In October 1956 Britain and France,with Israeli support, launched military strikes against Egypt. The military operation was entirely successful, and within a matter of days it appeared that all the operational objectives would be achieved. However, almost immediately, the United States put so much pressure on their allies that the operation became unsustainable. Nine days after the attack was launched the Eden government declared a ceasefire and within two months all of the British and French attacking forces were withdrawn, leaving Egypt the clear victor, Eden himself was forced from office in January 1957.
The point was that even the formerly equal wartime allies were compelled to recognize the power reality- the hostility of the United States to the operation could not be overcome. From then onward the United Kingdom generally aligned its policies with the United States.
It is tempting to consider that any American attempt to seize Greenland might be met with similar determination, though for the time being America remains the hegemonic power. Nevertheless the direct challenge to a NATO ally strikes at the heart of the current international order. Even if we assume that the attempts by Greenland to become independent of Denmark were successful, and even if we assume that the independence parties are indeed discussing a new relationship with China, the reality is that Trump's determination to plant the stars-and-stripes over the territory will come with a cost that would give an administration less demented that that of Donald Trump severe pause for thought.
Trump and his backers reject the idea that the USA should be bound by agreements that limit their freedom of action in anyway. They hold the very concept of international law in contempt. They are nativist and nationalist in the strongest sense of those words. Yet their contempt for international collaboration and what they regard as the hypocritical, fake morality of the international system is blinding them to some very real truths that underlie American power.
The truth is that American hegemony requires the consent of its allies.
The United States has been able to amass such a fearsome military arsenal because it can spread development costs by sharing them with its allies. This permits full interoperability across NATO and effectively extends the power of US systems into all its allied powers, including those outside the alliance, such as Saudi Arabia and the Gulf States. However this only works if the risk of any conflict amongst the allied powers is deemed to be negligible. The moment that an ally loses confidence in the goodwill of the United States is the moment when they will not wish to use American equipment. This means that sales of advanced equipment, such as the F-35, are insufficient to warrant the development of multiple variants, and the development costs are spent against a small number of unit sales- in short the cost per unit increase and fewer units are sold. This is now already happening, as NATO allies are opting for other suppliers, such as the Swedish Gripens, because they can be confident that there is no "kill switch", and also that the higher spec F-35 variants will not come into production. Thus, although the Gripen is a less capable weapons system, it is cheaper and not so much weaker than the American plane. This is now happening across the arms industry- fewer and smaller purchases of US systems. It has also been a bugbear of the Europeans that America dragged its feet in supplying Ukraine and prevented the Europeans from supplying American made equipment.
The growing relative weakness of the US arms industry is significant, because the military power of the US has underwritten not just NATO but the United States economy itself. In exchange for American defence guarantees, Allied powers have been prepared to underwrite US borrowing and by doing so have maintained the US Dollar as the reserve currency. Despite various attempts, no other currency, not the Euro, not the Yuan and not the Yen have been able to challenge the reserve status of the Dollar.
As a result the American economy has been able to issue virtually limitless amounts of debt. Over a third of the entire global debt issuance is American. Bearing in mind that the GDP of the United States is only about a quarter of the global total. Therefore the US has been able to fund a government debt to GDP ration of over 125%- the second largest in the world. Non financial corporate debt issuance is about 70% of GDP, and the market capitalisation of the US markets is around 50% of the global total. The external debt of the US is also the largest in the world. Foreigners have been prepared to fund the American demand for credit because the US was militarily secure and because the depth of the liquidity available in the US Dollar markets was so large.
The final, critical plank for the power of the American economy was the rule of law. The detailed legal system of the various United States are mostly based on common law, and provides a flexible but most importantly enforceable framework for contract law. Though the propensity of American's to litigate has often been derided in the past, the reality was that the court system was a trusted and generally fair way to establish legal rights and to maintain them in the face of any challenges. the key principle has been that no one, not even the US government itself has been above the law.
Within this transparent legal framework has been a detailed and also transparent set of market regulators. The purpose of the regulations was to ensure fairness and honest dealing in business and in finance. The key was to provide a transparent, even democratic forum for investment that prevented corrupt insider dealing and therefore allowed investors a large measure of trust in the system.
The effect of these features of the American economy has been that the US has not only been able to borrow more than anyone else, they have been able to establish the "exorbitant privilege" of being able to so so in their own currency. This has meant that most commodities, for example, are priced in dollars, especially the energy prices. The final settlement of physical trades rests on the full faith and credit of the United States and that rests on the idea that the US will not actively target any specific investor as somehow and illegal actor, and that were that to happen, then the legal rights of foreign holders of American investments can protect their rights in court.
What happens if that is not in fact true? That the US can arbitrarily change the conditions for investors and remove any legal remedy? Many have argued that were such a thing to occur, then the US markets would collapse. My view is a bit different: The markets may stay relatively stable, but that the premium that the US has been able to enjoy versus its global rivals would close. Since the return of Donald Trump to the White House the US markets, in USD terms, have preformed quite well, but when we look at the market in overseas currency terms, they are flat or even down. So while the Americans demonstrate confidence in their own country, the gradual weakening of the Dollar is both a symptom and a cause of Foreign unease about the direction of the US market.
This slow puncture may now be about to change.
The dubious legal assault on the Federal Reserve demonstrates the growing willingness of Trump to burn the house down in the pursuit of his agenda. It is of a piece with his all-out assault on the freedom of speech and of assembly that are supposedly guaranteed under the US Constitution. Indeed the way that Trump conducts himself in office might even be considered a breach of his oath to protect the Constitution.
Certainly in one year the strongly and aggressively negative approach to the free government of Ukraine and the perceived tilt in favour of Moscow has stretched the Atlantic alliance to near a breaking point. The latest attempts to annex Greenland, in defiance of the wishes of its people may have already ended the Western Alliance. Certainly the majority of the population of Europe has a strongly negative view of Trump and increasingly the country that re-elected him.
If Trump follows through on his declared wish to annex the territory then the US not only ceases to be an ally, it becomes an adversary. More than two trillion Dollars of US Treasuries are held in Europe, there are over 100 US military bases in Europe. Unpicking the alliance can not be done overnight, however one thing that can be done very rapidly is that the premium that the American economy has had may evaporate. The seven tech giants that comprise a huge part of the NASDAQ exchange and of American market capitalisation are trading at a premium to the premium, yet in sales and technology they are falling behind their Asian and European rivals.
The American economy is over indebted and increasingly the growth engines that have underpinned their perceived technological leadership are sputtering. If the United States continues to betray its alliance it will lose its allies. Then the exorbitant privilege will need to be paid for. If that happens then the US will face its own Suez moment- and discover as Britain and France did- that no state has complete freedom of action.
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