The world is changing, fast
After Argentina was — at the end of a long, drawn out process — denied financial support from the IMF and left with no choice other than default and devaluation, the US Treasury encouraged the IMF to provide a large backstop to both Brazil and Uruguay. That strikes me as the right metaphor for tonight. But rather than worrying about the rest of the world, the US authorities now are worried about the health of the United States’ own financial system.
Lehman failed, at least in part because the Treasury and Fed were not willing to put taxpayer money on the line to help Lehman.
Merrill accepted Bank of America’s offer. And one assumes — based on Yves Smith’s analysis – that the Fed was quite happy that Bank of America was willing to bid for Merrill.
AIG is on the ropes and needs cash, which could imply that the type of institutions with access to the Fed’s liquidity window keeps expanding.
The Fed certainly is going to accept a broad range of collateral to try to avert John Jansen’s worst fears.
Felix is hoping that the deal for Merrill — together with the expansion of the Fed’s liquidity facility — saves the day. He defines short-term success as a fall in the equity market of less than 5%:
If AIG hasn’t collapsed after New York markets open and the broader stock market is down less than 5%, all that will mean is that there hasn’t been a systemic meltdown yet. It’s going to take a long time to liquidate Lehman and unwind all of its positions, and nobody has a clue how that’s going to play out.
I personally would pay more attention to the credit markets than the equity market. Partially that is because I understand credit markets better than equity markets. But that is also where it would seem, at least to me, the real shock may lie. Lehman’s likely liquidation implies, I suspect, that some of Lehman’s creditors won’t get paid in full or on time.*
The US banks need to rollover a lot of debt over the next few months. Debt was was issued two years ago, back when the market was driven by greed rather than fear, is now coming due. The bankruptcy of Lehman could be more of a surprise to the debt market than the equity market; after Bear, the risks of holding equity in a major US bank were pretty clear. Up until now, though, unsecured creditors of large financial institutions generally have been protected from losses.
Back when the New York Times Magazine profile of my former boss/ co-author of “Bail-ins and Bailouts” came out, I said, more or less, that I would think the current crisis was over when it was clear that Nouriel Roubini was too pessimistic. Right now, though, things are still playing out far too close to his script for comfort.
* If this is wrong, do let me know — I am not at all an expert on how this will all unfold, and who exactly will be taking losses.
[...] –Brad Setser [...]
I did no take your August post to mean you thought that the worst was over.
You could share a bit of that medal I would think.
You also do very good work and listen to the “common man” via your blog.
The big question is how the system of credit default swaps is going to work or not. In the last two weeks we’ve seen a stream of unprecedented defaults. A lot of the people that bought bonds from investment banks also bought what was basically credit insurance, and this is the first time that this system has been tested.
Also “credit market” in investment banking means something different from investment in bonds. What it means is a market in credit instruments. Almost no one buys a unsecured bond in a large corporation. Usually you can also buy a credit dfault swap which is basically life insurance for a major company. The trouble comes in is what happens when the seller of corporate life insurance also starts to have problems and that is what is happening with AIG.
What we are about to see is how the system unwinds itself. The absolute worst cause scenario that could unfold over the next 72 hours is a domino effect as CDS losses causes a chain reaction of meltdowns. Or maybe not. We shall see.
This is truly financial history in the making, and no one really knows what the world of finance is going to look like at the end of this week.
I’m not terribly worried about the rollover of debt because it’s likely that the Fed will adjust interest rates and move liquidity around to avoid a crisis. It if looks like that we will run into deflation, the Fed can increase liquidity in the system.
People are working overtime tonight figuring out who is going to get stuck with losses. One thing about finance is that time is a very important factor. It makes a huge difference is you have years to figure out what to do (Chinese NPL’s of the 1990’s), a few months (the Fannie or Freddie) or when the speed of decision making is measured in hours (which is the case with Lehman and was also the case during the Mexican Peso crisis of 1982).
This is truly historical since no one knows what is going to happen in the next 24-48 hours, and we could be in a situation where by the end of the week, this is all seen as a minor hiccup, or we could be at the start of a second gredit depression.
It was also a freak event that the major Asian markets (Tokyo and HK) were closed today which gave people a few extra hours to do some planning.
Something’s fishy with the whole BoA-Merrill Lynch deal. $29 a share? Even after the Lehman fiasco exposes just how dire the toxic sludge in these firms has become?
