The absence of history is the absence of adversity. Nothing goes wrong. No need for puts. No need for savings. No need for insurance. We quote the Great Mogambo: "Ha, ha, ha, ha..."

Ad-ver-si-ty. Our guess is that it is under-priced and under-appreciated. This morning, we pause briefly to laugh at Gilder and Fukayama and Bernanke and Bush. We thank the whole team of dreamers and schemers, world improvers and mountebanks who make our job so entertaining.

First, we turn to Paul Ford, of Harper's Weekly, on how the triumph of democracy has transformed Mesopotamia:

"Thirty beheaded corpses were found in Baquba, Iraq, and 10 more bodies were found in Baghdad, where the homicide rate had reached 33 per day. Shiites were abducting Sunnis in bright daylight on crowded streets. 'If the Americans leave,' said one Sunni man (whose brother had recently been executed after being tortured with power tools), 'we are finished. We may be finished already.' In Miqdadiya, near Baquba, militants attacked a prison, killed 20 people, and freed 30 prisoners. A doctor in Baghdad admitted to killing 35 policemen and soldiers who were being treated at his hospital. American and Iraqi forces said they had killed 17 Shiite militiamen at a mosque in Baghdad; Iraqi television showed corpses in a prayer room."

We guessed that the campaign in Iraq would be a mess. If we were a better man, perhaps, we would take no perverse, schadenfreude in being right. But we're only human, and like all humans, we slip into sin and error as eagerly as we put on a new sweater. That is why the dollar is doomed - the war on terror, and the empire too, dear reader. We may drive a Mercedes and watch cable TV, but we are still heirs to the same slimy beasts that crawled out of the warm sea - with hearts so feeble, they were expelled from Eden.  

Meanwhile, on the money front, we return to George Gilder's preposterous notion that record debt levels don't matter - because our houses are worth more. It is true that debt would be no problem if history really had stopped. But, the trouble with debt is that it can't stand adversity.  

The Economist published the following figures for money supply growth in various countries over the last 12 months: Australia +9.1%, Britain
+11.7%, Canada +7.7%, Denmark +14.7%, U.S. +8.1%, the Euro area +7.3%.

Everywhere you look, the money supply is going up twice or three times as fast as GDP. Where does all this money go? Liquidity, like rainwater, has got to go somewhere. What has been going up two to three times faster than GDP? House prices! In other words, the supposed extra "wealth" that Americans enjoy is not real wealth at all. It's just inflated asset prices. Too bad monetary officials didn't inflate at 20% per year, or 100%. Perhaps they might have taken a page from the Argentines in the '80s or the Weimar central bankers of the '20s; they might have just recalled all existing dollars and added three or four more zeros. Think how rich we'd be then!

No, dear reader, it is not that simple. You can't get rich just by printing money, and you can't get rich by going into debt. The deeper you are in debt, the more exposed you are to ad-ver-si-ty. Just a small tide of setbacks and you are underwater completely. Even a hedge fund run by Nobel Prize winners - Long Term Capital Management - was drowned like a kitten after its managers took on too much debt. All of their studies told them that Russian bonds would come back to a normal trading range - and they were right. The bonds did regress to the mean, but the poor geniuses at LTCM couldn't wait. They had borrowed too much money.

Most households are not run by geniuses; ordinary people with a limited line of credit run them. The typical family spends what it earns - and then some. It is already up to its neck in debt.

On Tuesday, the Fed raised its key rate by 0.25%. The water is rising.

*** You can make a lot of money by watching what bankers are doing - just remember to do the opposite. In the 1980s, Texas banks poured money into the Houston oil economy. We remember reading stories of wildcat lenders drinking champagne from cowboy boots. Of course, then the price of oil collapsed and weeds grew up in the new housing developments. And who were the lenders to the Third World, just before the debt sold down to pennies on the dollar? Bankers only missed the Tech Bubble through no fault of their own. The scrappy young dot.com hustlers found that they could get even more money out of the gullible public and on easier terms - they didn't even have to pay interest! 

But at just the moment the Tech Bubble reached its zenith, Britain's central bankers and its chancellor found a way to make up for lost time. All over the world, economies were in the middle of the biggest explosion of money and credit of all time. Central banks were greasing up their printing presses, trying to keep up with the stacks of dollars arriving in their vaults. And gold - that age-old antidote to financial trouble - had been going down for 20 years. Was there ever a worse time to sell it? We can't think of one. Yet, the Brits unloaded much of their remaining stock of the yellow metal, getting about $6 billion in return. If they'd waited until yesterday, they would have gotten twice as much. But that is history. What about the future? What are the banks doing now? What can we learn that might be useful?

Paul Kasriel, at Northern Trust, tells us the obvious: that U.S. commercial banks have record exposure to mortgage debt. In 1985, the mortgage market represented only 30% of their assets. Now, it is 62%. Not only that, much of their other lending is indirectly linked to mortgages. They lend to hedge funds, for example, that use the money to buy mortgages. If push comes to shove, says Kasriel, the banks will lose in two ways - their mortgages will go bad and the hedge funds will default.

The median new buyer in 2005 put down only 2%. More than 40% put down nothing at all. How will these people respond to adversity? Will they not just walk away? Most defaults occur in the third or fourth year of a mortgage, we learned today. Half of all outstanding mortgages are in their third or fourth year now. The default rate is rising.  The bankers, in other words, stand in the same deep pool of debt as their customers.  Everywhere, the water is rising...to their chins.

We, dear reader, want to make sure that we are on solid ground - on the bank...with a picnic lunch and a bottle of wine.

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