Blockchain Will Be An Easier Hurdle Than Economists Admitting They're Wrong

Blockchain Will Be An Easier Hurdle Than Economists Admitting They're Wrong
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Very early in the morning of November 5, 1956, the 668 men of the 3rdBattalion of the British 16th Independent Parachute Brigade, the famed Red Devils, boarded their Hastings and Valetta transport planes in Nicosia, Cyprus. They were bound for the El Gamil airfield, a narrow strip of land about three miles west of the Egyptian city of Port Said. Their objective was to secure the airbase, destroy a bridge west of the field, and then push toward the city linking up with RM Commandos in order to clear enemy forces in preparation for larger amphibious landings the next day.

The Red Devils were not alone in dropping into hostile Egyptian territory. They were joined by 487 men of the Coloniale, France’s crack 10thParachutiste Division and another 100 from France’s 11th Demi-Brigade Parachutiste de Choc, the latter accompanied by part of the British 1stGuards Independent Company.  The French objectives lay south of Port Said, to capture bridges linking the city with the two main roads heading toward the Suez Canal and the rest of Egypt.

The French force achieved its military aims within about an hour, while the British came under heavy fire from Egyptian army troops led by Brig. Gen. Salah ed-Din Moguy, consisting of three reservist battalions and 600 riflemen of the national guard. There weren’t more Egyptian forces in the area because they had been diverted days earlier.

Israel had attacked Egypt about a week before on October 29, 1956. Israeli Air Force Mustangs bombarded Egyptian positions all throughout the Sinai Peninsula in advance of a land invasion spearheaded by an armored division. Paratroopers of Battalion 890, 35th Brigade were dropped near Mitla Pass, a 500-meter high uneven narrow divide between mountain ranges to the north and south that acted as a strategic chokepoint.

British and French aircraft raided Egyptian Air Force positions all throughout the country on Halloween. They were successful in destroying Egypt’s air power.

In response to what looked like all-out invasion, Egyptian leader Gamal Abdel Nasser had ordered the majority of his armed forces to the west of the Suez Canal, the real object of hostilities. Earlier in the year, on July 26, 1956, Nasser had announced that Egypt would nationalize the waterway under its sole authority. The Suez had been operated since its construction a century earlier by an Anglo-French corporation.

British troops had occupied parts of Egypt even after granting the country independence in 1922. By 1956, they had been steadily shifted into almost exclusively the canal zone, as British officials were gravely reluctant to leave the Suez entirely. Rising nationalist sentiment and often outright hostility to what was perceived as British occupation led the UK to finally withdraw completely by early July that year.

From Britain and France’s perspective, Nasser’s decree was tantamount to declaration of economic war.  Reticence to give up complete control by force around the Suez was not strictly lingering imperial impulses; the canal was everything especially the flow of oil to modern Europe. Sir Ivone Kirkpatrick, UK’s Permanent Under-Secretary of Foreign Affairs put it this way:

“If Middle East oil is denied to us our gold reserves will disappear. If our gold reserves disappear, the sterling area disintegrates. If the sterling area disintegrates and we have no reserves, we shall not be able to maintain a force in Germany, or indeed, anywhere else. I doubt whether we would be able to pay the bare minimum necessary for our home defense. A country that cannot pay for its defense is finished.”

Whether or not that was actually true was beside the point; a great many people of influence in both France and England believed that it was. Among them counted the British Prime Minister, Anthony Eden. It was Eden who as Foreign Secretary for Winston Churchill’s second term as Prime Minister tactfully arranged the Suez Base Agreement of 1954 allowing British forces to remain until July 1956.

Eden understood very well the diplomatic nuance of the Egyptian position. Along with US Secretary of State John Foster Dulles, the British would pool their resources with the Americans (along with a large World Bank commitment) to aid Nasser’s Egypt in building the Aswan dam.  For the Egyptian leader, this project was modern Egypt, the key to everything. It may have taken the form of nationwide electrical supply capacity and arable farmland, but for a man who desperately sought to become the face of the free Arab Middle East that was the only place to start.

But Nasser had approached the US for a major arms deal in 1954, one the Eisenhower administration outright refused. Egypt was openly hostile to Israel and the American government wasn’t going to rearm one of its major allies’ biggest antagonists. In lieu of American weapons, the Egyptians through the Soviet Union arranged an alternate supply via Czechoslovakia in September 1955.

