Every positive article about the U.S. economy bases at least part of its optimism on America’s domestic energy bonanza. That is also true of negative articles such as Ian Bremmer’s The Tragic Decline of American Foreign Policy:
- “Improving US fundamentals, a steadily recovering jobs market, and revolution in energy production remind us that Americans aren’t waiting on Washington to kickstart growth.”
America’s corporations now have a tremendous cost advantage over their European competitors. As a result, we are already seeing a renaissance in U.S. manufacturing and a migration of European companies to America. The U.S. energy revolution removes a huge constraint that has been restricting American foreign policy since the Arab oil embargo of the 1970s.
This confidence brings to mind the old adage about the “Curse of Oil“. As an year old NYT Op-Ed put it:
- “Every nation wants to strike oil, and after it happens, nearly every
nation is worse off for it. It may seem paradoxical, but finding a hole
in the ground that spouts money can be one of the worst things that can
happen to a country.”
This theme has been discussed by others as well. But all the research we have seen deals with the curse of oil on less developed countries. We cannot find a single piece that discusses what a sudden oil bonanza can do to a developed society, let alone to the dominant economic & military superpower in the world. But what we see troubles us.
Think of the Obama Administration’s policy in the Middle East. The US-Saudi relationship has frayed substantially and Secretary Kerry’s flawed & unsuccessful efforts have led to a rift between America and Israel, its long standing critical ally in the Middle East. This would have been unthinkable a few years ago. Because that America was critically dependent on Middle Eastern oil and was expected to remain so for decades. Then came America’s energy revolution and suddenly the oil shackles on US Foreign policy were removed.
Ironically shackles are often very useful because they put real constraints on imperial ambitions. Back in 2003, America’s imperial neocons had no constraints in exercising military power anywhere in the world. China was not a major factor and Russia lay defeated both economically & strategically. This absolute unrestrained freedom to exercise power led to the invasion of Iraq. Today America looks back and rues that invasion.
Those actions were the natural expressions of an imperial power, specifically of America’s Imperial Class, to use words of Robert Kaplan of Stratfor. He wrote in November 2012:
- “The United States is an imperial power and has been for more than a century, ever since its invasion and occupation of the Philippines, which began in 1899. … Like empires of yore, the United States periodically sends its forces into harm’s way in imperial-like interventions, seeking to oust this foreign tyrant or that for supposedly threatening the empire’s interests.”
- “Now these imperial-like military interventions have often been ill advised, but they happen nevertheless. They happen partly because there is an imperial class in the imperial capital of Washington, D.C., that agitates for them.”
Secretary Kerry would be among the first to echo these sentiments about America’s neocons & about the mistake that was the invasion of Iraq. But he should not. Because Kaplan makes a similar argument about the opposite extreme class, a class we call neolibs for symmetry:
- “An imperial class is a large group of people who have a deeply evolved sense of imperial mission, and whose professional interests are connected to that mission succeeding.”
- “Indeed, a significant section of this imperial class can be defined as humanitarians, who believe America’s proper role in the world is to prevent genocide and otherwise protect embattled ethnic or sectarian minorities.”
The second paragraph above seems to describe what drives Secretary Kerry in his quixotic missions to bomb Syria’s regime & force feed a flawed peace plan to Israel & Palestinians. Both America and the Middle East are fortunate to have escaped Mr. Kerry’s experiments.
The two segments of America’s Imperial Class generally detest each other, to put it mildly. But Vladimir Putin is one enemy that both unite against. The right wing considers Putin’s Russia to be America’s greatest geostrategic challenger and the left wing wants Ukraine & eventually Russia to become like “liberal” Western Europe. But the American people simply don’t care. Ian Bremmer quoted a recent Pew poll in his article that showed
- “A full 80 percent agree that the United States should “not think so much in international terms but concentrate more on our own national problems.”
If you think about it, there is substantial symmetry between the America of 2003 and today’s America. That America was run by imperial neocons who reveled in the unrivaled supremacy of American military power. Today’s America is run by imperial neolibs who revel in the unquestioned dominance of the American financial system. American economy is on an upswing while China, the new challenger, is suffering from a structural economic slowdown. America’s oil bonanza makes American economy relatively immune to an oil shock and acts as a brake on global oil prices thus hitting Russia where it hurts most.
The last decade has been structurally positive for America in that both China & Russia have been integrated into the global financial system, a peacefully nice term for what is American hegemony in global finance. The recent economic troubles in Europe have made the American financial system the implicit sovereign of the world. Remember what Kaplan wrote:
- “Imperialism, keep in mind, should be defined as a relatively weak form of sovereignty exercised by a great power.”
And what are the weapons of American financial sovereignty? Ambrose Evans-Pritchard wrote this week in the British Telegraph:
- “An elite cell at the US Treasury has developed an arsenal of financial weapons that can in theory bring even large countries to their knees through use of “scarlet letters” that cause global banks and insurers to pull back. Japanese banks are already retreating from Moscow to pre-empt problems with US regulators.”
These financial weapons were successfully tested against Iran last year and brought the Iranian economy to a standstill. Russia is well aware of the power of these American weapons according to a Moscow banker quoted in the Telegraph article:
- “What we’re all worried about is another round of US sanctions. Even the domestic bond market is freezing up,” … “The US has all kinds of tools it can use against us and inflict tremendous damage.”
This sounds so wonderful, doesn’t it? Sort of a new “Sitzkrieg” where the American people can simply sit secure while America’s financial forces are unleashed on other countries. The Iraq war also looked like a “Sitzkrieg” in the first few week. Then Iraq blew up and America owned the remains at great cost.
Frankly, we are far more afraid of the consequences of a financial war than a military war. The American physical homeland is secure from any non-nuclear invasion. But the American financial homeland is not. An integrated financial system is subject to fast & systemic contagion that can cause havoc even to a strong economy. The American econo
my is improving but it is far from being impervious to a financial contagion. Russia was much tinier in 1998 and that American economy was robust. Yet that Russian default led to the collapse of Long Term Capital and the prospect of a meltdown in the American financial markets. Today a Russian default or a reciprocal seizure of financial assets will create grave unintended consequences for the global financial system and the biggest victims will be giant European banks.
But the real long term danger is much greater and much more destructive. Waging an intense financial war against Russia will force Russia to seek alternative payment & currency systems. Russia can force an energy dependent Europe to purchase Russian natural gas at least partially in Rubles. If Russia’s response to US financial sanctions ends up forcing Germany to pay for Russian natural gas in Rubles, that alone will create a rally in the Ruble and make Ruble a de facto regional currency.
Russia can also persuade Europe, especially Germany, to enter into multi-year Ruble-Euro swaps. If that works, the Ruble arrangement can be “extended” to the entire Eurasian bloc and to all countries that want Russian natural gas or military weapons.
China has witnessed America’s financial war against Iran. If they see America using its massive financial arsenal against Russia, they have to wonder whether China will be next. So we could easily see China taking steps to insulate its financial system from an American attack by creating a Yuan bloc. They are already beginning to do so and those efforts will be accelerated to include countries in Latin America that live on exports to China.
The core bulwark of America’s financial prosperity is the U.S. Dollar and its status as the World’s Reserve Currency. That would not change tomorrow or in the next few years. But that can easily change in the ten years if other large economies decide they need an alternative global currency or a separate financial system.
The Iraq invasion was 10 years ago. America still rues that decision. Let’s hope we don’t look back at 2014 and rue a decision to launch financial war against Russia. As we said, restraints & shackles are sometimes a good thing. They prevent recklessness.
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