The Next Meltdown

It took one act of terrorism in 1914 to cripple the world's financial markets. Why it could happen again

In the world of finance, that was one happy Old Year. Whether they were buying Indian real estate or Brazilian commodities, traders and investors made serious money. Profits at Goldman Sachs exceeded the gross domestic product of Bolivia.

The best explanation for the good times is liquidity. Thanks to global integration and financial innovation, higher short-term interest rates have not translated into monetary tightening. On the contrary, the world economy has been swimming in credit of every conceivable kind. Money-supply figures for the U.S. understate the phenomenon because billions of dollars flow abroad every month to finance the American trade deficit....

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