U.S. bonds are going down, which means interest rates are going up. How much? How fast? We can't tell you. But it appears that the great bull market in bonds ended in June of 20003. Since then, yields have risen (bond prices fell). What we think this means is that the great empire's stock reached its zenith more than two years ago. If we're right, it will be downhill for many years.

Paul Volcker was in the news this week. The former Fed chief remarked that the, “U.S. had better watch out,” for higher inflation levels. It was Volcker, we recall, who set America's bull market in bonds in motion - back in the early ‘80s. He did it by raising the cost of credit, and practically eliminating consumer price inflation. For the next twenty years - until June of 2003 - interest rates were allowed to fall, bringing with them huge increases in asset prices...and debt.

The other thing Volcker said was that the country was spending about 6% to 7% more each year than it earned. The difference is made up by those very nice people in Asia, who lend us money at low rates of interest without looking too hard at the collateral.

These remarks were not new to us. They are the same thing we have been saying for years. But it was a comfort to hear them from Paul Volcker. We were beginning to think we had missed something. Many economists say the trade balance is meaningless. What counts is profits, they say. American businesses are very profitable, because they are using cheap Asian manufacturing! This makes the trade balance negative...but the cash is still flowing to the United States

Delphi, for example, is a business that couldn't make it - as long as it had to pay U.S. labor rates. But under protection of the bankruptcy laws, Delphi is transforming itself into a “platform” company - outsourcing its production to low-cost manufacturers in Asia, while insourcing the resulting savings and profits to the United States.

We don't doubt that is happening. And we don't doubt that many U.S. companies have become more profitable as a result. What we doubt is that it changes the entire meaning of the national accounts. Yes, some U.S. assets may have become more valuable as a result of this new, globalized world. But Volcker is still right; the U.S. is living beyond its means. Sometime in the future it will have to live below its means, just to get even.

The average man and economist salutes Alan Greenspan for this long period of growth and stability. But it was really Volcker's doing. Greenspan's contribution was first to avoid interfering with it...and then to carry it to excess. Where Volcker tightened...Greenspan loosened. Where credit was once too expensive...now it is too cheap. Where stocks were too cheap...now they are too expensive. Where houses were a bargain...now they are a bubble. Where Americans were troubled and cast down...now they have never been surer of themselves.

There are tides in the affairs of men, as the Bard of Avon once put it. The tide in the U.S. credit market seems to be ebbing. When it goes out, it will carry a lot of trash out to sea.

*** Hmmn. The reincarnation of King Solomon weighs in on Empire of Debt:

“Okay. Here's my take. Your idea to send a copy of your new book, Empire of Debt to our elected officials in Washington is a complete waste of time and money. But, not for reasons that a bunch of goofy libertarians might think.

“First, why bother trying to enlighten people who are PROVEN incompetent? It's like, after determining that your newborn baby can't drive a car, giving it a second try when it becomes a toddler.

“And then, second, what kind of a solution is cutting spending? Is that the best idea you can come up with? If so, then what makes your vision of the future any more vital than the fantasies of our elected officials?

“You will only play into the problem of our present day culture if you follow through with your idea to send free copies of your book.

“You will prove both your incompetence to solve the problem and your willingness to throw good money after bad, the very tendencies you spend so much time railing against (and rightly so I might add!).

“I must be the reincarnation of King Solomon. Because the more I see of men, the more I am amused by their vanity.

“That's why I'm sure you'll send the book. You'll think, what's the harm in having a little fun on the march to Babylon? But once you discover that the whores are not impressed by your work, will you then appreciate how you do more to justify their leadership in the downward spiral?

“My guess is that you will not. You will instead vainly proceed to continue insisting that you are more qualified to lead the way to Beezlebub (I had to use that word... it gives me something to laugh at).

 “You asked for it.”

*** Longtime sufferers of our daily missives know we have no solutions to offer. Only mockery. Cutting spending might keep more money in the hands of the people who earn it, but given the state of consumer spending on gee gaws and other useless trinkets these days, we're not even sure that would be a positive development.

But in response to King Solomon's diatribe, there is one thing of which we are absolutely certain: If we woke up tomorrow and discovered by some unfortunate chain of events we'd been elected to a “higher” office, we would immediately demand a recount... or trump up some charges to get ourselves thrown out as quickly as possible.

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