Yippy ti yi yay...the housing crisis is no problem...the trade deficit’s no problem either.

Today’s dreary accounts:

Spent - $7 billion
Received - $5 billion
Net - misery

Classical economics and common sense tell us this is no recipe for prosperity. But wait...Mr. Michael R. Sesit reports in the International Herald Tribune that there’s more to the story. More below...

“Today that 200-year-old theory is flawed and overly simplistic,” he says. More below...

And don’t worry about the U.S. housing crisis . David Richards, in Barron’s, tells us that compared to the raging elephant of global economic boom, the American housing industry is nothing more than a bothersome gnat.

It is only 6% of the U.S. economy, he says. Of the worldwide economy...it is insignificant.

We reported yesterday that U.S. housing represented more than 10% of the U.S. economy - a $1.5 trillion industry in an $11 trillion industry. The difference in the numbers probably comes from a difference in definition. Are REALTORS part of the housing industry? How about the people who make 2 x 4’s?

Yesterday, we noted that Weyerhaeuser (NYSE:WY ) reported an 89% decline in earnings. Today, we follow up with the latest figures from the wall board industry. USG Corp. (NYSE:USG ) dominates sheetrock. It is a beautiful business; wall board is too bulky and too low-margin to entice foreign competitors. That’s why Warren Buffett bought a big stake in the company. But when building turns down in the United States, USG’s market disappears. It says net income is down 68%.

Meanwhile, the people who put up houses are going up in flames . It’s the “Bonfire of the Builders,” says BusinessWeek.

And here we pause...and gulp.

By the time BusinessWeek gets onto a story, it is usually too late to profit from it. If BW is announcing the bonfire of the builders, maybe it is time to buy?

On June 19, 2007, the U.S. Census Bureau released the residential construction report for May 2007. It showed that housing starts are down 24.2% year over year...permits are down 21.7% year over year and completions are down 19.3% year over year.

In addition, the Census Bureau report showed that permits are plunging, inventories are rising, and to look for a decline in construction jobs.

Survival Report’s Mike Shedlock noted, “Given that housing permits tend to lead starts (and starts provide jobs), the signs are all in place not just for a continued housing recession, but also for a full-blown severe consumer-led recession. I’m still on recession alert.”

Meanwhile, a cousin reports from Maryland that his business - installing septic systems - has fallen off. “I used to have 50 jobs backed up...now I’m going from one to the next, and happy to have work.”

How big will the problem be? The last crisis in the property market occurred in the early ‘90s - both in America and in Britain. In the United States, the Resolution Trust Company was set up to sort out about $300 billion in bad loans. But that was when America had an economy of only about $7 trillion. Today, U.S. GDP is closer to $11 trillion. Back then, consumers had only about half as much debt . And the housing boom of the ‘80s was nothing compared to that of the last 10 years. This blow-up is likely to produce a couple trillion dollars worth of casualties...and a long period of rest and rehabilitation for housing values.

“The Great Unwind May Be Here,” says the Wall Street Journal . We did not read the article. We didn’t think we needed to. We’ve been asking the same question already.

When people talk of ‘unwinding’ they are usually referring to the carry trade - speculations involving borrowing in a low-interest currency and placing the money in higher-yielding investments. Typically, the carry trader borrowed yen and bought New Zealand bonds...or maybe U.S. dollar collateralized debt obligations.

So far, the New Zealand bonds are still making their coupon payments as promised, but other things have begun to go wrong. Mortgage backed securities, for example, have proven no more valuable than the flakey mortgages that backed them. And the yen (JPY ) has begun to move up. Having borrowed yen to gain leverage, the carry trader is, effectively, short the Japanese currency. If it goes against him, he can lose big. So many speculators are faced with unwinding their positions.

But there is a larger unwind going on. It is what happens at the end of the credit expansion.

Little did they know it, but ordinary Americans were conducting a carry trade of their own. They borrowed from mortgage lenders at 6% or so...and invested the money in houses, which they thought were going up at 10% to 20%. The trade was a good one as long as houses kept rising. When housing stopped rising, they went into ‘negative carry’ and many soon found the burden just too much for many of them to carry at all.

By the way, we reported that the big hump in mortgage resets would occur in October of this year. Not so, says our old friend John Mauldin. Instead of peaking out at $55 billion worth of mortgages subject to upward adjustment in October of this year, John says the total gets bigger...reaching $110 billion worth of mortgages to be reset in March of ‘08. Thereafter, the numbers go down.

Not surprisingly, a lot of housing speculators are eager to unwind their positions before the carry gets any more negative. Others wait...and have their burthens reduced, courtesy of the bankruptcy courts and foreclosure proceedings.

The U.S. housing industry may be insignificant to the worldwide economic mega-boom, but it is hardly insignificant to the U.S. economy. As we mentioned yesterday, a substantial decline in housing is like a substantial leak on a big ship. Once she starts taking on water, the whole boat sinks lower. As long as seas remain calm, she can stay afloat for a long time. But as soon as a storm brews up - it’s every man for himself.

Sauve qui peut!

*** And now comes an article in the International Herald Tribune explaining why the trade deficit is no problem. The United States exported $1.4 trillion worth of goods and services in 2004, says Mr. Michael Sesit. It imported $1.7 trillion worth. On its face, this produced a deficit of $300 billion. But many of the products it imported were actually made by U.S.-owned companies. And if you take that into account, he tells us, the picture is much rosier...the result is much less miserable than you might have thought. In fact, instead of having a $300 billion deficit, we had a $1.2 trillion surplus!

Hosanna...and yippy ti yi yay!

So, let’s see...

Ford (NYSE:F ) makes a part overseas...using foreign workers...foreign suppliers...foreign factories...foreign currencies...maybe even foreign capital. It then sells the part to Americans, who send their money overseas to pay for it. Not to worry, says Sesit, because it is a subsidiary of an American company making the sale. Of course, almost all the money stays overseas too, where it is used to pay wages to local workers, pay local suppliers, pay taxes to local government, and generally boost up the local economy. Profits, if there are any, are almost certainly re-invested locally too - to hire more workers, pay more suppliers, etc.

Except for the dividends paid to the parent and distributed to shareholders - who may be foreigners themselves - neither the capital, the expertise, the tools, nor the wages paid, end up in the United States. And the dividends might be just one or two percent of sales...in other words, the real amounts measured by the trade deficit are probably 50 to 100 times the amounts represented by dividends that may or may not be paid at all, to people who may or may not be U.S. residents.

Alas, the numbers still tote up in the traditional way:

Expenses - $7 billion.
Revenues - $5 billion.

The United States runs a trade deficit of about $2 billion per day. Result - Misery.

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