It's the Debt, Stupid

With the sequester in the news right now, the discussion about the nation’s debt and deficits rages on.  There are some who say that the debt is not out of control and we should not worry about our increased debt.  Others feel that we must do something about our rising debt but disagree how to attack the problem.  The two political sides differ on whether increased taxes, decreased spending or some combination of the two are the correct approach.  

For those wondering whether excessive debt is a problem, the saying goes “Those Who Fail to Learn From History are Doomed to Repeat It”.  A look back at the Suez Canal crisis of 1956 is telling.

Without going into all of the details of the Suez Canal crisis, which can be explored in more detail here: http://www.economist.com/node/7218678, the event took place in 1956 at a time when global politics were changing.  Britain, France and the other countries of Western Europe were declining in influence as the U.S. and Soviet Union were emerging as the world’s only superpowers. 

When Egypt nationalized the Suez Canal, Britain risked losing vital maritime access to India.  At the risk of overly simplifying the situation, Britain, France and Israel put forces on the ground in Egypt.  The U.S. and Soviets opposed their actions but with Britain and France holding United Nations vetoes, there was not much the U.N. could do.  However, when President Eisenhower influenced the IMF to refuse loans to Britain, the British economy could not handle the economic pressure and they were forced to end their military actions.  

“America struck at Britain’s fragile economy. It refused to allow the IMF to give emergency loans to Britain unless it called off the invasion. Faced by imminent financial collapse, as the British Treasury saw it, on November 7th Eden surrendered to American demands and stopped the operation, with his troops stranded half way down the canal. The French were furious, but obliged to agree; their troops were under British command.”

Britain obviously had a substantial amount of debt from the aftermath of World War II (which they just paid off to the U.S. in 2007 , by the way).  Their reliance on other nations for loans made them vulnerable in foreign policy.  Not only did this vulnerability force them to withdraw from Egypt, it signaled the change in the balance of power from “Old Europe” to the United States that has stood to the present day.

What makes this story important now?  The U.S. now owes over $16 trillion.  Some of that debt is to countries that don’t necessarily share our interests in the world.  Imagine a potential conflict between China and Taiwan or China and Japan.  What if China tried to flex it’s muscle and claim additional territory in the Pacific or deny access to certain waterways?  What if we tried to intervene and China used our debt as leverage?  Could that mark our decline as a superpower because we could not manage our own financial situation?

Our world influence depends on our moral example, our military might, and our economic might.  Rising debt diminishes all three sources of power and risks making the U.S. less relevant on the world stage.