In a series of interviews made recently, both US President Joe Biden and Secretary to the Treasury Janet Yellen affirmed and confirmed that the US is in the position of fighting two wars at the same time: that both Ukraine and Israel can be supported against their aggressors, Russia and Hamas respectively. Biden said “We’re the United States of America for God’s sake, the most powerful nation in the history — not in the world, in the history of the world. … We can take care of both of these and still maintain our overall international defense.” So, he justified his answer by re-affirming the USA’s geopolitical dominance at global level. Janet Yellen, providing an answer more centred on the fiscal sustainability of the military efforts, said that the USA’s weakened fiscal position does not constitute an obstacle to the support of these two countries in difficult positions.
Is it really the case that the US can afford to fight two wars at the same time? It is certainly true that, historically, it has been able to do so. Just to mention contemporary history, during World War 2 the US obviously did fight on two fronts at the same time. In Europe the US was fighting the Nazi-fascist bloc in Germany and Italy, with the decisive help of France, the UK and the Soviet Union. In the Pacific, it was fighting a parallel war against Japan, which ended up with nuclear bombs being dropped on Hiroshima and Nagasaki.
In the post-WW2 period, the US was fighting the “cold” war with the Soviet Union (1947-1991), but this did not prevent the US from fighting “hot” wars in Korea (1950-1953) and subsequently in Vietnam (1955-1975), just to give two examples. More recently, the US found itself embroiled in two separate wars at the same time, in Iraq (2003-2011) and Afghanistan (2001-21), and they managed to conduct these simultaneously, although the results in both cases were highly questionable.
So, Yellen is correct in responding “absolutely” to the question of whether the US can afford to fight two wars at the same time. But a different issue is the implication of all this for the US fiscal and monetary position and the overall global financial order. In fact, it is not a mystery that the collapse of the Bretton Woods monetary system was the result of the excessive military expenses the US had encountered to fight the war in Vietnam. When France asked to convert their US dollar reserves into gold, US President Nixon was forced to declare the end of the convertibility of the US dollar into gold.
Financing wars has huge fiscal and monetary implications. Central banks – and their predecessors – were originally created to finance the wars of the kings. They certainly were not initially created to carry out banking supervision, or be lenders of last resort and monopolists of currency issuance, let alone to conduct monetary policy, as is the case today.
Are financial worries of this kind emerging these days? Certainly, they are emerging in the form of a rapid increase in long-term US Treasury yields, those which are more closely linked to weaker fiscal positions and higher inflation expectations. The 10y UST yield has recently reached 4.91%, and the 30y UST yield 5.08%, levels not seen since the period prior to the Global Financial Crisis in 2007-09. This testifies to the fact that investors are worried about the long-term sustainability of the US fiscal deficit (now 5.8% of US GDP) and of the US public debt (now 129% of GDP), in spite of the “exorbitant privilege” that the US enjoys in printing the global reserve currency, the US dollar. The example of the Vietnam war shows that even the most consolidated US-centric regimes end, and that new international monetary frameworks can emerge as a result.
