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The U.S. Current Account Deficit doesn’t get the Credit it deserves for its paramount role in fostering ongoing global liquidity excess. Basically, our Credit system now creates and disburses $1 Trillion of new IOUs – additional purchasing power – to the world each year. As long as global central banks and the leveraged speculating community step up to "recycle" much of this liquidity back to U.S. debt markets, this perpetual "money" machine works as well as subprime finance appeared to work in 2004/05. However, the Insuperable Credit Bubble Dilemma is that over time the quality of the underlying debt deteriorates progressively until – as it did recently with Wall Street and its subprime exposure – there reaches a point of recognition that risk has grown unacceptably high.

The problem for "Vintage 2007" U.S. "Ponzi" finance is that it has insidiously become acutely vulnerable to a flight away from U.S. securities markets. With major Credit problems on the horizon, U.S. mortgage finance is now dangerously vulnerable to any spike in market yields. The already suspect quality of much of the new M&A related debt is further vulnerable to a jump in rates, a stock market break, liquidity dislocation and/or economic downturn. And the massive agency debt market is an accident in the making, while the entire U.S. financial sector’s debt structure is increasingly suspect. The greatest vulnerability could very well be "Vintage 2007" structured finance – CDOs, CPDOs, CDS and derivatives generally.

U.S. securities markets continue to lag much of the rest of the world. Yet there is an ingrained market perception that financial tumult/crisis is invariably instigated at The Periphery. Participants have been conditioned to believe that risks and excesses are greatest with the inherently fragile "emerging" markets. These markets have also tended in the past to perform as credible "canaries in the mineshaft," warning of more generalized financial turbulence. So with emerging markets again trading well and crude and commodities on the rise, complacency with respect to the general liquidity backdrop has returned with a vengeance.

Here’s where the markets could have it gravely wrong: the greatest vulnerabilities associated with the most egregious (ongoing) excesses today reside not at The Periphery but at The Core. Indeed, current global liquidity excesses are now exacerbated by heightened excesses and flows away from The Core, in the process masking heightened securities market fragility throughout The Core. To be sure, the confluence of $1 Trillion "Ponzi" foreign-sourced funding requirements and suspect "Vintage 2007 and beyond" U.S. debt creation should keep us all on guard.

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