The American Empire ended this week

When historians in the future look back to try to find the date that the American Empire was definitively finished, odds are good that they will choose this week. In the space of five days, the actions have been taken that will make our ruin inevitable. Of course, nothing has come crashing down yet. It will still take time before the effects manifest. But from this point on, time is all it will take. As of now, the results are certain.

America's dominant position in the world has two aspects: economic dominance, and military dominance. Both are now finished.

End of the petrodollar

On Sunday, June 9, Saudi Arabia allowed the 50-year-old "petrodollar" agreement with the United States to expire, with no new agreement in place. This agreement, dating from the Nixon Administration, guaranteed that America would protect Saudi Arabia militarily; in return, the Saudi government committed to accept only U.S. dollars in payment for oil, and to invest their excess U.S. dollars in American Treasury certificates. (For references, see here, here, or here.) This agreement meant that countries who wanted to buy Saudi oil (i.e., most of them) had to use U.S. dollars to do it; therefore, it created a significant international demand for U.S. dollars. At the same time, it created an international demand for U.S. Treasury bills, because the Saudi government had to have some place to park all their earnings. The result is that the U.S. government could engage in 50 years of deficit spending without ruining the economy.

Give me a minute to explain this. Normally if a country spends far more money than it takes in, the result is runaway inflation. But the reason for the runaway inflation is that there is too much currency in the market (for example, too many dollars) chasing the same quantity of goods. So if there are (let's say) $10 billion in circulation, and suddenly the government prints another $10 billion without increasing the available quantity of goods and services, those goods and services are now worth $20 billion (the total amount of available money). What that means is that the value of each dollar has been cut in half, because it takes $20 (for example) to buy what would have cost only $10 last week.

But notice that this effect only works if all those extra dollars are circulating in the marketplace competing for the same goods and services. If someone comes in with a vacuum cleaner and sucks up all the extra dollars, so that they are no longer competing for the same goods and services, then there's no pressure on prices to go up. There's no pressure towards inflation. At that point the government has generated money out of thin air and gotten away with it.

And that's exactly what the petrodollar agreement with Saudi Arabia did for us. Since nations all over the world needed dollars in order to buy oil, they regularly bought up all the extra dollars that our government was printing. Since countries like Saudi Arabia needed places to park their new wealth, they (and others like them) bought U.S. treasury securities, thus lending the American government money that it didn't otherwise have. Both steps allowed the American government to spend like a drunken sailor for 50 years and get off scot-free.

No more. 

With the end of the petrodollar, we should expect to see the natural results of our profligate overspending finally catch up with us. What this means is that, as other countries decide they no longer need to hold onto dollars, the value of the dollar will start to drop. How far will it drop? I don't know, but the U.S. national debt is now $34.7 trillion. The U.S. Gross Domestic Product is only $25.4 trillion. So even if every penny generated in the country in an entire year were confiscated and used to pay the debt, there would still be trillions left to pay. I assume the dollar will fall far enough that owing a trillion of them isn't so much of a burden as it used to be. But that is likely to be ruinous for personal savings.

This won't all happen at once. It will take time for the international markets to react. Also, America's internal market and internal economy are huge. Even if the dollar drops compared to other currencies, it should still hold up for a while for buying domestic goods. I don't know what form the future will take.

All I know is that American economic domination of the world will be a thing of the past.

Supporting Ukraine against Russia

Maybe there were things we could have done to stave off the fall of the petrodollar, but to some extent the final decision was out of our hands. The end of American military dominance, by contrast, will be the result of a massive unforced error. We did this one to ourselves.

Today, Thursday, June 13—just four days after the end of the petrodollar—"President Joe Biden and Ukrainian President Volodymyr Zelenskyy … signed a 10-year bilateral security pact aimed at strengthening Ukraine's ability to defend itself in the present while also deterring aggression in the future." (Reference.) The Fact Sheet that the White House issued for this agreement lists a number of specific provisions, and then summarizes as follows:

This agreement, together with the mutually reinforcing security agreements and arrangements Ukraine has signed with a broad network of partners under the G7 Joint Declaration of Support for Ukraine, is a key part of Ukraine’s bridge to NATO membership. As President Biden said in Vilnius last year and as NATO allies have agreed, Ukraine’s future is in NATO. We are not waiting for the NATO process to be completed to make long-term commitments to Ukraine’s security to address the immediate threats they face and deter any aggression that may occur. (Reference.) [Emphasis mine.]

Do I have to spell out what a bad idea this is? I've talked about it before in other places. 

• If Ukraine joins NATO, then Russia will declare war on NATO. (I discuss that point in this post from two years ago.) 
• Russia still has nuclear weapons. (Everyone remembers this, right?)
• Nuclear war between the U.S. and Russia means the loss of a lot of lives all around the world. What's more, if there are any winners, it won't be us.

I've argued some of this in other places. I don't know if I have the heart to dig up all the links and reproduce them here. Suffice it to say that I remember the peace movement from the 1970's. Back then people on the Left did the calculations and came up with horrific numbers of deaths, in case of a nuclear war with what was still (at that time) called the Soviet Union. The argument throughout all of polite society was that we had to do whatever it took to avoid such a war, because the consequences would be catastrophic for everyone involved.

Am I the only one in this country whose memory reaches that far back?

Sometimes it feels like I am.

Anyway, there are one of two possible outcomes for this pact with Ukraine.

The less-likely option is that the Senate will reject it, or that Joe Biden will lose the election and his successor (whoever that might be) will tear it up. I don't expect that, I don't really believe it will happen, but logically it is possible and so I have to leave it on the table. But of course if that happens, American credibility around the world will be shot to hell. And since the looming economic crisis (see above) will make it ever harder for us to pay for troops around the world, we will retreat from our hegemonic position with our tail between our legs.

The more-likely option is that we will be stuck with this treaty. Then we will have war with Russia. Then we will lose. Again, it will mean the end of American hegemony, but in a much more sudden and painful way.

I wish I could see another option. If you see one, please comment to let me know.