Are you serious financial innovation – must commend you for making such a statement in current environ..pull up Martin wolfs article in the ft on the value add from the financial sector vs. profits. What you should be asking youself is whether the bankrupt political economic decisions made over the past decades have had the desired effect. I will tell you flately that the current economic course is unsustanable. The US economy is a trmped up hedge fund leverage and all and we all know that over the long run you don’t outperform. enough said.

There is also an article in the FT today discussing China’s defense of the current free trade regime. Ultimately this data is the flip side of the US current account deficit and the incumbent globalization driven macro system.

What is so interesting, though not at all surprising given the US bags productivity and China gets development model, is that the curve is overcrowded on the both ends, which makes application of the “Fed” model difficult. The question become is the yield curve permanently impaired by what seems to me an unsustainable (eventually?) disequilibrium in global capital flows. I suspect the system will be broken from below (grassroots) rather than from above (government).

It makes sense then that we shouldn’t be shocked that private investors are not keen to buy sub 0% real return securities with duration. This fact alone should tell you the the current yields are in disequilibrium and the purchases not economically rationale -as sester alludes. likewise the read on the dollar is relatively bright as long as the system lasts. I read the China comments today to be public jawboning for no change in “fundamental” principles. I also read the current round of Bush speaking engagements at Factories and free trade jawboning as a concerted attempt to stave off what will eventually be a fundamental rethinking of international trade dogma.

Curiously the incumbent monetary regime should be good for equities (even beyond the pure mathematical implications of low interest rates). On the flip side in the face of a dissolving system, equities would clearly struggle under the weight of much higher interest rates.

All that said, this is a classic example of Prisoners Dilemma. Yet another case of TBTF, so expect those sovereign flows to keep coming.

In any case, the USA no longer does tradeables anymore, so of course we have a deficit. Manufacturing is for China, services for India, and Americans get financial innovation. Which of these gets the word ‘innovation’? Financial services. That’s just the evolution of the good ol American way. ‘Nuff said.