Suez, America-style
August 26, 2008 – 12:59 am
It’s no longer any secret that the USA is deeply in hock to foreign governments, particularly China, Japan, the Petro States, and increasingly Russia. We have two very large deficits that have to be financed: a trade deficit and a fiscal deficit. Americans buy more than they sell. We consume more than we earn. To keep the process going, Americans and our government have to borrow money from abroad. At rates that are totally unprecedented.
As I.O.U.S.A. notes, foreigners today own a larger share of American society than ever before. (During WWII the U.S. government ran up much larger deficits as a percentage of GDP, but these were financed primarily by American citizens themselves.)
This leaves our economy incredibly vulnerable. But how? It’s easy to understand military vulnerabilities, not so easy to contemplate economic vulnerabilities.
The 1956 Suez crisis has much to teach us…..
Back then we were the ones wielding the financial weapon, against our friends the British. Eisenhower had a disagreement with the English about how to handle Egypt in the wake of Egypt’s nationalization of the Suez Canal. A 2004 article from The Atlantic says it this way:
The British Empire…endured the humiliating demise of its great-power status in [the 1956] clash over the Suez Canal. U.S. policymakers should take note: Britain was brought to its knees not by a military defeat but by an economic one—specifically, America’s refusal to support the British pound, which created a monetary crisis for the British government, forcing it to call off its ill-advised campaign with France and Israel to recapture the Suez Canal after nationalization by Egypt. As its international debt grows, the United States becomes ever more vulnerable to its own Suez moment.
Since that article was written in 2004, our international debt has grown substantially. Foreigners who hold our debt could sell it in large chunks. And selling dollar-denominated debt is tantamount to selling the dollar itself. In such a situation, sellers of dollars would outnumber buyers and the dollar’s price would go down. Hard.
There are those who argue that the Chinese would never deliberately spark a run on the dollar. For one thing, their foreign reserves are largely concentrated in dollars: as the value of the $ goes, so goes the value of their national savings account.
But this argument assumes China’s government will behave like a rational trader. A hedge fund with a concentrated position in a stock can’t exit the position all at once because it’ll hammer the value of its own holdings. True enough. But China isn’t a hedge fund. It’s an emerging superpower with interests that extend beyond the value of their foreign reserve accounts.
It’s also true, of course, that the Chinese economy is driven largely by exports to the U.S. A fall in the value of the dollar wouldn’t just decimate the value of their foreign reserve holdings, it would cause major disruptions in their economy as exporters are driven out of business.
And yet as its consumer class explodes, China’s own domestic market will one day be large enough to absorb most of what the country produces. No longer will the country’s economy depend on exports to survive. At that point it might even make sense for China to let the dollar collapse against its own currency. That will give the Chinese even more economic heft to compete with Americans for the world’s goods and services.
Ike’s economic power play at Suez in 1956 ended the British empire. If we can do it to the British, why wouldn’t the Chinese some day do it to us?
Posted in Dollar, Economy, international trade |
18 Responses to “Suez, America-style”
I’m Dutch. We were a superpower once. Welcome to the club!
By Martin on Aug 26, 2008
A very interesting post Rolfe and it highlights very well that monetary, political and military power are tightly related. We are as strong as our bank balance….
By Nick Gogerty on Aug 26, 2008
Good. The sooner we become displaced as the world’s policeman the better for the US. Switzerland does absolutely no policing, and they are doing hunkydory.
By burritos on Aug 27, 2008
Unfortunately, when the dollar does collapse, the politicians (both Republican and Democrat)will be looking for someone to blame, and they will be saying how no one could have predicted it would happen. But the politicians, the Federal Reserve, and the Pentagon should all share the blame. An ancient Chinese proverb says it best: “May you live in interesting times.” The future will be very interesting!
By Robert Cunningham on Aug 27, 2008
It’s not really any consolation, but the Egyptians didn’t exactly become a great nation after taking that canal.
By Mikey on Aug 27, 2008
Americans will be better off when the majority of them come to realize that the US military is not the worlds policeman, rather they act as muscle, an enforcer. Akin to the Mafia pimp who needs muscle to protect and enhance business goals.
By desoto on Aug 27, 2008
Previous comment:
But it helps (psychologically and otherwise) to elevate the pimp role to think of ourselves as policeman !!
By Like_your_comment on Aug 27, 2008
Folks, Britain had America as its ally during its post-Imperial days. In other words, despite the fact that it had lost all of Africa, Bahrain, and east Asia (sans HK), it was still America’s financial portal to western European markets. In essence, that’s how the UK has remained, a well off society for all of these years. When the so-called American empire declines, there’s no uncle nation to take care of it. In other words, China isn’t to the US as the US was to the UK. What’ll happen is that the US will decline more towards Brazil’s level than that of the UK (1950-2000). The western nations which will maintain their mediocre standings will be Canada and Australia, the two raw materials, low population density export nations to east Asian countries like China, Vitenam, and Korea.
