US Defense Department’s China Focus
Published on 17th March 2023
Late last week, the Biden administration submitted to Congress a Fiscal Year (FY) 2024 Budget request of $842 billion for the Department of Defense (DOD), an increase of $26 billion over FY 2023 levels and $100 billion more than FY 2022.
The DOD proposed budget is a red flag, has China in focus, and points to further entrenching the US-China rivalry. No doubt, this will further accelerate geopolitical fragmentation and support our call on secular inflation.
The geopolitical variable, we have argued, requires significant attention in constructing client portfolios aimed at multiyear horizons. Shifting positions of major powers have implications across regions, nations, and sectors of economies. We postulated in 2021 that a « great transformation » is in play; this is one of the key drivers of secular inflation. Thus higher rates for a secular cycle, not a business cycle. Investment portfolios must remain positioned accordingly.
Indeed the major power rivalry to note and stay on top of is between the US and China, which has deteriorated quickly over the past 5-7 years, accelerating geopolitical fragmentation and further solidifying the globe into more distinct ideological blocs (see our November 2022 Webinar).
In a world shaped by ideologically aligned economic blocs, there is a more discriminate movement of ideas, people, goods, services, and capital. Economies become more top-down structured and controlled and move towards reducing interdependence and ensuring greater self-reliance as the preservation and fortification of the nation-state become the ultimate policy objective. As a result, a bifurcated, trifurcated, fragmenting world will likely have a higher inflation backdrop.
US Secretary of Defense Lloyd J. Austin’s statement1 on the budget request is worth reading and shockingly blatant regarding the US position on China. He states the budget request is « …the most strategy-driven request we’ve ever produced ..our National Defense Strategy makes clear, the People’s Republic of China (PRC) is our pacing challenge ».
He mentions the PRC four times, including in the section on National Defense Strategy (NDS) priorities list:
- Defending the homeland, paced to the growing multi-domain threat posed by the People’s Republic of China (PRC).
- Deterring strategic attacks against the United States, our allies, and our partners.
- Deterring aggression, while being prepared to prevail in conflict when necessary – prioritizing the PRC challenge in the Indo-Pacific region, then the Russia challenge in Europe.
Such decisive statements and the general confrontation position adopted by the US, NATO, and others on China, are, in our view, clear examples of « soft wars,2 » and wars of any kind are inflationary. Long-term investors need to be aware.
1. Department of Defense Releases the President’s Fiscal Year 2024 Defense Budget
2. Soft War, The Ethics of Unarmed Conflict – Cambridge University Press 2017
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