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War? What War?


Not a lot of talk in the financial press or among the bulls about Iraq anymore. This despite the fact that there have been more US soldier deaths since the War was proclaimed over than there were from the start to that official end. Though it seems tasteless and trite to talk about the financial cost of the war when the above mentioned human costs are so terrible, it's important to understand what our ongoing presence there means for the US Treasury.

To this end, not sure if anyone caught the NYT's story today about Defense Secretary Rumsfeld doubling the cost of keeping troops in Iraq. Now the defense department thinks it will cost the US $3.9 billion per month for an indefinite period of time to keep US troops there. Add to that the $900 million or so that Afghanistan is costing us per month, and you get a non-trivial sum. These figures have nothing to do with the cost of reconstruction in those two countries mind you.

Given the record US current account deficit, financing these costs fall quite a bit on the shoulders of foreigners. After all the rest of the world is funding our consumption: trading their Toyotas for our US treasury paper - to use Brian Reynolds' excellent analogy. The more paper we put out - to fund our troops in Iraq and Afghanistan, to pay for this summer's tax cuts - and the more the dollar declines, the higher the payment (read: interest rates) that holders will demand. And at a time when the economy is on knife's edge between growth and recession, the last thing we need is for itchy foreigners to start liquidating their treasury holdings and cause higher interest rates. Sure they'll still be low on an absolute basis, but 13 Fed cuts later and we're still not out of the economic woods means any material increase is sure to hurt. It sure isn't today's business, but it's worth thinking about for the long term.
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