While Washington’s all-powerful ego may have our leaders believe they still control our fiscal fate, they lost that power long ago. Now, the Fed and the Treasury may dictate who gets what, but China decides how much and when.

That’s scary.

After yesterday’s unnerving trade-deficit report, Americans are waking up to Beijing’s power and its dangerous shenanigans. If it continues unabated, this nation’s role as a supreme power is over.

It is absolutely no coincidence China unveiled new banking reserve requirements on the very same day the Commerce Department reveals the largest trade gap in ten months. With a seriously undervalued currency working to its advantage, China needs to appear like it cares about America’s financial future.

In reality, we know the truth. China doesn’t care. It already owns us.

All across the globe, calls for yuan (China’s currency) appreciation are growing louder by the day. Of course, you won’t hear much from the Obama administration. After all, it’s hard to talk when an important appendage is getting squeezed in a vice.

But France’s Nicolas Sarkozy has the, um, guts to say what needs to be said. He doesn’t have a $400 billion trade imbalance to worry about. Flat out, he tells the world “The monetary disorder has became unacceptable.”

But as American voters have learned. Talk is cheap. It won’t get you anywhere, especially with China.

If America is not willing to politically attack Beijing’s manipulation, it will have to do it by good old-fashioned belt tightening. Stop asking China for so much of its goods and free cash and the country’s ears will quickly bend our way.

Obama has his chance to stand up for you and me next month. But will he do it? Has he ever?

The political and financial pundits will be all over the president in February as he reveals his latest budget proposal. If he does what is best for this country, this will be a watershed event for the world markets.

But if Obama falls to the pressure of ever-political Pelosi and the constituents that elected him, it will be a non-event that proves we are enslaved to Asia.

As for me, I’m hoping Obama does what he’s promised (for a change) and cuts the nation’s spending by at least 5% next year. That would show China that we’re not ready to lie down just yet. Even better, it would slow down our government’s massive growth.

You and I know Obama is not about to cut tens of billions of dollars without slipping an equal amount through some sort of accounting loophole, especially when the Peace Prize winner is about to ask for another $33 billion on top of an already record-shattering defense budget.

If all goes as planned, Obama will allocate close to $750 billion in Defense Department spending next year.  Who will be lending us that money? You guessed it, China.

But don’t expect that to be a line item on Obama’s upcoming budget. If Bush managed to hide defense spending, you know this “ultra-transparent” administration will find an even better way.

We are in the midst of a critical year for this country’s fiscal fitness. By my calculation, we have not fallen of the cliff yet, but the ground beneath us is crumbling. If we don’t swallow our pride and jump to safety now, we will likely never get another chance.

China has open arms, awaiting our fall.

*** As investors, this is heavy stuff. If the value of the dollar falls, so does our wealth. If national security weakens, so does our wealth. And if our taxes rise, we lose even more wealth.

The future is scary. But inaction will make it even worse.

For many investors, gold is the fallback. But I don’t buy it. If America fails, Washington will either steal your gold or unload its own onto the market.

Diversification is the key. If you are holding a portfolio filled with domestic stocks, you are sitting on a time bomb. You don’t want to own American companies when the Chinese are increasing their share of the global market. You want Chinese companies.

And you want Indian firms. And you want Japanese companies. And you most certainly want exposure to Australia’s vast natural resources.

You don’t need any more exposure to the land of broken promises and empty rhetoric. Talk is cheap and Obama’s only making it cheaper.

David Stevenson (MoneyWeek, UK):

It’s not been a great week for British bankers.

There’s the ongoing spat between RBS and HM Government over how much the former’s heavy hitters can pay themselves in bonuses. Then there’s the embarrassing yet somehow inevitable revelation that our banks are the ones most exposed to Dubai – with RBS top of the pile, naturally.

Meanwhile, French President Nicolas Sarkozy has been unable to disguise his glee that Europe’s new finance minister is a Frenchman, who he clearly believes will take the City down a peg or two.

But these are just niggles compared to the real dangers the banking system faces.

