For the week, the S&P500 slipped 0.3% (up 1.7% y-t-d), and the Dow declined 1.2% (down 3.9% y-t-d). The Morgan Stanley Cyclicals were little changed (up 16.2%), while the Transports rallied 1.3% (down 7.7%). The Morgan Stanley Consumer index slipped 0.1% (up 1.4%), while the Utilities rose 1.4% (down 5.3%). The Banks dropped 2.5% (down 17.8%), while the Broker/Dealers gained 1.0% (up 28.1%). The S&P 400 Mid-Caps dipped 0.2% (up 7.1%), while the small cap Russell 2000 added 0.1% (up 2.8%). The Biotechs rallied 3.3% (up 8.3%). The Nasdaq100 increased 0.6% (up 22.2%), and the Morgan Stanley High Tech index added 0.2% (up 32.6%). The Semiconductors lost 0.5% (up 24.0%), while the InteractiveWeek Internet index gained 0.5% (up 40.7%). With Bullion up $5.40, the HUI gold index rallied 4.0% (up 16.9%).

One-month Treasury bill rates ended the week at 5 bps, and three-month bills closed at 18 bps. Two-year government yields sank 16 bps to 1.03%. Five-year T-note yields sank 28 bps to 2.51%. Ten-year yields dropped 25 bps to 3.53%. The long-bond saw yields end the week down 17 bps to 4.32%. The implied yield on 3-month December '09 Eurodollars fell 16 bps to 0.905%. Benchmark Fannie MBS yields were down 22 bps to 4.58%. The spread between benchmark MBS and 10-year T-notes widened 3 bps to 10 bps. Agency 10-yr debt spreads narrowed 2 to 23 bps. The 2-year dollar swap spread declined 10 to 37 bps; the 10-year dollar swap spread declined 5.5 to 20.25 bps; and the 30-year swap spread declined 5.25to negative 18.5 bps. Corporate bond spreads were mixed. An index of investment grade bond spreads were little changed at 192 bps, while an index of junk spreads widened 24 to 901 bps.

Investment grade issuers included Citigroup $5.0bn, Merck $4.25bn, Time Warner $1.5bn, Omnicom $500 million, Analog Devices $375 million, Virginia E&P $350 million, Massmutual $300 million, Campbell Soup $300 million, Torchmark $300 million, Enogex $200 million, Rochester G&E $150 million and Gulf Power $140 million.

Junk bond funds saw inflows of $ million (from AMG), 15 straight weeks of positive flows. The list of junk issuers included Smithfield Foods $625 million, Alliance One $570 million, Univision $545 million, XM Satellite $525 million, RSC Equipment $400 million, Jefferies Group $400 million, Solo Cup $300 million, and Belden $200 million, and Oxford Industry $150 million.

I saw no convert issuance this week.

International dollar debt issuers included Danske Bank $5.0bn, Telefonica Emisiones $2.25bn, Credit Suisse $1.3bn, Lloyds Bank $735 million and Shinhan Bank $500 million.

U.K. 10-year gilt yields fell 12 bps to 3.68%, and German bund yields declined 11 bps to 3.39%. The German DAX equities index slipped 1.3% (down 0.7%). Japanese 10-year "JGB" yields declined 5 bps to 1.39%. The Nikkei 225 added 0.9% (up 11.5%). Emerging markets were mostly stronger. Brazil's benchmark dollar bond yields sank 24 bps to 6.00%. Brazil's Bovespa equities index increased 0.2% (up 37.1% y-t-d). The Mexican Bolsa added 0.8% (up 9.3% y-t-d). Mexico's 10-year $ yields bps to 6.2%. Russia's RTS equities index sank 5.5% (up 51.2%). India's Sensex equities index gained 1.7% (up 53.0%). China's Shanghai Exchange rose 1.7% (up 60.8%).

