Is the noose tightening?

Last week, the European Central bank raised rates. This, combined with a falling dollar, will make it difficult for the Fed to go in the other direction. But it is in the other direction that the Fed will want to go. Because, while the dollar is threatened...U.S. consumers are beginning to feel the rope chafe their necks.

Let's glance backwards at the fundamentals. The U.S. economy is 70% consumer spending. But the money consumers spend, recently, has not come from earnings - but from borrowings. And now the lenders are getting scarce.

The weekend's news brought word that consumer credit is now falling at the fastest rate in the last 14 years. We did not examine the details of the report. But it is surely related to the fact that house prices are no longer rising...so lenders have nothing lend against.

In the sub prime market, for example, late payments are rising sharply...and so are foreclosures. Texas and Michigan lead the nation in foreclosures, says the Financial Times, with a total of more than 20,000 foreclosed houses for sale between them.

And wouldn't you know it, one of the big sub prime lenders just went broke - a company called Ownit, which just happens to be a firm in which Merrill Lynch bought a big stake a year ago. If there were one industry that the geniuses at Merrill could master you'd think it would be the business of sharking mortgage money to semi-literate poor people. But even there, they seem to have missed the whole cycle...buying Ownit at the very peak of its regrettable and sinister success...when customers are less interested in owning-it and more interesting in not losing-it.

Now Ownit has gone bust...and the U.S. consumer is getting nervous. He's standing up proudly on what looks more and more like a gallows. He's wondering what will happen next. Will the housing correction stop at a 2% loss...as Alan Greenspan suggests? Will it halt when it is down 25%...as Gary Shilling guesses? Or, will it go all the way to a more than 40% loss - as Robert Shiller's numbers imply?

We don't know. But if the poor consumer is waiting for the Fed to ride to his rescue - with lower rates - he may have to wait. Because, meanwhile, the dollar seems to be under pressure. The poor greenback faces trouble whichever direction it turns. The United States has run up the biggest trade deficit in the history of international trade. Keeping it up is like trying to keep a dipsomaniac's drink topped up. It needs a constant flow of new money into the dollar...or it will drain away. And yet, practically every major dollar holder has warned recently that they intend to sell the buck. And now the Europeans are making euro deposits even more attractive.

It was nice while it lasted. Foreign buying of the dollar helped keep interest rates in America low...which helped consumers refinance their houses and take a little out, which helped 'buck up' consumer spending. But now all that seems to be coming to an end. The consumer may not know what he did wrong...but the poor fellow feels he is about to be lynched anyway.

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