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The next financial crisis will be much less agreeable. For one, I believe the general nature of leveraged speculating is different today. The type of the underlying assets being financed (distorted and inflating global assets) is altogether different, and the general inflationary/liquidity backdrop is unrecognizable from 1998. Whereas LTCM speculations were primarily Credit spreads and various rate-arbitrages, I fear the prominent trades today are more of the global carry trade variety. These involve borrowing in low-yielding currencies to finance speculations in instruments of higher-yielding currencies. This recalls SE Asia, Russia and Argentina.

Objectively surveying the global environment, one can surmise that today’s leveraged speculations are financing gross and unsustainable distortions (including U.S. over-consumption and global asset inflation). This implies especially weak underlying Credit instrument fundamentals, basically a non-issue back in 1998. To what degree leveraged speculations have been financing our Current Account Deficit is unknown, but this could prove to be a huge issue in the event of a currency market disruption. One can envisage a scenario where the Fed’s best intention of supporting the marketplace in providing Credit to "worthy borrowers," is undermined by the deteriorating view of U.S. creditworthiness. There is a huge risk associated with financing serial current account deficits and asset inflation with market-based leveraged speculations. To be sure, U.S. imbalances and policymaking are certainly held in much less regard these days.

I will suggest this evening that acute dollar vulnerability is poised to significantly curtail the Bernanke Fed’s flexibility. The ramifications for a policy approach that pushes the Credit system into overdrive to counter financial disruption are different going forward - perhaps much different. The greatest problem for the global financial system currently is enormous and relentless dollar liquidity excess. Inciting Credit growth and risk-taking may very well prove counter-productive, and it is likely that aggressive (1998-style) Fed actions would exacerbate a flight out of dollar securities. A flight from the dollar would only then worsen the deteriorating inflation backdrop. Not only is it possible that the Fed loses the luxury of lowering rates during the next crisis, it may very well be forced at some point to do what other countries are forced to do - raise rates to mitigate a run on its currency.

Perhaps we’ve already been somewhat privy to the backdrop for the next crisis: a sinking dollar, spiking metals prices, surging crude, and rising global bond yields. A scenario where marketplace dislocation manifests first in the currency markets (with a faltering dollar) is as reasonable as it would be problematic. Here, one would assume that the Fed’s proven modus operandi of adding liquidity, cutting rates, and inciting more Credit and liquidity would be only counter-productive. And, as we have witnessed, the nature and consequence of current leveraged speculation are more unsettling than those preceding 1998. Today’s inflationary backdrop nurtures destabilizing speculative leveraging in all the "un-dollar" markets – certainly including the emerging markets and commodities. This creates a highly unstable situation prone to myriad and recurring Bubbles, volatility and busts. Accordingly, the characteristics of the underlying debt instruments are problematic and increasingly susceptible to wild price gyrations.

I read a lot about Bubbles these days: The "energy Bubble", the "metals Bubble", the "commodities Bubble", the "emerging market Bubble", the "hedge fund Bubble", and so on. But most of the analysis misses the more salient points. What we’re dealing with – the overriding issue is - The Dollar Liquidity Bubble. The combination of massive Current Account Deficits and outbound (investor and speculator) finance is inundating the financial world, and there is no way short of a major U.S. crisis to rein it in. This liquidity is fueling myriad dramatic global marketplace price inflations – as well as the occasional hiccup - along the way. I don’t view recent pull-backs in these markets as bursting Bubbles because I don’t yet see any change to the nature of underlying dollar liquidity excess.

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