"Inflation is a crowd phenomenon in the strictest and most concrete sense of the word. The confusion it wreaks on the population of whole countries is by no means confined to the actual period of the inflation. One may say that, apart from wars and revolutions, there is nothing in our modern civilizations which compares in importance to it," wrote Elias Canetti in "Crowds and Power." "The upheavals caused by inflations are so profound that people prefer to hush them up and conceal them."

Last night, before going to bed, we read an essay by Paul Cantor about hyperinflation in Germany in the 1920s and how it affected the writings of Thomas Mann, particularly his short story, "Disorder and Early Sorrow." Cantor deconstructs the story from the perspective of Austrian economics, showing how hyperinflation provides not merely a background, but also a means of understanding it.

This is how Mann describes one of his characters, a housewife, coping with skyrocketing prices:

"The floor is always swaying under her feet, and everything seems upside down. She speaks of what is uppermost in her mind: the eggs, they simply must be bought today.  Six thousand marks a piece they are, and just so many are to be had on this one day of the week at one single shop fifteen minutes' journey away."

We find we do our best thinking when we are asleep. While we were dozing, our brain must have gone to work on the theme of the article like a Pakistani policeman on a "jihadi." We awoke in the middle of the night to find it reduced to a bloody pulp, and blabbing about one simple and horrible crime:  the destruction of the American middle class. 

But, the culprit is no pawn of jihad. No splinter faction or 5th columnist...no mole, no collaborator...no revolutionary cell skulking in basements. No, in the United States in the early 21st century, as in the Weimar Republic, the saboteurs are the financial chiefs ensconced in the capital itself. They are the nibs whose faces grace magazine covers, who give speeches, win honorary degrees, and chivvy consumers  - can you believe it? All to avail themselves of every latest innovation from the financial industry...such as adjustable rate mortgages.

Remember that although the value of the dollar was whittled in half during his tenure at the Fed, Alan Greenspan enjoys his retirement today like a portly bishop...basking in a job done well. And, was it not the same Alan Greenspan who was knighted by Queen Elizabeth II, shortly after he won the prestigious Enron Prize? 

The inflation of the mark in Germany led to disorder. It then led to sorrow. The inflation of the dollar, over the last quarter of a century, leads in the same direction...winding through bubbles, busts, ARMs and Neg Am mortgages. In the last four years alone, debt in the United States has gone up by an amount equal to 100% of the GDP. There are now an estimated $300 trillion worth of derivative contracts outstanding - in a world economy only worth $55 trillion. And, it takes five to six dollars of additional debt to create one single dollar of additional GDP. The typical ratio is usually about two dollars of debt to one dollar of GDP.

But it is the bust in residential real estate that creates the most disorder and the most sorrow, because it has got the middle and lower classes caught in a steel trap from which they cannot escape. 

"No Money Down Disaster," reads a headline in this week's Barron's. The author notices what we have been saying for months that adjustable rate mortgages are on the verge of ruining the marginal borrower and dragging down the entire economy, too.

For, now, says Barron's, residential real estate is threatening to revert to the mean, which may indicate a 30% drop in prices that will wipe out the equity of millions of homeowners. 

Either they will end up paying more than they can afford (why did they go for "no money down" in the first place?), for something worth less than they paid for it (that is what happens in a bear market). Or, they will lose their houses. When that happens, the world they thought they understood, will give way beneath their feet.

As Dr. Cantor writes about the 1920s, "A society composed of embittered people...is soon going to face major political problems, as the rise of fascism in Germany was to show."

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