'Money Wars' at the G-20

After President Obama’s first major performance on the global stage, it’s fair to ask: who are the players now among the world’s nations?

The global stage may appear complex, but there are really just two kinds of players: creditor nations and debtor nations. Today, oil-rich Islamic states such as Saudi Arabia and Kuwait and resource-rich, autocratic states such as China and Russia are developing huge holdings in Western currency, debt, and industries, while Western governments slip deeper and deeper into debt. Though these countries are not richer than the United States or other Western nations, they are now the creditors of those nations. The power is shifting.  A new relationship is emerging, one that no longer favors the West.  

The West’s poor fiscal discipline and failed economic policies have allowed this to happen. The economic power of these rising nations began with their central banks purchasing excess reserves of Dollars and Euros and, later, US and European debt.  More recently, many countries have established new financial vehicles called Sovereign Wealth Funds to make direct investments in global companies and industries, thereby extending their nation’s financial influence.  Guided by the best and brightest from Wall Street and making more and more sophisticated investments in our economy, these foreign governments are aiming for greater returns, both economic and political, from their investments.  

Given their growing economic might, the new “creditor nations” will have the power to further their geopolitical ambitions by using a weapon of international diplomacy and warfare that hasn’t been seen in centuries: economic statecraft.  The last time this weapon was used, the mercantilist nations of Europe held sway over larger, and arguably stronger, nations until British seapower outweighed them decisively.

When a state uses its upper hand in an economic relationship with another state to influence the weaker state’s foreign and domestic policies, alliances and actions, economic statecraft is in operation.  As in traditional warfare, the fact that the weaker state would suffer far more harm than the stronger state in the case of a change in their relationship leaves the weaker state vulnerable — and allows the stronger state to gain concessions.  Traditional wars will not cease to happen, but their beginnings and outcomes will be primarily determined by economic rather than military might.

Already there appears a perceptible tilt to the playing field.  The non-Western creditor nations occupy the favorable higher ground.    Many of these nations such as China, Saudi Arabia, Indonesia and South Korea are joining global economic discussions for the first time as participants in the G-20.   And many other Arab oil states and nations with significant investments in the United States, either directly or through sovereign wealth funds, are not yet represented in a global economic forum.  The G-20 may even supplant the European-dominated G-8 as the most important global economic meeting of leaders–the G-20’s larger, more diverse forum seems well positioned to grow in importance given the shift in economic power away from the United States and Europe.

Consider that in the decade following World War II, the United States economy represented more than half of the world’s wealth. Today, that figure is only 14%.  The United States is now a debtor nation, with a national debt of over $11 trillion dollars, much of that held abroad.  China alone holds over a trillion dollars of our debt.  No longer “too big to fail,” the United States’ role in the world order is changing. 

The impact is not only economic; it is also political and geopolitical.  The creditor nations are generally autocracies — in many cases, they have been able to focus on amassing huge international reserves at the expense of improving the lives of their people.   In contrast, their debtors are democracies. 

In past times, the United States would have worked to either neutralize or even bring these autocracies into pro-American alliances.  But now and in the future, our position as a debtor nation will make it increasingly difficult for the United States to assert its influence over any of the nations who are our creditors. And we are not alone in our diminishing influence.  
Whether in response to direct pressure or merely in deference to its creditors, the UK government recently decided to recognize the legitimacy of Beijing’s direct rule over Tibet. Secretary Clinton avoided public condemnations of China’s human rights record on her recent trip there.  European states are often reluctant to criticize human rights violations in the Gulf countries. 

And so it shall be with us.  There are as many ways our creditors can influence us as there are dollars we owe.  But what if…

What if the Chinese decided to build a military base in Venezuela and threatened to sell large holdings of our currency if we objected?

What if President Obama were to decide that we would build missile defenses in Eastern Europe and Russian PM Vladimir Putin threatened to dump European sovereign debt held by Russia, if the Europeans allowed us to do so?

What if the Israelis refused a Palestinian state and the Arab nations threatened to stop purchasing our Treasuries and Agencies unless we pressured the Israelis to change their minds?

And what if several events like these happen at once? 

As the United States’ reliance on foreign capital continues to escalate, the fundamentals of the American economy will be rearranged, and our ability to defend our national interests and lead the world will be significantly compromised.  While the United States holds tightly its belief that it is the world’s superpower, other nations no longer measure the world in those Cold War terms. While the United States has continued to pursue its traditional role as a global promoter of democracy and mighty defender of the free world, other nations look to the future by building alliances of trade and mutual economic benefit.

In the emerging world order, global dominance will not be decided only by armies and aircraft, but by greenbacks and Euros, Rubles and Renminbi as well.  And we can no longer simply impose our views on the world.  Conferences such as the G-20 meeting in London will have huge influence over our economic future and our daily lives.  Countries are now projecting power with their economic might — and in new and innovative ways.  

From the U.S. perspective, foreign investment may seem to be a savior to cash-starved American businesses and a financial industry desperately in need of capital and an easy answer to politicians who fear difficult votes about cutting benefits or raising taxes.  But by becoming large stakeholders in our nation, the new creditor nations will be able to exert unprecedented influence over our foreign policy decisions, alliances with other countries, human and civil rights agendas, environmental objectives, legal system, and other policies and institutions central to our way of life.  

Today, we stand at the turning of the tide.  Shall we just watch?