Freddie Mac 30-year fixed mortgage rates increased 4 bps to 5.42% (down 103bps y-o-y), with a 5-week rise of 60 bps. Fifteen-year fixed rates slipped 2 bps to 4.87% (down 117bps y-o-y). One-year ARMs declined 2 bps to 4.93% (down 34bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates down 3 bps to 6.54% (down 84bps y-o-y).

Federal Reserve Credit dropped $58.5bn last week to $1.997 TN. Fed Credit has declined $249bn y-t-d, although it expanded $1.122 TN over the past 52 weeks (128%). Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 6/24) jumped $12.3bn to a record $2.764 TN. "Custody holdings" have been expanding at an 20.5% rate y-t-d, and were up $442bn over the past year, or 19.0%.

Bank Credit increased $3.1bn to $9.730 TN (week of 6/17). Bank Credit was up $340bn year-over-year, or 3.6%. Bank Credit is now down $183bn y-t-d (4.0% annualized). For the week, Securities Credit jumped $62.5bn. Loans & Leases sank $59.4bn to $7.021 TN (52-wk gain of $123bn, or 1.8%). C&I loans fell $11.5bn, with a one-year decline of 2.1%. Real Estate loans dropped $37.0bn (up 5.9% y-o-y). Consumer loans slipped $1.9bn, and Securities loans decreased $2.4bn. Other loans fell $6.7bn.

Year-to-date total US ABS issuance of $62.7bn (tallied by JPMorgan's Christopher Flanagan) compares to the $108.5bn from the same period of 2008. U.S. CDO issuance of $23.6bn compares to last year's y-t-d $16.9bn.

M2 (narrow) "money" supply increased $15.7bn to a record $8.369 TN (week of 6/14). Narrow "money" has expanded at a 4.6% rate y-t-d and 9.5% over the past year. For the week, Currency increased $0.9bn, and Demand & Checkable Deposits jumped $24.9bn. Savings Deposits expanded $11.3bn, while Small Denominated Deposits fell $5.3bn. Retail Money Funds sank $16.0bn.

Total Money Market Fund assets (from Invest Co Inst) were about unchanged at $3.675 TN. Money fund assets have declined $155bn y-t-d, or 8.4% annualized. Money funds rose $220bn, or 6.4%, over the past year.

Total Commercial Paper outstanding sank another $47.4bn this past week to $1.155 TN. CP has declined $527bn y-t-d (65% annualized) and $598bn over the past year (34%). Asset-backed CP dropped $21.3bn to $481bn, with a 52-wk drop of $267bn (36%).

International reserve assets (excluding gold) - as accumulated by Bloomberg's Alex Tanzi - were down $27bn y-o-y to $6.798 TN. Reserves have increased $33bn year-to-date.

Global Credit Market Dislocation Watch:

June 26- Bloomberg (Gavin Finch): "The cost of borrowing in dollars for three months in London dropped below 0.6 percent for the first time as central banks offered cash to financial institutions and signaled interest rates will stay at record lows... 'Central banks are still flooding the markets with cash and that's clearly continuing to ease the strains' said Christoph Rieger...strategist at Commerzbank... The Libor-OIS spread, a barometer of the reluctance of banks to lend, stayed at 38 bps... down from a peak of 364 bps on Oct. 10."

June 24 - Bloomberg (Gabi Thesing): "The European Central Bank said it will lend banks 442 billion euros ($621 billion) for 12 months, the most it has ever allotted in an auction, as it steps up efforts to unblock credit markets in the 16-nation euro region... The euro interbank offered rate, or Euribor, for 12-month loans fell to 1.57%... a record low."

June 25 - Bloomberg (Dara Doyle and Ian Guider): "Ireland's banks face losses of as much as 35 billion euros ($49bn) through next year as the economy shrinks at an 'unprecedented' pace, the IMF said. GDP will shrink a cumulative 13.5% in the three years through 2010... The losses envisaged are bigger than those forecast by the biggest Irish securities firms."

