March 22, 2006

We are witnessing – both in the Fed’s "flow of funds" and with real world flows of finance - the consequences of many years of unrestrained asset and speculative-based Credit growth. The current explosion of non-productive Credit Inflation literally required decades of (U.S. and global) Financial Sphere and Economic Sphere "evolution." It has been amazing to me that the economic community has generally disregarded the monumental changes that have transformed both finance and the nature of economic output. Instead of thoughtful and judicious analysis, carelessness conquered and repressed. It is a New Era, they preach to us. Credit growth doesn’t matter; Current Account Deficits don’t matter; mushrooming leveraged speculation and derivatives markets are healthy for the system; inflation has been pulverized and the Fed has complete and masterful control of both THE price level and the economy's growth rate.

As diligently as I have tried, my analytical efforts have been futile. It has been more than a challenging exercise to explain in real-time the various corrosive aspects of Credit and Asset Inflation, as well as the highly deleterious effects of Credit Bubble "Blow-offs." It has been a struggle to comprehend and illuminate the characteristics of a Credit system where the demand for borrowings has minimal impact on the price of (unlimited) finance. My view of the great risks associated with asset markets and economies distorted by leveraged speculation-based liquidity has gained few adherents. Even subsequent to the spectacular technology boom and bust, the analysis that booming corporate profits and cash-flows are a Credit Bubble Phenomenon simply hasn’t resonated one iota. It has been virtually impossible for me to elucidate why ongoing enormous huge consumer sector debt growth and the disappearance of "savings" is problematic. Ditto the notion that Credit Bubble-induced wealth disparities and unjust wealth redistributions will eventually lead to myriad animosities and backlashes, including sentiments supportive of "protectionism" and antagonistic to free markets. I have never adequately made the case why it is so vital for our nation to be much more self-sufficient.

As easy as it seems that it should have been, I don’t feel I effectively countered the absolute nonsense that our Current Account Deficit is driven by unrelenting global "capital" inflows. And I have not even come close to shedding light on the reality that unchecked – and inevitably unwieldy and unstable - global finance has been a commanding force within what the New Paradigm crowd trumpets as virtuous free-market "globalization."

Why then, you may question, do I suspect that Credit Bubble-like analysis will garner more attention going forward? Well, I believe the Fed and global central bankers may finally comprehend that they are facing a very serious problem – that Credit and speculative excesses begetting greater excess demand a true tightening of global financial conditions. Importantly, hope that a cooling housing market will obligingly chill the Bubbling U.S. economy is fading rapidly. As the "Flow of Funds" confirmed, the Credit system is currently firing on all cylinders and the Bubble economy has a full head of steam. The U.S. Current Account and Global Imbalances are poised to only worsen, fueled by Bubble dynamics that now command Credit systems and asset markets around the globe. Expectations for a slowing U.S. are shifting to fears of a runaway Global (Credit) Boom.