Both the British and US governments recoiled at the unpredictability of, and lack of loyalty (as they saw it) from, Gamal Nasser. From the American perspective, they were counting on Egypt to help rebuild US influence in the Middle East as part of its sweeping anti-Communist strategy of that part of the Cold War. They saw in Nasser a possible reliable ally, one with deep common interests.

Nasser, as it turned out, didn’t care much about the Cold War but Arab nationalism and Egypt’s place in front of it. It wasn’t nuclear war with Russia that was on the mind of his countrymen as much as growing Israeli military strength. As he saw it, there was an opportunity for a bidding war between the United States and the Soviet Union, convinced they would both line up to give him the resources he could than parlay into his ultimate goal. Upon obtaining modern Russian weapons in the autumn of ’55, however, the Eisenhower administration canceled the Aswan funding.

It precipitated Nasser’s July 1956 action upon the Suez, one in which, it appears, everyone misread the intentions of everyone else. The British, along with the French, believed Nasser to be a grave threat, something out of the thirties.  Writing to President Eisenhower, now Prime Minister Eden lectured:

“In the 1930s Hitler established his position by a series of carefully planned movements. These began with the occupation of the Rhineland and were followed by successive acts of aggression against Austria, Czechoslovakia, Poland and the West.”

Allowing Nasser to “get away with” taking control of the canal zone, Eden scolded Ike, was opening the door to similar advances into the rest of the Middle East.

The Americans for their part misjudged European resolve in this case. Eisenhower urged aggressive action but always short of outright conflict.  He supported wholeheartedly their position on the Suez, that ultimately free navigation through it must be preserved. As a peace candidate, however, during the 1956 Presidential election he could not countenance another war in which the US through NATO this time might be drawn in to (Korea was fresh on the American mind). 

Moreover, both the public and private views of key members of the government, including those of the President himself, favored Egypt for several reasons. They didn’t view the Aswan setback nor the Soviet weapons buy as deal breakers, rather as setbacks in the inevitably rocky, uncertain diplomatic courting process. The US did not wish to completely alienate especially the Egyptian population for what they saw as greater Cold War interests.

Beyond that, there was some very real affection for the situation vis a vis 20th century revisiting colonialism. At that time, Eisenhower and his people sympathized with Egypt’s desire for full and true independence from Britain, reaching back to similar American experience in moving toward self-government. Against the background of the United States trying to find its leading position of influence in the postwar world, there was a very real attitude that in order to truly take over leadership of the free world they would have to act somewhat impartially even when disputes were registered against this country’s closest allies.

Vice President Richard Nixon just days before the election, and one day before British and French paratroopers were to leave their bases in Cyprus, gave what was described as an electrifying campaign speech in Hershey, PA, evoking 1776 for the modern day:

“America’s second declaration of independence…For the first time in history we have shown independence of Anglo-French policies towards Asia and Africa which seemed to us to reflect the colonial tradition. That declaration of independence has had an electrifying effect throughout the world.”

This wasn’t mere pabulum. Not long before Nixon spoke, US intelligence had figured out what all three of Egypt’s invaders were up to. In seeing especially French fighters and bombers mixed among Israeli planes, the Americans knew that Britain and France had planned to retake the Suez by force all along. Their cover story was Israel; that the Israeli invasion, provoked by Egypt’s action, meant that the UK and France would respond, militarily, as peacemakers.

In taking control of the whole Suez, they assumed they could sell to the world their role as keeping the two presumed belligerents, Israel and Egypt, peacefully apart. Ike, however, wouldn’t budge. For as much as he may have agreed with especially Eden about a lot of the big issues surrounding the canal, Egypt was too important for those reasons.  He would not only risk upsetting the “special relationship” between the United States and England, Eisenhower would actively encourage what amounted to a humiliating British and French withdrawal.

On November 6, Britain’s Chancellor of the Exchequer, Harold Macmillan, calls together the cabinet in place of the ill Anthony Eden and tells them on the day British amphibious forces are landing at Port Said they must accept a ceasefire. Very few of their military objectives had been reached, indeed they hadn’t really gotten started, but Macmillan left them little other choice – he purported that $280 million of foreign reserves had been lost in just the previous week since the Halloween raids and that without especially American help there was no chance of holding sterling’s $2.80 parity.

