The declining of world only super-power: I

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Today is a special day, the seven anniversary of 9-11. I still remember that morning, when I watch the morning TV as usual, I saw the smoke coming out of World Trader Center Tower, and wondering “what absent-minded pilot fly his/her plane into the tower”?

We all know what happened after that. The war against Talian in Afganistan, the war for “weapon of mass distruction” in Iraq. More importantly, the gas price went from around $1.50 (I still remember some gas stations price gauging in the evening of 9-11) to $3.50, the US federal deficit and trade deficit grew significantly, and last but not least, the housing and credit crisis in the last year. Since my interest is mainly in economy and finance, let me go there for a minute.

This week (last Sunday) marks another hard-working weekend for US treasury secratery Henry Paulson, because of the goverment take over of Fannie Mac and Freddie Mac. The two Goverment Sponsored Entities have $5 trillion of US mortgages, half of US mortage size. Interestingly, roughly $1.5 trillion of that $5 trillion was purchased by the foreign goverments: China, Korea, Japan and Russia etc. This is the direct reason for the US goverment take over, because the foreign goverment lost confidence on the Fannie and Freddie. On the surface, with the take over, now the mortgage has the full faith of US goverment, now things are goody and dandy again. But wait a minute, the US goverment itself has $10 trillion deficit, what if the US goverment fails to pay its own debt? Well, there are two ways out of it:

1) The US treasuries print greenbacks like crazy (that will make both US consumers and foreign goverment unhappy);

2) The foreign goverment forgave the debt, or part of the debt;

Neither of the above are ideal, but it is happening to some extent anyway. For instance, the recent economy stimulus package costs goverment $150 billion, the bail out of Fannie and Freddie puts up to $200 billion on the line. Where is this money come from? If Chinese are not going to lend, the US treasuries print them anyway.

There are other variable appoaches, one is related to the soaring oil price lately. US spends about $750 billion importing foreign oil. If the US can use more domestic energy (from oil, gas, coal to alternative sources) and import less, the saving there could be significant.

Another way, as suggested by Jeremy Siegal of Wharton in his book “The Future for Investors”, is for US investors to sell the assets to foreign buyers. This is especially applicable considering the emerging middle class in developing economies.

To be continued…

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