Inside today’s Daily Journal…

Editor’s note: Although Erez Kalir ordinarily focuses on technology, blockchain, and biotech issues in Porter & Co.’s Tech Frontiers, Porter turned over the Journal to him today so Erez could tell the story of the longer-term consequences of the extended closing of the Strait of Hormuz: erosion of the supremacy of the U.S. dollar and the Trump administration’s inability to stop it…

In the fall of 1956, the British Empire learned – in the most painful way imaginable – that it was no longer in charge.

The immediate trigger was Egypt’s decision to nationalize the strategic Suez Canal, the narrow artery through which nearly all of Europe’s oil flowed. For Britain, the canal was not merely an economic asset, but the connective tissue of an empire – the link between London and the Middle East, India, and beyond.

British Prime Minister Anthony Eden responded the only way a fading empire knows how: with force. In late October, Britain, France, and Israel launched a coordinated military operation to regain control of the Suez. Militarily, the operation succeeded.

Financially, it was a catastrophe.

The United States, Britain’s most important ally, refused to support the invasion. Worse, Washington undermined Britain using the one weapon that mattered most, the dollar.

At the time, Britain still clung to the illusion that its currency, pound sterling, remained the global reserve. But sterling’s position as the world’s dominant currency had been eroding for decades… losing ground to the ascendent U.S. greenback. And in this crucial moment of geopolitical crisis, Britain depended on foreign capital to support sterling’s stability in the foreign exchange markets. When President Dwight Eisenhower signaled that U.S. support for sterling would be withdrawn, the rest of the world’s capital followed.

Sterling collapsed… Britain’s foreign reserves evaporated – and within weeks, Prime Minister Eden was forced into a humiliating Suez withdrawal.

Historians often describe Suez as the end of the British Empire. That’s not quite right – empires rarely end in a single moment.

But Suez was the moment the world saw, unmistakably, that Britain could no longer enforce the system that underpinned its power. And once the world sees that, it can’t be unseen.

Ray Dalio, founder of the world’s largest hedge fund, Bridgewater Associates, has spent decades carefully studying the rise and fall of empires – the Dutch, the British, and now the American.

Dalio’s framework is both intuitive and powerful:

In the beginning, an ascending power’s naval strength protects key trade routes. Controlling key maritime trade routes makes a nation’s currency the one everyone wants to use. Reserve currency status enables that nation to borrow from the rest of the world more cheaply. Cheap borrowing helps reinforce the nation’s military strength – and so the loop closes.

An empire’s decline works through a feedback loop, too: As a dominant power borrows more, it becomes complacent, believing it can continue to borrow in perpetuity. Its debt mushrooms. At a certain juncture, the cost of maintaining the military that catalyzed the empire’s ascent begins to become painful, then prohibitive. Foreign creditors begin to question the currency. The currency’s reserve status erodes, causing borrowing costs to rise, and the military weakens. The empire falls into a terminal decline.

In this downward spiral, the crucial moment isn’t when the hegemon weakens – it’s when the world realizes it has weakened.

All of which brings us to what is unfolding today in the Strait of Hormuz.