The week ended on July 31, 2026, interesting news items to look at for the past fortnight are:
Full Spectrum Competition: I borrow the title of the current Blog from “full spectrum dominance.” Full-spectrum dominance is a military strategic concept created in the United States during the 1990s (prominently featured in US military publications like Joint Vision 2010 and 2020). It is used to describe the achievement of absolute control over all dimensions of a battlespace—including land, air, sea, space, cyberspace, and the electromagnetic spectrum—so that an opposing force has total constraint and cannot effectively resist. (Fig. 1).
Now, if the US population, which constitutes 4.2% of the global population, wants to sit on top of the other 95.8% in perpetuity, they are either delusional or living in a man-made Matrix. The race for multipolarity has been on since 2010 and it looks like that after one and a half decades, we are at the finishing line in 2026.
It has been said that there are 3 pillars that support the US Empire, viz: the US economy, the USD as the Global Reserve Currency, and the US military. It was not brilliance in design or execution that gave the US its superpower status; it all fell into her lap after Europe and Asia tore themselves to pieces as a result of WWII. The surprise was not the U.S. achieved superpower; the surprise was how the U.S. achieved it with so little cost and effort to itself. Contrary, if there was any single factor that caused U.S hegemony to lose its potency, I would ascribe that single factor to the fallacy of the doctrine of “Full Spectrum Dominance” and it was all self-inflicted. My thesis is based on three decades of observation of how, every time a particular aspect of US dominance faces competition, the entire US system is re-calibrated to eliminate a particular competitor, but in the process it weakens the empire as a whole.
Our thesis began with post-WWII competition between NATO and the Warsaw Pact. The US and the Soviet Union were shoulder to shoulder in terms of technology and military sophistication, and the Cold War lasted 45 years. To maintain the cohesion of the respective bloc, Russia directly subsidized the Warsaw Pact members, but the US had the advantage of the USD and indirectly subsidized Europe through trade deficits and shouldered NATO defenses single-handedly. In the end, the Soviet Union collapsed in 1990 but before that, the US defaulted on the Bretton Woods Agreement in 1971 and built USD hegemony on an unstable foundation in the Middle East in terms of the petrodollar.
The petrodollar, while it worked as an important anchor for dollar hegemony, comes with a huge cost in the sense that the US had to widely distribute dollars internationally through trade deficits (Fig. 2)
and pay record-high interests to stabilize the initial default volatility. (Fig. 3).
As a result, claims by foreigners against the US economy are a whopping $35 trillion, comprising $15 trillion in bank credits and $20 trillion in financial assets of treasuries, bonds, and equity. This compares with the US M2 of $22 trillion, and 40% of bank-created US dollars are outside the United States. Hence, dollar hegemony is both a strength and a deadly vulnerability. Sadly, successive US administrations only see the dollar as a weapon of threat and coercion, but were blinded by hubris to see the dollar as a double-edged sword that, when wielded, cuts both ways.
US is a country endowed with rich resources and naturally protected by the vast Atlantic and Pacific Oceans. In terms of oil and gas, US was the predominant supplier to both sides of the WWII conflict in the 1940s. (Fig. 4).
In fact, the primary cause of the Pearl Harbour attack was a U.S. oil embargo against Japan. However, by 1949, having exhausted its endowed good fortune of oil and gas and greatly profited from the vast WWII demand, the US became a net importer and eventually the biggest buyer of Middle East oil, and hence was able to seal the petrodollar deal in 1971. Few people knew that the petrodollar deal was not so simple as an exchange of oil pricing in USD against US security protection of the House of Saud. Embedded in the deal was the Saudis would receive partial payment in gold and a scheme to maintain the international gold price at around US$400/oz for the Sauds to convert USD to gold as they received the dollar payments. To back up the scheme, the U.S. Treasury leased out its gold reserves to bullion banks and dumped them in open markets to depress the gold price (a mirror reflection to strengthen the dollar) for cash. The lease rates to bullion banks were around 25 to 50 basis points, and the bullion banks would lend to gold miners at preferential interest rates at 500 to 700 basis points. but repayable by gold miners in gold. This was the genesis of the gold carry trade. Naturally, Wall Street bullion banks would market the gold carry trade and borrow substantial quantities from the European Central Banks. (Fig. 5).
You can see from the chart between the early 1980s and the mid 1990s, the gold price stayed depressed for 15 years, irrespective of volatility in inflation and interest rates. One also notes that, since 1974, the U.S. gold reserves have not been formally audited for over 50 years. This is despite US domestic political cries for a formal audit and a request by client central banks for inspection.
