04/13/2006 The 'Holy Grail' *

Higher rates are beginning to weigh on global equities – finally. For the week, the Dow increased 0.2%, while the S&P500 dipped 0.5%. The Transports and Utilities each declined about 1%. The Morgan Stanley Cyclical index added 0.2%, and the Morgan Stanley Consumer index gained 0.8%. The broader market was weaker. The small cap Russell 2000 fell 0.7%, and the S&P400 Mid-cap index declined 1%. The NASDAQ100 dipped 0.6%, and the Morgan Stanley High Tech index declined 0.8%. The Semiconductors were hit for 1.4%. The Street.com Internet Index fell 1.1%, and the high-flying NASDAQ Telecommunications index was down 0.3%. The Biotechs added 0.4%. The Broker/Dealers were down 1%, while the Banks were unchanged. With bullion gaining $13.75 to $603, the HUI Gold index was up 1%. For the week, two-year Treasury yields rose 5 bps to 4.95%, and five-year yields gained 6 bps to 4.97%. Bellwether 10-year yields jumped 7 bps to 5.05%, the first time above 5% since June 2002. Long-bond yields increased 6 bps to 5.115%. The 2yr/10yr spread increased 2 bps, ending the week at a positive 10 bps. Benchmark Fannie Mae MBS yields increased 5.5 bps to 6.155%, this week slightly outperforming Treasuries. The spread on Fannie’s 4 5/8% 2014 note narrowed one to 29, and the spread on Freddie’s 5% 2014 note narrowed slightly to 31.5. The 10-year dollar swap spread declined 0.25 to 54.75. Investment grade and junk bond spreads were little changed this week. The implied yield on 3-month December ’06 Eurodollars rose 4.5 bps to 5.345%.           Investment grade issuers included Residential Capital $3.5 billion, Goldman Sachs $1.5 billion, American International Group $1.0 billion, DR Horton $750 million, Yum Brands $300 million, Toyota Motors Credit $280 million, and Navigators Group $125 million.  Junk issuers included Avis Budget $1.0 billion, Williams Scotsman $450 million, Burlington Coat $400 million, Nutro Products $315 million, Stora Enso $300 million, Packaging Dynamics $150 million, Brigham Exploration $125 million, and Tango Finance $100 million.  Convert issuers included Medtronic $4.0 billion and Rentech $50 million. April 12 – Financial Times (Richard Beales): “The rapidly growing global market for collateralised debt obligations is now bigger than the high-yield bond market, underscoring its increasing importance to capital markets around the world. CDOs are pools of the debt of dozens of different borrowers, repackaged into slices with different levels of risk… Global CDO issuance jumped almost 60 per cent last year to more than $250bn (£143bn), according to data published yesterday by the Bond Market Association. Less than $200bn-worth of high-yield bonds were issued globally last year, according to Dealogic.” Foreign dollar debt issuers included KFW $3.0 billion, Societe Generale $1.0 billion, and Urbi Desarrollos $150 million.  April 11 – Bloomberg (Steve Rothwell and Jennifer Ryan): “Porsche AG, the world’s most profitable automaker, is so convinced the European Central Bank is driving borrowing costs higher that it sold about $2.5 billion of euro-denominated bonds in January -- almost 18 months before it needed the money…     Thirty-five companies sold $29 billion so far in 2006, the most in five years. Sales jumped 28 percent from last year…” Japanese 10-year JGB yields jumped 8 bps this week to 1.96%, the highest level since September 2002. The Nikkei 225 index declined 1.9% (up 7.0% y-t-d). German 10-year bund yields rose 6 bps to 3.95%. Emerging debt and equity markets were generally under moderate selling pressure. Brazil’s benchmark dollar bond yields were little changed at 6.88%. Brazil’s Bovespa equity index dropped 2.2%, reducing 2006 gains to 13.8%. The Mexican Bolsa dipped 0.8 %, with y-t-d gains reduced to 8.5%. Mexican 10-year $ yields jumped 10 bps to 6.19% this week. Russian 10-year dollar Eurobond yields gained 6 bps to 6.69%. The Russian RTS equities index gained 2.2%, increasing 2006 gains to 38%. India’s Sensex equities index fell 3%, reducing y-t-d gains to 19.6%. Freddie Mac posted 30-year fixed mortgage rates rose 6 bps to 6.49%, up 52 basis points from one year ago. Fifteen-year fixed mortgage rates gained 4 bps to 6.14%, up 64 bps in a year to the highest level since June 2002. One-year adjustable rates increased 4 bps to 5.61%, an increase of 127 bps over the past year. The Mortgage Bankers Association Purchase Applications Index declined 4.7% last week. Purchase Applications were down 11.9% from