The price of gold soared last week...and the week before...and the week before. We saw the bull market coming seven years ago. People who bought then are nearing a 200% gain. Those who haven't bought yet are wondering whether to get in now, or wait for the next correction. We're wondering, too.

We don't get many opportunities to gloat, so we have to pretend we deserve them when they come. It is a better species of vanity than pretending that we don't, and it gives us a suitable soapbox on which to stand while we address the question our dear readers haven't asked. What do we see ahead for the yellow metal?

How did you guess? Of course, we expect gold to go up. Maybe it will correct in the near-term, but the bull market is far from over, in our opinion. How far will it go? Probably a lot further than anyone thought possible, and with a lot more damage to the world's financial system than anyone imagines.

Despite the huge increase in the gold price, we see very little in the press or in conversation that makes us think the public is wising up. If asked about it, commentators and analysts say, "all commodities are rising." That is true, but gold is rising even more, which must mean one thing and one thing only: people are losing faith in paper.

Yet, the world is awash in the stuff: bonds, mortgages, shares, currencies, I.O.Us., derivatives, funds of funds of funds holding piles of paper assets. And of all the forms of paper that swirl around in the world's financial alleyways, one is ubiquitous - it is the one in which even the price of gold is quoted: the U.S. dollar.

We are as wary of group-think as anyone, but the fact that most people think the sun will shine tomorrow doesn't make us think it won't. Nor does the fact that almost everyone believes the dollar will go down convince us that it will go up. We may be contrarians, but we are also unreliable. Sometimes, we figure, the crowd finally gets it right. And what it has right is that the greenback has become a cat stuck in a tree. Somehow it must come down. Otherwise, the U.S. current account will go negative by more than $1 trillion per year.

Of course, there are economists who see no harm even in a deficit of that magnitude. Then again, these were the same sort of people who thought Hurricane Katrina would save them from having to water the lawn.

But gold is telling us a different tale. The yellow metal has run the gauntlet of resistance levels with white-hot speed, slicing through a hundred dollars in a matter of weeks. Forecasters who predicted that this was a "spike" caused by speculation have been scorched. The commercial short-sellers - and there are many of them - have had to eat their losses and their scoffing. What has happened is simple but historic. Gold has changed its nature from a mere metal to a benchmark against which all currencies, not merely the dollar, are being measured. It is trading like a currency itself, a fundamental one, to which not just greedy, but frightened money is pouring. And the money that is running scared right now is the money printed in green ink.

Still, while everyone agrees that the dollar is coming down, few expect that it will cause much trouble. Even Morgan Stanley economist Stephen Roach, who used to be reliably gloomy on the future of the world economy and moaned regularly about the "unbalanced" state of things, now seems to have lost his balance, spouting claptrap about how "coordinated efforts" by central bankers will put things right. And what are the bankers conspiring to do? Bring down the terrified dollar, of course.
 
And then there's Harvard economist Martin Feldstein, writing in the Wall Street Journal, reminding us that a currency devaluation can be relatively painless, as it was when the U.S. dollar went down nearly 40% in the early '80s.

But, of course, that was then. A quarter of a century can make a difference. In the early 1980s, America was still a net creditor to the rest of the world. The price of gold and credit was high, and stocks and bonds were low. Now, it is the other way around.

By the mid-eighties, oil dropped to $25-35 a barrel. There was not a single McDonald's in all of China, and the sovereign nation of Russia didn't even exist. Now, Russia and China are among America's biggest creditors, oil trades over $70, and the United States is running $800 current account deficits.
 
Among the dizzy optimists is former Assistant Treasury Secretary Brad DeLong, who argues that the deficits are trivial when compared to the size and growth of the U.S. economy. Real GDP of the United States is growing by $400 billion per year, he writes. Even after depreciation, the $130 billion that does not go to labor is capitalized at about $1.5 trillion of wealth. Thus, the current account deficit - even at $1 trillion - is not overwhelmingly large. The country can sell two-thirds of the increase in GDP to finance imports and still be $500 billion better off every year.

Yes, say the optimists, the United States could run $1 trillion deficits soon - but so what? That's still only 8% of GDP. The interest on this extra borrowing is only about 12% of last year's economic growth. And when the dollar does come down, as it inevitably must, U.S. firms should be able to export more and will become even more profitable.

Readers might recognize this argument as the same one used to comfort America's households. They need not worry about soaring debt levels - not when their houses are going up in value! But like a headstrong mistress, debt has a mind of her own. You may have sidled up to her; you may have encouraged her or even egged her on. But after a time, you no longer control her. Compound interest takes over. She controls you.

Compound interest has been described as one of the wonders of the world. Your money grows, and then feeds on itself and grows - as if by magic. But compound interest works in the other direction, too. When you owe money and don't keep up with the interest payments, the unpaid interest keeps getting added to the principle. And now it's the amount you owe that grows
- as if by black magic. In no time at all, you're bankrupt.

Already, Americans cannot keep up with their bills. The interest on $1 trillion may be "only" $50 billion, but the U.S. debt is not growing by $50 billion per year; it's growing by $1 trillion! That's the measure by which expenses exceed income. In the absence of savings, much of that amount must be taken up as debt.

And who's going to lend? Who's going to want to take dollars?

So you see, dear reader, that cat is coming down one way or another, even if we have to cut the tree down. Most economists believe it will be painless...almost effortless. But what's that noise? It sounds like chainsaws revving up. We're moving our car out of the way, just in case.

*** Ameriquest, one of the nation's leading mortgage lenders closed 229 branches and laid off 3800 employees. Households are paying more in mortgage interest than they have for the last quarter century - 15.8%. It appears that they have reached a limit. Mortgage applications are declining. Unsold inventories of houses are increasing. The bubble in America's property market is over. At last, it looks as if prices are becoming a barrier to buyers.

But what will those who need a roof over their heads do now?

Where they will go?

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