Today, the euro. Tomorrow, the dollar.

The euro is taking a beating. Investors are worried that it won’t survive Europe’s debt problems.

Note, we said ‘debt’ problems. Many experts still believe it is a liquidity problem. That is, they think it’s just a problem of finding financing. They blame speculators and hedge funds for panicking…or for deliberately cutting off the flow of juice.

But the speculators are just doing their job. They see that the real problem is debt. Greece, for example, has government debt equal to 120% of GDP. It’s too much. And even if all their austerity measures are put in place successfully – that is, if the Greeks go along with proposed budget cuts – the level of Greek debt will still increase, to 150% of GDP.

In other words, the fix makes things worse, not better. Debt needs to be defaulted…and restructured…not increased.

And it’s not even sure that the fix will happen as planned. Spain’s big unions are planning a huge strike for June 8th. Malcontents, anarchists, public employees, retirees – all are resisting budget cuts. And as long as the fix is in, they figure they can get away with it. Most likely, the only way to really rein in spending is by cutting off the money.

With the cuts or without them, the situation looks bad. What will happen? Some think Germany will leave the euro. Others think Greece and Spain will leave.

Who knows?

But the euro is not alone. The worst deficit on the east side of the Atlantic is not in Greece. It’s in England. And the worst household debt is not in Spain; it’s in England too.

Not surprisingly, the pound is falling. This week, speculators are betting against sterling at a record level.

And the US dollar can’t be too far behind. From the US debt crisis to those in Britain and Greece, the basic numbers are very similar. Debt and deficits are high – with no obvious way to bring them down.

“Divided Europe Spreads Contagion Fears in US,” says a Reuters headline.

Reuters sees the effect; it misses the cause. Debt is not catchy. It’s more like cirrhosis of the liver or lung cancer. It’s the result of behavior, not the result of contagious disease.

Yesterday, in New York, the Dow gave back the gains it registered on Friday. It was down 126 points. It is clearly headed down. The question we’ve been asking ourselves: is this just another downtrend…or THE downtrend.

We’ve seen the top. Somewhere up ahead is the bottom. At the top, stocks sell for more than 20 times earnings. At the bottom, they sell for less than 10 times earnings…maybe as little 5 times earnings.

If this is THE big downtrend, it will keep taking stocks down until it finally reaches bottom – even if there are a few bounces and countertrends along the way. Look for Dow 5,000 or less – sometime in the future.

In the meantime, gold went way up yesterday – a $17 gain. The fundamental problem in the western world is debt. That debt is stated and measured in terms of paper money. Rather than let the debt go bad, governments are trying to increase the supply of money so that debtors will be able to pay. But governments don’t have any money, so they have to issue more debt first (magnifying the problem). Then, when governments can’t pay, they will probably issue more paper money to cover the problem. How this will play out exactly, no one knows. But it is sure to spell T-R-O-U-B-L-E. And when there’s trouble, people turn to gold.

Here at The Daily Reckoning, our guess is that the bull market in gold will continue until the monetary system finally falls apart. Then, the dollar, the pound and the euro will ALL be going down – fast – against gold and other real assets. And all forms of debt, denominated in paper currency, will be marked down sharply. Many will disappear…worthless…

And here we offer a prediction:

The employees of the US Federal Reserve will ask to be paid in gold before the crisis is over.

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