Friday, July 23, 2010

Countdown Begins To Bursting Of Defense Bubble

Crashes were inevitable after the dot-com bubble and housing bubble.  U.S. sovereign debt is probably a bubble that in turn feeds yet another bubble  - in defense spending.  Uncle Sam's war on a radical Islamic mafia since 2001 has cost over one trillion dollars and has fed explosive growth in parts of the military-industrial complex that have little direct involvement in warfighting.  One such part is U.S. Joint Forces Command in Norfolk, VA. 

I recently had the opportunity to visit Virginia and spent some time in Suffolk, home to USJFCOM's Joint Warfighting Center.  The Center's businesslike complex is near a cluster of office parks occupied by the usual suspects:  Lockheed Martin, SAIC, Raytheon, Northrop Grumman, and smaller subcontractors too numerous or secretive to name.  All of them are enjoying the bubble times and flush feelings that come from riding a gravy train.

That gravy train may very well come off the tracks, at least where they end in this neighborhood.  The Defense Business Board is studying ways to make the U.S. military more cost effective and is recommending the shutdown of Joint Forces Command:

A Pentagon advisory board is recommending that the Defense Department eliminate the Norfolk-based Joint Forces Command as part of a plan to significantly cut defense spending.

Joint Forces Command is the linchpin of Hampton Roads' blossoming high-tech industry, a segment that provided almost 4,500 high-paying jobs and pumped about $365 million into the local economy in 2007, according to a 2007 Old Dominion University report.

It employed more than 3,000 contractors, 1,491 military personnel and 1,533 civilians as of May, said Lt. Cmdr. Robert Lyon, a Joint Forces spokesman in Hampton Roads. Those figures include personnel deployed throughout the world, he said.

It's worth noting that the number of contractors at USJFCOM just about equals the number of traditional staffers from the armed forces and civil service.  There is no clearer reminder than this of where the money went in the war on terror.  Many of these contractors are retired military officers themselves.  I'd love to find out how many are making more than what they made on active duty in addition to their standard pensions.

Scaling back defense spending is inevitable.  America's current wars are among the costliest in our nation's history when measured in inflation-adjusted dollars and we have little to show for the investment besides uneasy strategic stalemates.  World War II bought us new allies and revolutions in crossover technologies (radar, plastic, rocketry).  This war has bought us little so far.  The one remaining benefit is the prospect of opening up Afghanistan's hidden trillions in untapped natural resources for the world market.  The U.S. recently forgave the debts owed to it by Afghanistan as a down payment to ensure access to ore.  All those rare earth metals lying under the mountains are very necessary for our standard of living.  Many Afghan tribesmen are going to get rich.  Many defense and mining contractors will continue to get rich; just not as many as before. 

The end of the defense bubble is coming.  It may come with a bang if the global bond market revolts or with a whimper if defense spending gradually tapers off to the minimal level needed for a multi-decade Afghan footprint.  Defense spending will never end and in some ways it may increase if unmanned vehicles, smart sensors, and precision logistics are brought to maturity.  Some defense projects will be great investments but the low-hanging fruit has probably been picked clean.  Military historians define surprise as an event that occurs in the mind of a commander.  Deflating bubbles always come as surprise to those inside them. 

Full disclosure:  Long put under LMT as hedge against decline in U.S. defense budget.