I don’t buy it (pun intended). Bank of America would be dragging its own value down into the abyss with all the less-than-transparent obligations that Merrill-Lynch is stuck with– their shareholders would eviscerate BoA on Monday if these deal were realized.
The news reports have actually been saying that the BoA-Merrill Lynch deal is tentative and not yet finalized. I suspect this means that BoA is establishing itself as the chief suitor, but will then pull out of the deal (as Barclay’s did) when they “come to their senses.”
Merrill will then nosedive and self-destruct just as Lehman has, but BoA will then be first in line to pick up the choicest pieces.
Frankly, I don’t see any safe have anywhere in this industry– it’s all about to unravel. I’m not a bear but the imminent catastrophe is obvious to anyone with a working pair of eyes and ears.
Morgan Stanley is next– if anything they seem to have been a little better at hiding their liabilities than Lehman was, but they’re toast. They can’t hide that toxic sludge for long. Then Goldman-Sachs. If anything G-S might be the worst off of all– they self-insure, and if nothing else because of they’re size, they’re exposed even worse than Lehman was to the toxic waste.
And it doesn’t even stop there, b/c I doubt that the pure investment banks will be the only ones to crumble. JPMorganChase is right in the firing line. I sense they’re going to come soon to regret the BearStearns “rescue”– it’s becoming apparent how many of the CDO’s, credit swaps and derivatives were melting down off the books. Besides JP’s own independent liabilities, the graveyard will be calling for them before the year is out. BoA was already heavily leveraged in the radioactive waste, and the real estate market continues to crater. Citibank? Toast.
Heck, even the regionals like Wells Fargo are gonna get clobbered– Wells Fargo is exposed in the regions of the country worst hit by this crisis, and still getting worse.
And we haven’t even gotten to the insurance crisis yet. AIG? Just the tip of the iceberg.
I frankly don’t have the foggiest idea where to put one’s money these days. If nothing else, I’d be getting the heck out of anything dollar-denominated ASAP. Not even the old mattress-stashing would make any difference at this point– if Bernanke (as expected) calls an emergency session and guts the interest rates, we’re gonna have Zimbabwe in North America and inflation turning those dollars into something more worthless than paper towels.
All my smartest college classmates are actually leaving the country, Lord knows where one can go. I guess it helps to have some Chinese or Korean background. Maybe a German great-great-grandmother in there somewhere (Germany/Austria still seems pretty decent for high-tech science). The wealthy Gulf States maybe. South America seems to be a big draw for the good life if nothing else– ironic that South America was mentioned in this post itself!
This is honestly the scariest time since 1929 for our economy. And if anything even worse– at least back then, we weren’t bankrupting our Treasury with social programs, thousands of costly nukes and more foreign wars than we can keep track of.
One thing about crises is to take a deep breath and not let the psychology overwhelm you. Yes we may be seeing the end of the world as we know it, but when the old world dies, a new one is waiting to be born.
And no point leaving the country, there is no place on the planet that you can hide from this mess.
And one bit of hopefulness is that the European markets are only down about 5%. Given the magnitude of what has happened, that is extraordinarily good news.
Here the legal bankruptcy document for Lehmann. Japanese banks are at the top of creditor list for bank loans, but the state-owned Bank of China is also facing a $50 million default. Taiwanese Banks will also be hit hard by the Lehman bankruptcy. Attached list of the top unsecured claims:
http://blog.rebeltraders.net/wp-content/uploads/2008/09/show-case-doc.pdf
The numbers are staggering !!!!
Those are only the direct inter-bank borrowings. The big question mark is in the $138 billion in bonds that Citibank holds in trust for Lehman, those aren’t directly owned by Citibank, and it will be interesting to see who does hold them.
CNBC kind of admits that it is game over for Wall Street….
http://www.cnbc.com/id/26718389
“This is a perfect storm in a perfect storm,” said Justin Urquhart Stewart, investment director at 7 Investment Management. “It’s a return to pure capitalism, the survival of the fittest — government can’t and won’t bail everybody out.”
Nope. Old games are over. New games are starting. Anyone the market is only down 2-5% right now so it looks like the levees and dikes are holding. We’ll know more by the end of the week, but it doesn’t look like a meltdown is happening.
Twofish,
We are probably only in the 2nd to 3rd inning of the credit bubble meltdown. Moreover, US accounting standards permitting Level-3 “mark to imaginary model” for valuating securities are an absolute joke. The entire US banking industry resembles Enron.
