Defense Spending Bubble and Malinvestment

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The bubble in government spending has a large defense spending bubble as one component. Government has been able to finance this spending by access to central banking induced falling-yield and now low-yield sovereign debt. This has enabled malinvestment in the military sector. With military spending having grown from the $50 billion to the $800 billion level in 40 years, the bubble is evident. When higher interest rates catch up with the U.S. government, this bubble will be vulnerable. If it breaks, a large adjustment in uses of labor and resources will be evident too. To maintain this level of bubble spending and pay higher interest rates, the government will have another option: to raise taxes. That brings the higher spending out into the open, however, and causes large social friction between taxpayers and tax-feeders.

11:27 am on May 13, 2012