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War and Financial Speculation

“Of course the people don’t want war. But after all, it’s the leaders of the country who determine the policy, and it’s always a simple matter to drag the people along whether it’s a democracy, a fascist dictatorship, or a parliament, or a communist dictatorship. Voice or no voice, the people can always be brought to the bidding of the leaders. That is easy. All you have to do is tell them they are being attacked, and denounce the pacifists for lack of patriotism, and exposing the country to greater danger.”

– Hermann Goering, highest-ranking Nazi official to be tried at the International Military Tribunal at Nuremberg, Germany

Rennes, France.

The war in Afghanistan is finally coming to a close, with a majority of US troops expected to be pulled out by the end of 2014. And what a war it was. In addition to being undeclared and unfunded, it lasted longer than the military campaign carried out by the Soviet Union, costing the lives of 2,240 US soldiers (as of June 28th, 2013) and the American taxpayer over $660 billion.

And just how well was that money spent? According to a story in the Washington Post, the US plans on destroying $7 billion worth of military hardware already in Afghanistan. The argument is that it will be cheaper to just sell it as scrap (for pennies on the pound) rather than ship it back to the US. The equipment being destroyed represents more than 20% of all US military hardware deployed in Afghanistan. Among the items being junked are 2,000 mine resistant armored vehicles known as MRAPs. These were quickly rushed into production in 2007 to protect US troops from the devastating effects of improvised explosive devices (IEDs). Unfortunately, the vehicles – which cost $1 million each – proved no more effective at saving US lives than less expensive alternatives.

[Author’s Note: if the US military were really concerned with saving lives it would address the current suicide epidemic raging among soldiers and veterans]

On June 18th of this year, a ceremony was held near Kabul, Afghanistan, in which Anders Fogh Rasmussen, the secretary-general of NATO, officially declared that the Afghan National Security Forces (ANSF) were now in charge of all security operations in the country. But NATO (which, for all intents and purposes, really means the United States), would like to keep a presence in Afghanistan for the foreseeable future. This is being complicated by the inability of the US to arrive at a status-of-forces agreement (SOFA) which would grant immunity from local prosecution to US soldiers operating in Afghanistan after 2014.

So just what are the full implications of peace breaking out in the Middle East? Unfortunately, it doesn’t look good for the Military Industrial Complex. With the war in Iraq over and the war in Afghanistan winding down (the total cost of both expected to eventually reach between $4 trillion and $6 trillion), the Military Industrial Complex is facing tepid demand for their lethal hardware. For the first time since 1998, worldwide defense spending has fallen.

A report by the consulting group AlixPartners disturbingly tells us that the “prospects for the defense sector” are “clouded by shrinking military budgets in the U.S. and Europe.” More troubling still, we are told that “U.S. defense spending [is] set to be cut by about 25% over the next five years and by at least $500 billion over the next 10 years.” This will result in “challenges” for the aerospace industry (i.e. Military Industrial Complex) as “the focus continues to shift away from defense and toward the commercial sector.” To translate that into English, the days of easy war profits are over and companies will now be forced to compete on the open market for civilian orders if they wish to survive.

Fortunately, the report isn’t all negative. Defense firms are being told that they might want to look into “federally funded civil projects, including security services.” It would appear that the billions of dollars the Department of Homeland Security (DHS) is spending on creating an internal State security network (all to make Americans “safe” and the likes of which the East German Stasi would be jealous of) should pose an easy target for defense contractors looking to make a quick buck.

Plus, for those in the Military Industrial Complex wanting to take the “glass is half full” approach to life, there is always the chance that America will be drawn into a full scale war with Syria and / or Iran. Yes, this will probably result in the deaths of thousands of US soldiers (and needless to say, hundreds of thousands of innocent civilians), but just think of the business opportunities!

As an aside, there is apparently another area for easy profits that the AlixPartners report neglects to talk about. Namely, convoluted financial transactions, the benefits of which might not be immediately obvious to outside investors.

On June 18th of this year, Moody’s Investors Service lowered the corporate family rating of AlixPartners from B1 (speculative and subject to high credit risk) to B2 (even more speculative and subject to even more high credit risk). Moody’s states that the reason for the downgrade was a “significant increase in leverage” and a “shift to more aggressive financial policies.” This includes a proposed $191 million “special” dividend payment to current equity holders. The dividend would come almost a year after AlixPartners was purchased in a leveraged buyout transaction (LBO) by CVC Capital Partners. To be fair to AlixPartners, Moody’s believes that the “ratings outlook remains stable” and that AlixPartners should see growth and is expected to “apply free cash flow to debt reduction.” Let us hope so.

War and financial speculation. Two industries that should provide oversized profits for some time to come.

Tom McNamara is an Assistant Professor at the ESC Rennes School of Business, France, and a former Visiting Lecturer at the French National Military Academy at Saint-Cyr Coëtquidan, France

 

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Tom McNamara is an Assistant Professor at the ESC Rennes School of Business, France, and a former Visiting Lecturer at the French National Military Academy at Saint-Cyr, Coëtquidan, France.

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