The lack of any market sector leadership and the fact that the US stock market can’t produce any sustainable rally demonstrates that we are headed for much lower levels. Nouriel Roubini, Brad Setser’s buddy, predicts at least another 15 percent drop in the market. Just wait till the Option ARM and the even larger Alt-A mortgage bombs explode. The overbuilt commercial real estate bomb will follow.
The US banks following in the footsteps of the Japanese are still refusing to write-off rapidly devaluating Level-3 assets. The largest credit bubble in world history can’t be solved within a year or two. If we are lucky, it will be a decade or longer of economic stagflation.
Twofish: Anyone the market is only down 2-5% right now so it looks like the levees and dikes are holding. We’ll know more by the end of the week, but it doesn’t look like a meltdown is happening.
That’s a glass-one-tenth-full view. This is a crisis. Some credit is due to Bernanke and Paulson for drawing a line on direct government bailouts.
What a difference a day makes. I think we just get a meltdown in selected stocks this week, but the Fed goes back towards worrying about downside risks to the general economy, more so than inflation. It may be that the Saudis even co-operate by pumping lots of oil into a falling dollar.
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Fed Fund Futures Flip, Pricing a 92% Chance For a Rate Cut
Monday, 15 September 2008 12:15:09 GMT
Written by David Song, Currency Analyst
Fed Funds Futures are pricing a 92% chance that the FOMC will cut 25bp to leave the benchmark interest rate at 1.75%, which has jumped from 0% from last week. Meanwhile, Fed Funds are also pricing an 8% chance that the MPC will leave the interest steady at 2.00%, which has fallen from 98% from the prior week. The recent developments in the U.S. financial sector have clearly taken a toll on the interest rate expectations for the Fed, which would only fuel bearish sentiment for the dollar going forward.
From Bloomberg, Lehman bankruptcy leaves Asian banks holding the financial losses
http://www.bloomberg.com/apps/news?pid=20601170&refer=special_report&sid=ai1w0bUy9iNA
According to the bankruptcy papers thrown together over the weekend, the list of Lehman’s 30 biggest unsecured creditors is dominated by Asian financial institutions: Aozora, Chuo Mitsui Trust, Sumitomo Mitsui Financial, Mizuho Corporate Bank, Shinkin Central Bank, Bank of China and so on.
Who else did you imagine would be left holding this bag? Who else did you imagine was propping up the system? For 25 years Asian financial firms have been amazingly indulgent of U.S. investment bankers.
What do you think they’re saying about them — and us –now?
Damn Roundeye. Lie like crouching snake, pay like hidden dragon.
Why this always happen to us? What are we doing wrong? Negative real interest rates? Chinese banking no good?
DC: Moreover, US accounting standards permitting Level-3 “mark to imaginary model” for valuating securities are an absolute joke. The entire US banking industry resembles Enron.
Whatever problems exist are not those of the US banking industry. They are problems of the global banking industry. There is nowhere to hide and nowhere that is safe.
DC: If we are lucky, it will be a decade or longer of economic stagflation.
Which is going to destroy the Communist Party of China if it happens. There are probably a lot of nervous people in Beijing right now.
DC: What do you think they’re saying about them — and us –now?
I bet what people are saying in Beijing, Tokyo, and Shanghai right now is “we hope to heaven that Wall Street limits the damage of this problem, because if the global financial system goes, it will tear everyone with it.”
Beijing will do everything it can to save Wall Street, because if Wall Street self-destructs, then so does the Communist Party of China.
Personally, I think everything is going to work out more or less OK because there are just too many people with too much to lose if it doesn’t.
Twofish,
Do you understand the concept of “too big to bailout”? In the past fiscal year, almost one-third of Chinese national savings was sent to the United States. That precious capital has been misallocated into worthless GSE bonds instead of domestic China capital investment, social spending on education and poverty alleviation.
In the not so distant future, even more of Chinese national savings will need to be shipped overseas to the United States to stabilize the financial situation. If the entire Chinese nation sent 100% of its national savings to the United States, it still might not be enough given the actions already taken, from the Housing Bill to the nationalization of Fannie Mae and Freddie Mac, the US federal deficit will double to $800 billion. Hank Paulson doubled the US national debt balance sheet to $10 trillion over the previous weekend with the GSE bailout. Former Goldman Sachs CEO Hank Paulson services are certainly expensive for the US taxpayer.
