Despite several years of worldwide economic recession, global defense spending increased 25 percent in the last four years, from $1.28 trillion to $1.6 trillion. Put another way, it's up a bit, from 2.5 percent of world GDP in 2007, to 2.6 percent in 2010. The United States is now responsible for about 43 percent of that spending. However, American spending increases are declining. In the last decade, American defense spending has increased 80 percent, and accounted for most of the worldwide increase since 2001. While military spending continues to decline in Europe, it's up nearly everywhere else. This includes Africa and South America. Russia is rearming in a big way, and China's increase was smaller last year, because of the recession, but there was still an increase. India and China are in something of an arms race, although its mostly India trying to catch up with an economically much stronger China.
All this is still less than the Cold War numbers, which reached a peak in the late 1980s, when spending (adjusted for inflation), went past $1.7 trillion a year. After the Cold War ended in 1991, worldwide spending fell by nearly half, to about $960 billion a year. Since then, especially since the war on terror and growing aggressiveness by Iran, the spending has been rising. It was just over a trillion dollars in 2005.
The Soviet Union, which started the arms race in the early 1960s, couldn't keep it up, and disintegrated, partly because of the huge military spending, in 1991. Global defense spending began to rise again in the late 1990s. Now annual global military spending is rising steadily. But it's not the same as before. In fact, it's very different. Back during the Cold War era, there were over a hundred million people under arms, and each year, factories turned out thousands of tanks, hundreds of warplanes and dozens of warships. No more, not even close, even though current spending is nearly back to its Cold War peak.
There are fewer than 40 million people under arms now, and tank production rarely exceeds a few hundred a year, with annual warplane production of less than a hundred a year, and only a few dozen warships.
When the Cold War ended, so did the era of huge conscript armies, masses of tanks (the Soviet Union had over 50,000 when the end came) and comparatively large numbers of combat aircraft and warships. Suddenly, after 1991, everything got smaller, and more expensive. Conscripts were replaced by far fewer professionals, who got paid a lot more money. This was something the British pioneered in the 1960s, followed by the United States in the 1970s. When the Cold War ended, and the world saw what pros could do in the 1991 Gulf War, everyone began to dismantle their conscript armies. Smaller armed forces, staffed by professionals and equipped with less, but more capable, gear, were the new norm. Another change has been the growth in U.S. defense spending in the last few years, to support operations in Iraq. This includes lots of money for bases in Iraq, and the hiring of over 100,000 civilians (including about 20,000 armed security contractors) to help with the war effort.
Thus the patterns of defense spending have changed. Much more of it now goes for payroll, and for buying far fewer, but higher quality, weapons. More money goes into equipment, high tech stuff like satellite based communications and computers. Billions of dollars a year is spent on satellite communications alone, and not just by the United States.
With the Soviet Union gone, no one else out there wants to try and match the United States spending levels. The war on terror also has American spending going up again. Currently, the United States spends about $690 billion a year (according to SIPRI, an independent defense research organization), all of Europe, over $200 billion, all of Asia, nearly fifty percent more, the Middle East, over $110 billion (and rising fast). Africa and the rest of the Americas account for the rest. While nearly half the spending is by the United States, most of that money is not buying weapons, but payroll, benefits and materials needed for training and operations (food, fuel, spare parts, services.)
For most of the decade, not many new tanks, warplanes or combat ships were built, as everyone continued to live off the Cold War surplus. But that is changing, Many countries want to build new stuff, despite the fact that everything has gotten so much more expensive. That's because computers and powerful sensors and all manner of nifty technology provide most of the lethality in new weapons. For example, your basic $500 assault rifle becomes far more lethal when you add several thousand dollars worth of computerized accessories.
Countries are spending more on defense, but they aren't buying the same kind of stuff they were two decades ago. Everyone, including the Russians and Chinese, have agreed that the Western way of warfare, with small number of well trained volunteers using high-tech weapons, is the way to go.