The imbalance of trades created a credit expansion. For example, Japan banks used the trade imbalance to increase the money supply 356% in the 1960s. At the end of 2001, the U.S held $2.3 trillion indebtedness to the rest of the world or 23 percent of GDP and $500 billion surplus is reinvest back into U.S dollar dominated assets. One could argue that credit growth is equivalent to GDP growth and therefore manageable. Growth is a function of corporate profitability and profit alone sustains the growth not debt with debt provide short term benefits. Private invest rises more than consumption during strong economic growth and personal consumption makes up the majority of demand in all major economies. 1990s experienced larger GDP than normal as an increased share of private investment purchased software and equipment for the dot.coms and telecoms. As financial credit worthiness worsen, credit extension slowed down expanding only 2 percent in 2002. Hard hit by credit troubles companies were quick to fire employees unemployment between Oct 2000 and June 2002 rose to 8.4 million and the rate rose to 5.9%. Consumer indebtedness is fueling consumption in the U.S. Consumers are have a hard time servicing their debt and borrowing 78% of GDP. Debt can not expand faster than income indefinitely. The sharp debt is occurring at a time when interest rates have never been cheaper. Pressure starts to mount against the consumer as interest rise and interest payments become a heavier burden. Without new loans to refinance old loans they must declare bankruptcy. The bubble does not recede slowly, it crashes. Switching to the government sector, in 2005, a federal debt of $8 trillion will expense the government $500 billion in interest payments, 4.5% of GDP with little doubt the government can service its debt. Systematic banking crisis accompany economic crisis, for example, 30 percent of banks fail in the great depression. Duncan points out that the risk is the $150 derivatives market meltdown.[Learn More ...]

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