You wanna know what is going on? David Rosenberg explains…

“US consumers are cutting back, and where they are not cutting back, they are scaling down. This new cycle is all about ‘getting small’ and it is deflationary. For yet another in the litany of signs pointing in the direction of social change towards thrift, have a look at what is transpiring at the upper echelons of the income strata – Now Even Millionaires See the Benefits of Budgeting on page B5 of the Saturday NYT is a must read.

“Not only are the rich trading down, but the article quotes a high net worth financial advisor who said ‘many of our clients are very happy to be sitting on bond portfolios and cash reserves.’ And see the article on page 2 of the Sunday NYT – Beauty Products Lose Some Appeal During Recession. According to the NPD Research Group, total sales of department store beauty products are down 7% from year-ago levels. Women are apparently opting for the ‘natural look’ – “some people are selectively replacing higher-priced items with cheaper products from drug stores and discount stores.”

Right on, David!

And here’s the CEO of Pepsico:

“The age of thrift is here.”

Even in Japan, after 20 years of coughing and sneezing, people have caught “the thrift bug,” says The New York Times.

What’s a consumer economy need in order to keep growing?

Uh…it’s needs consumer spending.

What do consumers need in order to boost spending?

Uh…they need more money!

Oh, there’s where it all starts to come apart, doesn’t it? Where do they get more money? They either earn it…or they borrow it. And right now, they can’t earn it – not with 12% unemployment in California! Workers have no bargaining power. And they can’t borrow it either. The banks won’t lend – not with the value of their collateral still falling.

Word comes this morning that mortgage delinquencies have hit a new record. And here’s a headline warning of worse to come:

“$30 billion home loan time bomb set for 2010.”

Even solvent homeowners who aren’t forced into foreclosure still find it beneficial to walk away from their houses. “Strategic defaults,’ says The Los Angeles Times, are becoming a problem for mortgage lenders.

We didn’t read the article. Instead, we began to think. What if we owned a house worth $200,000 with a $300,000 mortgage? What would be the smart thing to do? Easy…walk away from it. Then, buy it back at auction!

Desperate consumers do what they have to do. Canny consumers do what’s smart. And now it’s smart to walk away from any debt that you don’t actually have to pay.

As for adding more debt, you can gage yourself from the comments above, consumers are not eager to borrow. They’ve seen what happens when they go too far into debt. They’re older and wiser than they were in the bubble years. It’s been 10 years since the tech bubble exploded. Since then, stock market investors have made nothing – zero. And now houses are falling too.

So, if a fellow needs money for his retirement, where is he going to get it? Not from his house. Not from a pay raise. And not from his stocks either. He needs savings. He needs real money.

Americans aren’t so stupid after all. When they need to stop spending, they stop spending. When they need to save, they save. Too bad about the economy.

Yes, what is good for individuals seems to be bad for the economy. When people save instead of spend, the consumer economy stalls. And then economists think there is something wrong. They think an economy needs to expand constantly. And so, they try to find ‘solutions’ to the ‘problem.’

Actually, there is no problem at all. It’s just the way capitalism works. There are booms. And there are busts. Periods of growth…and periods when the mistakes made during the boom are corrected. There’s a time for every purpose under heaven. That’s the way it works. The economy breathes in and it breathes out.

And there’s always some dumb economist trying to smother it with a pillow!

A report from the world’s biggest bank, HSBC, tells us the dollar’s days are numbered.

“The dollar looks awfully like sterling after the First World War,” said David Bloom, the bank’s currency chief.

“The whole picture of risk-reward for emerging market currencies has changed. It is not so much that they have risen to our standards, it is that we have fallen to theirs. It used to be that sovereign risk was mainly an emerging market issue but the events of the last year have shown that this is no longer the case. Look at the UK – debt is racing up to 100pc of GDP,” he said

The Telegraph reports:

“Crucially, China and rising Asia have reached the point where they can no longer keep holding down their currencies to boost exports because this is causing mayhem to their own economies, stoking asset bubbles. Asia’s ‘mercantilist mindset’ of recent decades is about to be broken by the spectre of an inflation spiral.

“The policy headache was already becoming clear in the final phase of the global credit boom but the financial crisis temporarily masked the effect. The pressures will return with a vengeance as these countries roar back to life, leaving the US and other laggards of the old world far behind.

“A monetary policy of near zero rates – further juiced by quantitative easing – is completely incompatible with circumstances in most of Asia, the Middle East, Latin America, and Africa. Divorce is inevitable. The US is expected to hold rates near zero through 2010 to tackle its own crisis.

“What is occurring is an epochal loss in the relative wealth and economic power of the old G10 bloc of rich countries compared to rising regions of the world. The euro, yen, sterling, Swiss franc and other mature currencies will be relegated along with the dollar in this great process of rebalancing, but the Greenback will bear the brunt.”

That said, we repeat a headline from Seeking Alpha:

“Dollar shorts should look out.”

We agree with HSBC and the Telegraph: the dollar will probably slide – especially against Asian currencies – for the next few decades.

But that’s the long term. In the relatively short term we still face the shock of another leg down of the credit contraction crisis. Risk is likely to make a comeback. When that happens – and it could happen in a ‘Red October’ – the dollar will seem like a relatively solid refuge. This is what happened last year. We wouldn’t be surprised by a replay of that ‘flight to safety’ we saw at the end of last year.

But we know what you’re thinking: what? When did the dollar become a ‘safe currency?’ Of course, it’s not safe. But when the end of the world approaches, it will seem safe.

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