The problem is anatomical.

Will the Fed raise rates next month? Or lower them?

We have, helpfully, given both opinions in these pages. Dear readers can choose the one they prefer.

On one hand, rates would be raised, we guessed, because it is only by fighting inflation at the short end of the yield curve that lenders out on the other end are encouraged to continue lending at low rates. It is only low mortgage rates that can keep the housing bubble from popping. And it is only the housing bubble that keeps the economy from falling apart.

On the other hand, in bringing up his troops to fight inflation it seems that Ben Bernanke has faced them in the wrong direction. It looks like the housing bubble is already losing air. Of course, we have thought so for a long time. But sooner or later we are bound to be right. Why not now? And we further presumed that when the housing bubble really begins to deflate, the Fed will panic...and cut rates.

But listening to Ben Bernanke's congressional testimony yesterday, we came away with the idea that even the Fed chairman doesn't know which hand he will raise. He seems to be reading the headlines, just as we are. He calls it "data dependent." If the news is good, in other words, he will raise rates. If it is bad, he will lower them.

So far, the headlines are mixed. On the one hand, producer prices were higher than expected. And the core inflation rate is now running at 3.6% annually. But on the other hand, the stock market surged yesterday. As Bernanke gave his little speech, it looked like the odds of another rate hike were shrinking, which gave heart to the bulls and discouraged the bears. And news came from California that, despite falling sales, house prices were still going up.

And, if we had yet another hand, headline stories from across the nation about sagging real estate would be on it. "Housing starts fell 5.3% in June," says Bloomberg. "Mortgage applications fall 4.5%," adds CBC. "Housing market's in trouble," continues the news from Chicago. Even from Shanghai comes a report that "Luxury flats empty." The Chinese, ever cryptic, feel no need to elaborate with verbs.

Still, we were able to read the signs of the time from an enterprising Frenchman who has lived in China for the last 10 years - running a furniture factory. What's going on there, we wanted to know.

"It's an interesting place," he told us. "When you've been there for a year or two, you think you've got the place figured out. But the longer you stay there the less you understand.

"You can make a lot of money. You can lose a lot of money, too. You get numbers from Chinese companies, but you never know what is behind them. And if you try to follow the rules, you soon learn that the rules are changing all the time. You never know what they are. I finally realized that the best way to do business in China is just to do it...and don't ask any questions."

According to the numbers, the Chinese economy is growing at its fastest pace in 10 years, more than 11% GDP growth annually. What is behind the numbers, we don't know. But from what we read, most of the growth comes from massive capital investment - building factories to make things for people who can't pay for them. The United States is China's major export market. When consumers in America finally feel the pinch of rising fuel costs and falling housing prices, the boom in China will be over. Look out below.

"The Chinese have to redirect their economy toward domestic consumption," said Stephen Roach on television yesterday. Yes, indeed.

And, in the words of our president, Kofi has to get Assad on the phone and tell the sonofab**** to tell Hezbollah to stop this sh**. And, to steal a thought from a man with too many of them, all that the public-spirited Iraqi "opinion leaders" have to do is to delegitimize terrorism. Americans have to restore balance to their current account, we add, by not spending so much money.

And none of it is going to happen until it is forced to happen. That is, until a hand or two has been chopped off.

Meanwhile, one in four Americans is falling behind on his monthly payments, which tells us that the day cometh and soon is.

So what do we know? The Fed is raising rates...or lowering them. Inflation is mounting...or declining. Stocks are going up...or down. If only we had more hands.

As we said earlier, we try to be helpful.

*** A colleague came across this note in a West Virginia newspaper:

"A Gold Mine in Bedroom Drawers: People are selling their old scrap gold that is gathering dust for its cash value because gold prices are so high...ScrapGold.com, a gold recycler, offers free insured recycle kits so people may cash in their scrap with 24 hour service and guarantee satisfaction. 'Everyone has bits of gold just lying around which can be turned into cash,' says Richard Zakroff, VP of marketing. 'Even old dental gold has value.'"

So, good news, dear reader: you can turn your gold teeth into a nice profit!

*** Soft landings...yes...soft landings. Now that the condo flippers are flipping less often, the word on the street is that the real estate dirigible is coming in for a very soft landing. It reminds us of the approach of the Graf Zeppelin over Lakehurst, NJ. It seemed to float, majestically...until a spark of static electricity ignited a leak and set the big hydrogen-filled balloon on fire. In seconds, the whole ship was in flames and crashed to the ground. Of the 97 people on board, 35 were killed.

Why shouldn't there be a soft-landing in housing? Again, it is a problem of anatomy, and topography, in our opinion. The knee bone of consumer spending is still connected to the leg bone of the housing market, which is still connected to the anklebone of easy money, and a lot of it. The lower limbs run along nicely as long as they are going down the gentle slope of declining interest rates. But when the ground turns up, the pace slackens. In some parts of the country, four out of five people who bought houses in the last two years did so with ARMs - adjustable rate mortgages. On the downhill run, they glide along.

 But woe on the upside. The Fed has aggressively moved up rates - 425 basis points over a two-year period. This is the biggest percentage increase in the fed funds rate in the last 44 years. All of a sudden, borrowers face a steep incline. The hot weather and high energy bills don't make the going, which used to be so good, any better. We wait to see how many fall on their faces.

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