As history shows us, all empires fall. Roman, British, Ottoman, Greek, Mongol, Ming, Mughal, Austro-Hungarian are just examples of the few “big” ones. Is this a start of the American empire to follow the same path?

At this point, I am not sure. I am still collecting facts and trying to figure out how America is different. Though the clouds on the horizon are of any indication, our future is in a precarious position due to this economic mess and the “consume everything” mantra plus the “politics”.

America is in a fortunate position currently to be able to change course and perhaps maintain/or share the “empire” status. The question is: Are the politicians ready to take the tough steps needed for this change? Is the public ready?

If the current cat-fights among all the politicians continue and the media keeps on sensationilizing irrelevant material, I am afraid that we are all doomed.

Here is a scenario that we are facing today:

China, Japan, India, Europe are the major holders of the US debt. China alone has about $2 trillion of US Currency as Reserves and debt.  We continue to increase the debt(some say we have no choice and I agree). In fact, US can continue this cycle because the world has put all their eggs in one basket and are stuck! Look at this July 2008 chart below for the amount of debt held by foreign countries. In July 2008, it was close to $2.6 trillion! At the end of Jan 2009, this figure is now $3 trillion!!!

Make no mistake about it, the Federal Reserve knows that others can’t really take drastic steps to hurt America. It would be committing suicide for China to dump US holdings or even stop buying the debt in the short term.  China, Japan,  India and others know this and are powerless to do anything about it in the very short term. The key word is “short term”.

From several accounts, China has slowed down the purchase of US debt. In fact, they are “spending” $585 billion into their own country’s infrastructre. They have begun buying “real assets”.

The other area where the “World” got caught is the dependence on the American economy and consumers. Based on the demand in the US, the World kept on producing and their economies got stronger. The party has come to a stop. Their factories are not running at full capacity, if running, at all. Now they have learned a hard lesson. It is like you have one customer who provides 80% of your revenue. Now that customer is dead, per se. What are you going to do? That is the question that China, India (though affected in a different way), Japan and others are dealing with. They are searching for that next “big” customer. For China, it seems that they want the the Chinese, a savings-minded population, to start being consumers. A tough sell, but they do have 1.3 billion people, you know!

Recently, the Chinese government officials have been flexing their muscle. Chinese Premier Wen has called on America to protects “it’s” assets. Chinese Central Bank governor, Zhou Xiaochuan, is calling for multiple Reserve currency rather than the single Dollar presently.

Here is a link that I got today from Yahoo! Finance. China Muscles!

So, what can the US do to avoid this? Caveat: I am not an Economist!

Some of the hard choices I mention above is going to include:

• Moving away from the consuming nature over time. Presently we need this, but, overtime start to reduce once the economy is back up.
• A savings plan should become mandatory. At least 10% of your earnings should be saved regardless of what you are doing in your 401k.
• Become more Energy Efficient and Independent. (However, this is fraught with results that the US may or may not want) - I will discuss this in another blog
• We are currently the space & technology leader. However, this is slipping away fast. We need to re-invest in those areas to maintain our lead.
• Investment in Health Sciences is another one. US used to be known for the top most research in curing diseases. This is coming under attack. South Korea is especially concentrating on this and technology. (Though South Korea did get kicked in the teeth by one of their own scientist few years back for faking “cloning”)
• The Education system here is crumbling. I have the privilege of knowing a “rocket” scientist that works for JPL. He has studied in Europe and is always mentioning how the collegues who have studied here in the US are so far behind. Well, I think most of us know how true this is.
• Transportation systems are a mess. Remember the Metrolink disaster last year? That would not have happened if there was an investment made in the Positive Train Control. Have you looked at LAX lately? Compare that to the Chinese new airport opened last year for Olympics. Link: Beijing Airport
• And I am sure a lot more things other smarter people can outline.
• Finally, politics needs to stop. This is NOT the time to argue the differences and benefits of/between Keynesian Economics, or Classical Economics or the Laffer Curve. This is a moment where the country needs to come together.

US can steer this the right way and prolong the status. But will we?

As a side note, I am not trying to portray China as the “big bad wolf”! Every country has its share of problems. I live here in the US and thus am looking at this from the perspective and benefit for the US. If I was living in China, I would be writing things on how China can cut its dependence from the US.

I wanted to provide a different view to all of you about the ongoing crisis. I will explain different issues over time. For this time, I want to address all the arguments going back and forth about letting big banks fail, letting irresponsible home owners take the loss, put people in jail and so on.

As the title of this blog states, we are damned if we do, we are damned if we don’t!

Let me illustrate with an example to show you what is happening in “one” aspect of things.

I buy a house and take out a mortgage of $100,000. My local bank, “Bank A”, willingly provides me this loan. Mr. Freddie comes to the Bank A and says that he will buy this mortgage from Bank A and pay them $80,000 for it. Bank A would do this since they would not get the full $100,000 loan paid of from me right away. It would take me 30 years to pay that back. So, they would rather have the $80K today and let Mr. Freddie worry about holding out for 30 years.

Mr. Freddie is not worried about being paid either since Uncle Sam guarantees that the full $100K would be paid, if not by me, the willing taxpayers.

So to summarize: My Loan $100K > Bank A lent it to me > Mr. Freddie purchased it > Uncle Sam guarantees it.

So, Mr. Freddie has an “loan” worth $100K on its book. After sometime, Mr. Freddie needs more money to “buy” those really good loans and needs another $80K to rinse, repeat and dry!

It goes to Uncle Sam for these funds. Uncle Sam looks around and says that they will buy from Mr. Freddie, the original $100K loan for $80K. Now here comes the clever part. Uncle Sam then literally types(printing money, creates a loan) in $80K in the computer and transfers that to Mr. Freddie.

So, in summary: Mr. Freddie sells $80K to Uncle Sam > Uncle Sam creates the monies and pays Mr. Freddie > Now Uncle Sam is the owner of the mortgage that it guaranteed in the first place. So if I default on my loan, Uncle Sam is left holding the bag, per se. So, all tax payers are now responsible for my default!

Now, when you read or hear the media go on about how the actions of the government are putting us at risk…think to yourself; we are ALREADY at risk! We HAVE been at Risk. We just didn’t know it or chose to ignore it!

Of course, I am not happy the way things are going. So much damage is being done to the long term prospects of the US, it is beyond comprehension. We have a tangled mess and it is going to be very painful to untangle.

Even China is deep into this mess, regardless of their recent comments.