Does excessive government spending to finance military action cause inflation ?

Question

Does excessive government spending to finance military action cause inflation ?
Historically have economies of nations that have high levels of government spending to finance a war , relative to GDP experienced high levels of inflation for years during and after ear ends

Answer 1

I think it has caused inflation historically. The reasons behind this are multi-dimensional i guess you could say. (many angles to look at it from and to look for a cause from).

But from a pure theoretical social science point of view I guess you could think of it war as an unnatural obstruction of competitive market forces (everything becomes more socialistic in a way because the government is dominating spending) and so the result is a price bubble.

Answer 2

I also answered your other question that is relevant to this matter but this is slightly different and since it is in economics category I can use more economics.

The infaltion is not a single factor phenomenon. In modern economies the inflation is influenced by production, consumption, interest rates, exchange rates and many other factors.

The best example to explain my opinion is the US because the US is currently at war and a very expencive one.

US inflation is very interesting to study from economic point of view because it chalenges many of the well established theories.

The infaltion during war time and during peace time is influenced more from an effective General Goverment than the other economic factors. War will lead to inflation for sure but how much is another story. An effective goverment will not allow infaltion to rise that much and threaten the economy.

US is a country that bases its economy in consumption and is something that it has become a culture to the US for more than 60 years. I am sure you have heard the expresion everything is bigger in the US and this is true because the people are motivated to consume as much as they can. Also US is in huge deficit. Theoritacaly no currency could sastain such a big deficit and for such a long period. Inflation accoridng to the theory should be much higher in the US. Also US keeps spending like there is not tomorrow for war operations and currently it is conducting a very expencive war. Despite all these factors the US inflation is only 2% and again according to theory it is very difficult to go lower and for many economists the infaltion should never go much lower if you want to sastain growth.

The US has done the same thing at least three times in the recent history to maintain high deficits, large consumption in the country and low infaltion. After WW2 it charged huges ammounts to the allies for its help bringing back the money it spent. Also with the argument that it had at the time the strogest and most stable currency, estabished the Dollar as the currency for international trade (Bretton woods system). US took advantage of the dollar dominance and issued more money that actually could back with gold but because of this domiance when it was revealed that the dollar was not backed the other countries backed the dollar because of its significance to the world economy. So the WW2 resulted actualy to a low inflation and a very strong dollar.

After the first Gulf war the US charged a huge ammount of money to the Saude Arabia for military expences. That protected the US from its big deficit by ensouring that all the transaction for oil would continue to be done in dollars. In other words there would still be high demand for dollar so high value of dollar hence low infaltion.

The same happens now.The US have the largest deficit in their history and they spend like crazy for war. The infaltion in the US is very low because by going to war with Iraq they make sure that the dollar is kept as the currency for international trade and for oil trade. So a war has not lead to a higher inflation. Also the war brings high consumption (of materials for weapons and weapons) in the US and that helps the overall consumption in domestic market.

Your hypothesis is correct in general but you can see that it can no be verified everytime. I could say that the winner sets the rules so and in this case the US did. The interesting thing is to see how the phenomenon will evolve since until now it has proved all theories wrong.

Answer 3

The problem isn't in in military spending by itself; the problem is actually in causing an increase in the national deficit.

The deficit is basically a loan to the government, as the deficit gets larger, people demand a higher interest rate to continue loaning. Its beyond me to explain the economics of this beyond that though.

Answer 4

probably

america is in debt. the more you go into debt, the more you've borrowed and the more you're looking for more money to borrow, which pushes up interest rates which leads to price inflation

but if you've read anything about 'petrodollars' you'd know that the mission in iraq is to actually control inflation, by maintaining american hegemony necessary to continue coercing the arab world into accepting USA$ for their oil... or effectively backing the US paper currency with ARAB petroleum. that is a very effective method of controlling inflation.

Answer 5

Inflation is caused by the companies who manufactuer and sell the products we buy in the US raising prices, but employers not raising salaries to match, making the dollar less valuable.

Answer 6

Inflation is a monetary phenomenon...Milton Friedman c1970s!!

Answer 7

No, because 98% of that money is not spent in the public market.