The Economics of Foreign Policy
It’s Not About “Security”
The mythology of U.S. foreign policy runs deep. It is all about defending the good ole U.S. of A. It is about promoting peace and democracy around the globe. It is about keeping at bay all those who hate the U.S. for its “freedom”.
U.S. foreign policy is, of course, none of those things. It is about the expansion of power and hegemony. This does not make the U.S. unique. All nations want to expand their power as far as they can. However, for most nations this is not very far at all. That the U.S. reach is global is a facet of its enormous wealth. The problem, as I have been detailing on this site is that the drive for greater power undermines the very foundations of that power. This is the cycle of the rise and fall of great powers and empires.
U.S. foreign policy should be viewed as a predictable outgrowth of interventionist domestic policy, central banking, and the inherent nature of the state as a “territorial monopolist of ultimate decision-making.”
To understand this, we must look at the interplay between fiat currency, the military-industrial complex, and the distortion of global markets.
The Engine: Inflation and the Warfare State
At the heart of sound economics is the rejection of central bank intervention. In a free market with commodity-backed money (like gold), a government’s ability to wage war is limited by its tax revenue. When the U.S. moved to a fiat system, it gained the ability to finance “perpetual war” through inflation. The inflation tax is when, instead of raising taxes (which is politically unpopular), the state prints money. This devalues the currency, effectively stealing purchasing power from the citizenry to fund overseas interventions.
The Cantillon Effect is when the first recipients of this newly created money, defense contractors and large banks, benefit at the expense of those further down the line (the general public), who face higher prices later. This explains who benefits from this government intervention into the economy.
Hegemony and the Petrodollar
My position is, and it is not particularly unique, that U.S. foreign policy is designed primarily to maintain the status of the U.S. Dollar as the global reserve currency. By ensuring that global commodities (specifically oil) are traded in dollars, the U.S. creates a constant global demand for its currency. This demand allows the U.S. to run massive trade deficits. The U.S. “exports” its inflation to other countries, who hold its debt (Treasuries) to stabilize their own currencies. Enforcement then becomes crucial. Military interventions in the Middle East can be interpreted as “currency defense.” Any attempt by a nation to bypass the dollar is seen as a direct threat to the U.S. Treasury’s ability to fund its own debt.
The Myth of “Economic Interests”
Mainstream schools of foreign policy argue that interventions protect “national economic interests,” Murray Rothbard, among others, makes a crucial distinction, the state’s interests are not the people’s interests. Foreign aid and military spending are seen as massive transfers of wealth from taxpayers to a small elite. Foreign aid is often just a “round-trip” subsidy. American tax dollars are sent to a foreign government on the condition that they spend that money with U.S.-based defense firms.
Sanctions and trade embargoes, frequently used tools of U.S. policy, should be viewed as aggressive violations of the Law of Comparative Advantage. They prevent individuals from engaging in mutually beneficial exchange, impoverishing both the “target” nation and domestic consumers. Yet they continue because they benefit the class of connected interests that benefit from empire.
The “Boom and Bust” of Empire
Just as artificial credit expansion causes a business cycle of boom and bust, I would argue that “imperial overstretch” (a notion adapted from the historian Paul Kennedy) creates a political cycle of boom and bust. The state expands its influence, fueled by cheap credit and a strong dollar. Eventually, the costs of maintaining the empire (interest on debt, military upkeep) outpace the ability of the productive economy to support them.
The logical conclusion is that interventionism abroad is the “foreign” face of interventionism at home. True peace and prosperity, according to the economist Ludwig von Mises, can only be achieved through laissez-faire capitalism and a policy of “neutrality and free trade with all.”
The market economy makes for peaceful cooperation. It bursts asunder the boundaries of the state and creates a world-embracing system of the social division of labor.
— Ludwig von Mises
The outgrowth of this is the realization that the Petrodollar system is the ultimate “interventionist fix.” It is seen as a sophisticated mechanism that allows the United States to bypass the natural market constraints that would otherwise limit a nation’s debt and monetary expansion. In order to more fully grasp this economic basis of U.S. foreign policy we need to take a deeper look at the critique of this system and its inflationary, and moral consequences.
The “Exorbitant Privilege” as a Market Distortion
In a free market, if a country prints excessive amounts of currency, the value of that currency drops, and its citizens face immediate price inflation. However, the Petrodollar system, cemented in the 1970s after the collapse of the gold standard, created an artificial, global demand for U.S. Dollars ($USD). Because the world must use dollars to buy oil (the lifeblood of industrial civilization), every nation is forced to maintain large reserves of $USD, thereby creating an artificial demand.
This global demand acts as a “cushion.” It allows the Federal Reserve to expand the money supply far beyond what the domestic economy would normally tolerate without immediate hyperinflation.
Impact on Modern Inflation: The “Return” of the Dollar
The most stinging reality regarding modern inflation is that the Petrodollar system merely defers inflation, it does not eliminate it. For decades, the U.S. has exported its inflation. The U.S. sent “paper” (dollars) abroad, and in return, received “stuff” (oil and other goods). This kept domestic prices low while devaluing the dollar globally. If nations begin to trade oil in other currencies (like the Renminbi or Gold), the global demand for the dollar drops (de-dollarization). When those trillions of “offshore” dollars are no longer needed for oil or reserves, they flow back into the domestic U.S. economy. This is what “Austrian” economists warn is the “endgame”, a sudden, massive increase in the domestic money supply that leads to high, uncontrollable price inflation.
The Moral Hazard of Force
Finally, I would point out the ethical and economic cost of enforcement. Because the U.S. economy is now dependent on this artificial dollar demand, U.S. foreign policy must become aggressive.
From this perspective, any nation attempting to sell oil, or other products, in a different currency is not just a trade competitor, but a “monetary insurgent” threatening the solvency of the U.S. government. This necessitates a massive military budget, which requires more debt and more inflation to fund, creating a self-destructive cycle.
A Better Way
None of this is necessary. All of it is a choice. These are political choices that benefit a discrete class of politically connected individuals and groups. People can bellow all they want about democracy, but it does not work that way, never has, never will. Politics will subvert the “will of the people”, if that is even ascertainable. Shifting alliances and the need to secure resources for election, and reelection will pollute the process and favor those who have connections.
The only way to cut this Gordian Knot is to vastly reduce the power of the government, both domestically and internationally. A government no more powerful than your local weed control board cannot do the egregious damage that the current regime has foisted upon the world.
It involves many more words than this essay to configure what a multipolar world of less powerful states looks like and how to get there. For now, the task is to educate and make folks aware of what it is that drives U.S. foreign policy. Bringing all this out into the light and making it clearer how badly ordinary people are being ripped off can become a catalyst for a more permanent change.
God wants His children knowledgeable, so this becomes a righteous task and a prudent place to begin.
Praise Be to God
