We had a vision this morning.

Two headlines hit us like a rock in the head; in a flash, we saw disaster coming.

"Refco halts business" was the first of them. The news story must already be familiar to you, dear reader. The giant futures trader ran into trouble and ran out of money. All of a sudden, it couldn't honor its commitments.

"Area resale home prices peaking," was the second. It came from the Arizona Republic. The story went on to tell us what we were beginning to guess: house prices are weakening all over the country. In the last 12 months, the typical maison out in the desert has gone up almost 50% - to $263,000.

(Even that seems like peanuts to we poor American émigrés posted in London. Doghouses sell for more than that here.)

But what goes up goes down...or at least flattens out for a while giving inflation a chance to catch up with it. London houses are said to be going down in price. And in Arizona, price increases that ran about 4% per month have been cut down to only 1.6% last month.

Last year, the English, as well as the Americans, enjoyed a big bonus. Their houses increased so much they were able to 'take out equity' - by refinancing, mortgage-linked lines of credit and so forth - and continue their spending spree. It was as if they had looked around the house and found things they could sell on Ebay...a painting stripped from the bedroom walls...an old fur coat up in the attic...a lawnmower. None of this stuff did they miss.

In the United States, the loot from these sales brought in an astonishing $600 billion - or about 5% of GDP. That is, they made more money from refinancing their houses than they gained from salary increases, investment returns or any other source.

Now it is a year later and house prices are no longer rising as fast as they were. Houses are taking longer to sell. Americans are going to their closets and attics, looking for equity. But they find that they are bare; they've already sold off all they could. There is no longer any equity to 'take out.'

What can they do? They have no choice. They must give up something. Already, in Britain, the governor of the Bank of England warns that a fall off in consumer spending may soon lead to recession. Can America's recession be far behind?

A slowdown in American spending and American living standards, however, is only the beginning. Chinese manufacturers depend on buying from the United States. In the new globablized economy, our working-class, factory-laden neighborhoods are on the other side of the globe. And there, they operate on wafer-thin profit margins...or no margins at all. And Chinese banks, already shaky, are heavily exposed to Chinese companies on the one hand...and to U.S. dollar bonds on the other. What begins as a consumer pullback in America will likely develop as a capital, social, political and financial crisis in China. It will be Refco raised to the power of 10, with bankrupt businesses, supported by bankrupt banks, held up by a bankrupt government afraid to let anything go down for fear that the masses may revolt.

But China will not be the only one facing bankruptcy. David Walker, auditor of the federal government's books, tells us that the total of all federal commitments and obligations has a present value of $43 trillion, or about $350,000 of debt for every full time employee in the country. In addition, there is private debt - equal to nearly 20% of household income.

Both the feds and private households have gotten into the habit of spending more than they can afford. Where does the money come from? It comes from China and other, mostly Asian, lenders. Nearly nine out of ten of the dollars needed to fund the federal deficit come from foreign sources. One of the major sources is China. And when U.S. consumers cut back their purchases of Chinese-made geegaws, the Chinese - in addition to having plenty of problems of their own - will have no funds to recycle back into U.S. capital markets. Result? A spike up in Treasury bond yields...a deeper recession in the Anglo-Saxon world...and an end to the era of easy money.

Of course, the financial world is far too complex for your editor to try to anticipate in detail. Anything could happen. In a crisis, for example, U.S. Treasuries could even be seen as a safe harbor. Yields could go down rather than up. That is why we buy gold rather than U.S. Treasuries. At current low yields, there seems little to be gained from treasuries...and a lot to be lost. Gold, on the other hand, has been the best-performing financial sector this year - up about 16%. We doubt that the bull market in gold is over; we suspect it is just beginning.

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