Friday Mar 02, 2007

Protracted Wars and Asset Attrition

Much earlier, I've written about the use of war spending as a quick-and-dirty means to apply a consumptive forcing function in an economic cycle. (On the issue of economic time scales and the dynamics involved, I have also written an earlier note.)

When aggressive wars are waged with the purpose of acquiring resources (geopolitical bases, currency values, people, mines, energy resources, transportation resources, land, etc.), besides the moral bankruptcy of such a behaviour, the utilitarian calculation that takes the aggressor into war also stems from the "positive" consumptive impact on its economy. The "positive" nature of the impact shows up in the hope of the application and execution of war in a short time scale in order to solve a specific problem in a specific economic cycle. The impact of war spending on the cycle will always prove more dramatic than any long-term investment, whose impact will be faced and felt in a term longer than of interest to the executioners of "national interest."

However, matters of war and peace, and life and death, have always proved to be more complex than what simple utilitarian calculations tend to reveal.

Despites rosy predictions and enthusiastic promises pundits of the war party give, the aggressive war itself drags on when it faces resistance, which it often does. Note that historians have found it odd and unusual when an aggressive war has encountered no resistance. While the planners of aggression always do what they can to dismantle resistance, the aggressor should always bet on encountering resistance to its aggression. (Even little Melos resisted the Athenian armada.) Occasionally, the aggressor perpetrates extreme violence in order to prove resistance futile. As a consequence, those who resist fold temporarily but only as a means to survive for a better day.

So, as a historical experience, all aggressive wars in history have bred resistance in various forms, scales and stages. Often the aggressor is quite well-versed in history and knows this fact of history full well. So, the aggressor takes care only to attack those who cannot be expected to defend themselves or only targets which have been "softened" through years of brutal but calculated preparation. Of course, not always do such preparations and campaigns succeed. History is littered with their failures more than with their successes. However, the successes occur with enough frequency to salivate the aggressor's appetite.

With the stretching of the war beyond expected scope, larger chunks of hard-to-renew resources continue to be wasted on it. Even as such wasteful spending may be advocated to drive further consumption, in reality, it generates no added value to supplement existing asset values. Hence, a general asset attrition sets in, and by extension, inflation takes hold, and soft and hard landings beset various asset-based sectors of the economy. Note that all sectors of the economy ultimately prove to be asset-based if we are daring enough to include, also, non-physical assets in our utilitarian calculations. We can think of various types of assets -- for example, national currency value (determining the value of various forms of savings and investments), stock values, real-estate values, expertise, know-how, skills and knowledge -- these are all assets, the latter few examples of which, by themselves, are non-physical assets even if they may have physical representations. Note that the most important assets are the human beings. This makes a mockery of aggressive war as one waged "for the hearts and minds" of the targets of aggression.

As war drags on, a grinding attrition grips all national assets. Resources that should have been invested to improve such assets are wasted, and the negative long-term economic impact draws itself near. (I refer the reader to a note elsewhere which extracts one of Nobel Prize economist Joseph Stiglitz' relevant observations on the cost of war.)

In conclusion, we should note that asset attrition has a multiplicative effect at a macroeconomic level. The value of assets deployed in a value network depend on the value of other asssets. So, as a particular group of assets lose value due to a lack of proper and long-term investment, they depress value of other, related assets.

Saturday Jan 20, 2007

Google's Capital Spending

Google's capital spending more than doubled to $800m in 2005. Expansion has continued, and capital spending numbers for 2006 will be released next month. It will be interesting to watch.
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