one year ago, with dollar volume down 8.0%. Refi applications fell 6.6% last week. The average new Purchase mortgage rose to $237,600, while the average ARM declined to $353,000. Bank Credit gained $5.8 billion last week to a record $7.729 Trillion, with a y-t-d gain of $223 billion, or 11.0% annualized. Over the past year, Bank Credit inflated $693 billion, or 9.8%. For the week, Securities Credit jumped $12.1 billion. Loans & Leases declined $6.3 billion for the week, with a y-t-d gain of $151 billion (10.3% annualized). Commercial & Industrial (C&I) Loans have expanded at a 15.7% rate y-t-d and 13.8% over the past year. For the week, C&I loans rose $9.8 billion, while Real Estate loans dipped $1.8 billion. Real Estate loans have expanded at a 10.6% rate y-t-d and were up 12.1% during the past 52 weeks. For the week, Consumer loans declined $1.4 billion, and Securities loans fell $7.3 billion. Other loans dropped $5.5 billion.   On the liability side, (previous M3 component) Large Time Deposits jumped $14.5 billion. M2 money supply jumped $23 billion to $6.798 Trillion (week of April 3). Year-to-date, M2 has expanded $85 billion, or 4.7% annualized. Over 52 weeks, M2 inflated $320 billion, or 4.9%. For the week, Currency added $0.1 billion. Demand & Checkable Deposits surged $34.8 billion. Savings Deposits fell $15.5 billion, while Small Denominated Deposits gained $3.0 billion. Retail Money Fund deposits added $0.9 billion. Total Money Market Fund Assets, as reported by the Investment Company Institute, declined $4.5 billion last week (week ended April 12) to $2.057 Trillion. Money Fund Assets are about unchanged y-t-d, with a one-year gain of $156 billion (8.2%).  Total Commercial Paper dipped $1.7 billion last week to $1.680 Trillion. Total CP is up $31.1 billion y-t-d (15wks), or 6.5% annualized, while having expanded $211 billion over the past 52 weeks, or 14.4%.  Asset-backed Securities (ABS) issuance was a slow $6.0 billion. Year-to-date total ABS issuance of $198 billion (tallied by JPMorgan) is 7% ahead of 2005’s record pace, with y-t-d Home Equity Loan ABS issuance of $146 billion running 20% above last year. Fed Foreign Holdings of Treasury, Agency Debt (“US marketable securities held by the NY Fed in custody for foreign official and international accounts”) dipped $1.5 billion to $1.592 Trillion for the week ended April 12. “Custody” holdings are up $73.3 billion y-t-d, or 16.7% annualized, and $203 billion (14.6%) over the past 52 weeks. Federal Reserve Credit declined $2.6 billion last week to $817.9 billion. Fed Credit has declined $8.5 billion y-t-d, or 3.6% annualized. Fed Credit expanded 4.7% ($36.5bn) during the past year.  April 14 – Bloomberg (Nerys Avery): “China’s foreign exchange reserves, which overtook Japan as the world’s largest in February, rose 32.8 percent from a year earlier to $875.1 billion at the end of March, the People’s Bank of China said.” April 13 – Bloomberg (Garfield Reynolds): “Russia’s foreign currency and gold reserves, the world’s fifth-biggest, rose for a 20th consecutive week, reaching a record $208.1 billion… The reserves added $2.2 billion in the week to April 7…” April 14 – Bloomberg (Archana Chaudhary): “India’s foreign-exchange reserves, comprising overseas currencies, gold and special drawing rights with the International Monetary Fund, rose $2.59 billion to $154.21 billion in the week ended April 7…” Currency Watch: The dollar index was little changed for the week. On the upside, the New Zealand dollar jumped 1.7%, the Polish zloty 1.3%, the Peruvian new sol 1.1%, and the Colombian peso 1.1%. On the downside, the Iceland krona fell 4%, the Indian rupee 1.0%, the New Turkish lira 0.8%, and the South Korean won 0.5%.    Commodities Watch: April 12 – Bloomberg (Mathew Carr): “The International Energy Agency, an adviser to 26 oil-consuming nations, said demand for crude in the past two years was greater than previously estimated, underpinning higher prices. Demand in 2004 and 2005 was revised higher by 300,000 barrels a day, driven by the Middle East and Asia, excluding China…” Copper rose to yet another record, gold traded above $600, and silver touched $13. For the week, May crude jumped $2.06 to $69.45. May Unleaded Gasoline jumped 6.6%, and May Natural Gas rose 6.5%. For the week, the CRB index rose 1.5% (y-t-d up 3.2%). The Goldman Sachs Commodities Index (GSCI) surged 4.9%. The GSCI is up 8.7% y-t-d, with a 52-week gain of 30.0%.   