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Fed Policy Squanders the Peace Dividend

03/17/2011 10:47 am ET | Updated May 25, 2011

The U.S. Federal Reserve's second round of Quantitative Easing stimulus, QE II, has caused vicious unintended consequences around the world. The 42% rise in the CRB index of food prices has already caused starvation for millions of people, burned down the Middle East, and is increasingly creating havoc in Asia. But QE II's most venomous consequence may be its squandering of the United States Federal Budget's expected "peace dividend", as America is now re-ensnared in the Middle East sectarian turmoil.

The goal of the Fed's QE II stimulus was to create enough inflation to force reluctant consumers to open their wallets and start spending. The program's result has been vicious food and commodity inflation causing consumers to be more reluctant or unable to spend on anything but basic essentials. Given that the Middle East has the highest percentage of income spent on food with Morocco at 63%, Algeria at 53%, Egypt at 48%, and Libya at 38%; it should not be surprising the region would be the first to burn down from protests.

Iran's Shiite leadership has clearly stoced the fires of popular dissent that has caused the uprisings in North Africa. The recent spread of this havoc to the Arabian Peninsula now represents a once in a generation opportunity for Iran to try to regain dominance in the entire Persian Gulf. For the last decade the Iranians have used covert paramilitary capabilities to undermine America's military missions in Iraq and Afghanistan. Iran has seen their efforts as a low cost and high reward opportunity to bleed America's public support for the Gulf commitments.

Barack Obama ran for president as a centrist candidate with a strident pledge to military intervention in Afghanistan. As Obama campaigned in 2008 the Bush Administration was achieving a modest victory in Iraq and a stalemate in Afghanistan. Most analysts assumed if Barack Obama became president he would quickly cut-back spending and draw-down American ground forces in the Middle East. But once in office, President Obama almost tripled the U.S. troop strength and spending in Afghanistan and pursued an aggressive war. With current spending on Iraq and Afghanistan running at approximately the same $250 billion annually as in the Bush administration, there is an still an expectation that by the 2012 election campaign the United States will begin to realize a "peace dividend" from an American troop withdrawal of about $150 billion per year.

Saudi Arabia has watched in horror over the last two months as their allies in Morocco, Algeria, Egypt and Libya have been devastated by popular unrest. After its neighbor Bahrain with its 60% majority of Shiite Muslims was rocked by protests, Saudi Arabia decided to send in its military to "rescue" their embattled Sunni Muslim Al Khalifa family who ruled Bahrain since 1783. The "rescue" of Bahrain and the liberation of Kuwait are the only two direct military actions by Saudi Arabia since World War I. The Iranians had probably hoped to destabilize Bahrain without triggering an invasion by Saudi Arabia, but the introduction of an occupying military force into a fellow Shiite majority country creates a probable third front for Iran to challenge and bleed the United States and her allies.

The Obama administration now finds itself in the midst of a boiling Middle East cauldron with massive political and military risks. Bahrain is the home port to the U.S. 5th Fleet, which provides America with control of the Persian Gulf and protection for the world's largest sources of crude oil and natural gas. Even though the latest Washington Post/ABC News poll released today finds that sixty-four percent of Americans think the Afghanistan war "hasn't been worth it"; President Obama will probably soon be forced to announce a halt to or even reverse of the withdrawal of U.S. combat forces from Iraq and Afghanistan as Iran becomes more emboldened by America's new political and military weaknesses.

The American government has racked up a sorry record in its misguided attempts to stimulate the economy, which seems to have only resulted in a doubling of our national debt and even higher unemployment. With a new Congress determined to cut deficit spending, the Administration obviously pressured the Fed to do something bold to help the economy. So far, the Fed's QE II bold stimulus has spewed inflation and harmed many nations. With the Middle East heating up and the "peace dividend" about to evaporate, QE II may soon inflict tremendous political and financial damage to the United States.