It’s a new world

America is squandering (or has already squandered) it’s position in the world.  Others are jumping in the void..

America Is Not Too Big to Fail

  • Friday, September 12, 2008 10:19 AM In the 1978 blockbuster Superman, Lois Lane falls from a rooftop in New York. The late actor Christopher Reeve, decked out in blue tights, swoops down to catch the falling Lane.
  • “Easy, miss. I’ve got you,” he says with a trademark grin. “You, you’ve got me? Who’s got you?” replies Lane, looking down over his arms to the pavement below.
  • We could ask the Lois Lane question of our own government these days. They’re stepping in all over the place to dig out banks and save investors. Yet the world’s biggest economy is in no shape to write those checks.
  • In fact, the United States is harrowingly close to the same kind of utter financial collapse that Americans once thought only shaky Latin American regimes could suffer.
  • The Fannie and Freddie bailouts, monster entitlement programs for retiring baby boomers, Wall Street in flames, and sliding home values are coming to a head at exactly the wrong moment.
  • The chances we’ll be able to muddle through are slimmer every day.
  • “The earthquake will come via a collapse in the market for U.S. government bonds as domestic and foreign investors realize that the only way Uncle Sam can meet his future spending obligations is to print massive quantities of money,” warns Boston University economist Laurence J. Kotlikoff, writing in Fortune.
  • “The result will be sky-high inflation and interest rates and, most surely, a prolonged reduction in output and employment.”
  • “This could happen today. It could happen tomorrow. But it will happen here just as it has happened in every other country that tried to spend far beyond its ability to pay,” he writes.
  • Exactly. Who’s holding up Superman? Us, the taxpayers.
  • It’s far too easy to confuse the shorter-term government deficit, which seems manageable at $407 billion, the latest Congressional Budget Office figures, with the real, larger outlay ahead.
  • But even that has a sad punchline. Goldman Sachs now says that the short-term number, once you figure in bailouts, military spending, and probable tax-receipt shortfalls, is likely to be $5.3 trillion over the next 10 years.
  • Nevertheless, the real total debt of the government right now is $70 trillion, Kotlikoff figures. Never mind the personal debts — credit cards, mortgages, cars, and other loans — Americans would face as our economy heads, potentially, into a deep recession.
  • Compare that figure to the entire U.S. economy, which amounted to $13.8 trillion in total economic output in 2007. Imagine if your personal credit-card debt was five or six times your annual paycheck. Scared yet?
  • Large-scale bank failures could cost hundreds of billions more, beyond the billions promised so far to save Indymac, Fannie, Freddie, and Bear Stearns. Automakers are begging Congress for cheap loans. Airlines won’t be far behind them.
  • If we keep our promise to the retiring baby boomers, we’ll be paying out $4 trillion a year that we don’t have for decades, says Kotlikoff.
  • He figures it would take a payroll tax hike equal to 15 percent of everyone’s paycheck, immediately and permanently, to try to fix the problem.
  • Of course, that would be the equivalent of truck-bombing our consumer-driven economy.
  • We could just scale back benefits for retirees, right? Don’t count on Congress to voluntarily tell tens of millions of elderly voters they’re on their own after decades of promising to care for them, even if it bankrupts the nation outright.
  • Or shut down our military. That doesn’t seem likely in a world where Russia feels it can just roll tanks into a neighboring country. Maybe we could get a second job. Or learn to fly.

Imperial overstrech (a 3 trillion dollar war), an all too dogmatic belief that free markets don’t need regulation (the origins of the housing and credit crisis) and that the state is never the solution, always the problem (except when buddies need bailing out) has hobbled this great nation in an amazingly short time. Others are profiting.

