Now we’ve finally figured it out. We were sitting in a pub, listening to a crazy woman. All of a sudden, it was clear...what went wrong with the U.S. economy, we mean.

The dollar has dropped so low that America is becoming a shopping paradise for foreigners. Of course, we’ve been predicting that foreigners would buy up U.S. assets...

Already, we’ve seen Arabs make bids for the NASDAQ...and a big chunk of the buyout-firm Carlyle. Poor Carlyle took a hit last month. It made bad bets and lost 24% of its assets. So let’s hope Abu Dhabi got a good deal for its billions.

You’ll recall, dear reader, that your editor is moving to Florida. He does not intend to actually live there, only to become a resident. He lives in Europe, but he needs a place to call home in the United States too, for tax reasons (that he can no longer recall). Florida seemed like just the place, since it has no state income tax. Besides, we don’t really like the sun or the beach...so it makes it easier for us to stay away; otherwise, we might get homesick.

But we’ve been wondering about Killeen, Texas. What’s it like?

America is a cheap place to live. Especially if you don’t live in the major metropolitan areas on the two coasts. According to USA Today, you can buy a four bedroom, 2Ã,½ bath, 2,200 square foot house in Killeen, Texas, for only $136,000. That’s less than 100,000 euros – a price that would be unheard of in Europe. That’s not only the cheapest price in the United States...it might be the cheapest price in the entire world. Even in Granada, Nicaragua, the price for a similar house would be about $150,000. In Mexico City, you’d pay $277,000. And in London...well, don’t even think about it.

The USA Today report tells us that there is a huge, regional difference in housing prices in the United States. The price for the equivalent four-bedroom house is over $2.2...not nearly as much as you’d pay in central London, but still getting up there.

Meanwhile, other cheap alternatives in the U.S. are Minot, South Dakota, where the house would cost you $139,000...or Canton, Ohio, with a $146,000 price tag.

Here’s an obvious idea, dear reader: Sell the digs in Beverly Hills; buy in Killeen. But wait. You say there’s nothing to do in Killeen? We don’t know...we’ve never been there. Maybe they have no Starbucks...no TGIFs...no multi-plex cinemas...no super-shopping domes...no sports stadiums...no fancy restaurants. C’mon, use a little imagination. There must be something you can do. How about rodeos and bull riding contests? Maybe they hunt and fish. Maybe they spend long, slow Sunday afternoons rocking on the front porch. Or, maybe they just hang out at the local saloon. Hey...this is sounding like the sort of place we might like!

Maybe some Dear Reader from the area can tell us what the heck people do there.

Besides, if you don’t like it, you can always do what we do with our home in Florida – not live there. Just to make the math easy, let’s say you sell your house in Beverly Hills, or San Francisco, or New York, for $2,136,000. Then, you buy a house in Killeen, put your furniture in it...and keep driving. You’ll have $2 million left over. Invest it safely; shoot for a 5% after-tax yield. That’s an annual income of $100,000 – the equivalent of about $150,000 before taxes. Rent a little pied-a-terre in Paris...hang out on a Caribbean beach...or simply rent a house wherever you choose. We’re not clairvoyants...but it could be a very smart move.

The Case/Shiller housing index tells us that housing prices in the United States have fallen every month this year. If prices keep going down at the present rate, the average house in America’s top 20 cities will lose more than 5% of its value this year.

But that’s just the beginning, says an expert interviewed in the Las Vegas paper. Houses there are already down 5%...and he says they’ll probably keep going down at least until 2010, probably sinking another 15% of so.

In Las Vegas, people speculated on houses...they didn’t merely buy them to live in. What is a teaser-rate, no doc, ARM anyway? It is just an option to buy a house – if things go well. If they don’t go well, you’ve got no equity in the place; you just walk away, just as you would from any other option contract that expired out-of-the-money.

There are now some 30,000 housing units for sale in Las Vegas – and another 23,000 in some stage of construction.

Meanwhile, out on the coast, house sales in California are off 28% from a year ago.

