Let's face it: There's no success in isolation. This is true atnearly every level of society. As individuals, we routinely combineour efforts with others to achieve greater success, as do ourcredit unions. If you doubt this, think of what your credit unionwould look like absent all of your vendor relationships. Withoutthese relationships it's likely that your credit union could notexist.

This fact is even more pronounced for larger companies and,increasingly, the business relationships critical to acorporation's success cross borders. For these large corporations,international trade, currency fluctuations, imports and exports,are second-nature concepts. Their ability to efficiently operate ona global scale is of paramount importance. And while this is truefor many of the financial service providers we compete against,credit unions, while generally not global competitors, still needto be well versed in global activity, and the reasons are many.Why?

The financial services landscape is growing increasingly morecompetitive as product offerings become more commoditized,consolidation accelerates and new competitors enter the market.Additionally, the needs of existing and potential new members areconstantly changing requiring credit unions to review and updatetheir business models. Receiving less focus is the fact that creditunions are also directly impacted by the globalization of commerceand the global capital markets. Everything from currency exchangerates, to interest rates, to monetary and fiscal policy is heavilyimpacted by global activity.

For example, let's take a look at net exports. In its simplestform, net exports is the amount of goods and services that acountry (businesses and governments) sells to entities in othercountries, less the amount of goods and services that country buysabroad. The U.S. historically has been a net importer, that is, webuy more from abroad than we sell. This activity puts dollars inthe hands of those countries that we buy from (according to theWorld Trade Organization, in 2004, the top five were the EU,Canada, China, Mexico and Japan). Of course, these countries buygoods from the U.S. as well, but it is the net activity that, onbalance, leaves more dollars in the hands of foreign countries,primarily China, Japan and the EU.

And in the case of China and Japan, those countries havehistorically been content to plow those dollars back into the U.S.financial markets. In fact, alone, the Banks of China and Japanhold more than one-quarter of U.S. Treasury marketable debt. TheBank of China has also diversified into our agency andmortgage-backed securities market. Their involvement has helped tokeep interest rates low in the U.S. and allow for greater businessactivity here. Now, what would happen if, as is being speculatedcurrently, China and Japan chose to pull out of the U.S. Treasurymarket? The end result is that we could see interest rates risehere, as the U.S. would need to offer higher rates to attractsufficient buyers to finance the federal deficit (annuallyapproximately $400 billion). The higher rate environment also wouldslow down business activity in the U.S. and probably consumerborrowing as well.

The end result for credit unions would be a slowdown in consumerlending, and a higher interest rate environment, which wouldincrease deposit rates. But, why would they (China and Japan) dothat, you might ask.

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

In the case of China, we have longer-term considerations. Chinais intent on developing internal demand and lessening the need foroutside demand (mostly U.S.). This is a very long-term plan. But,at the current pace of growth, China could conceivably pass theU.S. as the world's largest economy by the year 2029. Their needfor us will diminish over time as they gain ground on the U.S. Wemust also worry about politicians in Washington re-erecting tradebarriers that would touch off retaliatory actions by China. Chinanow 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 andIndia aren't the only growth spots on the globe. For the year 2005,all of the sixty largest economies (many of which down the listaren't large at all) reported strong growth in GDP. The traditionalpowers of the U.S., Europe, and Japan all grew, but at far lesserpaces. This growth in emerging markets is evident in the run-up incommodity prices as worldwide demand grows. Some of the priceincreases in commodities lately have been driven by speculators,but the fundamental outlook for commodities is very strong based ongrowing global demand. This means that offsetting any inflationaryimpact of commodity prices may not rest by simply lowering demandin the U.S. Even if the U.S. economy slows, we can envision a timewhen worldwide demand forces prices higher.

For these and other reasons, the U.S. will be less and less incontrol of its economic destiny and less of a driver of the world'seconomic engine. This is not an immediate concern, but it issomething 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 ruralpopulations becoming parts of the industrial work force in emergingeconomies 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 ongoingsuccess of our industry. Nonetheless, suffice it to say, as creditunions become more sophisticated, its leaders will need tounderstand how global factors can impact domestic economic andcredit conditions, and interest rates, especially if success is toremain a part of their balance sheet equation.