"Islamofascism" currently is the most prominent use of a time-tested semantic device – compounding two words into one. The effect on the reader or listener is to dim the distinction between the two original words and to associate the meaning of one of the original words with the other. "Niggerjazz," for example, was invented by Nazi propaganda technicians to transfer a racial slur to a musical form that was officially unwelcome.
The function of the term "Islamofacism" is to transfer the negatives associated with fascism onto Islam and to obscure the differences between Islam and fascism. The term's political purpose is to rule out the possibility of accommodation, compromise or reconciliation between the US (and the Western world generally) and Islamic regimes and militant Islamic groups. It is an incitement to war by innuendo. "Islamofascism" serves that purpose by invoking the uncompromising attitude of the United States ("unconditional surrender") against the fascist regimes of Italy and Germany during World War II as the proper attitude for dealing with Islamic regimes.
Islam and fascism are distinct concepts. Islam is a religion. Fascism, in the abstract, is an economic system that preserves the formalities of private property but subjects nominally private property to control by the state.
In Italy, Mussolini developed fascism as a repackaging of socialism (he had been the editor of a socialist newspaper). Fascist concepts allowed him to expand the state's control and his personal power while disclaiming the goal of extinguishing property rights. Because it involved control over private property, fascism empowered Mussolini to reward friends and injure opponents.
In Germany, Hitler adopted fascism as a convenient political device. It allowed him to make a rhetorical distinction between Nazism and communism and, as in Italy, it empowered him to reward friends and punish enemies. But unlike in Italy it was less an end than a means. The end was to promote the neo-paganism of worshiping one's tribe (the "Master Race").
Fascism acknowledges itself to be a human construction. Islam, on the other hand, sees itself as a revealed religion that points to a source of power and authority outside of anything constructed by mankind. It is "theocratic" in that it looks to the Quran and Sunna as the source of legitimate state authority, and it is illiberal in that it finds no inherent limits on state authority. But the necessity of state control of private property is not part of its teachings.
From a free-market point of view, there is nothing remarkable about Islam. Although it prohibits the charging of interest, it is not unfriendly to markets generally or to private property. Islam does not provide a basis for libertarian principles. Unlike fascism, however, it is not hostile toward free markets; it is indifferent.
"Islamofascism" bears the fingerprints of the monetary elite. The related "war on terror" inspires fear in the public and provides a rationale for limitations on personal freedom, regulation of international capital flows, military spending, political interference in smaller countries and deference to authority.