And in the case of China and Japan, those countries have historically been content to plow those dollars back into the U.S. financial markets. In fact, alone, the Banks of China and Japan hold more than one-quarter of U.S. Treasury marketable debt. The Bank of China has also diversified into our agency and mortgage-backed securities market. Their involvement has helped to keep interest rates low in the U.S. and allow for greater business activity here. Now, what would happen if, as is being speculated currently, China and Japan chose to pull out of the U.S. Treasury market? The end result is that we could see interest rates rise here, as the U.S. would need to offer higher rates to attract sufficient buyers to finance the federal deficit (annually approximately $400 billion). The higher rate environment also would slow down business activity in the U.S. and probably consumer borrowing as well.

The end result for credit unions would be a slowdown in consumer lending, and a higher interest rate environment, which would increase deposit rates. But, why would they (China and Japan) do that, you might ask.

The fact is that these countries will not suddenly pull the plug. Our consumer demand is still too vital to their economies to risk killing the goose that laid the golden egg. However, things can change. In the case of Japan, their economy has finally come to life after 15 years of dormancy. Next year, Japan has roughly $1 trillion in government debt coming due. To the extent that their population will prefer to buy stocks rather than the low-yielding Japanese bonds they have favored for so long, Japan faces the possibility that their rates could rise higher than they would like to see. The Bank of Japan does have an alternative, however. They could merely let some of their holdings in U.S. bonds mature and use those proceeds to pay down their debt. How much of this would they do? We don't know, but any decline in holdings of U.S. bonds could hurt.

In the case of China, we have longer-term considerations. China is intent on developing internal demand and lessening the need for outside demand (mostly U.S.). This is a very long-term plan. But, at the current pace of growth, China could conceivably pass the U.S. as the world's largest economy by the year 2029. Their need for us will diminish over time as they gain ground on the U.S. We must also worry about politicians in Washington re-erecting trade barriers that would touch off retaliatory actions by China. China now carries a very big stick by owning roughly $800 billion in U.S. dollar assets.

Moving on to how the globe is changing in other ways, China and India aren't the only growth spots on the globe. For the year 2005, all of the sixty largest economies (many of which down the list aren't large at all) reported strong growth in GDP. The traditional powers of the U.S., Europe, and Japan all grew, but at far lesser paces. This growth in emerging markets is evident in the run-up in commodity prices as worldwide demand grows. Some of the price increases in commodities lately have been driven by speculators, but the fundamental outlook for commodities is very strong based on growing global demand. This means that offsetting any inflationary impact of commodity prices may not rest by simply lowering demand in the U.S. Even if the U.S. economy slows, we can envision a time when worldwide demand forces prices higher.

For these and other reasons, the U.S. will be less and less in control of its economic destiny and less of a driver of the world's economic engine. This is not an immediate concern, but it is something we will all be dealing with in the decades to come. Demographic factors such as aging populations in some countries, birth rates, immigration patterns, and emergence of rural populations becoming parts of the industrial work force in emerging economies will all factor into how we deal with our work force, payment for our future obligations, and investor demand.

Strategic analysis of all these factors is key to the ongoing success of our industry. Nonetheless, suffice it to say, as credit unions become more sophisticated, its leaders will need to understand how global factors can impact domestic economic and credit conditions, and interest rates, especially if success is to remain a part of their balance sheet equation.