America146;s Suez moment

Despite its unchallenged military might, the United States has an Achilles8217; heel: its economy depends on foreign capital. Though hardly anyone acknowledges this publicly, China and Japan already hold so much American debt that, theoretically, each could exert enormous leverage on American foreign policy. So far, the economic dependence of these countries on American consumers has kept them from exercising such power. But what would happen if, for instance, Washington changed its one-China policy and officially recognised Taiwan? Or if the Bush Administration threatened to invade North Korea? Simply by dumping US Treasury bills and other dollar-denominated assets, China 8212; which holds more federal US debt than any other country 8212; could cause the value of the dollar to plummet, leading to a major crisis for the US economy8230;

America is like no other dominant great power in modern history 8212; because it depends on other countries for capital to sustain its military and economic dominance. In comparison, consider the British Empire. At the height of its imperial reign, in 1913, Britain was a net exporter, or investor, of capital8230; In contrast, the United States today is a net importer, or borrower, of capital 8212; not only from China and Japan but also from Europe and emerging economies, at a rate of more than 500 billion a year, or approximately five per cent of GDP. The British Empire eventually declined, of course, and in 1956 it endured the humiliating demise of its great-power status in a clash over the Suez Canal. US policymakers should take note: Britain was brought to its knees not by a military defeat but by an economic one 8212; specifically, America8217;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 nationalisation by Egypt. As its international debt grows, the United States becomes ever more vulnerable to its own Suez moment.

Excerpted from an article by Sherle R. Schwenninger in the January-February issue of 8216;The Atlantic Monthly8217;