How will the global financial meltdown affect the next President’s national-security policy? A typical—and true—reply is that our expeditionary armies in Iraq and Afghanistan will be harder to finance. But there are also subtler issues of potentially greater importance. Consider this episode from Britain’s post-imperial awakening:

In 1956, Egypt’s Gamal Abdel Nasser nationalized the Suez Canal, previously a British asset. Britain, France, and Israel intervened militarily and occupied the canal zone. President Dwight Eisenhower objected and sought to pressure Britain to accept a United Nations-supervised plan for withdrawal. Britain had borrowed heavily from the United States during the Second World War and was vulnerable to the demands of its creditor. To squeeze London, Eisenhower conditioned direct U.S. financial support and backing for a loan to Britain from the International Monetary Fund on Britain’s acceptance of withdrawal. The tactic worked. As the British Prime Minister Anthony Eden put it, “We were therefore faced with the alternatives, a run on sterling and the loss of gold and dollar reserves till they fell well below the safety margin…or make the best we could of U.N. takeover and salvage what we could.”

Brad W. Setser cites this example in an important new paper,”Sovereign Wealth and Sovereign Power,” published by the Center for Geoeconomic Studies, at the Council on Foreign Relations. The paper is exceptionally balanced and accessible, and it explores in depth the potential national-security consequences of American trade and financial imbalances with China, Russia, and oil-exporting states in the Persian Gulf. Setser challenges the view that economic interdependence inevitably promotes stability. He argues that such optimism “neglects the differing interests of creditors and debtors.”

The United States, of course, is a large-scale debtor in the current global system because we have voraciously consumed more than we have produced and have allowed China, among others, to finance our consumption. Many economists have argued that this pattern of indebtedness is, at least in some respects, a strategic advantage of the United States because the dollar remains the world’s dominant reserve currency and thus our creditors—even though they may not be political allies—have bound their economic prospects to our own. This is a geopolitical extension of the old Wall Street saw: If you borrow a little from a bank, the bank owns you; if you borrow a lot, you own the bank. China’s government, for example, owns a dollar portfolio worth more than a trillion dollars; it has no interest in seeing the value of that portfolio collapse by forcing a devaluation of the dollar, this argument goes. This has proven true so far, but will it always? Setser’s argument is that U.S. reliance on foreign governments for credit is an “underappreciated strategic vulnerability.” He writes:

A debtor’s ability to project military power hinges on the support of its creditors….In some ways, the United States’ current financial position is more precarious than Britain’s position in the 1950s…Britain’s main source of financing was a close political ally. The United States’ main sources of funding are not allies. Without financing from China, Russia, and the Gulf states, the dollar would fall sharply, U.S. interest rates would rise, and the U.S. government would find it far more difficult to sustain its global role at an acceptable domestic cost.

The current financial crisis is dynamic and its outcome is impossible to predict, but it does seem likely that it will extend, rather than reduce, the type of vulnerability that Setser has described. In the short term, the problem is panic and a lack of liquidity; in the longer term, those (like the United States) who took on debt to speculate on rising asset prices will suffer most. The relative winners, once the markets stabilize, should be those with large cash positions and sound fundamental economies. If you were to choose a single winner by that formula, it would be China, our largest creditor.

What interaction of creditor-debtor dynamics and hard military power might test this proposition, in a way comparable to the Suez crisis of the 1950s? Last week, the Bush Administration announced plans to sell about $6.5 billion in arms to Taiwan, a nation that China regards as its own sovereign territory. At a minimum, what Setser’s paper suggests is that the Pentagon’s traditional Taiwan war games—whose ships can maneuver fastest, whose weapons systems can perform the best, etc.—may be myopic and outdated.