The Economics of Modern Warfare

The US-Iran conflict exemplifies the scale and speed of modern military expenditure, with costs accumulating at a rapid rate. In the first six days, the United States spent approximately $11.3 billion to fund the war (around $1.8 billion per day). Estimates are suggesting that total costs have already exceeded $30 billion within weeks, with projections of up to $200 billion if the conflict continues over several months. This indicates how modern warfare can be extremely expensive and that much of the costs occur early on, as advanced weapons and military systems are deployed immediately.

Much of this spending is concentrated in high-cost military technology and logistics. For example, the initial phase of this war saw billions spent on munitions such as precision-guided missiles and air defence systems. Individual interceptor missiles can cost millions of dollars each per unit, with systems like THAAD (Terminal High Altitude Area Defence) costing approximately $12 million, which illustrates the financial burden of sustaining high-tech warfare. However, it is not just weaponry which governments spend on. Other aspects like maintaining global supply chains, fuel, personal deployment and intelligence operations also need to be accounted for. Each of these contribute to the overall fiscal weight of conflict. Furthermore, the US expanded defence commitments through signing a $16.5 billion arms deal with its Gulf allies, which makes this war more closely tied to a wider network of defence companies and military-related industries.

This surge in spending is a good representation of military Keynesianism. To put it simply, Keynesian economics is a macroeconomic theory that advocates for government intervention and spending to stabilize the economy. In this example, government expenditure on defence acts as a form of economic stimulus. The conflict has resulted in an increased demand for things like defence contractors and advanced manufacturing, which is being supported by a proposed $1.5 trillion US defence budget, the largest in history. Therefore, we can see that war reallocates economic activity towards specific sectors, boosting output and employment within the military-industrial complex. However, this stimulus diverts resources away from other areas of the economy. For example, the budget proposal mentioned previously also includes $73 billion in cuts to non-defence (domestic) spending. Ultimately, the conflict demonstrates how modern warfare can simultaneously act as a powerful economic driver whilst causing structural imbalance.

Due to the conflict, growing pressures are placed on government finances, particularly through rising deficits and national debt. War spending, which has been calculated to be around $1 billion per day, is mainly financed through borrowing. This contributes to US national debt, which is now surpassing $39 trillion. If the war does not end soon, total costs could reach hundreds of billions, making this fiscal deficit even larger.

This increased borrowing affects bonds markets, as the US Treasury has to issue more debt. Since the war began, the 10-year US Treasury yield has risen from 3.96% to 4.2%, while long-term yields have approached 4.9%. This increase reflects investors' concerns over inflation and higher borrowing needs. When yields rise, it means that investors are demanding greater returns to hold government debt, while existing bond prices fall so their effective return matches approximately 4.2%. Government bonds are usually seen by investors as a “safe haven” but as inflation increases, driven by war-related energy shocks, their attractiveness decreases.

This rise in bond yields directly feeds into higher interest rates. As yields increase, borrowing costs across the economy also rise. This is because the yield on US Treasury bonds is often treated as the “risk-free rate”. So If the Treasuries now offer 4.2%, banks must charge higher interest rates on loans and investors will not lend to businesses or households for less than that. Consequently, this affects aspects of the economy like mortgage rates and business investment. For example, UK mortgage rates have already climbed from 4.83% to 5.84% within a month, with millions of households expected to face higher repayments due to war-related financial pressures. Simultaneously, investor expectations have had a significant shift. Markets have scaled back their expectations of interest rate cuts, anticipating that central banks may need to keep rates high due to persistent inflation.

The US-Iran conflict demonstrates that modern warfare extends far beyond the battlefield, acting as a powerful force that reshapes economic systems at national and global levels. While increased military spending can stimulate certain sectors of the economy, especially within defence and manufacturing industries, this comes with a significant price. The rapid increase in government expenditure has led to rising deficits and national debt that only seems to be expanding. At the same time, the effects of fiscal expansion are passed onto financial markets, with higher bond yields driving up interest rates and tightening economic conditions for households and businesses.