June 26- Bloomberg (Ott Ummelas): "Moody's... cut its ratings on six Baltic banks, citing rising corporate defaults that may 'significantly' drain loan portfolios."

Government Finance Bubble Watch:

June 23 - Associated Press: "The Energy Department said... it would lend $5.9 billion to Ford Motor Co. and provide about $2.1 billion in loans to Nissan Motor Co. and Tesla Motors Inc., making the three automakers the first beneficiaries of a $25 billion fund to develop fuel-efficient vehicles... The loans to Ford will help the company upgrade factories in five Midwest states to produce 13 fuel-efficient vehicles..."

June 22 - Bloomberg (Valerie Rota): "Mexico will probably boost debt sales 46% in the third quarter to finance a budget deficit that is widening as the U.S. recession throttles exports and oil production slumps, according to Metanalisis SA. The Finance Ministry will issue 455 billion pesos ($34bn) of bills and bonds in the quarter..."

June 23 - Bloomberg (Dorota Bartyzel and David McQuaid): "Poland's state budget deficit will widen 48% to 27 billion zloty ($8.3 billion) this year as the economic slowdown crimps revenue, the Finance Ministry said."

June 23 - Bloomberg (Paul Abelsky): "Belarus expects to receive $2 billion from the International Monetary Fund before the end of this year to replenish reserves and stabilize its currency, President Alexander Lukashenko said."

Currency Watch:

June 26- Bloomberg: "China's central bank renewed its call for a new global currency and said the International Monetary Fund should manage more of members' foreign-exchange reserves, triggering a decline in the U.S. dollar. 'To avoid the inherent deficiencies of using sovereign currencies for reserves, there's a need to create an international reserve currency that's delinked from sovereign nations,' the People's Bank of China said in its 2008 review... The IMF should expand the functions of its unit of account, Special Drawing Rights, the report said."

The dollar index declined 0.5% this week to 79.84. For the week on the upside, the South African rand increased 2.7%, the Brazilian real 2.0%, the Swedish krona 1.5%, the Mexican Peso 1.1%, the Japanese yen 1.1%, the Euro 0.9%, and the Danish krone 0.9%. On the downside, the Canadian dollar declined 1.6%, the South Korean won 1.2%, and the Norwegian krone 0.8%.

Commodities Watch:

June 23 - Bloomberg (Shruti Date Singh): "Sugar jumped to the highest in almost three years on rising signs that a production deficit may extend into a second year and as the dollar weakened, increasing the appeal of commodities traded in New York."

June 22 - Bloomberg (Yuriy Humber): "Uranium rose to the highest in seven months as energy commodities gained globally and utilities sought to acquire stakes in companies mining the metal."

June 25 - Bloomberg (Carolyn Bandel): "The cost of piracy insurance has increased as much as 20-fold after attacks on shipping off the Horn of Africa doubled in the first quarter, insurance broker Marsh & McLennan Cos said."

Gold ended the week up 0.6% to $939 (up 6.5% y-t-d). Silver declined 1.0% to $14.085 (up 24.7% y-t-d). August Crude slipped 68 cents to $69.34 (up 56% y-t-d). July Gasoline fell 2.4% (up 77% y-t-d), and July Natural Gas declined 1.9% (down 27% y-t-d). September Copper gained 1.6% (up 63% y-t-d). July Wheat sank 3.8% (down 13% y-t-d), and July Corn dropped 3.8% (down 5.6% y-t-d). The CRB index dipped 0.6% (up 9.5% y-t-d). The Goldman Sachs Commodities Index (GSCI) declined 1.4% (up 29.2% y-t-d).

China Reflation Watch:

June 25 - Bloomberg: "China's central bank pledged to keep pumping money into the financial system to support a recovery in the world's third-biggest economy. The economy is in a 'critical' stage and the central bank will maintain a 'moderately loose' monetary policy, the People's Bank of China reiterated... The central bank triggered an explosion in credit by scrapping quotas on lending in November to back the government's 4 trillion yuan ($585bn) stimulus plan."

