“My bills are all due
And the kids all need shoes
And I’m busted

“Coffee is down
To a quarter a pound
And I’m busted.

“I went to my brother to ask for a loan
’Cause I was busted
I took the bait like a dog takes a bone
’Cause I was busted

“My brother said there ain’t a thing I can do
My wife and my kids are all down with the flu
And I was just thinkin’ ’bout callin’ on you
’Cause I’m busted...”

The old Ray Charles song might be coming back in style. During the boom years of the ’90s and the ’00s, it made no sense to people. ‘Why not just take out a credit card?’ they wondered. ‘Or, refinance the house?’

But now credit is becoming scarce and busted is becoming plentiful. At least, that is what we expect.

Yesterday brought mixed news. The Dow dropped 120 points. The dollar rose slightly, leaving the euro above $1.57. Gold remained a little below $950.

The Wall Street Journal calls the last ten years a “lost decade” for stockholders. The S&P is now about where it was in 1999. Stock market investors are ten years older and wiser; but not a penny richer.

And now they’re beginning to wonder about the whole scheme of things. The stock market was supposed to make them rich. “Stocks for the long run,” was the mantra of the late ’90s. Buy...hold...you can’t go wrong. But 10 years seems like a long time. If they don’t go up in a one decade, what makes buyers think they’ll go up in the next? Plus, even now, the S&P still trades at a P/E over 18 – which isn’t cheap. It seems as likely that stocks will go down in the next 10 years as up.

And, of course, there’s the housing market. Ten years ago few people doubted that if they just put money into property and left it there, they would make a good profit. For quite a while, it seemed to be true. But now, for the first time in U.S. history, housing prices are falling nationwide. They’re down about 11% from the peak...and leading economists think they have another 20% – 30% to go. What’s worse, Americans are realizing that it costs a lot of money to hold onto a position in property. There are bills to pay – taxes, utilities, maintenance...all of which seem to be going up.

You could add to those things the growing realization that wages in the United States are not going up. This inconvenient truth was masked – for more than 30 years – by rising household incomes and increasing debt. Real wages per hour didn’t go up, but more Americans worked and put in more hours. Then, they turned to credit cards and housing finance to increase their spending power. Both of those avenues have come to dead ends recently.

But here’s a little bright spot. According to a Bloomberg report, the Fed’s efforts to loosen credit really have done the job. Mortgage resets have been much less of a problem than anticipated – because the resets are linked to Libor, which has been pushed down by central bank action.

Of course, people are still losing their homes in record numbers – but it’s not necessarily because of the mortgage resets.

Also, the feds are looking at various plans to bail out homeowners in advance of the upcoming elections. Neither party wants long lines of angry, homeless voters lining up at the polls in November.

But the malaise that is spreading over America is more than just a matter of numbers. Ten years ago, America seemed invulnerable. Its money was on top of the world. Its military could take on the entire rest of the planet, if necessary. Its stocks were flying. Its houses were rising. Its financial institutions were the most dynamic, innovative and solid on earth. Nothing could stop it.

We argued then that when nothing can stop you, everything will. And, in the event, everything did. Ten years later, stocks have gone nowhere...housing is on its way down...the Pentagon is gummed up in a trillion-dollar war it can never win...and Wall Street has revealed itself not as cunningly cupid, but as blunderingly stupid.

More than that, the fantasy failed. Americans permitted themselves such an extravagant conceit that they practically begged the gods to punish them. “They sweat; we think,” was the gist of it. They allowed themselves the illusion that their new, post-Reagan, Internet-savvy capitalism would make them rich without saving money...and without actually producing anything. They thought the rest of the world would extend them boundless credit – forever. Now the scales are falling from their eyes...they’re beginning to see things more clearly. As a result, consumer confidence has dropped to the lowest level more than 30 years. Most people think things are bad...and few think they will get better. In the history of such surveys, never have so few people expected their incomes to increase over the next six months – less than 15% of those polled.

But here at The Daily Reckoning headquarters, we are always optimistic. Yes, Americans will be busted and broken by the realities of the real world in the 21st century. But they will eventually be bent into a better shape.

*** Now, we look at the Bear Stearns of the North Atlantic – Iceland.

From Ambrose Evans-Pritchard in the Telegraph :

“Fitch said countries that run current account deficits above 10pc of GDP for any length time almost always come to grief. East Asia's debt crisis in 1997 erupted before any state reached double digits. Iceland's deficit is now 16pc of GDP. Latvia is at 25pc, Bulgaria 19pc, Georgia 18pc, Estonia 16pc, Lithuania 14pc, Romania 14pc and Serbia 13pc. The region will need $337bn in foreign loans this year.

“Borrowing in foreign currencies was all the rage in the heady days of the credit bubble. Most mortgages in Hungary over the last two years have been in Swiss francs, with the Balkans and Poland not far behind. This is now turning into slow torture. The franc has risen 5pc against the euro since October. The real level of the debt is ratcheting up.

“The foreign debts have reached 122pc of GDP in Latvia, 101pc in Estonia and 73pc in Lithuania, mostly in euros. For now the debtors are shielded by fixed exchange rates in Europe's ERM system, but this could make the shock even worse should the currency pegs start to snap.”

And this from our old friend, Steve Sjuggerud. “Is it time to buy Icelandic bonds?” we wondered.

“Well, the bonds sure should be a good buy...

“I haven't watched this too closely... But I think this is the basic story over the last week...

“Carry traders got margin calls from their banks. That forced a large amount of money out of a small currency (Iceland's krona), which caused it to depreciate.

“Short sellers caught on, knowing that the carry traders had to close out their positions, causing the currency to fall faster... then SURPRISE...

“The central bank caught everyone off guard and raised short rates to 15%(!) and took other drastic measures.

“So now...you've got short rates at 15%. You've got a currency that is significantly oversold (cheap) now relative to its history (it's always expensive), in a country with a triple-A credit rating and no risk to government finances. (The only risk is they're the perceived lender of last resort to Iceland's leveraged local banks)

“The currency is always volatile. But buying short-dated paper, with a 15% ‘tailwind’ in a triple-A rated country, when the currency has backed off so much, ought to be a good trade.

“As you probably know, I prefer the inflation-indexed long-dated bonds to t-bills, because the capital gains potential could be huge...

“Icelandic TIPS pay 4.5% now, plus inflation (which should be 6% this year). So that's a double-digit yield. But the TIPS go out as far as 2044... so the capital gains on those long dated bonds would be huge if the real yield fell from 4.5% to 3.5% or lower.

“A real yield of 4.5% is ridiculous. My thesis all along is the capital gains portion of the trade... but one thing after another has kept that real yield high.

“The currency is the big risk. Its volatility can't be taken lightly. But when you think about it, it's foolish to short a AAA currency yielding 15%. So now should be a good time to put the trade on...”

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