Russia was rolling tanks into a little neighbouring country without the US (or the EU) being able to do much about that. China is also on a roll:

Beijing uses forex reserves to target Taiwan

  • By Jamil Anderlini in Beijing Published: September 11 2008 23:30 | Last updated: September 12 2008 10:48
  • The secretive government agency that supervises China’s foreign exchange reserves used its funds to help convince Costa Rica to sever ties with Taiwan and establish relations with Beijing last year, according to documents obtained by the Financial Times.
  • The purchase of US-denominated Costa Rican government bonds by China’s State Administration of Foreign Exchange (Safe) is the clearest proof yet that Beijing regards its $1,800bn in foreign reserves – the world’s biggest – as a tool to advance its foreign policy goals, as well as a potential source of income.
  • This is the first smoking gun that proves China uses its foreign exchange reserves for political purposes,” said Kerry Brown, senior fellow with the Asia programme at Chatham House in London.
  • “It raises questions about some of Safe’s other investments and will worry politicians and business people in places where Safe is taking stakes in high-profile companies.”
  • Encouraging the handful of countries that still recognise Taipei as the legitimate representative of the Chinese people to switch their allegiance is a key foreign policy objective for Beijing, which regards Taiwan as a renegade province.
  • China and Taiwan have for years used aid payments, infrastructure projects and the like as incentives for small countries like Costa Rica to take their side.
  • But Safe’s international profile is relatively new. In the past year, it has used a Hong Kong subsidiary to buy small stakes in publicly listed companies including BP, Total of France and at least three Australian banks.
  • Safe does not publicly disclose its investments and has refused in the past even to acknowledge the existence of its offshore subsidiaries. Safe and three of its offshore subsidiaries refused repeated requests for comment.
  • ChartIn January this year Safe bought $150m in US dollar-denominated bonds from the government of Costa Rica as part of an agreement signed last year under which the Central American nation cut diplomatic ties with Taiwan (after 63 years) and established relations with the People’s Republic of China.
  • The agreement, signed on June 1 2007 by Yang Jiechi, China’s foreign minister, and Bruno Stagno Ugarte, foreign minister of Costa Rica, explicitly links the foreign policy switch to China’s purchase of $300m in government bonds and a grant of $130m.
  • In an exchange of letters from January this year between Fang Shangpu, Safe’s deputy administrator, and Costa Rica’s finance minister, Safe promised to buy government bonds under the terms of the 2007 agreement, but included a clause demanding Costa Rica take “necessary measures to prevent the disclosure of the financial terms of this operation and of Safe as a purchaser of these bonds to the public”.
  • Costa Rican diplomats advised against keeping the terms secret, but the Chinese insisted, said people familiar with the matter.

Money talks. China is also pooring in money in Africa, it has won great influence, and is set to profit:

Booming Africa Could Be the New Asia

  • Friday, September 12, 2008 9:33 AM. Africa is emerging as a great investment opportunity, similar to 1980s Asia, say some money managers.
  • “If you look at (macro-level) risk, it compares to China in 1984,” Charl Malan, head of African research for Van Eck Global, told The Wall Street Journal.
  • Van Eck Global launched the first African Index ETF in July.
  • “If you think the commodities cycle is unsustainable, then why is Africa sustainable? This time there’s a whole range of growth initiatives put into place by various African leaders,” says Malan.
  • According to the Journal, the International Monetary Fund published a statistical comparison between a current basket of sub-Saharan African economies, including Ghana, Kenya, and Nigeria, and a snapshot of the Association of Southeast Asian Nations from 1980.
  • In terms of gross domestic product expansion, money supply, and debt-market growth, the African nations compare “favorably.”
  • In a January research note entitled “Africa Rising,” Goldman Sachs initiated coverage of sub-Saharan Africa separate from South Africa, with some 15 stock markets with 500 tradable stocks led by Nigeria, with its immense oil resources.
  • Three of the top 10 fastest-growing nations in the world for 2006 were in Africa, Goldman wrote.
  • There are risks, of course, Goldman wrote, but the investment bank is confident that growth will continue.
  • Other areas of Africa are emerging as financial centers, including Egypt, Kenya and Ghana. The Ghana Stock Exchange All-Share Index, for example, was up 63 percent for the year-to-date, as of September 2. Gold mining and stakes in other commodities led the advance.
  • As the predicted African boom takes shape, Wall Street brokerage firms, fund managers, and private equity traders have been quietly moving investment money into a variety of African markets and enterprises where prospects seem good.
  • According to the Journal, in the past 18 months, Russian investment bank Renaissance Capital has hired about 120 people in various African nations to coordinate an effort in that area.

We know another little country with a few promising resources..