The Suez crisis in 1957 was the end of the road for Britain’s 200-year role as a global rule-maker. From then on, it became a rule-taker. The recent political nostalgia for a different England pedalled by Brexiteers, that elegiac world of warm beer, sandwiches and Spitfires, was the world before Suez. The crisis was a monumental cock-up involving Britain, France and Israel, and a botched attack on Egypt to ensure European control over the critical Suez Canal. The fiasco resulted in the Egyptian nationalist leader, Gamal Nasser, having full authority over the canal.

Following a dressing down by new kid on the block the US, Britain and France withdrew with their tails between their imperialist legs. In the story of the global fight against colonialism, Suez was a famed victory for the colonised. It constituted the ultimate asymmetric war story where, like Iran and the Straits of Hormuz today, possession is nine-tenths of the law. Geography was on the Egyptian side.

Suez changed the global view of Britain for good. From then on, the risk of being associated with or adjacent to Britain in everything from geopolitics to finance increased. For more than 100 years, the UK had been a sure thing: the City of London was the epicentre of global finance; sterling was the world’s reserve currency; and the interest rates on UK gilts—the interest at which the UK government borrowed—was regarded as the global risk-free rate of return.

This meant that whatever else happened in the world, the UK government was seen as always good for its money, and would never default. With sterling pre-eminent, investors could shove their money into UK gilts and go on holiday, safe in the knowledge that it was a risk-free bet. In short, the UK manufactured sterling assets and the rest of world bought them, without question.

In finance, this extraordinary privilege is called credibility. After Suez, UK credibility gradually eroded, politically and financially—not overnight, but slowly and surely.

Could something similar happen to the US following Donald Trump’s war on Iran?

Let’s focus on finance.

Over the past few decades, despite all this talk of trade wars and the US’s inability to manufacture merchandise that the world wants, there is one product, made in the US, which the world wants in huge quantities: the American dollar. The Americans know the rest of the world wants American assets – stocks, bonds, companies and real estate. All of these are priced in dollars, so the Yanks are simply printing dollars and the world is buying those greenbacks. The process works like a resource find.

Other countries find oil that the rest of the world wants. The Americans have dollars, which they print for free and the world buys. Manufacturing these dollars is similar to turning on an oil spigot. Foreign money buys dollars to buy US assets, in the same way as foreign money flows into Saudi Arabia to buy oil. US government debt is above $31 trillion (€26.5 trillion), and foreigners hold about $9.5 trillion of US Treasuries. In order to get their hands on these American assets, foreigners must keep dollars handy, and therefore the US dollar still makes up 56.77 per cent of all official reserves all over the world.

After Suez, UK credibility gradually eroded, politically and financially—not overnight, but slowly and surely. Could something similar happen to the US following Donald Trump’s war on Iran?

Over a few decades, this process has led the dollar to be higher in value than it would otherwise be, plus it means the returns to US financial assets and its adjacent industries rise relative to other American industries. In time, finance elbows out manufacturing at home, while the expensive dollar makes it profitable for corporate America to relocate its industry overseas to cheaper........

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