"United We Owe," begins a Newsweek report on the subject, noting that credit card debt has gone up three fold in the last 20 years:

"The Center for American Progress estimates the cost of medical, food and household needs has risen more than 11 percent over the past five years - with seven in 10 households using credit as a safety net to cover basic living expenses...Meanwhile, wages have simply not kept up, remaining virtually flat since early 2001.

"'The data shows that people are borrowing more money not because of over-consumption but because they're caught in a bind,' says Christian E. Weller, a senior economist at the Center for American Progress and author of a May report 'Drowning in Debt.' He adds, 'In that bind, the only escape valve for middle-class families is to borrow more money."

And now, the papers are beginning to connect the dots. Without a real economy that can support higher property values, prices will go down. 

"Consumer group warns of adjustable rate mortgages," reads a headline from the New York Post. 

Where have they been, we wonder? Why didn't they say something when people were lining up for them? "Why didn't they say so when people were putting themselves in ARMs way?" asks colleague, Lila Rajiva.

Meanwhile, the price of gold fell to $625 yesterday. Oil dropped below $71. And bond yields seem to be declining. Even mortgage rates have actually been going down for the last four weeks. On the other hand, stocks bounced up - celebrating lower oil prices and the Fed's decision not to continue increasing rates.

Faced by two enemies - inflation on the one hand...and deflation on the other - Ben Bernanke hopes for a Napoleonic victory against both. Holding to the center, the Fed looks to crush inflation decisively, and then wheel its army of economic experts and camp followers around to face down the threat of a slump...a menace more and more immediate.

Now, the danger is glaring straight into our face; property prices are stable or even falling, while mortgage payments are rising. 

"Southland Homes Sales at 9-year Low," reported the Los Angeles Times earlier this week. 

And from Dallas comes this news item:

"The annualized rate of housing starts fell 3 percent to 1.795 million in July. Starts have plummeted 21 percent since peaking in January and are at their lowest level since November 2004. Building permits plunged 7 percent in July to their lowest level in four years.

"'Builders are responding as one would expect,' Mr. Fisher [Fed governor from Dallas] said. 'They are cutting staff, renegotiating prices and getting concessions from subcontractors, and either walking away from or renegotiating planned land purchases and other contracts. This is disinflationary activity that impacts economic growth.'

"A few days ago, Moody's Investors Service chief economist John Lonski made a more memorable remark: 'The harder the Fed fights core CPI inflation, the greater the risk of a bout of home price deflation on a scale perhaps not seen since the 1930s.'

"As the housing market worsens, there will be more downward pressure on prices to rent and buy. Deflation could swiftly replace inflation as the main focus at FOMC meetings. And that would be an unfortunate development, given monetary policy's limited ability to fight deflation."

Where does deflation come from?

Say there were 100 million houses in America, each one worth $200,000. Now, let's not even imagine that they go down in price. Let's just say they don't go up 10% this year. That's $2 trillion in "wealth" that people expected that never came in. And now, there are all these large houses, SUVs, and expensive lifestyles - all acquired with real estate money - that have to be supported. And every month, there are gasoline bills, electricity, taxes, and insurance that have to be paid out of actual income.

At the same time, all of those ARMs are being adjusted upwards...on the condos they were hoping to flip...on that extra house they can't really afford, despite leveraging it with yards of carpeting and granite countertops. And now, they can't kick the habit they've got hooked on all these years of spending more than they earn, and letting their house pick up the slack - by borrowing on their mortgages. 

USA Today adds this:

"The loss of manufacturing jobs helped drive down home prices in 26 metro areas between April and June compared with the same period last year, the National Association of Realtors said Tuesday.
 
"That's 10 more areas than in the first quarter, and it spotlights how joblessness in industrial states such as Illinois, Michigan, Ohio and Indiana is shivering the housing markets.

"The hardest-hit this year: Danville, Ill., where prices at which existing homes were sold fell 11% in the second quarter after a 12% drop in the first quarter.

"General Motors (GM), General Electric (GE) and Hyster (NC), a maker of forklifts, were among the companies to close plants in Danville, leaving behind hundreds of unemployed residents. The median price for a home has fallen to $65,200 - the cheapest in the country.

"The exodus of auto, textile and other factory jobs has a direct effect on home prices. People leave town to look for work, boosting the supply of homes for sale. Others sell their homes because they can't keep up with the mortgage. At the same time, foreclosure rates in these cities are among the highest in the country, and banks are quick to cut prices to get the homes off their books.

"'There were a lot of divorces, a lot of single mothers - all they could do is refinance their house or put it on the market and let it go cheap,' says Jerry Urich of Century 21 Home Team Realty in Danville."

But single mothers aren't the problem, we think. We'll stick to our analysis, until disproved or laughed off stage:

The U.S. consumer is being squeezed. With his bedroom ATM machine on the blink, he will have to cut back spending. This will put the entire economy into a slump, marked by falling prices for residential real estate. Trillions of dollars worth of supposed wealth - in the housing market - will disappear. This is the deflationary threat that the Fed now turns to face.

That is what rising bond prices are telling us now. It is why the Fed's next move is likely to be a cut in rates.  

*** "The only source of 'expansion' in the U.S. economy now is 'credit expansion'," continues the conversation in Cannes.

Dr. Richebächer: "Mindfull of past experiences, the Fed's decision to halt its rate hikes... have triggered strong rallies in the stock market. Investors, apparently, rush to jump on aboard the train before it leaves the station. It reminds me of a sarcastic remark by Keynes: 'Men, like dogs, are only too easily conditioned and always expect, that, when the bell rings, they will have the same experience as last time.'

"In the past, indeed, stock prices regularly took off when a central bank eased. What these people completely fail to see is that today's conditions in the U.S. economy and its asset markets [stock, bond and housing] have nothing to in common with those days when monetary easing had these magnificent effects.

"Monetary easing in the past regularly followed prior tightening, which also had created pent-up demand in the economy. Rate cuts were equivalent to removing existing tightness. As a result, the economy and the markets took off.

"But those conditions that used to provoke strong economic and asset rallies are not at all present today. There never was any monetary tightness. Instead, there has for years been a sharply accelerating credit expansion that has grotesquely run out of relation to economic activity. We see an economy and financial system that have pathologically become addicted to a permanent credit and debt deluge."

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