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.

Weak American demand for everything from oil to automobiles led to shrinking imports, which fell faster than exports, reducing the gap by 9.7% to $36 billion, compared to the $38 billion Wall Street expected, the Commerce Department said Friday in Washington.

“The narrowing reflects the ongoing economic downturn. U.S. consumers are pulling back and that’s resulting in fewer imports while exports are falling,” Mark Zandi, chief economist at Moody’s Economy.com in West Chester, Pa., told Reuters. “It reflects how bad economic conditions are everywhere.”

For the first time since 1982, total world trade is expected to decline this year as businesses and consumers cut back on spending in response to relentlessly poor economic news. Even China chimed in early this week reporting its exports plunged 25.7% in February from a year earlier, while imports declined 24.1%.

The narrower gap is bad news for the U.S. economy because it mainly reflects a drop in petroleum prices. Excluding petroleum, the deficit was little changed at $21.3 billion.

The numbers used to calculate gross domestic product (GDP), which eliminates the influence of prices, showed the trade deficit widened to $44 billion, the most since October, Bloomberg News reported.

Imports slid 6.7% to $160.9 billion, the least since March 2005, led by a $4.3 billion drop in crude oil purchases. Foreign automobile sales plunged by $3.3 billion.

The Organization of Petroleum Exporting Countries (OPEC) deficit dropped to $3.9 billion, the smallest since November 2003, and the gap with Japan plummeted to the lowest level since 1998.

The shortfall with the European Union was sliced by half from $7 billion in December to $3.5 billion in January.

The largest concern for the United States is the dive in exports, as foreign demand for American-made goods slackened. Exports plunged 5.7% to $124.9 billion, the lowest in two and a half years, as sales of automobiles, computer chips, telecom equipment and drilling gear dropped, the report showed.

U.S. exports of food, feeds and beverages were up marginally in January, but important categories like consumer goods, capital goods and industrial supplies all showed declines.

“It’s not a good report for U.S. manufacturing,” Julia Coronado, a senior U.S. economist at Barclays Capital Inc. (BCS) in New York, told Bloomberg. “This is certainly a sign that the global weakness is feeding into the domestic economy through the export channel.”

After shrinking at an annual rate of 6.2% in the fourth quarter of 2008 – the most since 1982 – U.S. GDP is forecast to contract further this quarter. The collapse in U.S. exports led to a widening in the trade gap that subtracted 0.5% from growth last quarter.

Source: Economic Slump Narrows U.S. Trade Gap to Lowest Level in Six Years