Japan Watch: April 13 – Merrill Lynch Research: “Japan is back as a provider of global risk capital. Evidence of this comes in the form of a sharp increase in outward-bound M&A activity. As corporate balance sheets are healthy and profits are high, Japanese corporate management is back at buying the world to increase market share and, hopefully, build more profitable global platforms.” April 12 – Bloomberg (Lily Nonomiya): “Lending by Japan’s banks accelerated, adding fuel to the central bank’s case that interest rates will need to rise as the economy expands. Loans climbed 0.4 percent in March, only the second gain since the central bank started keeping records in 2001…” April 13 – Bloomberg (Mayumi Otsuma): “Japan’s producer prices rose in March, extending two years of gains, as fuel and commodity prices increased. An index of prices that companies pay for energy and raw materials climbed 2.7 percent from a year earlier…” April 13 – Bloomberg (Kathleen Chu and Reika Kamimura): “Office vacancies in Tokyo fell last month to the lowest since September 2001, as demand for commercial space remained strong…   The vacancy rate in Tokyo’s five main business districts…declined for the ninth straight month to 3.41 percent…” China Watch: April 11 – Bloomberg (Nerys Avery): “China’s trade surplus widened to $11.2 billion in March, the second-highest on record… The surplus widened from $2.43 billion in February and was double the $5.7 billion median estimate… Exports jumped 28.3 percent from a year earlier, the highest gain since October…” April 13 – Bloomberg (Nerys Avery): “China’s economy grew about 8.5 percent in the first quarter, slowing from 9.5 percent in the previous year, the China Securities Journal reported…” April 12 – Bloomberg (Wing-Gar Cheng): “China’s oil imports rose 25 percent in the first quarter of 2006 from a year earlier as energy demand increased in the world's fastest-growing major economy. Crude imports climbed to 37.1 million metric tons (272 million barrels) in January through March… The nation’s oil import bill jumped 75 percent to $16 billion in the first quarter…” April 11 – Bloomberg (Yanping Li): “China should use more of its record foreign-exchange reserves to buy strategic resources such as machinery, raw materials and energy, Xia Bin, head of a research group linked to China’s cabinet, wrote in the Securities Times.” April 14 – Bloomberg (Nerys Avery): “China’s money supply growth topped the central bank's target for a 10th straight month in March as the trade surplus widened and efforts by the central bank to limit currency gains pumped more money into the economy. M2, which includes cash and all deposits, rose 18.8 percent from a year earlier to 31.1 trillion yuan ($3.9 trillion)…” Asia Boom Watch: April 10 – Bloomberg (Rich Miller): “Asia’s export-driven economy has a new engine of growth: its own people. With unemployment low and wages rising, Asian consumers are spurning the thrifty ways of their parents and turning out to buy. In Japan, spending rose the fastest in nine years in 2005. In South Korea, consumer confidence climbed near a four-year high in the first quarter. Even China expects domestic demand to contribute more to growth this year after cutting income taxes and raising minimum wages to pump up consumption. The rise of the Asian consumer helped prompt the International Monetary Fund to increase forecasts for economic growth for the region and worldwide this year…” April 12 – Bloomberg (Cherian Thomas and Kartik Goyal): “India’s industrial production in February expanded more than economists expected… Production at factories, utilities and mines rose 8.8 percent from a year earlier…” April 14 – Bloomberg (Archana Chaudhary): “India needs to attract $550 billion in investments in the next five years to meet growth targets, Business Standard said, citing a government panel’s report.” April 14 – Bloomberg (Seyoon Kim and Bernard Lo): “South Korea’s economy will grow more than 5 percent this year even as oil prices rise, Vice Finance Minister Kwon Tae Shin said.” Unbalanced Global Economy Watch: April 11 – Reuters: “Global private equity-backed merger and acquisition volume hit $128.3 billion from 621 deals in the first-quarter, a 20 percent increase from the year ago period, financial data provider Dealogic said… Fund-raising levels also rose, reaching $81 billion in the first quarter, a 56 percent increase from the year-ago period, according to Private Equity Intelligence, an information service for the buyout market.” April 11 – Bloomberg (Greg