The Dow fell more than a hundred points. The euro/dollar exchange remained about where it was. Gold dropped back $4.10.

The news from the housing market is still grim. Home sales are falling . Inventories are building. Prices are coming down.

Consumers had been ‘taking out’ hundreds of billions in cash from their rising house values. Now, house values are falling and they’re having trouble putting it back in.

Yes, Fortune magazine reports, “Home Equity Loans Soar.”

Foreclosures are rising too, of course. And now they’re in the ‘good neighborhoods,’ as well as the slums. “Big houses; Big problems,” says an article in Newsweek .

Even the wealthy are said to be feeling pinched. The Orange County paper says the rich are ‘belt tightening’ along with the people who cut their hedges and fix their roofs.

But let’s not get caught up in the worms this fruit has produced...let us look at the capitalist orchard itself.

When we left you yesterday, we promised an explanation. How could it be, was the question on the table, that capitalism’s leading race should be left behind in the biggest burst of wealth-producing growth the planet has ever seen? And now, those people face a slump, maybe a recession, with no savings and no margin for error. Their government, too, is in no shape to help. President Bush will propose a budget this week – one with the biggest hole ever, a deficit of $410 billion. And if federal finances follow the pattern of the most recent recessionary period, this hole will deepen into the world’s first $1 trillion government deficit.

“I believe you mean $3.1 trillion,” corrects The DR Australia’s Dan Denning.

“How can the dollar not fall when people get a load of that budget? It's astonishing really.”

“Yeah, what’s a few tril these days,” chimes in Chris Mayer. “The budget is, well, shocking – even though it shouldn’t be. I mean, we all knew what was going on. In fact, as Shadow Statistics John Williams often points out, the deficit is much worse than what they are saying, because they exclude social security payments and other things. I’m sure Williams will be writing about this soon. He always does.

“At some point, the dollar gets cheap enough that foreigners feel pretty good about picking up U.S. assets. We’re already seeing this actually. Last year, foreign investors’ purchases of U.S. assets increased 93% over 2006. I think you’ll see more of that. Of course, it’s painful when you’re early. China’s purchase of Blackstone has already lost a third of its value. But, I know I’ve read about how the Chinese are eyeing U.S. timberland, for example.”

How did such a lucky, rich, productive people come to this?

The background for this question is as follows:

The period 1980-2007 has seen more economic growth than any other period ever. More cars, more televisions, more highways, more hotels, more concrete, more Internet connections...just about more of everything was produced than in any similar 27-year period in history. In other terms, more money was invested and earned than ever before. And more people added more to their wealth than ever too.

The condition precedent for this explosion of wealth was that the world turned away from political change and towards market change. To the largest nation in the world, Deng Tsou Ping announced, “to get rich was glorious.” All of a sudden, a billion people were bussing, humping, and schlepping – not to build a proletariat paradise, but to make money. To the north, the Soviet Union was never defeated; it simply fell apart, crushed by the weight of its own central planning. By the end of the ‘80s, it too pronounced itself in favor of making money. And by the early 2000s, Moscow was the most expensive city in the world, with so many millionaires its politicians couldn’t shake them down fast enough.

Meanwhile, in Britain and America there were soft revolutions too. Maggie Thatcher and Ronald Reagan ushered in a new era where money and market solutions were said to be the cure for almost every problem. Regulations were eased or scrapped altogether. Marginal tax rates were cut. The ‘spirit of enterprise,’ as Reagan quoted writer George Gilder, would make us all rich. Those who could innovate would create new wealth. Those whom the spirit of enterprise did not touch directly could buy mutual funds. The market was the source of wealth. All you had to do was to be “in the market” and you would get rich.

For the first 20 years it almost looked true. The Dow rose 13 times from ’82 to ’00. Then, it slipped. But, with a huge in-put of new cash and credit from the financial authorities, it started up again. Meanwhile, houses went up too. After a period of 100 years when house prices only kept up with inflation, from ’97 to ’07 they shot up about 70% in real terms.

