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/ grainews.ca
OCTOBER 21, 2013
Columns GUARDING WEALTH
Investing in war Investing in times of war means profits for a few at the expense of many. But investing in an unknown outcome is a long shot BY ANDREW ALLENTUCK
T
he prospect of the U.S. entering into yet another Mid-East conflict, this time taking on Syria (or if not Syria, then another wretched dictatorship which annihilates its own people) raises a financial question: is war good for business? It matters in Canada too, for we are inevitably drawn into American conflicts, pay interest rates heavily influenced by the U.S. Federal Reserve Board, and have our commercial laws drafted to be in harmony with American interests. The idea that business follows the flag or, if you prefer, that the flag follows business, is standard left wing rhetoric. There are examples, of course. In the 16th and 17th centuries, Britain and Spain created empires to furnish raw materials and to buy products of the home country without the interference of customs duties. Conquest of Aboriginal peoples was swift and cheap. Empire came at low initial cost, never mind the high cost of European diseases given to peoples who had not experienced them before or tropical diseases that devastated European soldiers and administrators in the colonial outposts. Strictly on a cash flow basis, the Spanish looting of Mexico and Peru, for example, brought immense quantities of gold and silver to Europe. Spain
used its booty to wage war against Protestants, particularly English ones, lost the war and found that its imported gold had so driven up prices and its rape of forests for lumber to build ships so wrecked its economy that it went into depression for 400 years. Louis XVI financed the American War of Independence by loaning money to the rebellious English colonies. They gave France bonds in exchange, then defaulted. Louis ran out of money, and called the Estates General, a body that had not been assembled for 150 years. The various classes in the assembly refused to pay, the mobs came next and the French Revolution followed. That was 1789. Within the next quarter century, Napoleon, who crowned himself to French emperor, lost a fifth of all male children born between 1760 and 1790 in his campaigns, ultimately unsuccessful, and had to sell the vast territory of Louisiana, essentially the central part of the United States, for a pittance. The United States got one of the cheapest land deals in history, a vast amount of real estate that made its westward expansion possible with the stroke of quill pen. Its gain was huge, for as a non-combatant in the Napoleonic wars, it had no losses that had to be written off. A century later, in 1914, AustroHungarian emperor Franz Josef,
tired of having his wife (killed by an assassin in Switzerland), his son Rudolf (suicide/murder, though it is said that Rudolf had a bad case of depression), and his nephew Franz Ferdinand (assassinated in 1914) mowed down by terrorists, started World War I. Joined by the German empire, the two countries fought battles on an industrial scale, which, together with the trench-bred Spanish flu that spread around the world at war’s end, killed perhaps 50 million people, mostly in Europe. Franz Josef died before the end of the war, which saw the dismantling of the Austrian empire. Germany lost a few colonies in Africa and had to shrink its eastern and western borders. Germany was required to pay vast reparations to France and the U.K., created a hyperinflation to prove it could not, and laid some of the groundwork for the outbreak, two decades later, of the Second World War. The war Franz Josef started to protect his empire caused its destruction, set the groundwork for the collapse of the Kreditanstalt, the empire’s largest bank, and paved the way for the Nazi surge from a band of thugs in Munich to controllers of Europe, architects of genocide and then, of course, to self-destruction via invasion of the U.S.S.R. where the once mighty Wehrmacht suffered 90 per cent of all its casualties in the war.
The Second World War, arguably the creation of German and Japanese imperialism, saw the destruction of major German cities, the burning of most cities in Japan (not to mention the nuclear explosions in Hiroshima and Nagasaki), vast destruction of areas of China, population reduction by starvation (especially Manchuria where Japanese authorities experimented with bubonic plague), the devastation of the Chinese nationalist government and its ultimate replacement by Communism under Chairman Mao, and the loss of vast numbers of civilian lives to starvation and wartime annihilation in eastern Europe and the Soviet Union. To find profit of any sort in this orgy
Invest in productive enterprise, not destructive war of destruction is to indulge in a fantasy. Even the few German companies such as chemical maker Bayer, steel maker Thyssen and auto maker Volkswagen which had generated sales and profits in the period from 1936 to 1945 had massive losses of plant and equipment on the their balance sheets. No major German firms escaped devastating losses in the Second World War. Some firms did recover. Hugo Boss made fancy uniforms for the SS and went on to regain its sartorial stature in civilian dress several decades later.
BENEFITTING FROM DESTRUCTION There are countries able to benefit from warfare. The U.S. was a lender in the First World War, had relatively few battlefield casualties and emerged as world power largely by arriving late in the conflict and suffering minimal losses. In the Second World War, the U.S. acquired vast amounts of British assets and gold through
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lend-lease programs, and gained industrial supremacy for much of the remainder of the 20th century. U.S. casualties in the war were small by comparison to losses suffered by the Soviet Union or to losses suffered by Britain through bombing of cities and ultimately to the loss or surrender of its colonies in 1960 and following years. The seemingly endless wars in the Middle East are no different. They are devastating to the capital bases of combatants and profitable to the foreign countries that supply them. Syria will not be different. From a Syrian point of view, the vast destruction one sees on television represents accelerated capital destruction, depreciation on steroids. Hotels in Jordan, next door to the conflict, are full and making money. Taxi drivers helping refugees flee Syria are making money. But this does not mean that war in Syria is generally profitable, for what is spent on flight or, for that matter, rebuilding Syrian cities when this war ends will not be spent on other things. In the end, Syria will have suffered massive destruction of cities, devastation of its capital reserves, loss of productive people who have taken their money and families out of the country, and have acquired hundreds of thousands of returning refugees who will need food, housing, medical care and jobs. Syria may rebuild its cities, but it will have to borrow to do it. The country will emerge in perhaps decades with stylish buildings and a deadweight of debt that may take half a century to pay off. That war is good for business is just not true in a general way, as we can see. However, the threat of war maintains defense industries in many countries. Some companies that make military aircraft, for example, are profitable. War is dreadful, but it does, of course, have spinoffs. Investing in the unknown benefits of vastly destructive processes is always a long shot. What is important is to be early investing in arms making companies in lands far from the battlefield, late in arriving after cities are leveled to buy cheap real estate, ready on the sidelines to invest in companies that will rebuild what weapons have destroyed, and, of course ready with charity to funnel some profits back to the nations wrecked by causes of the moment which, in retrospect, seem trivial. As the twentieth century was shaped by Franz Josef’s pique over the murder of his nephew, whom it is said he actively disliked, the twenty-first is likely to be shaped by questions of control of the Middle East. Other real estate — the Americas, central Asia, China and southeast Asia, India, Australia, and Europe are already spoken for. Nobody lately has designed a war for profit and the old idea that there is big money to be made is armed conflict is wrong for participants and precarious for those who buy the bonds of the combatants. After all, if your debtor loses, you will be in the same position as those who bought Russian government bonds in 1914 and 1915 on which the Bolsheviks defaulted, Imperial Chinese bonds in 1923, and pre-Castro national bonds in Cuba. Best bet — invest in productive enterprise, not destructive war. The odds of losing are just too high. † Andrew Allentuck’s latest book, When Can I Retire? Planning Your Financial Life After Work, was published in 2011 by Penguin Canada.
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