By Randy on Aug 27, 2008
I guess America hating is popular now. Personally I look forward to the day when we don’t have to be the global cop. America was a better place before we had to shoulder the defense of the free world. All I can say to the world is be careful what you ask for. As far as empires go America has been a benevolent one. Europe, look east at the awakening Russian bear, look inward at your restless Muslim population. South Korea, do you really believe you’d still be free without the US troops stationed in your country? Japan, do you think China has forgotten the 1930’s and 40’s? And Australia with your tiny population, how long will China pay for your resources when she can take them for free?
By Dave on Aug 27, 2008
“And Australia with your tiny population, how long will China pay for your resources when she can take them for free?”
No need to fear for China will simply own the mining companies themselves. Think of PetroKazakhstan, it was originally a Canadian company and is now owned by the China National Petroleum Corporation.
“As far as empires go America has been a benevolent one”
Outside of Latin America, the US really isn’t an empire. It pales in comparison to the former Anglo-Dutch unions which had effectively turned sovereign nations into corporate run territories with the help of Victoria’s armies and navies. The US doesn’t control any non-American region with the resource wealth of an India, Indonesia, or South Africa. What happened, after WWII, was that the US had more worldwide influence, in part due to the declining British who were essentially doing that job for much of the 19th century and at the same time playing the cold war “Domino” strategy to keep Leninist factions at bay in Chile, Indonesia, etc. I’d say that it was a more stop-gap type of imperial overture than an empire.
By Randy on Aug 27, 2008
> I’m Dutch. We were a superpower once. Welcome to the club! - By Martin on Aug 26, 2008
The Dutch were a superpower?
By Dan on Aug 27, 2008
If it wasn’t so disastrous and deadly for so many people in the world, it would be amusing to observe the naive and sophomoric beliefs of so many Americans. Gore Videl (he’s an American author) has written a book, “The United States of Amnesia” which addresses this issue. However, I think the Videl has it wrong, it’s not amnesia, the majority of Americans never knew anything in the first place.
As an example, ask any of the dead Kurds, killed by Saddam Hussein with American chemical warfare agents (sales approved by the State Department) sprayed with Apache helicopters if they think that the US is benevolent. This took place because CIA (Criminals In Action) over through the legitimate democratic government of Iran in order to install the Shah of Iran, Mohammed Reza Pahlavi, because the US wanted easy access to their oil. The Shah’s secret police, the SAVAK, were as ruthless as Saddam and his boys any day, killing thousands of their political opponents. Ask those dead people about benevolence. Talk about blowback.
Of all the money that the world spends on military, the US spends at least half. However, when it comes to foreign aid, the US spends the least per capita of all developed nations. You better support your boys in Iraq, your lack of knowledge put them there needlessly and they are paying the ultimate price.
By desoto on Aug 27, 2008
“Saddam Hussein with American chemical warfare agents”
What about Pinochet and Suharto, they don’t count? This was a result of the cold war (Domino Theory of containing the spread of communism), and unlike the British, US troops didn’t establish protectorates in the middle east up until very recently with the Bush admin. All those tin pot dictators were natives of their respective lands and had in-direct military aid from the US, thanks to the cold war machine.
By Randy on Aug 27, 2008
Rolfe,
An excellent analogy.We can learn much from history.
Randy,
Very good point, the UK having us as their creditor while ours is China.
Dave,
The US a benevolent empire ? how much crack have you been smoking ? Millions of my people dead in your theft of our lands. Tens of thousands more dead thru slavery in the Middle Passage. Millions of Vietnamese dead while we fought against their nationalist struggle. Over a million dead in Iraq. What a sick, ignorant dumbass.
By oso on Aug 27, 2008
Oso,
Bitter! I think you need to move abroad-leave the US. To hell with this country. Yes, we’ve made some significant mistakes but we’ve also saved millions. Germany would be it’s own empire if not for us and God only knows how much of Asia would’ve become the Japan. Just be happy you can live in country that allows you such opinions vs hangs you in the street or dips you in boiling oil for being a traitor. We’re not perfect. I can say that I love traveling abroad but I’m always happy to be home in the good ole USA.
By Abby on Sep 1, 2008
Abby is a good example of who Gore Videl was referring to in his book, “The United States of Amnesia”. Accurate history tells us that on December 10, 1941, Germany and Italy declared war on the US, Three days after the Japanese attack on Pearl Harbor. In both World Wars, the US was the only industrial Western country that sat on the side lines while the rest of the world was fighting against tyranny. For those of you how are limited in their knowledge of history, WW 11 started on September 1, 1939.
People such as Abby have such low expectations of themselves and the US, this is decidedly un-American. They are the real traitors to the values that are espoused in the Constitution of the US, as these values are universal. I think that people such as Abby should leave. Many Americans, such as myself, have a much greater vision for America.
The millions who are dead in South East Asia; Viet Nam, Laos, Cambodia, may question your knowledge of history and misplaced values.
By desoto on Sep 7, 2008
From Malaysia with love
By Pak Karamu on Dec 23, 2008