Guns or Butter

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The phrase, guns or butter, sometimes stated as guns and butter, refers to the political dynamics in a federal government’s allocation to defense versus social programs, when deciding on a budget.  Both areas can be critically important to a nation’s economy and election outcomes.  Historically, the electorate has tended to favor social programs.  However, this can change rapidly when a country wakes up and sees tanks in the neighborhood.

Witness Germany, a long time significant under contributor to its NATO defense commitments.  Suddenly, Germany has stepped up defense spending to more than its obligatory 2% of GDP.

Germany is not alone, following the Russian invasion of Ukraine, there has been a significant sea change for many countries as they reconsider their reluctance to increase defense budgets.  Moreover, there has also been a dramatic increase in the willingness to support Ukraine.

While national budgets are clearly political, investors should recognize that changing budgets can affect corporate fortunes, as priorities shift.  Looking at the U.S. defense industry, it is also important to remember that Uncle Sam is not the only significant customer.

 All comments and suggestions are welcome.

Walter J. Kirchberger, CFA

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