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NZDF capital cycles

How long will what we have, last?
 
All organisations must invest in capital equipment in order to achieve their purpose. In business capital allows for production to achieve sales. The cycle of purchase, use, phase-out and replacement is captured by the concept of depreciation. An asset's book value starts at its purchase price and is reduced over time on the basis of an assumed life-time. Depreciation is typically an expense firms can claim against income as they are nominally preserving the value of the capital asset by saving to replace it.

The problem with military equipment is that its purpose is destruction not production. The objective of military capital is to destroy other military capital, or to put it another way combat is a process of value destruction. The savings and sacrifices of one nation (military capital) are pitted against the savings and sacrifices of another nation until one nation is left standing. A good example of this is Japan after World War Two. Japan started with an Empire and was reduced to cinders.
The stimulatory affect of war is largely achieved through increased productivity as nations move towards total mobilisation. Essentially nations sacrifice more and more of their productive surplus and more and more of their personal wellbeing (eg holidays, choice of food, and their lives) in order to successfully compete at destruction of the enemy nation. Heightened competition leads to shortened generational cycles of capital equipment as enemies compete to outdo each other technologically. An interesting example is the British Covenanter tank which was built between 1940 and 1943. The British built 1700 of these vehicles but scrapped them all because they were obsolete before they could even be used which is effectively a 100% loss of productive output though mismanagement rather than enemy action.
In the modern era there are two problems. 
 
The first is that nuclear weapons trump all. In total warfare the competition is no longer production but quickest launch. He who launches first may destroy the enemy's arsenal on the ground effectively leaving the enemy at their mercy. The biggest problem with this is the environmental consequences may come back to haunt the victor. The same problem applies to biological warfare agents.
The second problem is American military hegemony. The United States spends $1,753 billion on defence or 42% of the annual investment on the military in the world. This is three times more than China and $179.2 billion more than the next nine nations put together. This massive investment is designed to create global certainty. There is no chance of defeating the US in conventional military terms. This therefore acts as a disincentive by most nations to try. The problem is while there may be an 600lb Gorilla in the cage that doesn't mean that it is not worthwhile being big enough to intimidate the other inhabitants in small squabbles. So long as the 600lb gorilla doesn't butt-in, it's still possible to monster people.
And people have also noticed that the 600lb gorilla has grown sensitive in its old age. Unlike past despotic rulers the US does not plough salt (eg Rome vs Carthage) into its enemies fields or genocidally wipe out entire populations. Up until 1945 this was pretty normal. By being civilised the United States gives scope to those who fight dirty by hiding among civilian populations. Indeed increasingly the distinction between military and civilian is becoming meaningless. In a war based on information the distinction between an ordinary person and a terrorist is merely in a person's brain. The difference between an airliner or a bag of fertiliser as most people see them, and how the terrorist uses them, comes down to what is in that brain.
All investments in military hardware are a productive loss to the world economy. The only useful investment is in military research and development which can have civilian applications. The internet itself is an example. Many nations attempt to leverage off the need to develop a military capability to gain industrial benefits. These may be temporary or sustainable. The cycle of investment depends on how long any particular item of hardware is expected to last before it is replaced.

Below is a graph of New Zealand's major military systems and their declining residual value applying IRD depreciation tables to them.



The grey vertical line represents 2011. The red line 2020. By 2020 the residual value of most NZDF systems (except the NH90 helicopters) has begun to flatten out. By 2020 most systems, with the possible exception of Te Mana, will beginning to need replacement.