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Bubbles are seductive, seductive and more seductive. The key issue stated differently: The extreme level of debt (“stock”) is sustainable only as long as extreme amounts of new Credit (“flow”) are forthcoming.

But what about sustainability? How long can our system expand Total Debt at an annual pace of 25% of GDP? And what are the consequences of this unprecedented Credit inflation – with respect to financial and economic stability (both domestically and internationally)?

But Bubbles always burst, and this one should have been pierced several years ago. When Credit growth inevitably slows, or if interest rates spike significantly higher or the dollar dislocates on the downside, recession will be the least of our worries.

Although faster growth in the rest of world may support the adjustment process, part of this adjustment will eventually have to come from an adjustment of the saving-investment gap in the United States… A considerably larger correction will be necessary for the public saving-investment balance, with the current fiscal stance certainly not being sustainable in the long run. Such a correction will in all likelihood imply lower growth for some time. The choice is, however, not between correction or no correction, but between a correction sooner rather than later. The current situation is not sustainable and an adjustment is inevitable. A timely one may in the end be less costly than a postponed but eventually more disruptive one…

We will get our long overdue market adjustment as soon as the political and monetary authorities decide on an appropriate scapegoat to blame for the upcoming reality of a planned financial accident. Russia? GSE's? Mutual Fund fraud and scandal? Terrorist event? It will happen -- you can count on it.

Richard W.

The fundamental error people have made when suggesting that consumer debt has become unsustainable is that they are confusing stocks with flows. Debt levels are a stock, a fixed number. Debt service, the monthly minimum payment, is a flow, a recurring charge. If we were to compare debt to income, as do most who suggest debt levels are too high, we would be comparing a stock variable with a flow variable. It can’t be stressed enough: whenever comparing economic data, be sure that the variables are only of one type.

The fundamental error economists make is never taking a course in calculus so that they can understand the relationship between "stocks" and "flows".

While total household debt may be increasing, families are not overburdening themselves with debt payments they cannot handle...

Had to Laff out loud at that one. Debt going up but that's ok because we have inflated real estate to balance it out. Debt payments going down, but how many of those are 7/23 and how many are 3/27? There's a greater fool theory at work here, I know people who tell me their balloon mortgages are ok, because they plan to trade up, or rates will stay low. The greater fool is whoever loans them more money in the future. Instead of debts of 3X income it will be 5X income.