Defense Spending

The conservative philosophy believes that government’s roles should be few.  Conservatives are often accused of being for Big Government in defense spending at the expense of programs for social welfare.  That government has a role in national defense is one recognized by both conservatives and liberals.  In defense spending, some conservatives do think that bigger is better.  During the 80s, conservative philosophy routinely touted 25% of the Federal budget as a minimum target for defense spending. 

After the Vietnam war, the Carter administration reduced the size of spending on the military from 30% of federal spending to 23% of spending (2010 Budget, PDF p. 127).  By 1987, the Reagan administration had bumped up defense spending to 28% of outlays but in dollar amounts, Reagan’s administration doubled the amount of spending on defense. (p.127)

After the collapse of the USSR in the late 1980s, George H.W. Bush’s administration reduced military spending to 22% of total spending.  Continuing the reduction, the Clinton administration held defense spending to under 20% of federal spending.  If conservative philosopy shows a predisposition to a strong defense, liberal philosophy shows an equal or more passion for strong social spending.  From 1973 to 2000, social programs grew from 48% of federal spending to 62% of spending.  Democrats touted this increased spending on public welfare as the “peace dividend” while the Republicans attempted to curtail a trend that in time could cripple the federal budget.

After 9-11, defense and homeland security spending increased but, during Bush’s tenure, did not exceed 21% of federal spending. (p. 129 – 130)  As a surprising comparison, the Bush administration spent less than the Carter administration on national defense.

Spending on social programs continued to eat up ever more federal dollars.  By 2008, it had grown to 66% of federal spending and by 2014 is estimated to be almost 70% of total spending.  Interest on the national debt, which had hovered around 15% of spending during the nineties, dropped down to 7% in the early 2000s and below 4% after the credit crisis in 2008, as interest rates plummeted and investors worldwide flocked to the safety of U.S. debt.  In essence, we have been spending our “interest dividend” on social programs.  2014 estimates of this country’s interest payments are almost 12% of total spending, heading back to the percentages of the late 80s and 90s.  Social spending or military spending will have to be cut to make up for the additional percentage of spending in interest payments.  The more probable scenario is a reduction in both types of spending and higher taxes in the coming years.

The Decline of the Dollar?

The U.S. dollar index went up again Friday, approaching $90, as investors fled once again to the safety of the dollar.  The five year chart shows that the dollar is nearing 5 year highs.

The Euro fell below $1.20 on Friday and some are predicting that it could reach parity with the dollar in a few months.  During May, a lot of investors bought an ETF that tracks the Euro, FXE, thinking that the Euro had found bottom, only to be surprised as the Euro continued to fall.

For investors who want to bet on the dollar’s decline Power Shares offers an ETF that gains in value when the dollar’s value declines.  The ticker symbol is UDN and sells for about $24.

In the past few months the normal inverse relationship between gold and the dollar has changed.  They are now moving in the same, not opposite, directions. UUP below is a bullish ETF linked to the dollar.  GLD is a gold ETF.

What that says to me is that the world’s investors have lately been treating the US dollar as though it were gold – a very disturbing trend.  There is a limited quantity of gold while the dollar is nothing but paper promises from the U.S. government.  However, in the short term, the dollar index could break $100 if the world’s economy seems like it is starting to head into a double dip recession.