Monday, August 22, 2005

Where Are the Oil Dollars Going?

Perhaps discerning individuals might be asking, just what are the oil producing countries doing with the windfall profits on their oil. Well, one answer is that they are spending more on defense. Russia's armed forces are getting a twenty percent budget increase next year. The chief of acquisition stated that "We are going to spend the main bulk of finance next year not for acquisition of new pieces of materiel, but for modernization of existing weapon systems and extension of their service lives (source: Radio Free Europe/Radio Liberty)." It is obvious they are also spending some on military preparedness. At present they are engaged in a massive military exercise with China that has the US and others worried. While Russia and China both argue emphatically that the exercises are not intended to threaten their neighbors, no one believes them. Many of the countries of the region have quite a bit to be concerned about given China's continued pretensions toward Taiwan and Russia's recent statements that democratic revolutions in its region are "destabilizing."

So, while it is true that much of the increase in the flow of money going to the oil producing countries is being invested in the US economy and thereby sustaining low long-term mortgage rates, it is equally the case that at least some of it is contributing to long term global security problems.

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