Guns or butter, or better both and debt, has been the choice of those in power of our coinage for centuries. Intervensionst central planners that can debase the currency always do with either guns or butter and in some, desperate cases, both.
In contemporary terms nothing has changed. Its a common observation to see an inverse relationship between defense spending and the stability of a nation’s society and its finances. Ie the stronger a nation’s societal system inc its finances the least likely they are to spend on their military. Similar inverse relationships exist between this strength, inflation and currency debasement.
Here a chart of military spending by state.
No surprises to see the US well out in front but with Greece a good runner up. For all America’s saber rattling re the ‘aggressive’ chinese they actually cut defense spending (to gdp) and from a much lower level in 2010 whereas the US increased its spending (from a much higher level). Who is the aggressor between this pair i wonder? Germany and the Netherlands (rich and stable nations) spending the least on defense.
As Greece suffers austerity its austerity is not so bad that it cant purchase new tanks, planes etc. As Greece becomes increasingly unstable enemies old and new alike will doubtless become threats to the state and targets for this new military hardware. This is as inevitable as night following day.
The history governments of troubled states shows us this age old choice between guns or butter. (Or guns and butter but the conequence of this is debt (or currency debasement) and therefore inflation downtrack).
Krugman illustrating the acedemic Keynesian theory for repairing the US economy via guns strategy. Here using a scenario of a threat from space aliens but you could equally replace aliens for chinese.
Another view of the guns strategy
http://www.fpif.org/articles/war_the_wrong_jobs_program
Clearly neither guns or butter are a solution as both create huge misallocations of capital and typically represent a systemic theft from middle class savers and pensioners. These intervensionst policies succeed only in short term fixes that ultimately simply polarize wealth and lead to endemic corruption. For all the problems of surveys on these issues the US has fallen in the last 4 consecutive ‘CPI’ (corruption perception index).
And, by the way. This a telling chart, imo. A chart that informs of a great experiment by the neo keynesians re debt and equity. It has no historical precedents.
For many states, guns and butter, are often a ‘last throw of the dice’. From the Roman Empire’s increasing military defense spending to the troubled Argentina’s Military Junta’s attack on the Falkland Islands the choice of guns and butter is always made. If you own the world’s reserve currency you can do both and get away with it as was the case in the 60s of President Johnson.
The inflation of the 70s was a direct consequence of guns and butter policy of course.
Interestingly, also very ominously, perhaps the best known actual usage of the term ‘guns and butter’ was in Nazi Germany. In a speech on January 17, 1936, Minister of Propaganda Joseph Goebbels stated:
“We can do without butter, but, despite all our love of peace, not without arms. One cannot shoot with butter, but with guns.”
Sometime in the summer of the same year, Goring announced in a speech
“Guns will make us powerful; butter will only make us fat.”
So as we move inevitably forward here what are the trends here?
All we can do is observe and consider what investment opportunities exist from such madness. Gold is an obvious asset to own at such times but is a crowded trade now. International ‘defense’ companies have not performed well over the recent years in spite of international growth on military spending. These companies typically pay large dividends and are on low multiples to earnings. History tells us they may do veryy nicely in the coming years as leaders seek to distract their populations against society unifying enemies in the shadows. Defense manuufacturers are cheap and unloved at present. They offer an opportunity imo.
Here BAE trading at a 7.5 pe (SP500 average of over 21 at present) and a 6.7% dividend yield at today’s prices.
In USD terms the falls are even more dramatic. BAE as an adr in the US is listed at around $19 (the recent low 16) high of $36.
Here the US dowjones US defense Index
Trading at a pe of 14. (Average for wider sp500 21)
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