Quinn): “Canadian new-home prices rose 7 percent in February from a year earlier, the biggest increase since 1990, led by cities in Alberta where energy companies are luring thousands of new workers to expand production.” April 11 – Bloomberg (Craig Stirling): “Britain’s trade deficit was unchanged at a record level in February, a sign exports may be insufficient to help fuel an economic rebound this year… The gap in trade of goods remained at 6.5 billion pounds ($11.3 billion)…” April 12 – Bloomberg (Laura Humble): “The number of Britons claiming unemployment benefit rose in March to the highest in almost three years, casting doubt on forecasts that economic growth is accelerating.” April 12 – Bloomberg (Ben Sills): “Underlying inflation in Spain, Europe’s fifth-largest economy, accelerated in March to its fastest pace in three years… Consumer prices excluding energy products and fresh food rose 3.1 percent from a year earlier…” April 11 – Bloomberg (Jonas Bergman): “Swedish unemployment in March fell for a second month as companies sought more workers to meet rising demand… The non-seasonally adjusted jobless rate fell to 4.8 percent from 5.2 percent the month before…” April 10 – Bloomberg (Tracy Withers): “New Zealand house prices rose 14.8 percent in March from a year earlier, the slowest annual pace in seven months…” Latin America Watch: April 12 – Bloomberg (Patrick Harrington): “Mexico’s industrial production rose more than 5 percent for a second month in February as declining interest rates spurred homebuilding and quickening U.S. economic growth fueled demand for Mexican-made cars. Industrial output rose 5.4 percent from a year earlier…” Bubble Economy Watch: With half of the fiscal year in the history books, federal spending is running 8.7% ahead of 2005 levels, with Receipts 10.5% above (see below). March Retail Sales were up 7.6% from March 2005, with Sales Ex-Autos up 8.8%. Furniture sales were up 10.8% y-o-y, Building Materials 17.4%, Gasoline Stations 14.4% and Eating, Drinking Establishments 9.2%, taking note of the strongest sectors. The February Trade Deficit was reported at $65.7 billion. Goods Imports were up 11% to $150.5 billion, and Goods Exports were up 14% to $80.5 billion. March Industrial Production was up 3.6% from March of last year. April 10 – The Wall Street Journal (Jonathan Karp): “The Pentagon said the costs for 36 big weapons systems -- including marquee warplane, submarine and ground-vehicle programs -- have jumped by at least 30% and some by more than 50%... The Pentagon found that 25 programs had grown by at least 50% over original costs, while 11 programs were between 30% and 50% more expensive.” April 11 – Bloomberg (Guy Collins): “Wines from the new 2005 Bordeaux vintage may fetch between 10 and 30 percent more than 2004s, with top growths challenging records set by the landmark 2000s, according to buyers attending vineyard tastings this month.” April 9 - San Francisco Chronicle (Kathleen Pender): “In another sign that the real estate market is cooling -- but not collapsing -- the inventory of unsold homes in California is roughly double what it was a year ago… Statewide, the inventory of unsold single-family homes in February was 6.7 months, up from 3.2 months in February of last year.” Mortgage Finance Bubble Watch: April 10 – Bloomberg (Kathleen M. Howley): “U.S. sales of new and existing homes will fall 8 percent this year as rising prices squeeze more people out of the real estate market, according to a forecast by Freddie Mac. Sales will decline to 6.9 million from 7.5 million last year… It would be the first year since 2003 that sales were below 7 million. Rising prices and higher mortgage rates are putting homes out of the reach of more families, Frank Nothaft, Freddie Mac’s chief economist said…” April 14 – The Wall Street Journal (Danielle Reed): “As home-price appreciation has tapered off and mortgage rates have risen, foreclosures have started to pick up, with the Midwest region hit hardest… Nationally, the number of mortgage loans that entered some stage of foreclosure rose to 117,259 in February, up 68% from the same month a year earlier, according to Irvine, Calif., online foreclosure-data service RealtyTrac. Delinquencies are up as well.” Energy and Crude Liquidity Watch: April 14 – ABC News.com: “Soaring gas prices are squeezing most Americans at the pump, but at least one man isn't complaining. Last year, Exxon made the biggest profit of any company ever, $36 billion, and its retiring chairman