Thursday, February 10, 2011

A Reason Why The Debt Ceiling (And Government Debt) Matters

So its been a while since I put something up. And I had started a number of postings on whats going in various parts of the world. But this afternoon, I was reading about the Suez Crisis in 1956 and it reminded about why some things are more important.

For those who were failed by their history teachers, in 1956 Gamal Nasser nationalized the Suez Canal. Originally, the Suez Canal was owned by the French and Egyptian company which built the canal. Called the Universal Suez Canal Company, the stock of the company was held by French and Egyptian investors, most notably the Egyptian government. But the Egyptian Government ran into a severe financial crisis in 1875 and had to sell the shares. The shares were purchased by Great Britain. So, basically you have an Egyptian corporation whose shareholders were either French investors or the British Government.

Gamal Nasser, the president of Egypt in 1956, had earlier embarked on a policy of deliberately confronting Great Britain and other Western Powers. This resulted in Egypt drifting into the Soviet orbit during the Cold War. By 1956, with Britain's power waning, and France coming off the recent defeat at Dien Bien Phu, Nasser was ready to cut all ties with the west in bid to assert the primacy of Egypt in the Middle East. He ordered his military to physically seize control of the Suez Canal. As soon as the canal was seized, which it was by surprise, he froze all the assets of Universal Suez Canal Company, and ordered the forced sale of all the stock from the shareholders, thereby nationalizing the company and the canal.

Now, the British and the French were not prepared to take this act of thievery lying down. The only problem was the U.S. The Eisenhower administration had no desire to get embroiled in some flap in the Middle East. The United States had already been snubbed by Egypt when Nasser recognized the People's Republic of China. In retaliation, the US withdrew its support for the Aswan High Dam project, a move that some commentators believe was the trigger for Nasser's nationalization of the Suez Canal. Despite the cooling relations with the Egyptians, the U.S. failed to demonstrate any leadership in the situation, content to sit on the sidelines on this one.

With the U.S. failing to commit to any actions, the British and French enlisted the aid of Israel, who were suffering from the Egyptian blockade of the Straits of Tiran (in the Red Sea) which effectively closed the port of Eilat in Israel, in a plan to regain control of the canal. The result became known as the 1956 Sinai Campaign or Sinai Crisis.

On 29 October 1956, the IDF executed Operation Kadesh. Paratroopers and mechanized columns struck Egyptian positions in a blitzkrieg-style attack. Within days, the IDF had captured the whole of the Sinai Peninsula, including Sharm el Sheik in the south, which was the base from which the blockade of Israel was managed and directed. Having seized control of the Mitla Pass, the IDF was within 30 km of the canal, on 2 November 1956.

As part of their agreed plan, Great Britain and France initiated their operations on 31 October 1956. Known as Operation Musketeer and Operation Telescope, depending on phase of the operation, British and French forces invaded the canal zone, seizing control of strategic points and expelling the Egyptian Army after a short fight. By 6 November 1956, the military operations were concluded.

Although successful, the British, French and Israelis soon had the rug pulled out from under them. The Soviet Union began to threaten that Britain, France and Israel did not withdraw, it would lend Egypt military support. At the same time, the US was caught between trying to support the Hungarian revolution while reconciling how to support its allies in their endeavor in Suez. Unfortunately, the Eisenhower Administration could not, especially with the spectre of Soviet intervention becoming a reality. Trying to favor the Hungarians, the US forced the British and French to withdraw and the Israelis to surrender almost all of its gains in the war.

How did it do this? The primary power involved was Great Britain. However, British finances, which had been rocky for years, were being buoyed by the United States holding millions of pounds sterling worth of bonds which had been issued by the Bank of England. Because Britain's losses in recent years had been so bad, it was applying to the IMF for emergency funds. The IMF funds were denied to Britain by the United States. Eisenhower, to make his point, unmistakably clear, instructed his Secretary of Treasury to prepare to sell the British bonds. Sale of the bonds would have resulted in a massive devaluation of the pound, making it worthless. Faced with the potential for a worthless currency, meaning that Britain would be unable to import food or fuel, the British Government was forced to concede the issue.

It was a humiliation for the British Government, Empire, and its people. It was a blow to British prestige that still lingers. Britain was no longer a world power, but effectively a US satellite or a junior partner, unable to act in major foreign policy issues without the approval of Washington.

Without the British support, France could not sustain the occupation on its own. Its own resources were stretched by the rebellion in Algeria as well as the costs of recent war in Indochina. Without their British partner, they too were forced to withdraw from the Suez Canal.

Anyone noticed what happened there? Without debating the rights and wrongs of the Sinai Campaign, look at why the British and French were forced to surrender a significant concession. It was because of the British debt held by the United States. The amount of debt held in the form of the bonds was so great, that if only some of the bonds were sold, the Pound Sterling would be significantly devaluated. Had all of them been sold, and Eisenhower was believed to be ready to sell them all to make his point, then Britain would have been bankrupted.

We were allegedly Britain's ally in the Cold War. Being lead by a president who had demonstrated in the past great respect to Britain.

Who holds an awful lot of our debt? China.

And I'll be willing to say that they don't like us half as much as Eisenhower liked Great Britain back in the day.

And someone wants to raise the debt ceiling, again.  Maybe that's not such a good idea. Unless of course you want our government to cede its independence of action to a debt holder with as much power as we had over Britain in 1956.

1 comment:

Leonardo said...

It makes little or no difference whether we raise the debt ceiling or not. All of the debt amassed by the US government is simply debt created by the Federal Reserve , which is not actually money in the historic sense, but simply a debit created on a computer. No funds(gold, silver) were physically transferred from one account to another, merely created. Thus, these debts are only debts for which the world bankers collect interest. The Fed issues bonds in order to maintain a reserve the government must retain and to collect interest on this debt. The debt is backed by “faith in the United States” as long as there is a government there will be debt.