The big risk is that even if Beijing wants to save Wall Street, is it possible for the Chinese government save Wall Street without destroying China. The nation of Chinese savers does NOT have the economic or national resources to bailout the United States.
I think we are getting close to the point next year where there isn’t enough CB money in the world to cover the US twin deficit.
But if that’s how the world must learn reality, then so be it.
DC: That precious capital has been misallocated into worthless GSE bonds instead of domestic China capital investment, social spending on education and poverty alleviation.
And if I remember correctly you supported policies which encouraged this misallocation (namely the currency peg) while opposing people like Brad who thought that it was a bad idea.
DC: The big risk is that even if Beijing wants to save Wall Street, is it possible for the Chinese government save Wall Street without destroying China.
Which poses a major problem since I happen to think that it is impossible to have Wall Street collapse without destroying the Chinese economy. If hypothetically the GSE’s and US treasury bonds become worthless and exports to the US collapse, then you will destroy the Chinese economy in ways that make the survival of the Communist Party questionable. There is just no way that China can survive extended stagflation in the United States without having some serious economic problems of its own.
Personally, I think that this situation is not as awful as it seems. Market economies have credit cycles and boom and busts and right now we are in bust mode in a way that will likely clear itself out the same way as busts have cleared themselves out before.
But if you are right, then I’m interested in ideas as to what to do? First thing is probably to say a mea culpa to Brad since this is the type of thing he has been worried about for the last five years.
In any case the minds in Beijing that figured out how to keep the Chinese banking system from collapsing in the 1990’s probably have some ideas about how to keep the US banking system from collapse.
Even if the PRC refuses to buy one more dollar of treasuries or agency bonds, it already has enough of a stake that a general collapse of the housing market in the US would devastate the Chinese economy.
Also the government bailout of Fannie and Freddie was primarily a bailout of overseas central banks. The reason Fannie and Freddie were bailed out whereas Lehmann wasn’t shows how much the center of economic power has moved out of the United States.
s Roubini said a few weeks ago, stand alone investment banks will disappear. Lehman seems to be the first. Whether or not BoA pays too much for Merrill (great franchise but who owns it, the firm or the brokers?) there seems to be a tendency among US commercial banks to take the universal banking route. Very wrong according to leading academics, but rational from a managerial oint of view. After the Lehman insolvency, perhaps a new benchmark for too big to fail (the status bank managements require in order to feel comfortable) is needed.
Re Lehman, credit marlets et al: if the Lehnam netting seesion would have resulted in catastrophic losses elsewhere (a necessary condition for a melt down) we would have known by now. Apparently the smart money had departed long ago. hence, no panis, but also no need to feel cherful..
Twofish, let me reiterate global geo-politics once again.
US Dollar hegemony is the geopolitical phenomenon in which the U.S. dollar, a fiat currency, became the primary reserve currency internationally. After the 1973 Middle East oil crisis, only the US petro-Dollar could be used for the purchase of oil. Since China and everyone else needs Middle East oil, everyone also needs petro-dollars for the purchase of that strategic commodity. US Dollar hegemony is de facto backed by US military projection power in the Middle East region.
“US dollar hegemony” prevents the exporting nations especially China from spending domestically the dollars they earn from the U.S. trade deficit and forces them to finance the U.S. capital account surplus, thus shipping real economic wealth to the U.S. in exchange for the privilege of financing U.S. debt to further develop the U.S. financial FIRE economy. Any country that revalues its currency automatically suffers a massive loss in global competitiveness.
Brad Setser refuses to address the geo-political economic reality that US Dollar hegemony is responsible for the rising global economic imbalances. Ultimately there isn’t a “free lunch” in economics, but Dollar hegemony has permitted US deficit spending without tears for the past 2 decades.
DC: To be blunt, I think your analysis is wrong and misstates the fundamental nature of US power. (Actually China didn’t need Middle Eastern oil until about 1990.) But suppose you are right.
What do you think China should do about it?
I get very quickly annoyed at people that complain that the world is unfair and that they can’t do anything to change it. Of course the world is unfair. Of course as the world’s dominant economy power the United States is going to arrange the global financial system to meet its national self-interest at the expense of other nations.
The question is what do you plan to do about it other than complain?
