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From an Economic Sphere perspective, there have been major developments that have increased the capacity of the U.S. economy to neatly conceal the deleterious effects of gross Credit excess. Clearly, the shift to a "services"-based economy, while relying on imports for a large portion of required goods and energy resources, has profoundly altered the nature of inflationary manifestations in the domestic economy. Furthermore, Credit inflations and asset Bubbles, by their nature, redistribute wealth, and today’s gross disparities work to circulate purchasing power in an especially lumpy and atypical manner….

Eventually, Financial Sphere Profits become the commanding influence over system Credit expansion and investment, along with being a powerful influence over spending generally (fueling income growth and gains in financial wealth). This is where things get dangerous. The financial boom incites a self-reinforcing investment boom, as well as general liquidity excess and asset inflation. Financial excess masks the underlying vulnerability of profitability in the real economy. Or, stated differently, the Economic Sphere becomes progressively dependent upon Financial Sphere ballooning. The runaway Financial Sphere Profits boom at the same incites Investment Inflation (including over- and mal-investment) while progressively distorting financial flows and inflating real economy profitability.

A strong case can be made that this fateful Credit Bubble "blow-off" phase evolved out of the Fed’s overzealous response to faltering corporate profitability and resulting debt problems back in 2001/2002. And this year’s gross global liquidity excesses have been very much an outgrowth of a bloated and energized Financial Sphere’s push to capitalize on the U.S. Bubble economy’s susceptibility to a housing bust (get ahead of the next easing cycle!) The upshot has been another banner year of Credit expansion of sufficient scope to artificially inflate economic Profits at home and abroad. And these inflated Profits coupled with the loosest global Financial Conditions imaginable have fueled this year’s global M&A boom….

But the stakes are inflating right along with Credit, liquidity and general financial excess. Wall Street will now be occupied with creating sufficient Credit, liquidity and speculative excess to maintain grossly inflated global equities, bonds, real estate, (compressed) Credit spreads, along with inflated economic Profits for the coming year. The Financial Sphere is clearly geared up for the endeavor, although the enormous scope of the required global Credit expansion ensures escalating Monetary Disorder, including tumultuous currency markets going forward.

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