Doug Noland, investment strategist for Prudent Bear, on global inflation, the credit market dislocation, China, bursting bubbles, central bankers, mortgage bubbles, derivatives, the real estate bubble, and GSEs and Munis. Don't go here looking for sunshine and fuzzy blankets. Then there's Starbucks.

This week’s announcement that Starbucks plans to close 600 stores and fire 12,000 employees is emblematic of the major restructuring that lies ahead for the deeply maladjusted U.S. Bubble Economy. Throughout the real economy, businesses that had previously luxuriated in robust profits during the Credit and asset inflation-induced boom now see earnings and cash-flows rapidly erode. During the boom, Starbucks aggressively spent on capital expenditures, while expanding its employee base, product offerings, and real estate commitments. “Money” was easy, revenues were easy, and growth was easy.

For the economy overall, the enormous expansion of mortgage (and other) Credit poured spending power throughout, especially in the “services” sectors. This purchasing power was “multiplied” by additional borrowings by the likes of Starbucks and others, as well as by the real estate developers borrowing, building and leasing space to tens of thousands of coffee shops, retailers, restaurants, hotels, casinos, nail salons, health clubs and such. It amounted to a historic borrowing and “investment” boom in building out a massive consumption/services-based infrastructure. Now, with the Credit Bubble having burst, the economic viability of broad swaths of this economic structure is in question.

Years of Credit, asset price, and consumption-based investment inflation created a deeply ill-structured real economy. Simplistically, the U.S. Bubble economy was structured for a particular variety of inflation. As long as Wall Street could inflate mortgage and other asset-based Credit, along with real estate and stock prices, additional purchasing power would be created and distributed for spending throughout the economy. Sufficient business and government cash flows ensured adequate household income growth to go along with booming – and self-reinforcing - asset price gains. As such, Household Net Worth (asset values less liabilities) swelled by about $4.0 TN annually for the finale Bubble years 2003-2006.

And as the “world’s reserve currency,” our Credit system was able to generate endless new (and mostly top-rated) financial claims that so easily financed our import buying binge. Meanwhile, with business profits generated with such ease in the booming finance, consumption and asset sectors of our economy, the U.S. and global Credit booms worked deleteriously to hollow out our nation’s manufacturing base.