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Financial historians will reflect back on this period’s prevailing complacency, especially with respect to the massive U.S. Trade and Current Account Deficits, with astonishment and disbelief. Yet for now years of Credit and asset inflation – parceling out unimaginable financial rewards along the way - have Wall Street reassured that There’s Simply Not an Imbalance Not to Love. The Street now appreciates that massive and intractable Trade Deficits provide the fountainhead of global liquidity overabundance. Moreover, the markets keenly recognize that the Bernanke Fed (like Greenspan’s) is content to acquiesce to deficit and liquidity excesses. There is today no constituency for reining in the Bubble(s)….

Bear Stearns’ chief economist David Malpass provided commentary this week to The Wall Street Journal – "Embrace the Deficit." Mr. Malpass did a commendable job articulating Wall Street’s dangerously flawed analysis of Credit Bubble-induced imbalances….

Mr. Malpass: "The trade deficit is the mechanism allowing consumption and investment in the U.S. to grow faster than in Europe and Japan. The issue for the U.S. is whether it's worth the interest costs. It’s the same question facing a small business: Should it borrow money to expand the payroll, train employees, buy land and machines, conduct R&D, build inventory?"

My comment: The U.S. Bubble economy has been sustained in 2006 only through the massive expansion of Credit (certainly including securities finance/leveraging!) – more than last year but less than next. But in no way is the Trade Deficit the "mechanism allowing consumption and investment in the U.S. to grow faster…" Instead, the deficit has evolved to become one of the prevailing unavoidable consequences of the Credit Inflation required to hold the downside of the Credit Cycle at bay. Of course, Wall Street, politicians, and the Bernanke Fed will work in earnest to avoid the downside of Credit excess. And, the way these Credit booms work, things tend to run amuck on the upside when they are turning most susceptible to faltering to the downside.

And, yes, as difficult as it is for me to accept, "they" really have come to Embrace the Trade Deficit. I guess "they" have no choice. As is often said, "people will believe what they have to believe." All the same, it’s been stupefying to witness over the course of many years the seed of this spurious notion mature into a full-fledged national self-deception – ripening to the point of achieving ratification from top policymakers (including our Fed chairman), affirmation from the financial markets, and acceptance throughout. Students of economic history are all too familiar with the repeated bouts of turmoil, wreckage and revulsion – the legacies of absolutely ridiculous notions that somehow came to be readily embraced in the heat of intoxicating booms. Reading Mr. Malpass’s piece yesterday – and knowing that his views would be anything but dismissed as bullish tripe – left me again with that uncomfortable feeling that we’re living today in one of those extraordinary periods that will be studied and contemplated for many decades to come.

Doug Noland is a market strategist at Prudent Bear Funds. Their website is www.prudentbear.com.