The Islamic State, formerly know as ISIS, is creating chaos in Iraq, Russia is breathing down Ukraine's neck, North Korea continues to prove it's unstable, and there's the immigration crisis along America's southern border. Suffice it to say, things today are far from peaceful.
However, while all of the aforementioned conflicts could be considered threats -- or emerging threats -- to America's security, they aren't the biggest problem facing America. In fact, the biggest threat to America's security is far more insidious. It's a policy that a bipartisan panel of national security experts unanimously reports could bring America's defensive capabilities to its knees. Here's what you need to know.
The Quadrennial Defense Review
Every four years, during the first year of each presidential administration, the Secretary of Defense, in consultation with the Chairman of the Joint Chiefs of Staff, conducts what's called a Quadrennial Defense Review, or QDR. This report is then given to Congress, along with the President's fiscal year budget proposal, to help establish a shared vision for the future and facilitate Congressional oversight.
More specifically, according to the DOD, the purpose of the QDR is to advance a defense strategy for the United States and help determine a defense program for the next 20 years, which includes establishing a force structure, a force modernization plan, a budget, and other elements of the defense program and policies of the U.S.
Further, according to the National Security Act of 1947, the defense strategy delineated by the QDR must be consistent with the most recent National Security Strategy prescribed by the president, but is fiscally unconstrained by the current president's budget. In other words, while the QDR must take into account the National Security Strategy, and the defense budget proposed by the president, it is independent from the president's budget -- so changes can be made.
Importantly, because the QDR has a significant impact on the military and America's defense policy, by law, the report has to be reviewed by a National Defense Panel, or NDP. This is an independent and bipartisan panel of 10 national security experts that closely examine the contents of the QDR, and take into account current and future security challenges. After reviewing the QDR, the NDP submits a report to Congress that provides recommendations based on their findings.
The 2014 QDR review
How the above fits in with today's security concerns is that the 2014 QDR and NDP review was just completed, and the NDP's findings are anything but reassuring. Specifically, while the NDP found that the 2014 QDR presents "realistic force structure choices that the Department will be forced to make at top line funding levels currently being projected," the effects of these cuts will render the military unable to accomplish the National Defense Strategy. Explicitly, some of the problems the NDP found include:
- The smaller force envisioned in the QDR is insufficient to meet the challenges of potential adversaries: "the force structure contemplated in the 2014 QDR -- much less the projected force structure if the current budget baseline does not change -- is inadequate given the future strategic and operational environment."
- The 2014 QDR is not an adequate long-term planning document because it was dominated by shifting budget constraints, and these restraints don't allow the U.S. to "prepare for what will almost certainly be a much more challenging future."
- The budgetary path the Navy is on will result in 260 ships or less, which is far below the estimated need of 323 to 346 ships that may be required to meet potential challenges in the Western Pacific. (By 2020 China is expected to have a Navy of close to 350 ships, the majority being modern vessels with advanced capabilities.)
- Despite an increase in threats, the Air Force now fields the smallest and oldest force of combat aircraft in its history, and plans a 50% reduction to the Air Force's Bomber, Fighter, and Surveillance forces by 2019, which "will put this nation's national security strategy at much higher risk."
- Defense budget cuts won't help solve America's fiscal crisis: "Sustaining these significant cuts to our defense budgets will not solve our fiscal woes, but will increasingly jeopardize our international defense posture and ultimately damage our security, prospects for economic growth, and other interests. ... Aggressive health care cost containment should certainly be pursued both within the Department and more broadly across all government programs. Our national health care system is cost inefficient and stunningly wasteful, and it consumes more than a third of the federal budget."
To put the above succinctly, what the NDP found is that if the 2014 QDR is adopted by Congress and the DOD without significant changes, the military will be effectively gutted, and America's ability to combat escalating threats will go down the tubes.
The Budget Control Act's ripple effects
Defense budget cuts are a requirement under the Budget Control Act of 2011. But, as the QDR and the NDP point out, the threats facing America are continuing to grow, while the gap between the U.S. military's strategic objectives and the resources required to meet these objectives is increasing. Furthermore, the NDP reports that one of the only ways to reverse this trend is for Congress to find a solution to the Budget Control Act.
If Congress doesn't, and the 2014 QDR is implemented with the current budget constraints, the NDP states that America might find itself in a position where it has to either enter a conflict that it's not prepared for, or abandon a national interest -- either of which could be devastating.
What to watch
As of this writing, Congress hasn't agreed to a fiscal 2015 defense budget, let alone found a solution to the Budget Control Act -- and time is ticking as fiscal 2015 starts on October 1. The good news is the 2014 QDR and the NDP's review are seminal documents, and will hopefully cause Congress to act. If they don't, then America's ability to engage and deter threats like those coming from the Islamic State, China, North Korea, et al, could be a thing of the past, not to mention this could have a long-lasting impact on defense companies in general (I'll explain this impact in an upcoming article). For now, investors, and those concerned about America's security, would do well to monitor Congressional budget negotiations, especially as we near the middle, and end, of September.