Whilst the exchange value of USD is being artificially propped up by the gold carry trade, Japanese exports to the US went on a tear. In 1985, US, the United Kingdom, France, and Germany united against Japan and,, in the Plaza Accord and forced Japan to revalue the yen FX rate from 240 to 150 within 12 months. In 1986 and 1987 US also took major trade and legislative action against Toshiba and robbed the crown of semiconductor manufacturing. It was at that time that South Korea, Taiwan, Hong Kong, and Singapore (the four Asian Tigers) were raised to weaken Japan for coming too close as a rivary to US.
1986 was also the year when Western financial markets threw away their prudential rule book. First began with the London financial market “Big Bang”, exotic trading practices like computerized algo trading, portfolio insurance, index and derivative trading have all significantly enhanced stock market liquidity but increased volatility. Back in Japan, your average Mr Watanabe is unaware of the undercurrents in the global financial markets and only saw a robust Japanese economy, new-found purchasing power in the Yen and low returns on cash savings. He could hardly resist the Nikkei 225 index, which rose from 10,824 in 1986 to a high of 38,915 towards the end of 1989 being window-dressed by a secret army of state-sponsored economic hitmen. After all, the Western caimans have honed their skills since Black Friday, October 19, 1987 and have sharpened their stealthy daggers in cloaks against the naive Japanese. MOF officials with inflated egos have also scant knowledge of this new financial weapon of mass destruction. So, for an exuberant party of three years, Japan woke up and found itself shackled as a financial serf of the US for the next 30 years. The Gold Carry Trade was officially replaced by the Yen Carry Trade. Here I need to digress and mention that today Samsung and SK hynix of South Korea, and possibly TSMC of Taiwan, will meet the same fate as Toshiba of Japan; history is repeating itself right before our eyes.
In 1991, the Soviet Union finally collapsed. The coffers of US hegemony were filled to the brim after shorting the ruble and harvesting $1 trillion in blood money. Japan also bent the knee and opened her vault and backed US with a platinum credit card of virtually unlimited credit. US, the last superpower, remained standing and self-crowned itself Master of the Universe. Yes, the financial weapon of mass destruction has outgunned even the Soviet’s huge arsenal of nuclear bombs. It is only fitting that the United States should be honored with full-spectrum dominance and a US rule-based international order. With such victories, US turned its attention to the Middle East and Europe. How dare Saddam Hussein claim the promised reward for waging an eight-year war with Iran by actually invading Kuwait. What about the ambition of the Europeans in forming an economic bloc to rival the United States? And so the cycle of perpetual wars began with Operation Desert Shield, Operation Desert Storm (Iraq), Operation El Dorado Canyon (Libya), Operation Deliberate Force, Operation Noble Anvill (Yugoslavia), Operation Enduring Freedom (Afghanistan), Operation Iraqi Freedom, and Operation Inherent Resolve (ISIS).
So after two decades of war and $6 trillion of military expenditure, the Treasury coffers are drained; the Shiite majority in Iraq became close friends with Iran, and the US had to evacuate in haste from Afghanistan. Libya and Syria degenerated into failed states. In the meantime, without specific state-sponsored national targets such as the Soviet Union and Japan, the cohorts of economic hit men turned their weapons to Asia and Russia again. In Hong Kong 1998, Soros had his Waterloo moment. Soro’s Quantum Fund was forced to cover its naked short position because the Hong Kong Government bought every sell order thrown at it. (Fig. 6).
In Europe, LTCM blew up and needed a bailout coordinated by the Fed with successive Fed rate cuts. But the curse of wielding this financial weapon was brought ashore to the USA and caused havoc in the 2000 dot-com bubble and the 2008 sub-prime tsunami.
2008 was a pivotal moment and a wake-up call for foreign holders of USD and Treasuries. Fast forward to today, every attempt by the US Administration to dictate exclusive USD settlement, whether the end product is petroleum, minerals, semiconductors, or artificial intelligence tokens, is challenged by BRICS with viable alternatives. No longer is USD the currency of the United States, but another country’s problem. The spendthrift behavior of the US Administration will only be shouldered by US citizenry. The Federal Reserve printing press would guarantee domestic US inflation and the erosion of USD purchasing power. Full Spectrum Dominance is now Full Spectrum Competition. The table has turned, and the borrower now rightfully stands subservient to the lender. (Fig. 7)
Proverbs 22:7 The rich rules over the poor, And the borrower is servant to the lender. 8 He who sows iniquity will reap sorrow, And the rod of his anger will fail.
