As the United States faces a $33.55 trillion national debt, a $2 trillion deficit, and $200 trillion in unfunded liabilities and expenditures, can the federal government keep sending money to foreign governments? Following Hamas’ deadly attacks on Israel on October 7, there is now a debate on how much Washington can afford to ship to Jerusalem while also spending money in Eastern Europe. And how will the renewed conflict in the Middle East impact the global economy? The economics of supporting another war might be a tad complicated.
Ukraine, Israel, and Others
Reports are circulating that the White House is engaging in talks with lawmakers about preparing a supplemental funding bill to bundle funding for Israel, Ukraine, Taiwan, and the US-Mexico border. In addition, the current administration would try to ensure legislation would address the strain that sending more equipment to these three countries would have on the Department of Defense’s stockpiles by requesting additional money to build more weapons.
At an October 11 White House press briefing, National Security Council spokesman John Kirby weighed in on the possibility of grouping these funding measures together, noting that officials are participating in “active conversations.” But Kirby also made quite the admission that an open checkbook for Ukraine “is coming to the end of the rope.”
Indeed, how could the US government, already spending $7 trillion a year, find the money to perpetually fund foreign wars? What if China invading Taiwan is the next domino to fall in the global geopolitical chess match, how much would that cost? Officials crunching the numbers might not like a decision to abandon allies, but they have to think about how much the US can realistically spend to maintain its status as the policeman of the world. Suffice it to say, Washington is having trouble keeping its own doors open.
Consider this for a moment: The US government sold $20 billion worth of 30-year Treasury securities on October 12, but the bond auction witnessed weak demand as investors balked at the idea of an explosion in US debt supplies. In other words, Washington cannot sustain its astronomical red ink, meaning it will eventually need to make tough choices in the future.
The US Economy
Speaking from Morocco for the World Bank and International Monetary Fund (IMF) meetings this week, Treasury Secretary Janet Yellen downplayed any potential effects on the US economy from the war in Israel. “While we are monitoring potential economic impacts from the crisis [in Israel], I’m not really thinking of that as a major driver of the global economic outlook,” Yellen said. “Thus far, I don’t think we’ve seen anything suggesting it will be very significant.”
Global financial markets ostensibly concur, with the leading stock benchmark indexes rallying about 2% this week. At the same time, traders are still seeking shelter in conventional safe-haven assets, like the US dollar, which has climbed 0.4% since the devastation started. Economists assert that it is unlikely that the military conflict in the Middle East will spill over into the international economy in a significant way. However, the risks could intensify the longer the war lasts. And who knows what role countries such as Iran will play in the events.
One asset that could prove to be volatile under current circumstances is crude oil. Following oil’s 4% rally in the immediate fallout of the attacks, the energy commodity has calmed down, still trading far below the 2023 high of $95. But prices could spike if it is confirmed by the US government that Tehran participated in the bloodshed, resulting in renewed economic sanctions that could potentially cripple its oil and gas industry. Recent estimates suggest new restrictions could remove as many as 500,000 barrels per day from worldwide energy markets, exacerbating an already tight landscape.
Time Will Tell
Ultimately, Gita Gopinath, the IMF’s first deputy managing director, was correct when she recently told Bloomberg TV that it is too early to determine if the war between Israel and Hamas will bolster inflation pressures, hamper global economic growth, and damage international financial markets. Of course, with above-trend inflation, bank failures, a Chinese economic slowdown, the Ukraine-Russia conflict, soaring debt levels, two-decade-high interest rates, and a “limping” global economy, another major war is not something the international stage needs right now.