Author: Mr. X
One of the problems with the term “American Empire” is that it begs the question of what Americans are getting out of it. According to recent reports, Afghanistan is home to about $1 trillion worth of minerals including iron, copper, and most importantly, lithium. After two decades of occupation, one would think that Washington would have had the presence of mind to secure access to these minerals. It didn’t.
China and the United States are already in something close to an economic cold war that focuses on access to rare earth elements. While lithium doesn’t quite fit into that category, supplies of lithium are going to be key for the developing industries that will dominate the next few decades, especially electric vehicles. Now, China will probably have access to what the New York Times once suggested could be the “Saudi Arabia of lithium.”
Taliban spokesman Zabihullah Mujahid recently said China was the group’s “most important partner” because “it is ready to invest and rebuild our country.” He also praised China’s New Silk Road initiative and specifically said Afghanistan’s copper mines are ready for development. Copper has been reaching all-time highs over the course of the pandemic because of strained supply chains. As of April, Chinese demand for copper had already surpassed pre COVID-19 levels. Now, China has a new source of supply. I doubt the necessary purchases will be made with dollars if China can avoid it.
Nonetheless, America still has the world’s reserve currency. As long as that’s true, the country can run deficits and accumulate debt that other nations couldn’t sustain. Some progressives who oppose moderate West Virginia Senator Joe Manchin’s call for fiscal restraint explicitly make this argument. The rising popularity of Modern Monetary Theory in some circles is also used to pressure legislators to take advantage of America’s unique position. Certainly, it’s more politically popular to provide benefits than to preach fiscal discipline at a time of crisis. Besides, what difference does it make if the national debt is $28 trillion or $30 trillion?
This kind of argument seems bizarre or even immoral to many people. The dollar is backed by the full faith and credit of the U.S. government, but some claim that concept is too intangible. If the dollar is backed by “nothing” (not gold or silver), some claim that there will a grand day of reckoning when America will have to pay its debt and the entire system will collapse. Countless ads for gold and silver coins rest upon this premise.
Yet believers must deal with an awkward reality – even as the infrastructure bill moves towards President Joe Biden’s desk, the dollar has held its strength. Though the dollar index has declined since the start of the pandemic, it has actually increased Year-To-Date (YTD) and hit a 9.5-month high late last month – just after the fall of Kabul. In other words, even as American credibility was collapsing, the dollar was getting stronger.
Since President Richard Nixon removed the gold peg from the dollar, the U.S. currency has floated at whatever price the market saw fit. The new book Oil Money: Middle East Petrodollars and the Transformation of US Empire, 1967-1988 explains that political and military strength helped prop up American economic strength. American support for oil-rich Arab regimes such as Saudi Arabia allowed the flow of petrodollars into the United States. At the cost of a higher oil price (and involvement in the Middle East), the United States found a way to finance its deficits.
For some time, it’s been increasingly clear that Russia and China want to remove the dollar’s role as the standard currency for international deals, especially oil. Russia’s Gazprom has reached an agreement with China’s aviation fuel operation to transact businesses through their respective national currencies, cutting out dollars altogether. The two powers are eager to break away from the American run global bank-transfer system. As far back as 2019, The Wall Street Journal reported that rivals were building “workarounds” to using the dollar in most transactions.
For now, the dollar remains the standard. However, it’s clear Russia, China, and possibly other nations are working to dethrone the dollar on a strategic level. Meanwhile, China has just secured access to key resources that it needs and which are now presumably unavailable to the United States. Presumably, China will also want to trade raw materials in its own national currency, not dollars.
After two decades of fighting, the economic defeat is arguably more important than the military one. It shows America’s economic system can fail, something that few born in this generation have ever thought possible.
The fall of Afghanistan (and its co-option by China) signifies these issues will be intensifying in the future. America’s allies need to know that they will receive American military protection if they remain within the current financial structure. Now, America’s allies are unsure. European nations, especially the United Kingdom, have been arguably more outraged about the pullout from Afghanistan than many conservatives in the United States. Rulers on the Continent are already talking about building an EU army to give Europe the “strategic independence” that has been spoken of so many times before.
The battlefield of the future won’t just be fought with guns, missiles, and drones. It will be fought with currencies and media Narratives. America’s adversaries will seek to undermine faith in America’s alliance system. Similarly, via central banks and “workarounds” of the dollar, America’s rivals will attempt to wrest control of the international system away from Washington.
Neither China or Russia can move too quickly. Both would have too much to lose if they lost access to the massive American market. However, it is clear they are preparing for the economic equivalent of blitzkrieg. Other nations will join their efforts in time.
The retreat from Afghanistan may have proved temporarily embarrassing for Joe Biden domestically. Still, President Biden may recover politically – most Americans didn’t want to continue fighting a “forever war” with no clear objectives. However, the spillover effects of the president’s decision will bleed into the economy.
Look for more nations to set up bilateral trading agreements that don’t use the dollar. If such agreements become more predominant, those American debts and deficits will become much more important fast. At that point, stocking up on gold and silver with seem more like prudence than paranoia.