June 23 - Bloomberg: "Airbus SAS, the world's largest commercial planemaker, rolled out the first aircraft assembled at its China factory as it seeks to win more orders in the world's second-largest aviation market. The planemaker aims to deliver 10 more A320s this year from its factory in Tianjin, near Beijing... Production at the plant, Airbus's first outside Europe, will be raised to four aircraft a month by the end of 2011. Airbus is competing with Boeing Co. to grab orders in China as it seeks sales in emerging markets to help offset slumping demand in the U.S. and Europe. China will probably need 3,238 passenger planes valued at $391.2 billion from 2007 to 2026, according to the...planemaker."

June 22 - Bloomberg (Tony Barrett): "China may begin a 'crackdown' on speculation in domestic commodity markets after suggestions that companies are stockpiling raw materials beyond their needs in the hope of selling them later at higher prices, UBS AG said."

June 26- Bloomberg (Wendy Leung): "China Shipping Container Lines Co., the country's second-biggest box carrier, plans to almost double rates on Asia-Europe routes next month to help offset possible losses on weakening demand."

June 26- Bloomberg: "Chinese industrial-company profits fell at a slower pace as commodity prices declined from a year earlier and a 4 trillion yuan ($585bn) stimulus package boosted demand. Net income sank 22.9% in the five months through May to 850.2 billion yuan ($124.4bn)..."

Japan Watch:

June 24 - Bloomberg (Jason Clenfield): "Japan's export slump deepened in May, casting doubt on the nation's growth prospects as the economy struggles to emerge from its worst postwar recession. Shipments abroad dropped 40.9% from a year earlier, more than April's 39.1% decline..."

India Watch:

June 23 - Dow Jones: "India's fiscal deficit widened to 541.58 billion rupees ($11.16bn) in April, compared with 329.39 billion rupees in the same period a year earlier... During April, the first month of the current financial year, the government's net tax receipts fell 32%..."

Asia Bubble Watch:

June 26- Bloomberg (Shamim Adam): "Singapore's industrial production unexpectedly increased in May as pharmaceutical companies boosted output. Manufacturing, which accounts for about a quarter of Singapore's economy, rose 2% from a year earlier..."

Unbalanced Global Economy Watch:

June 23 - Bloomberg (Alan Purkiss): "Brazil, Russia, India and China, the so-called 'BRIC' countries, will account for most of the world's economic growth, if any, this year and next, said Jim O'Neill, who heads global economic research at Goldman Sachs...he said consensus forecasts are that India will grow by almost 6% in both years and China is likely to manage 8% this year and 10% in 2010. Chinese policymakers realized quickly that the period of very rapid export growth is over and initiated a massive boost to domestic demand, O'Neill said."

June 24 - Bloomberg (Brian Swint): "Almost half of U.K.-based foreign professionals are considering leaving as they endure rising living expenses and the recession, more than in any other country, a survey by HSBC... showed. Forty-four percent of expatriates in Britain are contemplating moving..."

June 26- Bloomberg (Kati Pohjanpalo): "Swedish household credit grew at the slowest pace in more than six years in May... Household lending grew an annual 7.9%..."

Bursting Bubble Economy Watch:

June 25 - California Association of Realtors: "Home sales increased 35.2% in May in California compared with the same period a year ago, while the median price of an existing home declined 30.4%... 'With affordability for first-time buyers at a record high, sales of existing, single-family homes continued to remain above the 500,000 level for the ninth consecutive month,' said C.A.R. President James Liptak... C.A.R.'s Unsold Inventory Index for existing, single-family detached homes in May 2009 was 4.2 months, compared with 8.7 months for the same period a year ago."

June 23 - Bloomberg (Alexander Nicholson): "Russia's economy shrank 11% in May from the same month last year, Interfax reported, citing Deputy Economy Minister Andrei Klepach."

