Yesterday, the Dow took its biggest drop in 15 months.

What is most curious to us is what happened during months 2 - 14: nothing. Instead, the Dow just sat there, like a FEMA official, not doing much of anything, while the nation took some of the biggest shocks in history. The price of its most precious resource - the stuff that makes its machines go and heats its houses - rose to record highs. And the worst storm in history passed over its black-oil rigs and blue bayous, almost wiping out an entire city.

Meanwhile, Americans continued to go into debt, continued to buy things, and continued to delude themselves about their place in the world and their future.

Investors Intelligence reports that financial advisors have been bullish for 154 consecutive weeks - the longest stretch ever recorded (since they began keeping track of such things 42 years ago).

Major Dow stocks have been cut in half; even the homebuilders are in decline. But the mood is still upbeat...positive...hallucinatory.

We just read another marvelous editorial by Thomas L. Friedman, who has become a kind of traveling minstrel to the empire...singing its praises throughout the world. If only the rest of the world - particularly the Arab world - could be more like us, he seems to say. We'll have more about that topic, perhaps, tomorrow. We never know exactly what we will write about until the words appear on the page.

That is the nice thing about barbarians. If they never appeared at the city gates, the imperial race would wallow in its delusions forever. Yes, dear reader, the Anglo-Saxon empire is on a downward slope. It has lost its edge. It no longer has an advantage in manufacturing, nor in energy, nor in money. Now it shoulders all the costs of maintaining a vast empire, but the benefits go to its new competitors.

That is the empty part of the glass. Yes, we will be hammered by history, as every empire eventually is. But, and here is the full part, we should be beaten into a better shape. This is why we are so cheerful in the face of imperial decline, dissembling at the Fed, an imminent stock and real estate market collapse, and the apparent incompetence of the Bush administration; it all helps take us where we need to go.

It is hard for a great people to be a good people. As the great imperial race becomes more and more cocksure, it becomes more and more delusional, and more and more insufferable. It comes to think its stock will never go down; that its economy is more "flexible and dynamic" (even though it runs $700 billion trade deficits); that it will save the whole world (even though it can't save a dime); and that the sun will never set on the empire. Pretty soon, it is reading columnists such as Thomas L. Friedman without giggling.

Also, as the empire ages, typically more and more people support the reigning delusions with habitual and mutual deceit. The Romans called it "consuetude fraudium." It becomes common, pervasive, and expected.

Evidence for this comes from yesterday's USA Today.

"Fraud booms with mortgage market," begins the article.

"As the U.S. housing market hits record highs, mortgage fraud appears to be rising from California to Florida, according to mortgage industry researchers and federal law enforcement agencies.

"According to an FBI report in May on financial crimes, 'Mortgage fraud is pervasive and growing.'

"Lenders last year reported to the FBI 17,000 suspected incidents of mortgage fraud, and the FBI's cases have grown from 534 in 2004 to 642 in the first half of 2005. At the IRS, criminal investigations of mortgage fraud from 2001 to 2004 have nearly doubled to 194 cases."

A recent case...

"In Kansas City, Mo., 17 people - posing as mortgage brokers, home buyers and sellers, appraisers and title-company employees - ran 'a massive scheme of fraudulent real estate transactions,' according to a lawsuit filed by ABN Amro Mortgage Group in federal court in June.

"In a suspected 'flipping' scam involving hundreds of houses, the defendants bought foreclosed homes at cheap prices, artificially inflated their values through false appraisals, then quickly resold them, the lawsuit says. They illegally profited from commissions and fees, the lawsuit says. ABN Amro, which underwrote and bought nearly 1,000 loans from the defendants, alleges that it was defrauded of millions of dollars."

What is particularly interesting about this is that involves the complicity of so many people. Was there not one honest democrat in the whole group? Apparently not.

*** On more than one occasion, dear reader, you have accused our daily missive of being focused too much on "gloom and doom," or being overly cynical. We recently mentioned this to our friend, Justice Litle...who is no Mary Sunshine himself...

"Oscar Wilde observed that a cynic is someone who knows the price of everything and the value of nothing," Justice said.

"That is a quote that haunts me sometimes. As I observe our world and comment on the state of things, cynicism is a common element of my writing
- sometimes I fear too common.

"But on the bright side, The American Heritage Dictionary puts me in good cheer. One of the three definitions of 'cynic' reads, 'A member of a sect of ancient Greek philosophers who believed virtue to be the only good and self-control to be the only means of achieving virtue.'

"While admittedly an erstwhile student of philosophy, I don't claim allegiance to any ancient Greek sect. No membership cards in my wallet, no knowledge of sacred rites or secret handshakes. Yet based on the description, I think these particular Greeks (the original cynics) were on to something.

"The ultimate source of virtue is a debatable question. The ultimate importance of virtue, however, is a given. No society can exist for long without ongoing efforts to teach, preserve and uphold its most important ideals. And whether or not self-control is the only means of achieving virtue, it is most certainly a byproduct of it. Virtue and self-control are interdependent; you cannot have one without the other.

"The interesting conclusion is that, while some modern cynics may be unhappy cranks who see the value of nothing, the original cynics were idealists. Oscar Wilde's sad remark did not apply to them. They knew the ultimate importance of virtue and self-control, and considered them to be the highest of all possible values. Their cynicism was born of idealism."

So there you have it. All this time you thought we were cranky old curmudgeons, when really we are idealists in the original form.

*** "U.S. housing boom is turning to a bust," says a headline in next week's MoneyWeek. Lenders' margins are being squeezed by competition, says the article. They are, "beginning to take the juice out of the market," says Edward Chancellor on Breakingviews.com. "The boom's days are numbered."

Here in England, house prices have fallen for 15 months straight, according to Hometrack. So far, the decline is so gentle that it has hardly been noticed. But on both sides of the Atlantic, investors are building up...prices are softening.

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