And the United States was refusing all aid until Britain and France got out of Egypt. US Treasury Secretary George Humphrey had told Macmillan, “You ain’t going to get another dime from us, until you’ve gotten out of the Suez.”

They were losing reserves at an incredible rate, one that couldn’t be sustained for very long. In exchange value with the dollar, the pound never really fell too far below $2.80. The spot rate had dropped to $2.785 upon Nasser’s canal declaration in July 1956, and remained at that level more or less until the end of the year. Forward rates indicated marginally more selling pressure, with 3-month sterling selling for $2.75 in late November.

The danger for the British currency, then, wasn’t in the price of the pound but that country’s feeble ability to defend it should it really fall under attack. The Bank of England had set $2 billion as a floor for reserves that it felt was the minimum sufficient in defense of the currency.

The Old Lady had reported to the British government that the, “New York market was extremely disturbed on the news of Israeli penetration into Egyptian territory.” Estimates vary because of more primitive accounting for international flows, but around $400 million of reserves were lost in November 1956 alone. That likely was the largest, by far, single worst month for pound sterling in its history to that point.

After the sale of Trinidad Oil Company in August, a $177 million replenishment of reserves, Britain held about $2.4 billion in official capacity. Those didn’t count tens of millions of US Treasury securities (as well as some swaps) that were eventually sold to raise dollars during the crisis (because they were not included as a reserve asset, and therefore left the impression with the public that reserve losses weren’t as bad as they really were). By the end of October, reserves had dwindled to less than $2.2 billion; by the end of the year, less than $1.5 billion.

Realizing their position, UK authorities beseeched the IMF for aid. First, they wanted permission to withdraw their own contributions to the fund. It was vetoed on American authority. Then the US Export-Import bank was instructed to deny a $600 million credit request to the British. Eisenhower even directed Treasury Secretary Humphrey to study ways and amounts to actively sell British currency and assets, including some of the massive holdings of UK government debt the US had accumulated during and after WWII. 

By December 4, Macmillan would have had to admit to Parliament (meaning the market) those massive reserve losses accumulating throughout November. He knew there was no way $2.80 would hold once that got out without substantial international interventions. The British and French military and political objectives would not hold up to such monetary pressure. The ceasefire was accepted by Israel and Egypt (the belligerents) on November 7 and both Britain and France on November 8 prepared orders of withdrawal for their forces from all Egyptian territory after accomplishing practically nothing (though they did inflict serious damage on the Egyptian military capacity, especially in the air, they left Nasser claiming a victory).

At the IMF meeting held on December 3, Secretary Macmillan was still insisting the US would not yet support any British rescue. The UN had set a December 22 deadline for troop withdrawals, and Eisenhower was uneasy neither Britain nor France had actually committed to it. Secretary of State Dulles was actually the one who ultimately convinced the President that both countries were sincere, and that turning over the territory in Egypt they had taken during the crisis would be accomplished by the deadline.

It was only after that conversation that Humphrey stunned the IMF meeting by completely reversing course and announcing full US support. Not only would $561 million of immediate funds be made available, another $739 million of standby credit would be funded for the United Kingdom. That $1.3 billion totaled 100% of the UK’s IMF quota, a rather generous sum intended to demonstrate massive commitment on the part of the international community for $2.80.

The entire Suez affair represents for many people the last gasps of the British Empire (as well as American closeness with France; the French 4thRepublic fell apart soon after and the 5th Republic as represented by de Gaulle’s leadership was more and more characterized by outright hostility to the US due in large part to the French feeling stabbed in the back over Egypt; there’s a reason why it was mostly France in the sixties demanding to convert dollars to gold). 

In monetary terms, sterling was never the same. For centuries, the British pound had been de facto global reserve mostly because of the size of the Empire as well as the mere fact it was everywhere.  The Royal Navy backed the currency as much as the Bank of England, but both were as helpless as infants in the face of American monetary rejection in 1956. Money is about trust, and power plays a big role there.

Reserve currency status is never a permanent state of affairs. It has been fashionable the past few years to make the Suez comparison to the dollar. You had then what was an economic powerhouse but still in many ways a geopolitical neophyte. The US had been the world’s largest economy for decades, but until WWII never truly exercised its economic or financial influence that way. It had left, as Vice President Nixon acknowledged, the Europeans still at the head of their spheres of influence.