Central Banker Watch:

June 24 - New York Times (Stephen Labaton): "During the debate over financial regulation, the Federal Reserve chairman Ben S. Bernanke has been surprisingly quiet. But behind the scenes, he has been a forceful proponent of giving the Fed more power, both defending his management of the economic crisis and arguing that more authority would help the agency act more decisively to reduce the chances of a recurrence... Despite criticism by some lawmakers that the Fed failed to anticipate the problems that led to the crisis, Mr. Bernanke has told associates that such critics fail to recognize the extraordinary actions taken by the central bank over the last year."

June 23 - Bloomberg (Simone Meier and Christian Vits): "European Central Bank council member Axel Weber said the bank has used up its room to cut interest rates and there's no need to expand its stimulus measures. 'The ECB Governing Council has used the room for rate reductions that was created by waning inflation risks and a dramatic worsening of the economic situation,' Weber, who heads Germany's Bundesbank, said... Having loosened policy further with its provision of unlimited liquidity to banks and a plan to buy covered bonds, 'additional steps are not necessary at the moment,' he said."

June 24 - Bloomberg (Monika Rozlal and Dorota Bartyzel): "Poland's central bank cut its key interest rate for a sixth time in eight months to a record low... The... Monetary Policy Council trimmed the benchmark seven-day reference rate a quarter of a percentage point today to 3.5%..."

Real Estate Bust Watch:

June 23 - Florida Association of Realtors: "Florida's existing home sales rose in May - the ninth month in a row that sales activity increased in the year-to-year comparison... Statewide sales showed gains over the previous month's sales... Also, for the first time in many months, the statewide median sales price in May for existing homes and for existing condos rose over the previous month's figure."

MBS/ABS/CDO/CP/Money Funds and Derivatives Watch:

June 26- Bloomberg (Jody Shenn): "JPMorgan Chase & Co. and Citigroup Inc. are expanding in 'jumbo' mortgages used to buy the most expensive homes, helping revive a market that shriveled amid a three-year jump in homeowner defaults. JPMorgan resumed buying new jumbo loans made by other lenders this month, after halting purchases in March... Citigroup is again offering the loans through independent mortgage brokers..."

California Watch:

June 23 - Bloomberg (Joe Mysak): "Investors are increasingly bearish on California, the Golden state, which is facing a $24 billion budget deficit. The... price on 1-year California credit-default swaps widened to 285.10 bps from 200 basis points on May 8.... Recently, all three rating companies have given notice that its cash position imperils its credit grades once again. On Friday, Moody's said 'lack of action could result in a multi-notch downgrade.'"

New York Watch:

June 25 - Bloomberg (Chris Dolmetsch): "New York City's 7.6 million daily bus and subway riders will pay more to commute starting this weekend when fares on the busiest U.S. public transportation system rise for the second time in two years. A single ride on New York City Transit buses and subways will increase 25 cents to $2.25..."

It is Economic

"The US is faced with the choice of either paring back its budget deficits and monetary base as soon as the current risks of deflation dissipate, or setting the stage for a potential upsurge in inflation. Even absent the inflation threat, there is another potential danger inherent in current US fiscal policy: a major increase in the funding of the US economy through public sector debt. Such a course for fiscal policy is a recipe for the political allocation of capital and an undermining of the process of 'creative destruction' - the private sector market competition that is essential to rising standards of living. This paradigm's reputation has been badly tarnished by recent events. Improvements in financial regulation and supervision, especially in areas of capital adequacy, are necessary. However, for the best chance for worldwide economic growth we must continue to rely on private market forces to allocate capital and other resources. The alternative of political allocation of resources has been tried; and it failed." Alan Greenspan, writing in the Financial Times, June 26, 2009

June 3 - Dow Jones (Judith Burns): "U.S. Federal Reserve officials are well aware of the danger of an inflationary flare-up ahead, but don't need to take action on that for now, former Federal Reserve Board Chairman Alan Greenspan said... Greenspan defended the flood of spending by the U.S. and other nations, saying it is needed to combat a dramatic contraction in the global economy... Greenspan acknowledged that reversing course will put the brakes on the economy, and he questioned whether political leaders have the stomach for such efforts. 'I don't think it's an economic problem; I think it's a political problem,' said Greenspan."

