Forget the wars. Forget the wild, uneven swings in the economy since the Vietnam war. The surest sign that the American empire is on the decline is the fact that the dollar is no longer as highly valued as it once was. Indeed, the nation which longs to assume America’s place atop the world’s hierarchy of nation states in the 21st Century (much as America replaced the British Empire as the dominant power in the 20th Century) has now officially called for the end of the dollar’s dominance of the world’s trading and financial systems:

China’s central bank has called for a new global reserve currency run by the International Monetary Fund to replace the US dollar.

Central bank governor Zhou Xiaochuan did not explicitly mention the dollar, but said the crisis showed the dangers of relying on one currency.

With the world’s largest currency reserves of $2tn, China is the biggest holder of dollar assets.

Its leaders have often complained about the dollar’s volatility.

China has long been uneasy about relying on the dollar for trade and to store its reserves and recently expressed concerns that Washington’s efforts to rescue the US economy could erode the value of the currency. […]

Mr Zhou said the primacy of the US currency in the financial system had led to increasingly frequent crises since the collapse in the early 1970s of the system of fixed exchange rates.

On Tuesday, the dollar weakened against most major currencies following the announcement of a US plan to buy up toxic debt.

Forget Obama’s plan to rescue Wall Street through an effort to erase the toxic waste of valueless derivatives from the balance sheets of our largest (and most recklessly mismanaged) financial institutions. This news, in the long term, is far more important than any temporary upswings in the marketplace that the Obama administration has occasioned with its efforts to help Wall Street recover from its own folly. Britain lost its power when its colonial reach became overextended, and the wars of the 20th Century which effectively ended its reign as the most important nation in the world, merely accelerated a trend that had begun long before.

As the British Pound lost value, so too did Britain’s ability to control world events prior to and after the First World War decline precipitously. Much like America today, Britain was once the largest creditor nation on earth, but its own failed policies of economic mismanagement coupled with expensive wars and defense budgets ultimately led to its downfall. Within a generation after WWI Britain was a debtor nation, living beyond its means. Sound familiar? And it was the fall of the Pound as the world’s reserve currency which signaled most clearly the ascendancy of America and the collapse of Britain’s preeminence in the world.

We are facing many of the same stresses of imperial overreach that Britain faced at the turn of the 19th Century. Our bloated defense budgets, our reliance on Wall Street and the financial “industry” to keep our economy afloat even as our once dominant manufacturing prowess has been literally stripped away and shipped overseas, coupled with the economic mismanagement of Milton Friedman’s disciples on the Federal Reserve, a corrupt Congress beholden to Wall Street lobbyists and the reckless policies of our Presidents, from LBJ and Nixon, to Reagan, Clinton and Dos Bushes, have all contributed to our downfall. We, too, were once the greatest creditor nation on earth. Now, like the Brits, we have become the Great Debtor, living beyond our means for the last two generations.

The dollar will be replaced as the world’s reserve currency, probably sooner rather than later. And there is little Obama or anyone else can do to stop that. Like Britain in the 20th Century, however, we will no doubt foolishly attempt to hold onto our power and influence, based on our former military and economic dominance, even as it turns to sand and slips through our fingers. History teaches us many lessons, but the people who learn them usually die before the benefits of their hard won wisdom can be put into practice by those who come after them. That is perhaps the single greatest lesson in history: that no great power ever accepts the reality of its fall as it happens.

The American Empire is coming to an end. We can let it go gracefully, or we can recklessly attempt to extend its reach in a world that no longer recognizes or accepts our efforts to influence and order events as we wish. The former path would allow us to focus on what must be done to help our own people, and our children, recover more quickly from the devastating mistakes of the past 30 years. Yet something tells me that is not the path our former Masters of the Universe, be they financial kingpins, defense contractors, Members of Congress or Pentagon Generalissimos will advocate. They will continue to resist the reality we face. And the rest of us will suffer for their arrogance and blindness.