Fundamentally, China has to make a decision as to whether or not it is going to acknowledge US financial hegemony or challenge it, and given that 1) China is *far* weaker militarily than the United States and 2) there is simply no domestic desire in China to be a dominant hyperpower, China is not in a position to challenge the United States either militarily or economically.
Since it is suicidal for China to challenge the United States this means that China must cooperate with the United States.
Also, it is rare that you actually have a choice so when you really do have a choice you need to take it. Where to set the RMB is a choice by the Chinese government. The Chinese government can make a choice to have economic policies that are hostile to exports. This will have bad ramifications toward exports, but if you think that the US economy is doomed, then I think it would be a bad idea to have the Chinese economy tied as tightly as it is to a sinking ship.
on the television we in europe we can see lehman brothers on the television from across the street, and it is only an ordinary office with strip lighting and people carrying out boxes of paper and putting them in the back of automobiles.
and we wonder – all this ‘masters of the universe’ and million dollar bonuses and incredibly complex financial instruments . . . . is that all that is left at the end ? boxes of papers ? and sending someone back to turn off the lights and the high tech advertising sign ?
it would not do to be too stuck on the images of the 1929 wall street crash, like generals who go into a new war always fighting the last one . . .
this one could be different. suppose the plunge protection team could freeze the dow jones at 11 000 ? it just might not be about that, this time.
however true a prophet nuriel roubini, there is usually an element of the totally unexpected in a crash, perhaps simply because the chief actors have prepared defences against everything else.
imagine oil at $40 / barrel, the dollar soaring. well ? when everyone bets the same way, the markets do whatever they have to do to prove them all wrong. it does not have to be this – but it might be something like it.
nimble feet and an open mind . . . predict if you can, but do not fall in love with your own prediction.
@DC
““US dollar hegemony” prevents the exporting nations especially China from spending domestically the dollars they earn from the U.S. trade deficit and forces them to finance the U.S. capital account surplus, thus shipping real economic wealth to the U.S. in exchange for the privilege of financing U.S. debt to further develop the U.S. financial FIRE economy.”
There are two fundamental flaws in this piece of reasoning. To address them, let’s first deal with “the dollars they (exporting nations) earn from the U.S. trade deficit”. Obviously, in order for exporting nations to have trade surpluses and thus foreign currency earnings, it is required that other nations have trade deficits, since the global economy is a closed system in which conservation of matter applies. This holds for whatever foreign currency those earnings are denominated in, so in order to make further discussion simpler let’s assume that gold is the only international trade and reserve currency. No dollar hegemony, no free lunch for anybody, a fair world.
We can now see the first basic flaw in DC’s reasoning: even in the context of a most fair international gold-based monetary system, China would still be unable to “spend domestically the gold they earned from the importing nations’ trade deficit”! (Unless the Chinese population turned to wearing massive jewelry like Indians do.) Which shows that the very concept of “spending DOMESTICALLY the (whatever foreign currency) they earn from the (importing nations’) trade deficit” does not make sense: the foreign currency (whatever it be) earned from foreign trade is for spending it ABROAD! (buying foreign goods, services or property.) And if a country is earning more foreign currency (whatever it be) than what it can wisely spend abroad, the wise path for that country is to start earning less foreign currency, meaning to export less and consume more, meaning in the end to have better lives, just as if someone is earning more money than he can spend in his lifetime, the wise path for him is to work less and enjoy life more.
Which brings us to the second basic flaw in DC’s reasoning: “Any country that revalues its currency automatically suffers a massive loss in global competitiveness.” First, that would happen just as well in a gold-based international monetary system, where Central Banks held gold reserves and managed the exchange rates between their national currencies and gold. And secondly, since, as said above, that loss of competitiveness means to export less and consume more, which in the end means to have better lives, it doesn’t look such a bad thing after all.
Brad:
Your comparison to Argentina is not as I remember. Argentine women had taken the streets carrying frying pans and threatened a coup. Argentine democracy was at risk. The IMF had attached unacceptable conditions to assistance. The govt. would have fallen. The coup would have succeeded. Given that prospect they refused the assistance while the rest of the world immunized themselves from “contagion”.
It worked. But the IMF is now irrelevant.
In some sense the Fed/Treasury response to LEH is similar. The political considerations of extending more govt. financing is more important than the economic. They got away with it with BSC. Any more taxpayer money given to banksters and the whole bunch may hang. The question again is contagion. Immunization now relies on the subterfuge of moving still more assets of questionable value to the Fed.