Mr. Greenspan is, again, wrong. It is very much an "economic problem." It is the nature of protracted Credit Bubbles to impart deleterious effects upon the underlying economic structure. As the master of "activist" monetary management, Mr. Greenspan's reign at the helm of Fed saw a move into uncharted territory with respect to marketplace interventions and manipulations. Over this period, confidence flourished - in the markets as well as throughout the real economy - that astute monetary management coupled with Washington stimulus assured a steady economic course with robust growth, interrupted only occasionally by shallow recessions and little cub bear markets.

The Greenspan/Bernanke Fed championed the disastrous doctrine that our central bank should ignore expanding Bubbles, choosing instead a course of aggressive intervention ("mopping up") once they had burst. This analysis failed to consider myriad financial, economic and political realities, including that massive fiscal stimulus would be required - and generally welcomed - in the post-Bubble crisis environment. Today's political and inflationary landscapes are very much an outgrowth of Greenspan's terribly flawed monetary management.

It's difficult for me to get the Q1 2009 "flow of funds" out of my mind. And the Fed's own Credit data refutes Greenspan. During the first half of the nineties, Non-Financial Credit growth averaged $565bn annually. Over that period, Financial Sector borrowings averaged $285bn. By year 2000, Non-Financial Credit growth for the year surpassed $2.0 TN, before peaking in 2007 at $2.545 TN. Annual growth in Financial Sector borrowings surpassed $1.0 TN in 2004, before almost reaching $2.0 TN in 2007. This was the massive expansion of system Credit that inflated asset prices, incomes, corporate profits, and government receipts. This Credit explosion was at the heart of economy-wide structural transformation to consumption, services, de-industrialization and massive imports - not to mention incredible financial leveraging and speculation. And once grossly inflated, it is a very difficult and painful process to return a system to a more even keel.

Greenspan can claim it's a political problem and warn against increased statism. Yet the real dilemma today and going forward is the maladjusted "Bubble Economy" structure that fends off systemic breakdown only through $2.0 TN-plus annual Credit growth. Of course, our politicians have not sat idly as the Credit system buckled and the economy lurched downward. And, indeed, it was Greenspan more than any other individual that was responsible for the public's blind faith in Washington policymakers' capacity to resolve any and all financial and economic problems. As always, politicians have a propensity to try to inflate their way out of jams. And that's why it is critical to maintain a disciplined financial system, a stable and balance economy, and a tough and independent central bank.

But let's get back to the "flow of funds." Federal government borrowings surged from 2007's $237bn to 2008's record $1.239 TN. Federal borrowings expanded at a $1.440 TN annualized rate during the first quarter. As I did with last week's analysis of the "flow of funds," I believe grouping Treasuries with GSE debt and agency MBS issuance today provides a better gauge of the growth in marketable federal debt obligations. This is the current focal point for Bubble analysis.

Combined outstanding Treasury, GSE and MBS obligations surged $1.949 TN, or 15.3%, in 2008 to $14.709 TN. This was a sharp increase from 2007's $1.165 TN, 2006's $532bn, and 2005's $411bn increase. The almost $2.0 TN expansion of "federal" marketable debt compares to 2008's increase of Total Non-Financial Credit of $1.873 TN. After the breakdown in Wall Street finance (i.e. "private-label" MBS, ABS, CDOs, etc.), it was virtually only "federal" obligations that retained the perception of "moneyness" in the marketplace. And, since the onset of the Credit crisis, this "money" has been issued in unprecedented quantities, in the process stabilizing the system yet setting the stage for a future crisis of confidence in "federal" Credit.