The cheap money that the UK’s lenders have been enjoying is about to dry up, for one thing. But worse still, while central banks have been flooding the world with money, a dangerous imbalance has been building up in the banking sector…

Click here for the rest of Mr. Stevenson’s insightful article at MoneyWeek, UK.

This from Money Morning:

The leaders of 20 of the world’s most developed nations, the G20, will convene in Washington D.C. on Nov. 15 for an emergency financial summit considered by many to be the 21st century version of the Bretton Woods initiative of 1944. This will be the first chance for European leaders – many of whom blame the current financial contagion on U.S. free market capitalism run – to press for an overhaul of a global financial system the United States has dominated for more than 60 years.

The summit will “seek agreement on principles of reform needed to avoid a repetition of the problems and assure global prosperity in the future,” U.S. President George W. Bush, European Commission President Jose Manuel Barroso and French President Nicolas Sarkozy said in a joint statement.

However, Barroso was more explicit – and less diplomatic – earlier this week when he said that  “we need a new global financial order.”

President Sarkozy has also expressed his desire for a more dramatic remaking of the current financial system, which he says “has distanced itself from the most fundamental values of capitalism.” It was the French president who earlier this week pressed President Bush to call a summit of the G8 and include the developing nations of India and China.

Sarkozy, over the past week, outlined some of the broad principles of reform he hopes to achieve. Specifically he argued that “no bank that works with government money should be allowed to work with tax havens” such as the Cayman Islands. He also raised the issue of curbing executive pay.

“No financial institution should escape regulation,” the French president said, referring to hedge funds and private equity firms. And the world’s most prominent credit agencies – dominated by such U.S. institutions as Moody’s Corp. (MCO), Fitch Ratings Inc., and Standard & Poor’s – should have their role in the global credit market reduced after their “scandalous” behavior.

Sarkozy isn’t alone either. The European Union (EU) is also on board with tougher regulations on hedge funds, limits on executive pay, and new rules for credit rating agencies. And British Prime Minister Gordon Brown, who has been instrumental in pushing for reform, has called for 30 cross-border “colleges of supervisors” to be established by the end of the year to monitor the activities of the world’s 30 biggest banks.

Indeed, the recent rash of criticism from leading politicians is indicative of the prevailing sentiment in Europe that the failure of U.S.-style free market capitalism is most to blame for the credit crisis that has put the world economy at risk of a recession. For Sarkozy, Brown and others, reform will not end with increased oversight of financial institutions but extend to the fabric of the global financial system, as well as the U.S. dominance that lies at its heart.

“Europe wants it. Europe demands it. Europe will get it,” Sarkozy said in reference to global financial reform last Saturday.

And while President Bush has insisted that the United States will seek to preserve the foundations of democratic capitalism – a commitment to free markets, free enterprise, and free trade,” Sarkozy has branded the lax regulation that has become the hallmark of the U.S. economic philosophy as a “betrayal of the spirit of capitalism.”

To Europe, the capital excess that is behind the global financial meltdown epitomizes the behavior of an America that has essentially squandered its role as the standard bearer of global finance.

“We cannot continue accepting the increasing deficit of the world power,” Sarkozy said. “Americans for three decades have been living over their limits.”

Bretton Woods – Then and Now

In 1944, the United Nations Monetary and Financial Conference – a collection of 740 delegates from 44 Allied nations – convened in Bretton Woods, N.H. The goals were to prevent a repeat of the Great Depression and facilitate the reconstruction of Europe following World War II.

After three weeks of deliberation, delegates agreed to a number of principles that established the rules for commercial relations among the world’s major industrial states and served as the foundation for today’s financial system. To this day, that complex plan is known as the “Bretton Woods system of monetary management.”

The nations participating agreed to fix their exchange rates to the dollar. The dollar was, in turn, fixed to gold at a value of $35 per ounce of gold bullion.  The conference also led to the formation of the Bank for Reconstruction and Development, the General Agreement on Tariffs and Trade, and the International Monetary Fund (IMF).