Now a great many see the US in the role of Great Britain and China the growing upstart who like the United States holds a huge proportion of the debt owed by its dominant competitor. Like the Suez crisis, might the Chinese seeking to exercise independent political thought threaten to sell all its US$ assets and ruin the dollar like the US once tried before British acquiescence?  After all, the threat was all that was necessary back then; America never did have to sell a single instrument, not a farthing dispensed from the Fed (it was New York markets that were converting, not official accounts).

But the US of 2017 is not Britain of 1957.  The British economy was being stripped of its colonial productive capacities; the US economy simply languishes without real growth.

And the Chinese have already sold a huge portion of their official UST holdings. During the past three years, from April 2014 to November 2016, the Chinese through mainland accounts, as well as those in Hong Kong and Belgium (yes, Belgium), dumped nearly half a trillion dollars in UST assets. Rather than crash American financial interests and the US economy with it, the Chinese fared far worse for it (though the US, as the rest of the global economy, was not unscathed) wielding no special influence during that time.

That’s because the actions via those assets was in response to monetary factors rather than in the act of making real on some political threat. In fact, the mainland Chinese accounts have bought back nearly $150 billion in UST’s because they need them for their own currency’s stability. It’s important to remember that what’s broken now and for the last ten years isn’t specifically the dollar but the eurodollar.

Ironically, it was the Suez crisis which opened the door for the eurodollar in its infancy.  Merchant banks in particular who were used to transacting global trade finance via the pound were aghast at its exposed weakness, no matter that it ultimately adhered to parity throughout. The real muscle behind the dollar expressed in 1956 made it the far better play; and so merchant banks like Midland which were experimenting with global finance (partly as a result of sterling not being completely convertible) found eager demand for any stable currency afterward from a globalizing economy.

There is no competing alternate format readily available right now. Because of that, there is both hope and despair. The latter follows from what’s already happened the last ten years, meaning that the wretched economy continues globally until something is done about the currency system. Either that happens as a matter of intent, or it’s left to breakdown further and further until the worst-case scenarios break out (like the forties) and force reluctant action to address the issue.

The opportunity here is that because this is a eurodollar problem specifically, the dollar itself could provide a remedy. It would have to be redesigned to fit the modern format, but the good news is that said modern format is already compatible unlike other alternatives.  In other words, worldwide the monetary system already works by dollar denominations, what’s at issue is how and where those “dollars” have come from (and why). What needs to be resolved is defining the dollar again using parameters that fix the eurodollar’s fatal flaws.

The eurodollar’s run as global reserve currency is reaching toward its end. That doesn’t mean it has to be changed by tomorrow; indeed, sterling’s fallout after the Suez crisis wasn’t really a hard break, nor was that one event really its cause. It was merely the last straw precipitating the unchecked fade of importance. What happened in 1956 was the final indignity in a long line of problems exposing the unsuitability, really, of the Bretton Woods framework particularly trying to keep Britain at the top (for some good reasons). 

The eurodollar is already ten years into the same kind of questionable situation. The countdown clock is ticking, but that has more to do with the economic consequences of its downward cycle.  It has seemed in many ways truly remarkable that it has lingered as long as it has in this kind of decaying state, but then again perhaps not since that seems to be the historical norm. Big changes often take a long time to play out, largely because of massive institutional inertia that can only be overcome by big events. 

The challenge is to make that big event replacing the eurodollar a favorable one of design and purpose, before it is one of (further) chaos and turmoil.  In that respect, the dollar is way ahead of all the competing prospective solutions – including blockchain. What’s required with it isn’t a technological revolution nor completely rewiring the whole from top to bottom. Instead what we need is nothing more than officials opening their minds to see what they so far desperately do not want to, and pursuing solutions with objective purpose rather than subjective ignorance.

Then again, maybe that is the highest hurdle to overcome. It might be easier to try to adapt blockchain, hashgraph, or whichever technological revolution comes next than it would be to get an Economist or politician to admit there is the smallest chance something is very wrong with the world’s monetary system.  That does seem the common element, just as British officials were blinded to their own predicament, too, until it was right in front of them, paratroopers already on the ground fighting their way up the sands and beaches of Egypt all for nothing.

Jeffrey Snider is the Chief Investment Strategist of Alhambra Investment Partners, a registered investment advisor. 

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