And the poor builders! Lennar (LEN) has been cut in half. Toll Bros. (TOL) is down a third.

“If those numbers were not bad enough,” writes The Survival Report’s Mish Shedlock, “the number of ARMs that are going to reset in the next six months is staggering.”

“We are unlikely to find ‘a’ bottom until May 2008. ‘The’ bottom can be years away. It all depends on how much the Fed fights the slowdown (the more the Fed fights a needed recession, the longer the recession will be).”

And the recession has not even started.

What’s going on in the stock market? The Dow rose again yesterday – nearly 100 points. If there is a recession coming, the stock market doesn’t see it. What’s wrong with investors? Are they blind?

“Stocks are riding a wave of optimism fueled by the Federal Reserve,” says Grace Wong, writing at CNNMoney.com. “But maintaining the upbeat mood will prove difficult to do. Get ready for the hangover.”

Still, she continues, “there are plenty of clouds on the horizon that could put the Fed in a tough spot and derail the rally.

“Surging oil and gold prices, along with a falling dollar, have fanned inflation worries. A sustained rise in prices could limit the Fed's ability to keep cutting rates and could even force policymakers to raise rates.

“In the long run, the U.S. economic slowdown could also start dragging on corporate profits, which at large companies have been propped up by strong international business.”

Then, she quotes a money manager:

“‘It has been stuck in investors’ heads that when the Fed cuts rates it’s a good time to buy stocks,’ he said.”

“I don’t know...I don’t feel comfortable here...I think I’ll go back to Russia...”

The woman in the pub was probably crazy or drunk. Heavy set – her hair stood out...an odd reddish color. Her cheeks were red too. She looked as though she had just come in from digging up potatoes all day. She was speaking to no one in particular...loudly...with a heavy Eastern European accent. Everyone ignored her. But your editor writes with his ears.

“I thought it would be different here. But it’s the same. Just people have more money.”

Like the smell of Proust’s lemon cakes, the words of a lunatic set off a whole chain reaction of thoughts. First, of course, there are many reasons why the United States got into its present fix:

Asians saved so much money, it swamped Western capital markets and drove down interest rates.

Wall Street generally, and the lending industry in particular, figured out how to securitize debt and thereby “socialize” the risk from their investments. They got the fees; ordinary investors got the losses.

The dollar was cut loose from gold in 1971; as the world’s reserve currency...and the currency of the biggest spendthrifts on the planet...it led the entire global economy into a liquidity bubble.

The Greenspan Fed panicked in 2001...taking rates down too low and holding them there for too long – inciting the residential housing bubble.

Globalized labor markets cut consumer prices...increased corporate profits...and allowed huge increases in monetary inflation (leading to higher asset prices rather than higher CPI readings)...

We could go on. You’ve seen all these explanations...and many more...here at The Daily Reckoning. But we prefer the grand sweep of theory. We thought about what went wrong in the Soviet Union.

The real problem was that centrally-controlled prices don’t work. Prices provide valuable information. They tell people when to buy, when to sell, when to invest, when to save, when to hoard...and when to run for cover. But when prices are not allowed to move freely...people get the wrong idea. They begin to do stupid things. They produce too much of the wrong thing...or too little of the right thing. Mistakes accumulate...piled one on top of another...until the whole thing collapses in a heap, which is what happened to the Soviet Union. Towards the end, the Soviet economy was a massive value-subtracting enterprise. “We pretend to work,” said the working classes, “and they pretend to pay us.” It took natural resources and transformed them into finished products. But the products produced by Soviet industry were so badly designed, so shoddily made, so out-of-date, so unneeded, superfluous, and trashy that they actually had less value than the raw materials that went into them.

Now, back in the U.S.A., a credit drenched economy is actually subtracting wealth from the average person. People are getting poorer. Many are the contributing factors. But could the main reason be the same for America as it was for the Soviet Union?

Bill Bonner is the President of Agora Publishing. For more on Bill Bonner, visit The Daily Reckoning.