Increasing military expenditures is an inflationary proposition. The production and employment of resources directed towards the military, increases income without a corresponding increase in the production of goods and services. The increased income associated with increased military expenditures puts upward pressure on the existing supply goods and services which have not expanded, and consequently creates higher prices on those goods and services, i.e., inflation.
How does the Federal Reserve and other central banks respond to the inflationary pressures associated with increased military expenditures? They target higher interest rates to slow investment and income so that income becomes aligned with the supply of goods and services in order to slow inflationary pressures. Higher and larger incomes diverted to military production must be offset by lower and smaller overall income elsewhere, for a given supply of goods and services, in order to prevent inflationary pressures. The private sector is shrunk, in order to accommodate the enlarged military sector.
In the alternative, central banks could leave rates stable or even reduce rates. This would encourage investment in productive capacity in order to increase the supply of goods and services in order to accommodate the increased incomes associated with increased military expenditures. The problem with this approach is, the investment period itself is inflationary because again, as in the case of military expenditures, incomes are increased while the provision of goods and services are not yet available.The combination of increased military expenditures and private sector investment, before the new goods and services come online, would be highly inflationary. The central banks would need to be extremely patient while awaiting the provision of new goods and services which would hopefully alleviate the inflationary pressures. The fear is that inflation, during this period, might become out of control.
Also, the high inflation itself would force longer-term interest rates to rise, and make planning difficult. Consequently, this would discourage investment so that an adequate provision of goods and services never arrives. This makes the central banks’ first impulse, to target higher interest rates, appear to be the better solution.
The problem is the shrinkage of the private sector through higher rates in order to reduce employment, wages, and consequently inflation, creates a growing immiseration of the broad populace. The growing discontent among the broad population is diverted by the political class, which points the finger at other nations and migrants as the culprits of the working class demise, which leads the Nation further into wars, leading to further military expenditures, more inflation, higher targeted interest rates, reduced private sector production of goods and services . . . and the process will feed on itself until sufficient destruction has occurred, and the rest of us say “enough is enough”.
What is the solution to all of the above? End the war economy. We should be stating “enough is enough” now, rather than after the destruction of lives and material well being. Use words, not munitions.