U.S. companies are making record profits, say the papers.

At first glance, that looks like a fact that does not fit our theory. Our theory, remember, is that the U.S. economic recovery since the recession of '01-'02 is a charade. It is based neither on savings nor earnings, but debt. Since all debt must be repaid - by someone, sometime, somehow - whatever boom it caused must be followed by a bust of exactly the same scale. A slump is equal and opposite the fraud that preceded it, we like to say.

Of course, that doesn't mean that every time you borrow money you ought to face a terrible bust. If you borrowed money to increase your own earnings by learning a new skill - if you are an individual - or to add to capacity
- if you are a new business - then you can pay the money back out of your new, plumped-up earnings. But a consumer boom, funded with credit, is something else because the money is not invested - it's consumed. And when it needs to be paid back, there is nothing to pay it back with other than the old pre-boom income.

Real earnings of most households in America have not increased during this last five-year period. This, too, helps explain why corporate profits are so high; businesses have not had to pay more to their employees. When consumers spend from their borrowings, rather than from their earnings, businesses get to sell more without having to pay anyone more. Income gets logged onto the revenues side of the ledger, but no extra wages are recorded on the expense side. Result: profit.

But if workers are not earning more, how are they going to keep up with the extra debt? They can only borrow more, or cut spending to pre-boom levels. So far, they've been borrowing more. They've borrowed against the increased prices of their own homes. It's too bad, but even if their houses were worth five times what they were five years ago, it wouldn't help them pay off their debt - unless they were to die or leave the country. If they're still alive they will have to live somewhere. So, they can't very well sell their houses.

Oh, of course, a few people could. They could sell their expensive houses in Miami or San Diego and go live in a trailer in the Ozarks. They'd be fixed for life. But if many people chose to do that, prices for houses in Miami and San Diego would collapse.

Already, we're getting anecdotal evidence that housing prices are weaker than the figures tell us. A friend from Florida passed through Paris last
week:

"You remember that house next to mine? It's right across the road from the beach. Nice 1920's-style cottage. I wanted to buy it for a long time. Well, I finally did. The guy wanted $2.5 million for it. He was sure he would get it if he waited long enough. But the longer he waited the more it looked like prices were headed the other way. I had offered him $1.9 million and he refused it. But prices are really getting mushy. I just bought it last week for $1.35 million."

"More housing weakness..." adds a headline from CBS Marketwatch.

As housing weakens, so does the U.S. economy. It is not apparent in the corporate profit figures - yet. The CEOs there are still enjoying additional sales revenues without additional wage expense. But those profit figures are history, not future. Wait until the consumer finally figures out that he can't continue borrowing to pay his way in life...wait until he finally figures out that he must cut back on his spending...wait until he figures out that he's been had.

The CEOs might become history, too.

*** Businesses may be more profitable than ever, but investors are not impressed. The Dow fell 121 points on Wednesday and another 166 yesterday.

Why are stocks going down now? Who knows? It could be nothing, or it could be the beginning of a trend. The Dow still trades at 20 times earnings. It is lower than it was at the height of the bubble in 1999. But it is still very high, with a long way to go before it finally comes to rest at the bottom. When will that be? 2010? 2015? How low will it keep going down - to 5,000? To 3,000? We can't say. But at the last bottom, you could buy the entire Dow for one ounce of gold. Even at today's gold price, it still takes 17 ounces to buy the Dow.

Our Trade of the Decade, announced back in 2000, was simple: sell the Dow, buy gold. Since then, gold has more than doubled, while the Dow has eased off. It took more than 40 ounces of gold to buy the Dow then. We will stick with our trade until it runs its course.

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