It was true, of course, that average hourly wages were lower in ’07 than they had been in the early ‘70s. But people were undeniably richer, weren’t they? Stocks are much higher than they were in ’82. (Still, in inflation-adjusted terms, the person who bought stocks and held them for the last 10 years is only about even – at best.) And how many people have stocks? Savings went down during the whole period. (Why save money when you live in such a dynamic, wealth-producing society with access to so many job opportunities and so much credit?) Most people are lucky to have a few pathetic mutual funds in a 401k account. As for housing, it is more handsome and more expensive today than it was 27 years ago, but far more debt leans against it. In terms of net wealth, we have not seen any reliable figures, but we estimate that the average homeowner is poorer. Housing may be up 70%, but total debt has more than doubled. You do the math.

*** How was it possible that the world’s most privileged and advanced people did not really benefit from the Free Enterprise boom of 1980-2007?

The answer we give is this:

There is no magic to Free Enterprise. It is the best way to create wealth, but it does not prevent people from making mistakes. Capitalism offers people a chance to make money. But it also offers them a chance to make fools of themselves. Free Enterprise – like the rest of life – merely permits nature to take her course.

In a centrally planned economy people get what they deserve, but rarely what they really want. Mistakes tend to be enormous...and petty. Results vary, but experiments with central planning always end in pathetic messes.

Results vary in capitalism too. Some people tend to do very well. Others don’t do so well. Economies lurch from boom to bust, sometime favoring one group, sometime favoring another. Sometimes the farmers over-invest and go broke. Sometimes the builders over-build. Sometimes filmmakers can’t seem to make a hit. It is like life itself, an old chaos about the sun. But out of this chaos, typically, comes progress, growth and wealth. Mistakes are made, punished and corrected. Innovations usually fail, but sometimes succeed. The rich get richer and then go broke. The poor get poorer and then get lucky. No one controls the process. No one can predict its outcome, but somehow, it bumbles forward.

Occasionally, in what is basically a free-market system, a whole class of people gets the wrong idea. This is what happened in America (and elsewhere...mostly in the Anglo-Saxon economies) in the last quarter-century. They thought capitalism would make them rich, so they spent as if they already were rich. They thought jobs and credit would always be plentiful, so they saw no need to save money. Their leaders said they would prevent anything from going wrong and the poor saps trusted them.

Instead of preventing things from going wrong with capitalism, the feds were distorting it so as to guarantee problems. A free economy, as opposed to a controlled, centrally planned Soviet-style economy, is one in which prices are set by free markets. But the feds insist on controlling the most important price of all – the price of money. They control both the quantity of money, thereby indirectly influencing the value of it; they control banking rules, which make credit relatively harder or easier to get; and they control the rate at which the central banks lends to its members, thereby setting the foundations for the whole credit structure.

After Paul Volcker left the Fed in ’86, America’s central bank began misleading the masses. Its low rates and easy lending policies – combined with the Bush administration’s reckless spending and Asian’s reckless saving (in dollars!) all conspired to lead the lumpenhouseholder astray. He thought he had more money than he really had. He spent more than he really should have. He saved less than he needed to. And he got what people who do those sorts of things get: a financial setback.

‘But why did his wages fall?’ you might still want to know.

Well, the easy answer is that all that ‘stimulus’ offered by the feds had quite an effect – mostly in Asia. Thanks to globalization and Internet communications, it was easier than ever for all those Asians, finally free from communist central planning, to compete. Who were they competing with? The low and then middle wage earner in America. Naturally, they dragged down the cost of low- and medium-skilled labor.

‘But in Europe, wages went up,’ you protest.

Yes, they did...slightly. The standard explanation is that Europe was able to maintain wage growth by investing heavily in new capital equipment and training. European economies are ‘high cost’ economies, where employers can’t afford low-productivity jobs, because the social charges are too great. Instead, they aim for high-productivity, high-skill jobs, where the Asians haven’t been able to compete – yet. Whether this explanation is correct, we don’t know. It certainly sounds plausible. In any event, Europe has been able to keep wages high and, until recently, has managed to maintain a comfortable trade balance with Asia.

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