More than a full year has already passed since the US financial bubble burst, jeopardizing the future of global economic peace and stability. Since then we have heard lots of talk but simply no convincing action or any credible commitments. Rather to the contrary, it seems that the same game is going to be repeated once again.

Let’s see what has been happening up to now and go back more in depth to the reasons lying behind the scene. What distinguishes this crisis from the others is that: (1) it emerged from the United States, that is, from the center and not the periphery of the global system; (2) it reflects the collapse of a bubble in an economy driven by repetitive bubbles; and (3) the bubble has grown into the financial structure in a uniquely complex and intractable way, through securitization -- the bundling of mortgages and derivative products to investors.

As underlined by James K. Galbraith, bubbles are endemic to capitalism, but after the early 1930s they did not predominate. In the recent crisis, industrialization and technology set the direction. It was only in the late 1990s with the information technology boom that financial considerations -- including the rise of venture capital and the influx of capital to the US following the Asian and Russian crises -- again came to dominate the direction of the economy as a whole. The result was capricious and unstable and followed by a financial collapse.

As the current housing bubble collapsed a commodities bubble succeeded it, notably in oil, food grains and base metals. This is a speculative bubble, which cannot be explained by fundamentals: oil prices doubled from mid 2007 to mid 2008 before subsiding, while the total demand for oil was up only a few percentage points. Regulatory changes, put into law at the turn of the 19990s that allowed financial speculation in the future commodities market exacerbated this process.

I am afraid that the same game is to be repeated once again. Among many others, Nouriel Roubini’s latest article (Financial Times, Nov. 1, 2009) summarizes the current situation and coming danger. As he puts it: “Since March there has been a massive rally in all sorts of risky assets -- equities, oil, energy and commodity prices -- a narrowing of high-yield and high-grade credit spreads, and an even bigger rally in emerging market asset classes (their stocks, bonds and currencies). At the same time, the dollar has weakened sharply, while government bond yields have gently increased but stayed low and stable.” In other words, as he puts it, since March, while the dollar is declining, risky asset prices have risen too much, too soon and too fast compared with macroeconomic fundamentals. One reasonable factor behind this process is the wave of liquidity at almost near-zero interest rates and quantitative easing.

However, the fall of the US dollar, which reflects, in our view, the erosion of the American hegemonic position and its structural weaknesses, triggers a new pace of global carry trade waves. This is almost what happened since the early 2000s. According to this, investors who are shorting the US dollar to buy on a highly leveraged basis higher-yielding assets and other global assets are not just borrowing at zero interest rates in dollar terms, they are borrowing at very negative interest rates -- as low as negative 10 or 20 percent annualized -- as the fall in the US dollar leads to massive capital gains on short dollar positions.

As in the past, easy money, quantitative easing, credit easing and massive inflows of capital into the US via an accumulation of Forex reserves by foreign central banks is seen as a short term and urgent solution as this process makes US fiscal deficits easier to fund and feeds the US equity and credit bubble. Furthermore, as Rubini underlines, a weak dollar is good for US equities as it may lead to higher growth and makes the foreign currency profits of US corporations abroad greater in dollar terms.

So far, so good. But what about the coming storm, that is, its negative repercussions? The weak dollar has resulted in an asset bubble almost everywhere and almost every market as noted above. Therefore, one of the worries for countries is to prevent this rising bubble. Second, the overvaluation of local currencies against the dollar forces countries to make some partial solutions such as excessively low interest rates and monetary easing through open market operations. Some other countries, such as Brazil, concerned about the hot money driving up the currency, has already decided to impose the so-called 2 percent Tobin tax controls on capital inflows.

When problems are global in nature, solutions should also be global. Partial and nation-based solutions may cause even more harm. The message is quite clear: This situation cannot be sustained. As in the current crisis, a new wave of crises emerges when the world loses confidence in the quite fragile system -- dominated by the two extreme but complementary cases of China in surplus and the US in deficit of almost every kind -- that supports the dollar, because of perceived instability, corruption and mismanagement, leading to a breakdown of regulatory authority and market order.

As James K. Galbraith and a group of the wise warned before President Barack Obama came to office: “The current recession will dampen commodity prices for the time being. However, the next administration may not enjoy a climate of reliably stable prices that has been the norm since the early 1980s, making possible the non-inflationary demand expansion that had created full employment by the end of the 1990s. Every step in that direction risks being bedeviled by the instability of basic commodity prices and by the precarious state of the dollar itself. Forces hostile to policy initiatives will exploit these vulnerabilities, to discourage and thwart any systematic strategy favoring economic growth or a new direction for economic development under the next president.”

In my view, we are passing through such a step. Therefore, the future of the world economic system and the future of Obama himself depend on his ability to change this game.