Montreal, Canada

No other global power since the Romans has dominated the world. The United States will go down in history as the greatest economic and military power – hands down.

Swayed from isolationism in the early 20th century to full-blown global superpower by late 1944, the United States almost claimed its biggest creditor or lender in 2009 – China. The Korean War (1950-1953) almost resulted in an American invasion of China.

The 2007-2009 Global Panic marked the beginning of the end of American financial hegemony. China is now emerging as the pre-eminent economic power and, increasingly, will force harsh creditor terms on the United States just as the latter did on Great Britain after WW II.

Soaring deficits and costly wars ultimately become a real liability for a global superpower. History provides a recent example of how Great Britain went from ruling the world with a vast empire starting in the 18th century until the country bordered bankruptcy by 1946.

The United States is following the same path in the early 21st century as China continues to gain clout and eventually surpasses America as the largest economy in the world over the next 25 years. Though still the uncontested military power, the United States will reluctantly have to share this role with China over the next several decades as the balance of power shifts from West to East.

Just how long will China continue to absorb U.S. funding requirements is hard to predict. But in a blog last week I quoted retired Hall of Fame hedge fund manager, Julian Robertson, Jr., warning that such a scenario is a growing possibility because of the weak dollar and skyrocketing deficits. Robertson is shorting U.S. Treasury bonds, betting bond prices will decline sharply.

Yu Yongding, a former adviser to the Chinese central bank, the People's Bank of China, expressed concerns to journalists in September 2008 that China was growing increasingly cautious about purchasing more U.S. Treasury debt. In March 2009, Chinese Premier Wen Jiabao lent his voice to warn the United States that China's appetite to buy Treasury debt was not unlimited.

"We have lent a huge amount of money to the United States, so of course we are concerned about the safety of our assets," Wen Jiabao stated at a press conference in Biejing last spring.. "Frankly speaking, I do have some worries."

In an October 13 op-ed in The Wall Street Journal, author Zachary Karabell ("Superfusion: How China and America Became One Economy and Why the World's Prosperity Depends On It," Simon & Shuster) makes a strong case why government deficits matter and how the United States is a sinking economic ship as it increasingly relies on China to obtain ongoing credit financing.

China owns about a one-third of all outstanding U.S. Treasury bonds – more than any other nation. Approximately 80% of its total foreign exchange reserves (now $2.2 trillion dollars) are denominated in U.S. dollars. By all measures, the Chinese are fenced in, loaded with dollars.

Mr. Karabell's historical illustration below is probably what lies ahead for the United States as its economic and military clout diminishes in the face of relentless deficits and overstretched military commitments:

"In spite of its global empire, a powerful military, and an enviable position at the center of worldwide commerce, in early 1946 the British government faced a serious risk of defaulting on its financial obligations…It asked the United States for a loan of $5 billion dollars at zero-interest repayable over 50 years…To the surprise and shock of the British, Washington refused.

Unable to take no for an answer, Britain explained that unless it received funds the government would be insolvent. The Americans came back with a series of conditions. They would lend Britain $3.7 billion dollars at 2% interest and the British government would have to abide by the 1944 Bretton Woods plan, which made the dollar rather than the pound sterling the reference point for global exchange rates and required Britain to make the pound freely convertible. Even more significantly, Britain had to end its system of imperial preferences, which meant no more tariffs and duties on goods to and from colonies such as India. These were not mere financial penalties: Taken together, they meant the end of the British Empire."

I've got to believe the Chinese are quietly selling dollars and accumulating gold every time there's a big seller. The Chinese can't be openly bullish about gold; so the best strategy is to gradually dilute its vast holdings of Treasury securities (and dollars) in favor of gold and other currencies, which by default, might offer better values than the dollar but are debt-plagued just the same. China is also the world's largest gold-producing nation since 2007.

A violent economic rupture is inevitable. The global balance of power is changing and that shift from West to East this century won't be peaceful.