I found the most recent Z.1 report so disconcerting because of the parallels now apparent between "federal" Credit and the previous Bubble in mortgage/Wall Street finance. Recall that Total Mortgage Debt growth accelerated from the nineties annual average of $269bn to $1.00 TN by 2003, $1.268 in 2004, $1.438 TN in 2005, and $1.390 TN in 2006. As more mortgage-related securities were issued in the marketplace, the annual growth in ABS surged from about $200bn in 2003 to surpass $800bn in 2006. With the explosion in "private-label" MBS issuance, the asset-backed securities (ABS) market actually doubled in size in just four years to surpass $4.5 TN by the end of 2007.

Back in 2006, acute systemic fragility was being masked by the massive mortgage Credit expansion intermediated through various sophisticated Wall Street structures. The crucial facet of the analysis was that this Bubble was increasingly vulnerable to a crisis of confidence. Not only was there massive issuance, but this boom was being sustained by rapid expansion of Credit of increasingly poor quality. In true Ponzi Finance dynamics, this Bubble was attracting enormous financial flows while having become susceptible to any reversal of speculator sentiments.

There was a confluence of critical dynamics that fostered acute fragility. The scope of annual mortgage Credit expansion necessary to sustain the Bubble (approx. $1.4 TN); the increasingly suspect quality of the underlying mortgages prolonging the boom; the vulnerability associated with inflated home prices; and that much of the mortgage-Credit was being intermediated through "AAA" marketable securities altogether created a quite tenuous situation. The stage had been set for a momentous change in market perceptions.

A major systemic crisis became unavoidable after the revelation of GSE accounting irregularities ensured that Fannie and Freddie would no longer provide the mortgage/MBS marketplace a "backstop bid." Going back to 1994, the GSEs had repeatedly nurtured concurrent booms in mortgage lending and MBS speculation through their aggressive market turmoil-periods of MBS purchases and liquidity creation. Speculators had over the years become quite emboldened, but their source of liquidity in the event of trouble would be nowhere to be found in 2007.

I see ominous parallels to the mortgage/Wall Street finance Bubbles with today's Government Finance Bubble. First, the scope of "federal" government marketable debt issuance - approximately $2.0 TN annually - has quickly reached massive proportions. Especially since little of this ("non-productive") debt is financing real economic wealth creation, there is a rapid deterioration in the quality of this debt being sold. There are clear Ponzi Finance dynamics in play. I would argue that the massive deficit spending has sustained incomes (May Personal Incomes up 1.3% y-o-y), purchasing power and general confidence in our system. But only ongoing massive fiscal stimulus will sustain the current maladjusted economic structure, while this massive inflation of government Credit will over time have problematic inflationary consequences. Acute underlying systemic fragility is masked only by the massive issuance of government "money-like" Credit. The issue is, at its core, more financial and economic than political.

One of the challenges of analyzing Bubbles is appreciating that powerful forces inherently arise to perpetuate them longer than one would have initially believed analytically probable. The tech Bubble went to incredible extremes - and then "doubled." Ditto for the mortgage/Wall Street finance Bubble. As an analyst, however, I've got to assume that the marketplace is today much keener to the problematic nature of Ponzi Finance dynamics.

The key to the rapid implosion of the mortgage/Wall Street Bubble was the combination of its unwieldy scope and the disappearance of the GSE "backstop bid." At $2.0 TN, arguably we've quickly reached ample "scope" in the market for "federal" obligations. As for the "backstop bid," foreign central banks have for some years now been massive buyers of Treasuries and agencies during periods of unwieldy global dollar flows. And with more comments out of China today, there is even greater support for the view that foreign appetite for our debt instruments is waning in the face of the unprecedented inflation in their quantity. Moreover, market perceptions are that Treasuries are bulletproof.

I know better than to try to predict the timing of problems developing in the Treasury and currency markets. But I do see all the makings for the next problematic leg of this financial crisis. As I have written before, our nation's predicament becomes much more problematic when perceptions turn against the Treasury/agency marketplace.