There are certain things we take for granted, even though we can't see them.

Take gravity, for example. When we travel to Australia or Argentina we are on the bottom of the world, depending on how you look at it. Still, we don't expect to fall off.

And debt. We take it for granted that when you borrow you have to pay back. "He who takes what isn't his'n, pays it back or goes to prison," is the old expression.

Or, on the other hand, according to the Denver Post, he who goes to prison, can take what isn't his, and still not pay it back. Colleague Dan Denning - in Australia - drew our attention this morning to the
following:

"Lenders supplied former inmates millions of dollars to buy homes that they never occupied at inflated prices.

"At The Villas at Cherry Creek in Aurora, a gated community overlooking Cherry Creek State Park, five former inmates bought 12 homes at inflated prices in four months.

"Neighbors noticed these homes remained strangely vacant - until 150 cars and hundreds of young people poured through the gates for a raucous party at one villa last New Year's Eve...

"One house on that list, 14001 E. Whitaker Drive, was offered for sale at $525,000. The asking price then jumped $150,000, and Zion Development LLC, which owned the house, sold it for $675,000 to Taiwan Lee.

Zion was managed by Timothy Todd DeNeui, a Highlands Ranch businessman who serves on the advisory board to Global Connection International, a Christian missionary organization that works in Third World and communist countries.

Lee was 23 years old when Colorado paroled him in July 2004 on drug and escape charges...On Feb. 17, 2005, when Lee bought 14001 E. Whitaker Drive from DeNeui, he had been back in prison for seven weeks, according to the Colorado Department of Corrections...DeNeui sold 14034 E. Whitaker that day to Cindy Ingram, also wanted for violating parole on drug charges. She borrowed $1.8 million for those homes. Talita James, a convicted cocaine dealer, bought two villas across the street from each other in one day for $1.1 million, promising to occupy them both. Her brother Torrence James and Ervin Camack, both released from federal prisons in Colorado, each bought another villa."

"Where did all the money go?" asks the Post.

Apparently, Torrence James and Ronald Fontenot, a man he met in federal prison in Colorado, became mortgage brokers in Colorado, which did not regulate brokers at the time.

Then, the Post tells us:

"James and Fontenot recruited buyers, supplied false loan application information, arranged to buy homes 'above the listed sales prices' and told sellers the homes would be appraised above asking prices, an indictment against them alleges.
 
"They also set up businesses purporting to make home improvements, which they instead used to siphon money at loan closings to themselves and pay kickbacks to the buyers..."
 
The lawsuit against the pair accuses them and others of taking $2.1 million on 17 houses sold at inflated prices, most of which have been foreclosed, and of stealing others' identities and forging their signatures. It seems that De Neui, Torrence James, Fontenot and a broker would sell homes to "straw buyers or investors at escalated sales prices supported by inflated appraisals."

And what happens to the shady loans?

"Critics say mortgage companies have little incentive to ferret out inflated sales because they bundle and resell their home loans to Wall Street investors, taking their profits and diluting fraud losses in large pools of mortgage-backed bonds.

"'These securities get "sold in little pieces all over the world,"' said Lou Barnes, a Colorado mortgage bank owner. 'It makes it very difficult to figure out who, if anyone, bears any responsibility for the flow of Colorado's foreclosures.'"
 
And, there other schemes involved in the fraud. The Denver Post
continues:

"One woman says her health and retirement have been compromised by an ID thief's buying homes in her name...Jantz traces her troubles to the day in 2005 that she explored the idea of refinancing her home. She gave her Social Security number over the phone to several mortgage brokers whose offers sounded promising.

"'My big mistake,' she said."

But she is not alone. Many Americans have been making mistakes almost as bad. In the five years since 2001, Americans have added $5.3 trillion to their indebtedness - up 77 percent. The longer the boom lasted, the more they took out - reaching a peak in the first half of 2006, when cash was getting taken out at the rate of nearly $700 billion per year.

But you can't 'take out' forever. Eventually, you have to put back in. You have to pay back debt. So the 'taking out' phase, which is inflationary - meaning that people have more money to spend, which tends to drive up prices, is followed inevitably by the paying back phase, which tends to be deflationary; people have to cut back on their spending in order to send money to their creditors. The quantity of money should remain the same, but the amount of money available for buying things shrinks.

When a creditor lends money, he still considers himself in possession of wealth. But the debtor also has money to spend. Between the two of them, spending capacity has doubled. And when the money is paid back, spending capacity is cut in half.

Of course, no one expects American householders to actually pay back what they borrowed anytime soon. But three things are happening that must force people to cut back on spending. (Continued below...)

*** First, those infernal ARMs are being reset to higher monthly payments - about $1 trillion of them in a 12-month period. So, homeowners have to reach deeper into their pockets just to continue living in their houses.

Second, the housing boom created a mini economic boom; in many places it was the largest source of employment. Most recent figures show homebuilding activity falling at the sharpest rate in 15 years.

And third, as the boom in housing ends, the flow of credit to homeowners is squeezed off. They can't continue spending as they used to.

Which is why the big news on Friday was that the U.S. economy is slowing down faster than economists had expected. Instead of growing at a 2.6% annual rate...as it was in the second quarter...GDP grew only at a 1.6% rate in the three months from July to September.

We were relieved to hear it.

Because we had begun to wonder. If the most basic laws of the economy had ceased to function...what else might be going wrong?

As spending declines so must a consumer economy - which is why we are happy to see GDP declining. It shows that the planet still turns as it should. And when we travel to Australia later this year to meet our colleagues, we won't have to worry about falling off.

We also note small signs that consumer attitudes are changing. "50 Ways to Slash Your Grocery Bill," appeared as a headline on the Compuserve portal this morning. During inflationary, expansionary periods, people aren't concerned about the cost of food. Why worry about the cost of carrots when your house is gaining in value at $20,000 per year? But when the deflationary period comes, every penny counts.

Neither in love, nor in war, nor in economic bubbles do you stop to count the costs. It is only when the passion is over that the bills and regrets are toted up.

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