Most people think that all you need to maintain an empire is guns, bombs, and soldiers. They are wrong.
To maintain an empire what you need above all else is money. Lots and lots of money. A victorious army in the field is useless without the wealth behind it.
A good example of this is the Suez Crisis of 1956, which marked the end to the British Empire.
America is following in Britain's footsteps.
Britain's attempt to strong-arm Egypt had indirectly caused a nationalist backlash and Gamal Abdul Nasser's rise to power. When Nasser nationalized the Suez Canal, Israel, France, and Britain invaded and quickly routed the Egyptian army.
But they had forgotten to do one thing - clear it with America.
Eisenhower was afraid the middle east would embrace the Soviet Union. But what could America do to stop it from the other side of the world? Plenty, as it turned out.
When the U.S. tried to pass a resolution through the U.N. Security Council that condemned the invasion, France and Britain vetoed it. So Ike took a different tactic.
Eisenhower threatened to sell the British Pounds that were sitting in America's currency reserves. What's more, he blocked attempts by Britain to withdraw their funds from the IMF.
The markets reacted by dumping Pounds as fast as they could. Suddenly Britain had a full-scale currency crisis. Chancellor of the Exchequer Maurice Harold Macmillan described it as a "catastrophe affecting not merely the British cost of living but also all our external economic relations."
Within two weeks the British were withdrawing troops from Egypt. But that wasn't enough.
Britain had to cave into America so completely that relations with America didn't return to normal until Prime Minister Sir Anthony Eden agreed to step down. In other words, we caused a regime change in our allie's government without even threatening to fire a single shot. Britain had been humbled.
Which brings us to America's situation today.
Like Britain, America has its own middle east military adventure that wasn't cleared with our creditors.
Like Britain in 1956, America no longer has the economy to support an empire, but still acts like it does. America gets away with pretending it is independent only as long as our creditors allow the game to continue.
But our creditors are starting to get nervous.
Seeking to head off any unloading of Fannie Mae and Freddie Mac bonds by Japanese investors, the U.S. Treasury Department is taking the unusual step of directly contacting Japanese financial institutions about the plan to rescue the mortgage giants, according to a published report.
The Treasury Department had reason to be worried. Foreigners were selling Fannie and Freddie debt in big lumps, and they have about $1.5 Trillion that they could sell (assuming that anyone would want to buy it).
The Japanese weren't the only ones who had a say in our domestic financial policy. The bailout of Fannie and Freddie, the largest in history, only happened because China insisted.
Investors in Asia, the biggest foreign owners of Fannie Mae's $3 trillion of bonds, were asking the Treasury to bolster the government- sponsored company and its smaller competitor, Freddie Mac, said three people with knowledge of the talks.
The next afternoon, before financial markets opened Monday in Asia, Paulson announced the rescue plan, saying he would seek authority to buy unlimited equity stakes in the companies and their bonds if needed, while the Federal Reserve would lend directly to Fannie and Freddie.
The reason I point this out is because Paulson met with the Chinese President just two weeks after the Bear Stearns collapse.
A month later Paulson was on his way to the middle east.
United States Treasury Secretary Henry Paulson will fly to the UAE and other Gulf states this week to reassure regional governments on their funds in the US following recent furore about the role of their investments.
A few decades ago you wouldn't picture the Treasury Secretary's role to be a world traveler. But times have changed. Now the Treasury Secretary's main job is to reassure our foreign creditors, without which the American economy would grind to a halt.
To a large extent, what the Treasury Department has become is an agency to sell American debt to foreigners.
To fully appreciate how far America has fallen, take a look at this.
"We need to show greater humility in the world," former U.S. Treasury Undersecretary Tim Adams said in an interview at a conference in Charlottesville, Virginia.
"Reciprocity is important," said Watanabe, who was in charge of Japan's currency policy and its purchases of foreign- exchange reserves from 2004 to 2007. "It's also important for the U.S. to set a good example, and to realize it cannot survive independently. They need to show more sincerity."
"Humility is not a word one associates with the U.S.," he said. "Usually it's hubris."
Hubris doesn't fit well on beggars, which is what we've become. Humility is the trait of beggars, and one we should become more familiar with. Especially since we're going to need to borrow a lot more in the coming years.
Bloomberg (Shamim Adam): “The U.S. may post a $565 billion budget deficit next year, and risks of an even wider shortfall are on the ``high side'' amid the possibility of more economic stimulus packages and rescues of financial institutions, Goldman Sachs Group Inc. said. The estimate is $100 billion more than Goldman's previous prediction for the year starting Oct. 1 and exceeds the Congressional Budget Office's forecast for a $438 billion shortfall, Edward McKelvey and Alec Phillips wrote in a note published yesterday. The deficit will be about $560 billion in 2010, the report said.
MarketNew International (John Shaw): “Congressional Budget Office Director Peter Orszag said... that if all of President Bush’s 2001 and 2003 tax cuts are extended and the alternative minimum tax is patched each year as well as maintaining current levels of federal spending, the U.S. could generate more than $7 trillion in cumulative deficits over the next decade.
America is already at the point where foreigners have a direct say in our domestic policies. If our borrowing must increase, what's to stop them from having a direct say in our foreign policies as well? What's to stop them from doing to us what we did to Britain in 1956? In fact that is exactly what many expect.
The longer the United States relies on international central banks and sovereign funds to support large external deficits, the greater the risk the economy's need for external credit will constrain the government's policy options, the report said.
It also warns that countries that do not share U.S. political values and policy goals could use large holdings of U.S. assets as political and economic leverage.