Since 1990, financials have roughly tripled their share of the S&P market cap, from about 7% to over 20% today. This is a proxy for what I call the debt industry. This massive industry with all its other associated services - lawyers, consultants and so forth - is going to collapse as the credit bubble ends. It is the basis of the so-called services economy. When it is (largely) gone, the error of encouraging the export of the US manufacturing base will be brutally clear.

Believing in the services economy is akin to taking seriously the joke about communities surviving difficult times by taking in each others’ laundry. Not that I’m against trade, countries should recognize comparative advantage and exploit it. But in the case of services that means exportable services. Creating debt, which is the U.S. specialty service now, is probably not going to be in huge demand.