Next, consider Balance of Trade: and in the case of the USA, deficit.

Now despite various financial and fiscal problems, Japan has not once, returned a Balance of Trade Deficit since its re-emergence. Not once. 

Table 1: Current Account Balance of Selected States, 2005 Estimate
Rank	Country	Current account balance in US$
1	Japan	165.6 billion
2	China	160.8 billion
3	Germany	115.5 billion
4	Saudi Arabia	90.73 billion
5	Russia	84.25 billion
6	Switzerland	58.24 billion
7	Norway	49.49 billion
8	Netherlands	39.95 billion
9	Singapore	32.74 billion
10	Kuwait	26.92 billion
159	France	-38.78 billion
160	Australia	-42.09 billion
161	United Kingdom	-57.61 billion
162	Spain	-83.14 billion
163	United States	-829.1 billion

Source: Economic and Social Research Council 

George W Bush’s illegal invasion of Iraq is an excellent example of unfettered, reckless and irresponsible deficit profligacy.

According to Joseph Stiglitz (Three Trillion Dollar War): this misadventure has already cost the US taxpayer in excess of $3 Trillion and rising.

Politicians and public servants could continue their prodigal ways and the American consumer could load up on imported toys and gimcrack and some dummy would always be around to pick up the tab!

Now a hidden aspect of external dollars is “seigniorage”: this, in one sense, is the Free Lunch a state receives when other states hold their currency as reserve. No interest is paid. At present, probably 30+% of external US dollars are held as non-interest charging deposits. This is about to change!

The US dollar is what is called a “Fiat” currency: in other words it has no particular bullion backing and is valued only on its credibility and the underlying stability of the economy of the issuing state.

Well, with recent events in Wall Street, one is compelled to say the dollar, internationally, is now less than triple A!

Significantly and seriously less.

And the belated, frenetic and wholly hollow gestures from the Fed and other Central Banks as a Knee Jerk reaction, throwing hundreds of billions of taxpayer’s cash into the already flawed system in the cause of promoting liquidity, simply exacerbate the reality: devaluing the core currency and driving down its international exchange value still further.

However, this Dollar-Centric global regime is finishing; mainly thanks to the now unsustainable nature of US deficits and the sheer risk exposure experienced by those holding large amounts of the currency.

Other disruptive tensions are at work in the fabric of globalised trade.

As we all know, the hitherto slumbering dragon, China has woken up in a rush. The dominance of China’s manufacturing and exporting industries have taken the World by storm! From a fairly lo-tech start, they have moved, increasingly into more demanding technological areas.

Perhaps this was demonstrated most by the successful launch into space of a Chinese astronaut, just after the brilliantly staged Beijing Olympics. One triumph following hard on the heels of another.

It is typically comforting for United States to say, well, they need us: we are their market!

This is self delusion.

Most interestingly, as this article was in preparation, I listened with great attention to a BBC radio interview with Chinese consumers and government ministers.

Following on from the South Korean example, the Chinese domestic consumer market is growing

Arrogant Western analysts like to believe that the average Chinese citizen still works for a bowl of rice a day.

Look at Korea (South) as a yardstick

Koreans, just 25 years back, worked on average six and one half days per week: annual leave was perhaps two or three days per annum in total. And for not much more than that bowl of rice a day!

Today, Korea is one of the most advanced technology countries in the World with the largest saturation of really high speed broadband, for example.

I well remember back in 1978 when I was involved in preparing financial analysis for a major development in Qatar and assisting with the search for suitable contractors.

Koreans were working in the Gulf States: the singular difference between Western ex pat construction workers and their Korean counterparts was local accommodation. Western guys demanded air-conditioned site buildings, refectories and the rest. The Koreans simply lived in the shipping containers. The ones they used to bring in equipment and materials from Seoul!

Things have moved on from there

Rapidly, Korean industry and determination have allowed their major corporations and conglomerates such as Hyundai to dominate the World.

Korea has the fastest, widest saturation broadband rollout in the World.

Its GSM cellular telephone networks lead the World: paying for random items, e.g. car parking is commonly with use of a mobile phone, as is banking on the move.

The Korean consumer market has expanded to the point where it is an equal with most of the West.

And, China is following; rapidly.

It is sobering to realise that the giant Korean electronics corporation, Samsung, is now in the global top three.

Chinese companies are catching up: fast. Their domestic market is expanding exponentially.

The United States isn't the only consumer of Chinese goods either: as India expands it is consuming rapidly.

And so is Europe: and the Euro is much more worthy and stable than the US dollar.

Plus with less exposure to Sub Prime investments, Europe will pull itself out of recession faster than the USA.

Eventually, at the right time, large holders of external US dollars as reserves will dump them increasingly more rapidly on the global forex markets: it's already happening.

As the US dollar value self-depreciates, ably aided and assisted by Paulson and Bernanke in their desperate yet doomed attempts to stave off reality, then large US dollar holder’s risk exposure diminishes.

The Euro is set to become the World's preferred reserve currency. For the moment: since internal economic and fiscal pressures inside the mechanism and the ECB’s lack of intelligent and rapid response to disparate state’s internal crises has caused tensions and lack of harmony.

Traditionally, countries built up their wealth and stability by prudence and saving. Indeed, Japan amassed its working capital from the diligent savings of millions of workers. Not a dangerous, fickle and out-of-control global market, which is short-term in view.

It is a fact that in the early 1970s when Japanese industrial effort was really moving into gear, and despite their size and asset bases, no one in London’s then new Interbank market wanted to lend to Japanese banks! Their “Names” were not accepted.

I know since I was working in London’s capital markets at the time; and did eventually manage to raise unsecured borrowing for one of the major Nippon banks: it was the hell of a struggle, though!