appears to be reaping the benefits. Exxon is giving Lee Raymond one of the most generous retirement packages in history, nearly $400 million, including pension, stock options and other perks, such as a $1 million consulting deal, two years of home security, personal security, a car and driver, and use of a corporate jet for professional purposes.” April 14 – Bloomberg (Maria Ermakova): “The Russian government may invest some of the country’s $60.5 billion stabilization fund, set up with windfall oil revenue, in stocks, said Oleg Vyugin, head of the Federal Financial Markets Service.” Fiscal Deficit Watch: The federal government ran a record $85.5 billion deficit during March, with spending up 14% from March 2005 and Receipts up 11%. Fiscal year-to-date (6 months), Total Receipts are running 10.5% ahead of the year ago level. Year-to-date Individual Income Tax Receipts are 8.5% above comparable 2005, and Corporate Tax Receipts are 30.5% ahead. Total Spending is running 8.7% above comparable 2005, with Defense spending up 8.9%, Medicare 15.5%, Social Security 5.7%, and Interest Expense 25.2%. April 12 – Market News International (John Shaw): “In a trip last month, David Walker, the comptroller general of the United States, found a very receptive audience to absorb his message about the perils of the present path of American fiscal policy. That was the good news. The bad news was that the audience was in the ‘wrong’ country: the United Kingdom.      In a speech to the London School of Economics, Walker said he is deeply concerned about the U.S.’s ‘deteriorating financial condition and worsening long-term fiscal outlook.’” Walker noted that the federal budget deficit for fiscal year 2005 was $319 billion, but added that far more troubling is the fact that the government’s liabilities and unfunded commitments reached $46 trillion that year, up from about $20 billion just five years ago. ‘As a certified public accountant and the federal official who signs the audit report on the U.S. government’s financial statements, I’m here to tell you that America’s finances are far worse than advertised.’” Speculator Watch: April 10 – Bloomberg (Harris Rubinroit and Alex Armitage): “Billionaire investor George Soros and partner Steven Mnuchin are seeking $745 million in loans to help buy Viacom Inc.’s DreamWorks LLC film library… Dresdner Kleinwort Wasserstein is arranging a $595 million five-year term loan with an interest margin of 1.375 percentage points over the London interbank offered rate…” April 14 – Bloomberg (Alex Armitage and Dana Cimilluca): “Michael Jackson, struggling to stave off bankruptcy, agreed to a debt refinancing that may lead to him forfeiting a share of a music catalog that includes more than 200 Beatles songs. Jackson refinanced loans with hedge fund Fortress Investment Group LLC, the singer said…” The “Holy Grail”: Fed chairman Bernanke has proffered that “to understand the Great Depression is the Holy Grail of macro-economics.” Regrettably, that prolonged quest has proved a colossal misadventure. There is, however, an opportunity for redemption. In the end, mastery of the current Global Credit Bubble and inevitable bust offers the (long-delayed) bounty of macro-economic “salvation.” Reading the analyses of today’s Depression experience authorities (notably Dr. Bernanke and Univ. of California’s Dr. Barry Eichengreen) leaves one with the sense that they are oblivious to the essence of the inevitable repercussions from the preceding boom’s gross excesses and distortions. There remains a curious disregard for the fundamental role played by Credit and speculation in fostering the fateful Bubble, this despite centuries of financial history illuminating their central responsibility. Rather, the inclination is to point blame at the Federal Reserve for not aggressively inflating the money supply after the stock market crash, as well as the deflationary forces supposedly imposed by the global gold standard monetary regime.  It all may be politically correct, exactly what the economic community and policy-makers are eager to hear, and exceptionally career constructive, but that doesn’t elevate it to sound analysis. I am compelled to expand on the superb analysis highlighted last week from “Banking and the Business Cycle” published in 1937. For starters, I definitely give contemporaneous analysis credence, knowing that views developed some decades later will be adulterated by misconceptions, personal and ideological biases, historical revisionism, and by whatever economic fad that is all the rage at the time. The authors’ focus on boom-time money and Credit excesses as a leading cause of the Depression was exceptional and quite credible. Nonetheless, the boom had unique circumstances that proved to be major distracting factors for the purposes of developing a more general and long-standing theory of business cycles.  