financial blog released this insightful article. As far as I can tell, it met with little fanfare. Some of these 2005 predictions are chilling (emphasis mine):

The Peoples Bank of China (PBOC) announced to day that they are effectively

taking over the interest rate responsibilities from the US Federal Reserve…The Fed’s inability to significantly impact long rates anymore is what led to the outsourcing. 

…today's actions are the net result of the United States consuming far more goods or services than it produces. Because of that, the Chinese have accumulated nearly a trillion dollars of US Treasuries. That makes them a de facto player in setting our interest rate policy and impacting our economy. 

As we have been writing for quite some time now, the Real Estate Complex has been the most robust segment of the U.S. economy. If the Chinese can succeed (where the Fed failed) in raising U.S. long rates, the strongest part of the US economy is at risk. While we know real estate had to slow eventually, the question is how fast will it occur, and how dramatically. 

In an unlikely – but possible – scenario, the Chinese can, at will, and without ever firing a shot, inflict as much economic damage on the U.S. as if we were at war. Armed conflict becomes unnecessary when countries can net impact their competitors as if they were at war. 

What is not uncertain, however, is that our Current Account Deficit has granted a degree of control and authority to another sovereign nation over our own economy. The net results of that may be determined over the coming decade.

To emphasize the impact of the Big Picture’s 2005 predictions, in 2007 China flooded the US market with toys painted with lead-based paint. In a stunning development, Mattel Toy Company issued an apology to the Chinese manufactures, not the American public. Time Magazine wrote “Mattel needs China just as much as China needs Mattel, and it cannot afford to jeopardize its relationship with the country that produces 65% of its toys.”  

China forced an American corporate giant to grovel. The Morlocks now have the upper hand.

I'm not saying the Chinese are becoming mosters, I'm saying both nations are entering into an unhealthy and dangerous arrangement, one which is transforming us into something neither side truly wants to become. Where will this new relationship between America and China lead? Maybe H.G. Wells said it best… 

The Upper-world people might once have been the favoured aristocracy, and the Morlocks their mechanical servants: but that had long since passed away…These Eloi were mere fatted cattle, which the ant-like Morlocks preserved and preyed upon.

Wake up, America. You are being eaten.

Already the Eloi had begun to learn one old lesson anew. They were becoming reacquainted with Fear.

Here’s an economics lesson for the American serviceman. Reach into your pocket and pull out a dollar bill. Its value isn’t set by gold or any precious metal, only law and world currency markets determine its worth. Why, then, would someone buy mere paper not backed by a tangible asset? For the same reason you might buy stock in a company. Foreigners buy our dollars because they know America has the greatest return on investment of any endeavor in history.

Historically, America is where the world’s smart money runs in troubled times. But now America finds itself in hard times. No longer a manufacturing giant, we’re now a consumer economy shouldering crippling public and private debt. The US is hemorrhaging trillions in real estate and corporate wealth while embroiled in two expensive wars. A 2007 BBC survey found America’s standing abroad ranking only above Israel, North Korea and Iran. With all this gloom, does the world’s smart money still consider America a safe bet?

Absolutely, and the US serviceman has something to do with it.

Since the early 1990s America led the way building the post-Cold War global economy, an international free trade system. For better or worse, the United States is the lynchpin holding it all together. When the world buys our dollars and debt they essentially cast a vote of confidence not only in America, but the global economic system we helped establish. This is true, even during the current crisis, due in large part to the US military.

Defense critics point out the US spends more on defense than the next 14 nations combined. True, but we also directly or indirectly protect those 14 nations’ access to international trade. From Bangkok to Baghdad, international merchants know goods and services flow unhindered because of US military power. This arrangement benefits our friends and rivals alike. China, the world’s manufacturing superpower, exported $1.2 trillion in goods last year, but China doesn’t protect the international trade routes on which she so strongly depends. Nor is it African ships leading the charge against pirates off Somalia or OPEC armies guaranteeing the flow of oil through the volatile Persian Gulf region. It’s the American fighting man and woman who keep global trade free.

Foreign nations may rail against US military power in public, but privately they vote with their money. They understand two important facts: our forces operate with immense restraint and in strict adherence to law; and no international coalition can yet match America’s military prowess. Would China act with our humanity and restraint? Can the U.N. match our decisiveness and competence should they become protectors of the global economy? This is why, rhetoric aside, the world trusts us to protect the global market.

For this reason our leaders must tread carefully. Recently, Rep. Barney Frank (D-Mass) called for a 25% cut in the defense budget. One lesson the financial crisis taught us is risk assumed by one global player is risk assumed by all. If America can’t or won’t protect the global trade system our national stock will surely go down. Investors will take their money elsewhere and other nations will fill the power vacuum we leave behind. What will our dollars and debt be worth then?

The 21^stcentury US Military isn’t just protecting our homeland or hunting down terrorists, but ensuring the global economy remains free.  If you’re an American serviceman reading this, you truly hold that dollar in your hands. It isn’t backed by gold...

...It’s backed by steel.