The chart below will likely come as a surprise to most. It shows total nominal US defense spending, more importantly it shows that such spending has been rapidly declining since 2010. And while on the surface it is great news the US is becoming more "pacifist" (apparently mass killings using drones are relatively cost-effective) and the result for the US is even better as it means lower deficits, there is one person who is very unhappy with this outcome - Ben Bernanke.
Why is Ben unhappy? Simple - as a reminder, the only reason Ben is even contemplating tapering has nothing to do with the economy. After all the Fed chairman (and/or his successor) is willing to send the stock market into stratospheric overdrive and would be very happy to add not subtract from the monthly QE $85 billion notional since it means more "wealth effect" and thus brings the US closer to the "Keynesian successful endgame" (that the logic here is completely inverted is well known to all but the most die-hard Keynesian fanboys and is not in the scope of this article).
However, the fact that the gross US debt issuance is declining (if only until the demographic and healthcare crunch hits in 2015 and deficits explode once more) means Bernanke has less primary issuance to monetize. Were Bernanke to maintain his monetization run rate into a lower deficit regime, the Chairman would destabilize the liquidity in the already increasingly illiquid Treasury market in which the Fed now holds over 30% of all 10 Year equivalents and its holdings increase by 0.3% every week. This illiquidity is manifesting itself most directly in the "special" repo rates that have become a norm in the past few months especially in the 10 Year, and which indicate an ongoing shortage of TSY collateral.
Of course, there is a very simple and elegant solution to declining defense spending, one which has been used time and again in US history when the US government needed to provide the Fed with more securities (i.e. deficit) to monetize: war.
According to RT that, or rather its more politically correct equivalent "kinetic strikes", is what may be just over the horizon. RT reports that President Barack Obama is considering using military force in Syria, and the Pentagon has prepared various scenarios for possible United States intervention. Army Gen. Martin Dempsey, chairman of the Joint Chiefs of Staff, said the Obama administration is deliberating whether or not it should use the brute of the US military in Syria during a Thursday morning Senate hearing. Gen. Dempsey said the administration was considering using “kinetic strikes” in Syria and said "issue is under deliberation inside of our agencies of government,” the Associated Press reported from Washington.
Dempsey, 61, is the highest ranking officer in the US military and has been nominated by Pres. Obama to serve a second term in that role. The Senate Armed Services Committee questioned him Thursday morning as part of the nominating process when Dempsey briefly discussed the situation in Syria.
The pre-story here is well-known to most: in a repeat fabulation of the Iraq "WMD" lie, the US and the entire developed world "found" Syria to have crossed a red-line when it used chemical weapons, despite subsequent reports that it was the Syrian rebels, aka Qatari mercenaries, who were the party responsible for chemical weapon use. No matter though: the public media campaign was hatched, and merely waited for the catalyst.
That catalyst may be imminent, although there is a substantial dose of skepticism this time around:
Pres. Obama said previously that the use of chemical weapons would cross a “red line” and likely trigger American intervention. When the White House concluded Assad had relied on chemical warfare, Rhodes said, “both the political and the military opposition . . . is and will be receiving US assistance."
That claim was met with skepticism, though. The Syrian Foreign Ministry called Obama’s claims a “caravan of lies.” Vitaly Churkin, Russia’s ambassador to the United Nations, later presented to the UN evidence supplied to his government that suggested the Syrian opposition fighters used chemical weapons.
With regards to foreign intervention, UN Secretary General Ban Ki Moon said, “Providing arms to either side would not address this current situation.” Sen. Rand Paul (R-Kentucky) and his father, former congressman Ron Paul (R-Texas) have also cautioned the White House against aiding Syrian rebels.
“You will be funding today the allies of al Qaeda” by aiding Syrian rebels, Sen. Paul said in May.
On his part, the retired lawmaker from Texas insisted that the administration’s lead up to possible intervention is “identical to the massive deception campaign that led us into the Iraq War.”
That isn’t to say the GOP is entirely opposed to taking any action. Although directly using the American military — either through boots-on-the-ground or unmanned aircraft — has been rarely discussed in public, Sens. John McCain (R-Arizona) and Lindsey Graham (R-SC), two long-time leaders within the Republican party, have been relentless with efforts to equip opposition fighters.
"I don't care what it takes," Graham told Foreign Policy’s The Cable earlier this year. "If the choice is to send in troops to secure the weapons sites versus allowing chemical weapons to get in the hands of some of the most violent people in the world, I vote to cut this off before it becomes a problem."
Other US officials have previously said Washington is considering implementing a no-fly zone above Syria, and last month the Pentagon left a fleet of F-16 fighter planes and its Patriot anti-missile system on the border of neighboring Jordan following a routine military drill.
And from the AP:
Amid an increasing clamor among President Bashir Assad's opposition for active U.S. involvement, Army Gen. Martin Dempsey said during congressional testimony that he has provided President Barack Obama with options for the use of force. But he declined to detail those choices, saying "it would be inappropriate for me to try to influence the decision with me rendering an opinion in public about what kind of force we should use."
The remarks by the Joint Chiefs of Staff chairman came after Sen. John McCain, R-Ariz., asked him which approach in Syria would carry a greater risk: continued limited action on the part of Washington or more significant actions such as the establishment of a no-fly zone and arming the rebel forces with the weapons they need to stem the advance Assad's forces.
"Senator, I am in favor of building a moderate opposition and supporting it," Dempsey said. "The question whether to support it with direct kinetic strikes ... is a decision for our elected officials, not for the senior military leader of the nation."
The use of kinetic strikes, a military term that typically refers to missiles and bombs, "is under deliberation inside of our agencies of government," Dempsey said.
"There are a whole range of options that are out there," Navy Adm. James Winnefeld, vice chairman of the Joint Chiefs, said of the planning for military action in Syria. "We are ready to act if we're called on to act."
All of the above, of course, is smoke and mirrors. The ultimate decision will come not from Congress but from the Fed.
So what may have spooked Bernanke and the sudden reappearance of the Syrian war as a real and credible possibility?
Why, the economy of course. Only not its "improvement" but its recent (and ongoing) deterioration.
And since the taper is largely priced in, Bernanke is already contemplating how to reengage in the subsequent untapering should all hell break loose following a September tapering announcement prompting the Fed to reengage once more. However, for that to happen, US deficits would need to flow once more, as only then will there be the much needed copious primary issuance of debt that the Fed will need in order to resume monetizing at a fervent pace without impairing the liquidity characteristics of the bond market.
As for the downside? What are some irrelevant Syrian lives in the grand scheme of things, when the status quo's wealth must be preserved at all costs. Costs including the death of thousands of innocent civilian Syrians and/or other nationalities should the conflict just happen to spill outside the Syrian borders.