The Federal Reserve System was in its infancy during the “Roaring Twenties” boom, so its operations and influence were understandably an analytical focal point for contemporary and future economists alike. Discerning analysts of that period focused on the Fed’s prominent role in fostering and repeatedly bolstering the boom-time monetary expansion, while today’s Depression “experts” fault the incompetent Fed for its failure to orchestrate post-Bubble reflationary measures. This irresoluble debate certainly detracts from a clearer understanding of and appreciation for the paramount role of boom-time Credit and speculative excesses. One can actually examine the current environment and ascertain a much more analytical “pure-play” with respect to Credit, speculation and the course of financial and economic Bubbles.  And while I certainly have no intention of dismissing the Fed’s role, when it comes to the actual expansion of Credit the Federal Reserve’s balance sheet is for this cycle hardly a factor. For example, Fed assets expanded only about $37 billion during 2005, compared to bank Credit’s $680 billion, ABS’s $645 billion, the Broker/Dealers’ $300 billion, and “Funding Corps'” $200 billion. Total mortgage borrowings expanded last year by about 38 times the amount of Fed growth. Bank reserve requirements are today a Credit non-issue, after muddying the Twenties’ Credit expansion analytical waters. Non-banks have become an instrumental source of “money” & Credit creation and financial intermediation, liberating Credit analysis from the traditional ambiguities of fractional reserve banking and the Fed’s role in creating system reserves to be “multiplied.”  Financial innovation – especially when it comes to new Credit instruments, avenues of financial intermediation and mechanisms facilitating speculative leveraging – is a paramount issue today, as it was during the Twenties.  Although hopefully the analysis will be more fruitful now that “financial innovation” is not intermingled with issues associated with a neophyte central bank system. Not dissimilar to the “Roaring Twenties,” the Federal Reserve’s role in nurturing an overindulgent backdrop and accommodating the private-sector “money” and Credit “printing presses” is the most fertile analytical perspective.  Momentous developments in technological advancement and production capabilities also confused the analysis of money and Credit during the Twenties, as it invariably does during any extended boom. The extraordinary gains in industrial productivity and its influence on the general price level garnered significant interest from the economic community back then. A reasonably strong case was made in “Banking and the Business Cycle” that the Fed’s effort to stabilize the price level (when it should have been declining along the lines of productivity advances) provided a major impetus to the inflationary Bubble. One is, nevertheless, left unclear as to what extent the Credit boom and its interplay with the real economy were bolstering both production increases (“Investment Inflation”) and the flurry of technological advancements, which were then exerting downward pressure on goods prices.    Many economists today hold the view that productivity gains and globalization provide a favorable backdrop conducive to outsized economic growth, quiescent inflation, and permissive monetary conditions, along with accompanying rising asset prices and surging financial wealth.   I propose that the issue this cycle for the U.S. economy is not its productivity gains or industrial capabilities, but the capacity for the economic system to expand salable “output” – goods and services to meet the inflated demand from Credit creation-induced purchasing power. In a services-based (certainly including healthcare, media, communications, and computer/electronic/digital output) economic system, the causal link between Credit growth and “output” expansion may arguably be more discernable. Whether it is or isn’t, the capacity for (contemporary) output to easily accommodate inflating purchasing power (more healthcare, more higher-priced services generally, more downloads, more upper-end and luxury products/services, more media, more electronic gadgets, more imports, etc.) must now become a focal point of Credit Bubble analysis. The danger of hyper-elastic output rests with its capacity to readily accommodate progressive Credit expansion and attendant excesses without an alarming increase in output prices.  