Yesterday, there was a splash in the stagnant economic waters.

A record high trade deficit was announced - $69.9 billion for the month of September. The number is shocking...edging up towards $1 trillion per year. But no one seems to care...or even notice.

Instead, the experts are focused on the Fed...what's it gonna do about rates?

So - you say, "inflation."

We say, "deflation."

What do the markets say? "Both!"

On one hand, stocks, oil, gold, silver - and even housing stocks - rose yesterday. Bond yields are rising too...after edging downward for weeks. Certainly looks like inflation.

Ergo, the Fed won't cut rates.

On the other hand, housing - where most of America's money is located - is slipping. Existing houses are down 2% or so nationwide. Now it looks like new houses are going down too - for the first time in 15 years. The housing deflation is bound to suck liquidity out of the rest of the economy; it only remains to be seen how much. Headlines from different parts of the country tell different stories...but all the stories have the same basic theme: the housing market - once hot, is now growing cold, and the cool air will work its way into the broad economy like a draft through a barn door.

Ergo, the Fed will have to cut rates.

And, peeking beneath the whole housing hoedown, what we find are a lot of icky, creepy- crawly critters. Whoever got the idea, for example, that you actually got wealthier just because your house went up in price? You have to live somewhere, and if your house goes up, generally speaking, so do others, and where does that leave you? Well, one way of tapping your extra 'wealth' is by dying. But we don't know many people who are that desperate for gains in the housing sector. Most of our acquaintances prefer to breathe, even if it means giving up attractive capital gains. The other way to 'take out' that equity is to move into less expensive digs. But what are you really doing? Merely lowering your standard of living to raise cash...and that you can do anytime, even without a housing bubble.

Yet, given Mother Courage by a bubbly housing market, the average American has set off a whole chain of screwy, wormy phenomena. In came the cheap suits, promising the most outrageous mortgage loans the world has ever seen. And then came the expensive suits, packaging the dubious credits into even more dubious MBS (mortgage backed securities)...which ended up on the books of financial institutions run by otherwise sensible people who put their pants on one leg at a time like everyone else.

Meanwhile, the householder set off on a spending spree. This, too, had consequences far beyond the trivial junk with which he filled his rooms and his life. For the junk had to be made and shipped and financed. Thereby, of course, hangs the tale known as 'globalization'...upon which also hangs the U.S. trade deficit, which happens to be the subject of today's little reflection.

One of the Three Big Challenges faced by the U.S. Empire is that it is losing market share. That is a loose way of addressing a number of related trends.

1. Wages in the United States are stagnant. Those in China, India, and the rest of Asia, are soaring. Relatively, Americans are getting poorer. Americans are also getting poorer in real terms - but since practically the entire world believes the opposite, the burden of proof is on us...and we don't have time for it today.

2. The United States no longer has much of a technological advantage. Technology is shared quickly throughout the world, and today Asian universities turn out engineers, while ours turn out people specializing in sports therapy.

America no longer has an engineering...and thus, manufacturing...advantage. In fact, what it really has is a big disadvantage. Factories in the United States are old and derelict, and there is no capital to replace them. Meanwhile, the wages of American workers are so far above those of Asians that it makes no sense to invest in new productive facilities in America, anyway.

3. The United States no longer has a financial advantage. While Wall Street used to dominate the money world, now huge fortunes are being made overseas. Persistent trade surpluses have given the Asians enormous capital sums, on which Americans count, not only for capital investment...but to support the imperial lifestyle of consuming and spending...on misbegotten programs like the military occupation of Iraq, for one thing.

That these trends are underway is beyond question. Every day that goes by, Asians add to their wealth and power. That these trends will continue is, we admit, a matter of guesswork. We can imagine many interruptions. But we can't see why they wouldn't generally continue.

Which is no skin off our nose...but it does pose a serious challenge to the Empire. For we know of no case in history where an empire depended on its rivals for money and still managed to stay afloat. Soldiers, after all, must be paid. Weapons must be bought. Bread and circuses must be provided. "He who pays the piper calls the tune," goes the old expression. In the late Roman Empire, when barbarians were called on to defend Rome, they quickly took over. Currently, China is the biggest single lender to the United States, while Japan has the largest pile of U.S. debt in the world. Surely, the modern day creditors will also want a say in who is paid, how much... and soon.

Bill Bonner is the President of Agora Publishing.  For more on Bill Bonner, visit The Daily Reckoning.