The outcome is still in question. If they fail the Fed may become irrelevant.
Twofish: ‘I bet what people are saying in Beijing, Tokyo, and Shanghai right now is “we hope to heaven that Wall Street limits the damage of this problem, because if the global financial system goes, it will tear everyone with it.”’
Twofish, please think the unthinkable and expand on the consequences. Has “hope” been good for anything at any stage of the crisis so far? No.
If I was vizier to the governments of the world, I would be advising them all (all those outside the USA), just as a matter of contingency planning, to think about how they might entirely route around the United States economically; to suppose that all their American investments, private and public, suddenly became worth nothing, and suppose that they also bought nothing from the US ever again. Obviously for those states heavily invested in American government bonds, such as China and the Gulf states, this implies a formidable political challenge too, but mostly this is an economic thought-experiment. It is an extreme case, an unrealistic worst-possible case, but for that reason it might suggest left-field possibilities which would turn out to be useful in the real world, if and when things turn out much worse than anyone dares to imagine.
In particular, I think that countries outside of America need to be looking to each other at this point, to find a substitute for those services which they were getting, or which they thought they were getting, from the US. Of course, that’s almost the story of this decade already, in everything but finance.
As for the USA itself, the most optimistic yet realistic take on events that I have seen comes from John Carney of dealbreaker.com, who says:
“The best thing we have going for us is that most Americans were not heavily invested in financial stocks, don’t have outrageous mortgages and have largely sat out the latest financial bubble. Provided we don’t make things worse with ill-advised government meddling, this could be a terrific re-evaluation about where wealth should be invested in our country. In short, unwinding the Wall Street boom should make us a healthier, better country.”
And personally I’d suggest that if you all make it to that point of really starting over, green energy might be a good place to make those investments. It would be a suitable foundation on which to begin again.
gillies — after reading your comment, i was reminded of paul volcker’s comment that the fancy new super-sophisticated shadow financial system has failed the test of the market place.
marco polo — we should talk more about argentina at a later date. the imf did place some absurd conditions on its loans — they basically were meant to be unacceptable to the argentines while showing exactly how much of a fiscal contraction was needed to maintain the peg. even late in the day, the imf wasn’t willing to say the peg itself was the problem, and that the fiscal policy needed to make the peg work was inconsistent with growth (and as you note democracy) and consistent with deep deflation. I do not think this was the imf’s finest hour. but that is a conversation for another time.
dc — i never thought i would say this, but you supplied some interesting links today. if you just didn’t combine it with the ridiculous $ hegemony arguments.
2fish — absolutely right; the real question is who owns the $138b in unsecured …
porter: Twofish, please think the unthinkable and expand on the consequences. Has “hope” been good for anything at any stage of the crisis so far? No.
Hope gets you out of the bed in the morning trying to do something to fix the problem. If someone says “the problem is truly awful, this is what we can do to make the problem less awful” that’s worth listening to. If all we are going to do is sit around talking about how we are doomed, then what’s the point of the discussion.
Markets have psychologies that are self-fulfiling. When times are good you need to keep from getting swept up in that. The same is true when times are bad. People have a tendency to look at what is around them and go crazy, and so you need to take a deep breath and calm down.
The main thing that needs to happen in markets is to have an orderly wind down. It’s a good thing if housing pricings or stocks go down 5%, 10%, 25%, 50% if people keep trading at the low price. I don’t know what the clearing price is, but as long as there is buying and selling, we’ll find the price and life will do on.
The bad thing that happens is that if the markets get stuck. The price goes down 10%, no one buys, no one sells, it goes down 25%, no one buys, no one sells. At this point the market just disappears and there is no price. That didn’t happen in the stock market yesterday.
porter: If I was vizier to the governments of the world, I would be advising them all (all those outside the USA), just as a matter of contingency planning, to think about how they might entirely route around the United States economically.
Too late. It’s not just the NYC that a problem. Markets in Europe and Asia are also falling. As far as the economy goes, we no longer live in a world of nation-states. As far as long term goes, there is going to have to be a discussion about what to do, but I really don’t think that you can disconnect from *any* major nation with the internet around.
This means that we live in one world, and you just can’t laugh at or ignore your fellow human being. I don’t think that this is a bad thing.
Also historically people have tended to underestimate the United States or global capitalism.