"What can be avoided / whose end is purposed by the mighty gods?" asked Julius Caesar, before he was stabbed dead on the Ides of March.

Despite the omens, no history was made yesterday - at least, not in U.S. financial markets. At the close of the day, prices were not far from where they were when the first rays of sun struck Manhattan.

But, if we are right about the way the world works, history kept bumping and grinding anyway, perhaps in secret...grinding all human conceits exceedingly fine and exceedingly sure. Who knows what ends are purposed by the mighty gods? But, who doubts that they can be avoided?

In today's Daily Reckoning, dear reader, we offer what you might call a General Theory of Grinding. We begin by insisting that every man needs a theory as much as he needs a pair of pants - perhaps more. Without it, he is ridiculous or at least semi-functional. All we humans have to judge the world around us are our eyes and ears, but what do these senses pick up? They pick up a rush of color, light, sound - raw data.

Without a theory, this "data" is meaningless. It is just "noise." We need theories to interpret it and give it meaning. Theses theories transform the rising edges of a woman's mouth into a smile and a growing complex of bright red light into a double-decker bus headed for Waterloo Station. How would we know what would happen if we stepped in front of it? We have never done it before. We've never seen anyone do it. Yet, we have a theory that tells us that if we position ourselves in front of a moving bus, we will be crushed by it.

More on the General Theory of Grinding below...

Among other things, the gods are currently grinding down the boom in real estate, support for the Iraq war, consumer incomes and spending power, the U.S. balance sheet...and the empire itself.

The Mortgage Bankers Association expects mortgage originations to drop off by 20% this year; it says refinancing should fall by 40%. Without easy finance, consumers have less to spend. Yesterday brought news that retail sales had fallen in February, for the first time in six months.

Why?

"Too many consumers have been attracted to products by the seductive prospect of low minimum payments that delay the day of reckoning, but often make ultimate repayment of growing principal far more difficult."

Speaking was U.S. Comptroller of the Currency John C. Dugan, and what he was speaking of, specifically, was the way in which consumers took out interest-only or negative amortization mortgages.

"In the last two years, however," Dugan continued, "we have seen a spike in the volume of payment-option ARMs which are no longer confined to well-heeled borrowers who can clearly afford them. Increasingly, they are being marketed as 'affordability products' to borrowers who appear to be counting on the fixed period of exceptionally low minimum payments - typically lasting the first five years of the loan - as the primary way to afford the large mortgages necessary to buy homes in many housing markets across the country."

We already know what will happen. We see the signs before us. Foreclosures are rising. Households which bought more house than they could really afford are going broke. Consumer spending has become a little wobbly.

The expected effects on the housing market itself are starting to show up. Sales are down. Inventories are rising.

In California, the housing boom has raised prices to the point where the median wage earner in L.A. County can only afford one out of every 35 properties on the market. We wonder who, then, will buy the other 34? Other people are beginning to wonder, too. Transactions in January fell 24% from the year before.

Speaking of prices, "I would expect a general decline of 5% to 10% throughout the country, some areas 20%...and in areas where you have had heavy speculation, you could have 30%," says Angelo R. Mozilo - a man who ought to know. Mr. Mozilo is the CEO of the nation's largest mortgage lender, Countrywide. While we have no reason to doubt Mozilo's words on the subject, it is his actions we'd bet on. According to Grant's Interest Rate Observer, Mozillo "has been a steady and heavy seller of Countrywide common for two years."

We recall an estimate reported in these epistles a few months ago. Fully 40% of the job growth since 2001 is said to be the fruit of the housing boom. If that is so - and if despite these new jobs, real wages have gone down during this period - we can't help but wonder what will happen to wages when the boom ends. It seems likely that they will go down further. And, it seems likely that consumer spending will fall, too. Is that when history starts up again?

Yes...or maybe even sooner.

*** Back to the General Theory of Grinding...

Against the theory that modern American democratic capitalism always makes things better, we offer our own theory: Things don't get better at all. Technology improves. Material living standards get better. But, down in that old "rag and bone shop of the heart" - where central bankers toil, politicians despoil, lovers and history grind away - things remain same.

We hold this truth to be self-evident: Everything degenerates, everything breaks down and everything is born again to new life.

"Wait a minute," you say, "things are getting better."

We expect you might toss the Great Crusades in our face, the Hundred Years' War, or the Aztec butcheries.

"See, we don't do things like that any more," you say. But, we offer this
rebuttal: Auschwitz, the 20th Century, the War on Terror!

Last night, we read an account of the Soviets' advance on Berlin in World War II. Was it much different from the Mongol invasion of the 13th century?

If there has been any progress in human affairs, dear reader, it has been very slow, very slight and very fragile.

What we see when we look around is a constant upwelling of institutions and ideas, and then, a constant wearing away, erosion, and degradation of them. That is history grinding away - churning, burning, turning everything up and down, over and around. Stock prices rise - only to fall again. Empires flourish - only to degenerate and make way for a new empire. Currencies, companies, economies...all have their moments of glory
- and their moments of sorrow.

Even modern democratic capitalism gets ground down by history, as we will see tomorrow, when we take up the General Theory of Grinding further.

*** Flash Tip: here's how to make some money. Sell short the Gulf! The Egyptian stock market has gone ga-ga - up over 1,000%. Stocks throughout the Gulf area are selling at 44 times earnings. Dubai is in a property bubble; they're putting up the Burj Tower, intended to be the tallest building in the world.

Sell! If it doesn't work out, please forget we suggested it.

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