How times change

Most Western societies had followed the prudent model of personal savings being deposited and then lent out to worthy borrowers.

Previously, cash flowed into the institutions in the City of London and Wall Street et al (circa 85% of all new fresh funds inflow is to institutional investors), and then to the stock market, bonds, treasuries and banks.

This capital would then be “Re-Cycled”, through Institutional Investors, such as Insurance companies, investment operators, mutuals and pension providers. These would, in turn, invest wisely in stable and growing companies with real growth prospects. From this reality came the term “Bell Weather” stock: a reliable and long-term activity, which would weather ups and downs in the financial climate and still come through smiling.

However, the new breed of Gunslinger traders wanted overnight fame and fortune! Don’t we all. Not for them the slow, steady and stable ride into success. New technologies opened up the global financial village to the amoral and opportunistic. 

A new phenomenon of the 1970s was the Interbank market. It all started with money brokers liasing between major banks on a local basis: as globalised trade took off, then brokers became international. This was particularly boosted as countries like the UK removed post war exchange controls[1].

These have been replaced by McJobs: the concept of service and retail activities, yet at wage and salary scales so far beneath before, that tens of millions of Americans cannot now afford decent healthcare insurance, let alone save for their old age. 

 (source: Nationmaster)

I also invite you to examine some of the other significant metrics!

It is an identical scene in the UK.

Worse, as costs and taxes rise – as they must to repay the hundreds of billions scattered around by Paulson and Bernanke and Brown and Darling in their vain endeavours of holding up reality – Joe Average will be less well placed than before to accumulate capital.

In previous economic downturns, America could rely on its inventiveness and industrial base to pull itself up by its financial socks.

With manufacturing plants all over continental USA shuttered and work transferred to Asia, Mexico and Eastern Europe, one is tempted to ask “What industrial base?”

Detroit? On its knees: both Ford and GM have just has their credit rating downgraded almost to junk by S & P.

In the 1970s, the Japanese Ministry of International Trade and Industry – MITI – developed its Grand Plan. Asia would become the World’s factory; the Americas the World’s farm: and Europe its leisure park.

OK, so some of their planning was off. No one could have foreseen the rapid rise and super-growth of China. However much of the plan remains intact.

Earlier we looked at which global powers hold the largest foreign exchange deposits and present the strongest Balance of Trade Surpluses.

It is pretty obvious where the winners are!

Most worrying of all, perhaps, is the size of the US Current Account Deficit: this is expressed as:

“The Economics Glossary defines the Current Account as the difference between a country's savings and its investment. "[If the current account balance is] positive, it measures the portion of a country's saving invested abroad; if negative, the portion of domestic investment financed by foreigners' savings."

Thus the question which must be asked is simply this: Will foreign nation states and major global investors continue to fund the US deficits and borrowing after this current financial and regulatory debacle?

I would say not.

Will the holders of the lion’s share of World currency reserves continue to allow the US banking system to screw up global financial and economic stability through greed, perfidy and malfeasance? After all, they didn’t create this global meltdown, America did. All the Asian banks and Sovereign Risk Funds did was suffer.

I have to say no once more!

Will the World’s major wealth producers and oil states continue to use a demeaned and wholly discredited fiat currency as a yardstick of exchange of value?

No again.

My forecast is a continuance of the Euro as the new reserve currency and medium of value exchange, until within a few short years a Currency Basket is agreed between emergent Islamic states, Russia and Asian locomotive economies.

The World is in for some serious rethinking and remodelling.

Let’s hope US politicians are wise enough to realise which side the bread is buttered this time around.

But they are politicians: and if I measure their brainpower and astuteness by the way Dems and Goppies alike voted through a complex 480 page Bail Out bill, with little or no analysis or oversight, but well larded by Pork Barrel goodies to get them onside, then I for one am not going to hold my breath!

[1] Exchange Controls were invoked mainly post WW II, to conserve hard currency for essential imports. Those wishing to either export funds or buy external assets had firstly to gain permission from their central bank. In the UK, for example, the Exchange Control Act of 1948, was not finally repealed until 1979. The USA has never suffered Exchange Control.

Author’s Comment The central plank of this work, is to propose and support the core premise of America losing its favoured status of both owning the World’s major reserve currency and controlling the globe’s financial and banking systems. Additionally, I posit the inescapable reality that a continuum of other nation states funding profligate US deficits cannot and will not pertain. Solid and empirical evidence is presented herewith as well as valuable anecdotal commentary and conclusion. When presenting any work such as this, it is tempting to pursue the academic route and also produce rafts of supportive evidence and source references. Such a course would, I fear, add further difficulties to the reader’s cause and sanity! One critical topic I have discussed at length with my Editor, Les Blough, is the separation of values for straight foreign currency reserve and investments in US Treasury paper. Unfortunately, this is neither an easy nor transparent task, as reporting regimes vary significantly. The IMF is the most credible, since statistical lag is low and their regime demands clear division of values into component items. Unfortunately, however, China does not seem to report adequately! However, a core aspect of my argument is the obvious dominance by China in possession of other state’s financial and treasury assets: and the paucity of same, sitting in the USA! I thus adopt a middle course and included herewith a number of useful references from which most combinations of asset type and value may be culled. MCF http://fas.org/sgp/crs/row/RL34314.pdf http://www.washingtontimes.com/news/2008/jul/27/chinas-economic-bargaining-chip/ http://www.ustreas.gov/tic/mfh.txt http://en.wikipedia.org/wiki/United_States_public_debt http://www.chinadaily.com.cn/bizchina/2008-09/19/content_7043051.htm