The Bretton Woods system met its demise in 1971 when U.S. President Richard M. Nixon severed the link between the dollar and gold. Most major world economies now float their currencies. However, such Bretton Woods institutions as the Bank for Reconstruction and Development and the General Agreement on Tariffs and Trade (GATT) live on in the form of the World Bank and the World Trade Organization (WTO), respectively. The IMF, meanwhile, is currently negotiating broad-based bailouts for Iceland, Ukraine, Hungary, and Pakistan.

And analysts aren’t confident that the upcoming round of dialogue will produce the “very large and very radical changes,” that British Prime Minister Gordon Brown has called for and Sarkozy has seconded.

The original Bretton Woods conference took years of coordination and planning. It was also a three-week gathering of the world’s foremost economists, including John Maynard Keynes – not an impromptu political salon for world leaders to pontificate on the obvious shortcomings of the current financial system. And as the IMF’s continued intervention in many struggling world economies illustrates, many of the old Bretton Woods Institutions still have value.

“Things like this that produce real results for the world are planned years in advance,” Edwin M. Truman, who was an assistant secretary of the Treasury under U.S. President Bill Clinton, told The New York Times. “The notion that you’re going to have something come out of this in three months is probably naïve.”

The timing of the conference is also precarious, as it will come just 11 days after a new U.S. president is elected and just a few days before President Bush takes his last official trip abroad. The U.S. president will be joining an annual summit of Asian-Pacific leaders in Peru.

The meeting is being planned in such haste that the White House was not yet certain where it will actually be held. And with so many nations participating – not to mention a lame duck U.S. president – it unlikely the November summit will achieve anything substantive.

Still, there remains the hope that at least a framework of discussion – and perhaps even an outline for reform – can be established.

Instead the leaders who attend will be challenged to “agree on a common set of principles for reform,” White House Press Secretary Dana Perino told The Times. It will then be up to financial experts “to put meat on the bones when it comes to fleshing out the principles.”

Source: Will Calls for a “New Global Financial Order” Result in a Second Bretton Woods and the End of U.S. Dominance?

Violence has shut about 20% of Nigeria’s oil production since early 2006.

“The market is so concerned about supply that just about any headline can unnerve traders,” said Phil Flynn, of Alaron Trading. “Once prices began moving higher, there was a massive move to purchase futures.”

Also yesterday, the International Energy Agency said it will attend talks convened by Saudi Arabia on June 22 between producers and oil-consuming countries in an environment of record oil prices.

“We would welcome an opportunity to act collectively to reassure the market about future demand and supply balances in order to change the perception of extended tightness,” said IEA Executive Director Nobuo Tanaka.

Source:  Oil Rallies as Roller Coaster Continues - Nigeria Moves to Stabilize Production

French President Nicolas Sarkozy said on Tuesday the European Union should consider capping sales taxes on fuel products if oil prices rose further but his proposal got short shrift from Brussels. Sarkozy also suggested siphoning off extra revenues from sales taxes on petrol to create a fund for professionals, such as fishermen protesting about the price of fuel, who are hardest hit by the jump in energy prices.

“Oil has gone up 60% in 6 months putting big pressure on US household budgets,” says Bill Bonner in The Daily Reckoning.

“Now, instead of taking the hint – that it’s time to go in the other direction, by raising rates to head off rising prices – speculators think Ben Bernanke will continue battling deflation with further rate cuts. Maybe, maybe not… but our guess is that it doesn’t matter.

“Even if the Fed raises rates, it is unlikely to raise them enough to block the consumer price inflation already in the pipeline.”

The biggest laugh The Mogambo Guru has had all week was from Bloomberg.com reporting that “European consumers are ‘suffering as surging food and energy prices erode the value of their wages’, finance officials said.” The article continues that this is “urging governments to boost spending to help the poorest deal with the fastest inflation in 16 years.”

“Consumers are suffering because the stupid European governments boosted spending for a decade or more, the money financed by debt, and it is all of this spending that has made the purchasing power of the euro to fall,” says Mogambo. “And now the governments are going to boost spending some more Hahaha!”