Mistakenly perceived a virtue, the problematic upshot of this circumstance is a ballooning Financial Sphere and a cumulating pool of (global) liquidity available to inflate asset market Bubbles, stoke self-reinforcing speculation, and impart myriad unchecked financial and economic imbalances.   Even today, we are subject to the bullish propaganda that the “efficiency” by which the U.S. economy now uses energy ensures that surging crude oil prices exert only a minimal restraining influence on GDP (and core CPI, for that matter). But this dynamic has little if anything to do with actual efficiency. Rather, it is indicative of a major transformation in the nature of economic output, as well as an Economic Sphere commanded by the Inflating Financial Sphere.  Surging energy prices today neither stymie output nor elicit tightening from the monetary authority – but they are efficiently “monetized.” Energy inflation is a consequence of and additional stimulus to Credit inflation, with Credit excess begetting higher oil prices, begetting only more Credit and higher prices.  From a Credit Bubble prospective, the economic system’s pricing mechanisms now largely operate without adjustment or self-correction. Virtually unlimited “output” readily expands to meet demand, rather than the market force of rising prices working to crimp demand.  Indeed, it is the unstable financial boom that is dictating an inflated and highly imbalanced level of economic output. In a replay of the Twenties, an atypical economic backstop warranting determined policy restraint is misinterpreted as one permitting of monetary looseness. Alan Greenspan and others’ efforts to blame the current global currency regime (“pegged” Asian currencies, in particular) for mounting imbalances recalls analysis that pinned late-‘20s instabilities and the depth of the Depression on the vagaries and then breakdown of the global gold standard. Again, the focus must be first and foremost on underlying Credit systems and monetary conditions. Greenspan, of course, is keen to point fingers at foreign governments and their “pegged” currencies, when the impetus for the Great Credit Bubble can be traced back to “pegged” U.S. interest-rates, in conjunction with Fed assurances of abundant marketplace liquidity and a persistent inflationary bias. Such an unparalleled financial backdrop beckoned for reckless excess. No currency system or monetary apparatus can be expected to function stably in the face of rampant underlying Credit expansion and resulting cumulative speculative financial flows. The Twenties’ financial profligacy doomed the gold standard, and it is simply inconceivable how a stable global currency regime could today be maintained in the face of the unprecedented dollar-based Credit inflation and the ensuing massive pool of global speculative finance.  The 1920s/’30s gold standard debate is lost in time. But great effort must be made to ensure that underlying Credit systems and speculative dynamics (the U.S.’s in particular), along with resulting U.S. and global economic maladjustments - are the focal point with respect to the analysis of any future systemic dislocation - and not the global currency system, as hopelessly flawed as it is.  Ballooning foreign central bank reserve holdings are not THE global imbalance, but are instead indicative of deep underlying Credit system and economic maladjustment. Ditto the unknown Trillions of assets being accumulated by the global leveraged speculating community. There will be more than ample blame to spread around when this historic boom gives way to bust.  Learning the correct lessons from this experience will demand the acceptance of responsibility for our own financial and economic misdeeds, of which there have been many. The “Holy Grail” of macro-economic understanding is an unattainable goal, yet we are presented with an exciting opportunity to get economic analysis and theory at least back on the right track. The first step will require the recognition and acceptance that unrestrained Credit and unchecked leveraged speculation are inconsistent with the stability of Capitalistic systems.