It's the Battle of the Bubbles, dear reader. No, we're not talking about hedge fund managers out on the town, squirting each other with Dom Perignon. This is different...but it still might be fun to watch.

Everything is hunky dory, of course. Nothing to worry about. Really - Ben Bernanke just said so. Who wouldn't believe the world's most powerful central banker on a matter of money?

Bernanke told Congress on Wednesday that he saw no compelling reason to tinker with interest rates. And why should he, when everything is going so swimmingly? On Thursday, all three Dow indices hit new all-time highs.

Frankly, we're getting a little tired of the whole thing. All this happy moderation, we mean. We'd like to see a little action...a little clarification...a little vindication.

Do you see what we're getting at, dear reader?

Everything is going along just fine - except for everything that matters. But what matters most is what appears to not matter at all.

And right now, there are two related things that appear not to matter. First, the bubble in U.S. residential housing is steadily losing air. And second, the bubble in worldwide liquidity is getting bigger than ever.

Foreclosures in the Denver area, we found out yesterday, are running at five times the level of 2003. According to the local news from Denver, there are whole neighborhoods that are sinking under foreclosure. In some of them, as many as one in four houses are in foreclosure. Imagine if you owned one of those that wasn't. You couldn't expect to sell it for a reasonable price - if you could sell at all.

And subprime lenders are taking a beating. For example HSBC, which decided to get into the mortgage lending business on the wrong end - where the customers didn't have any money - recently issued the first profit warning in the company's history. And the firm has been around since before John Wilkes Booth put a bullet through Abe Lincoln's head. Century Financial also announced extraordinary charges resulting from bad mortgage loans. And the subprime lending firm Ownit, actually went bust after realizing that its customers neither owned it nor could pay for it.

The great residential property money machine is on the fritz. Normally and naturally we could expect an economic slump in the United States. It is a consumer society, after all. Consumers have come to rely on rising house prices in order to continue spending at the rate to which they have become accustomed. No rising house prices equals no equity to 'take out', which equals no money to spend.

We just read about a Ms. Lehn in Minneapolis who is facing 20 years in the state pen. Her crime? She decided to 'take out' equity before there was any equity to take out. She defrauded lenders into lending more than the actual sales price, thereby liberating future equity for use currently.

She hasn't been sentenced yet, and it's none of our business, but we urge the judge to go easy on Ms. Lehn. For what did she do that the whole nation did not? Except for lying on a few documents? Homeowners as well as the feds themselves have all been taking from the future, by running up debts that will have to be paid out of money that hasn't been earned yet.

As the bubble deflates, you would expect that it would be harder to pay those debts...and that a lot of people won't be able to do so. Thus, Realtors might want to consider their career opportunities in a new light. Instead of becoming waiters, they might want to get into foreclosures, work-outs, debt management, and bankruptcy - all of which are sure to be growth industries.

But wait. The other big trend that people don't think matters takes us in the opposite direction. While the U.S. housing bubble loses air, the worldwide bubble in liquidity gets huge new gusts of it.

Ed McCarthy, president and CEO of Financial Risk Management Advisors Company fills us in:

1. Over the last five years, the balance sheets of the Investment Bank community have expanded exponentially. We include all of the major foreign Financial Institutions of this caliber, as they already are as much or more investment as they are commercial. In the aggregate, globally, the total footings of these majors is well over $7-8 trillion.

2. Hedge Fund total assets have grown from $300 billion to approximately $1.4 trillion and the leverage on top of that is unknown but, in all probability, at least another [one and a half to two] trillion [dollars].

3. Private Equity funds availability has gone to approximately $1.1 trillion, and the leverage can be as little as [four] or [five] times cash flow on the deals they are in or as much as 10, 12 or even 15 times.

4. Credit Default Swaps have grown from less than $1 trillion to $14-16 trillion in the United States and at least $26 trillion globally as last reported by the BIS and probably substantially more. Our theorem here widens to include a hypothesis. The buyer of a CDS may simply be taking out default insurance. On the other hand, we cannot but theorize as was and as continues to be the case in the mortgage industry where, much more massively but still there, the GSE's could load up their balance sheets to over $3 trillion and take on an equivalent amount in contingent liability through their ability to Guarantee. The same, in a somewhat different way pertained in the MBIA, MGIC world.

And thus is the stage set for the Battle of the Bubbles. Will the rush of money and credit into global markets overwhelm the hiss of air coming out of America's deflating property? Or will the jagged end of the U.S. housing wreck prick the big bubble and cause the whole thing to pop?

We don't know...but we still go out every morning and hoist our "Crash Alert" flag anyway - and hang on to our gold. Just in case.

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