http://nabe.com/graphweek/2008/gw080413.html

http://www.nationalpriorities.org/u_s_military_spending

Consider that the US spends more on military than the rest of the world combined: http://www.globalsecurity.org/military/world/spending.htm

If you think about a situation of increased government spending and decreased or unchanged taxes, that means that the government is borrowing more money. Sometimes when the US government borrows money, they write up T-bills, which are then bought by the federal reserve. To buy these T-bills, the fed prints money, which causes the money supply to increase and the domestic interest rate to fall.

Because this increase in US money supply has no effect on foreign interest rates, there is now an interest rate differential between US and foreign debt. Investors can get a higher interest rate by buying foreign debt, so they sell US assets in order to buy foreign assets, and in doing so bid down the price of US currency and bid up the price of foreign currency. This is known as arbitrage and it is the mechanism by which the exchange rate equilibrates interest rate differentials.

Demand for US money has fallen and demand for foreign money has risen, and therefore the price of US money relative to foreign money (the exchange rate) also changes. US currency becomes cheaper relative to foreign currency (depreciates).

[The link between military spending and dollar value is the Interest Rate parity condition,

R=R* + (E'-E)/E

where R is the domestic interest rate, R* is the foreign interest rate, E' is the expected future exchange rate, and E is the exchange rate. This essentially says that the exchange rate adjusts to equilibrate interest rate differentials across borders.]

http://74.125.153.132/search?q=cache:YLGn9zKzPJ0J:answers.yahoo.com/question/index%3Fqid%3D20090509083830AAvN9GE+dollar+value+military+spending+correlation&cd=1&hl=en&ct=clnk

donfletch… While it is easy to agree that drastic action is inadvisable at most junctures, and certainly at current juncture, and while your ideas on debt reduction carry weight (if actually carried out, which all doubt to see), you haven’t commented beyond short- to medium-term on military spending.

Do you truly believe that this industry offers the long-term return prospects that merit continuation in these exhorbitant investment trends? What say you?
correction: exorbitant

The nationalistic objective right now is to keep the US dollar in decline relative to outside currencies. This is first and foremost to correct trade imbalances. But it also induces those who hold US debt to offer to sell it for less, thus reducing US debt by inflation.

Yes, getting people to sell US bonds at a discount does cut US debt as readily as taxing and paying that money to buy bonds at a premium.

USA does not want its currency to go into free fall, but just on a soft landing course. Using new currency rather than selling bonds to the world to finance military adventurism is helpful only insofar as it keeps the military-industrial complex working and so happy. Cutting that spending would put a lot of angry workers on the streets. Did we think 8% unemployment was bad?

Who wants my share of Obama tax cuts?

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