The Dow bounced right back – up 180 points yesterday. Gold soared over $721.

What do you think, dear reader? Both went up yesterday...but which is the surer bet?

We have our opinion. What bothers us is that it is too obvious. Central banks and financial intermediaries have been flooding the world with cash and credit. As the quantity increases, it is only reasonable to expect the quality to go down. That’s why we have a problem in subprime debt...lenders stretched to earn more money by making loans to marginal borrowers and then selling the paper on to investors who didn’t ask too many questions. Now, the lenders...and the investors who bought the mortgages from them...are in trouble…and in turn, you could be, too.

Countrywide (NYSE: CFC )...known as “Countryslide” in the New York Post...has seen its share price fall 60% this year. The stock fell 5% on Monday...following word that the firm needed a bailout pronto. The company’s president, Mozilo Angelo, said the business desperately needs cash to continue operations.

Fifty mortgage lenders have closed their doors so far...and probably more will before the correction is over.

We remember quoting Mr. Angelo a couple of years ago. What impressed us was that the CEO of the nation’s largest mortgage lender – the firm makes one in five mortgages in the United States – had no illusions. If we remember correctly, he saw the implosion coming. We wonder what happened? Was he powerless to protect the business? Was the lure of fast profits too much to resist? Did the crisis come sooner...or harder...than he expected?

We don’t know; but we take it as a warning. Even seeing the broad outlines of a problem shaping up doesn’t mean you’re going to be in the clear when it hits.

The geniuses who run hedge funds must see the traps, too. Still, many walk right in. Moody’s says the default rate on high-yield debt is likely to double. And today’s news brings word that two more large funds have barred withdrawals. Investors are trapped in Pirate Capital and Y2K Finance. Pirate says that two of its Jolly Roger funds have lost 80% of their money in the past year. And Y2K, run by Wharton Asset Management, is down a similar amount.

“Neither a borrower nor a lender be...”

If only people had paid attention to Shakespeare. But who reads the classics anymore? And who can blame the moneylenders? They didn’t make any money unless they lent. And borrowers? Who doesn’t want to get in line when someone is handing out money? And now both lenders and borrowers are in trouble. Everyday brings more evidence – foreclosure rates, defaults, late payments.

Still, you wouldn’t know it by looking at consumer spending. Consumer credit rose 3.7% in July. That’s down from 5.9% in June, but still considerably higher than GDP growth. Credit from mortgage lines has become harder to get, so the lumpen borrower is switching to more expensive credit from credit cards. Our guess is that the real impact of the real estate slump hasn’t quite registered yet . So far, only about a third of the ARMs written in 2005 and 2006 have been reset. And, so far, the average house price has been barely affected. Jobs are plentiful. Credit cards are easy to come by.

Success is a hard thing to overcome, we keep saying. The American consumer has been so lucky for so long it will take him a long time to realize what a bind he’s gotten himself into.

Ben Bernanke is a smart man...and an idiot. Yesterday, the smart man spoke to a crowd in Berlin and delivered such a clear-headed, honest appraisal of the world financial situation, we’re surprised it was not followed by a stock market crash.

Bernanke pointed out that the great boom has been largely a result of saving done by oil producers and Asian exporters. He did not explain it, but this money freed Americans from the need to save any money themselves. Instead, they just borrowed from overseas savers – while their own money was used for consumption. Nor did he describe the real, long-term consequences of this division of financial labor: Foreigners become rich producers and savers; Americans (along with many of their Anglo-Saxon cousins in Britain and Australia) become poor consumers and debtors.

What he did explain was that this easy money is probably going to dry up “over the next few decades” as oil exporting countries and Asian manufacturing countries begin to consume more of their own output. China, for example, is almost certain to save less and spend more in the years ahead. Inevitably this will mean pressure on Americans to save more themselves...and consume less. It will also mean higher real interest rates in the United States, a lower-value dollar, and lower U.S. asset prices.

Two years ago the idiot Bernanke spoke and noticed the same phenomenon. But then, he referred to it as a “global savings glut,” and encouraged the fantasy that Americans were doing the savers a big favor by taking their money. He made it seem like such a benign and salutary exchange. They do the saving...we’ll do the spending. They do the producing...we’ll do the consuming. “They sweat,” said one financial pundit; “we think.”

The conceit of it had about the same effect upon American investors and consumers as finding an over-turned liquor truck in the street. Soon, they were helping themselves to armloads of bottles – and the party was on!

“We are so clever, we no longer have to do the hard work,” they told themselves. “We are such geniuses; we no longer have to save. We are so ‘inventive’...we are so ‘creative’...we have the most ‘dynamic economy’ and the most ‘flexible’ markets. Hey, let’s face it – we’re just smarter than everyone else.”

But now, the cops are on the scene and people are throwing up in the bushes. “The party is over,” says the Financial Times . And the Fed is said to be considering a cut in its benchmark rate at its meeting next week – just as we predicted. American subprime borrowers (and lenders) no longer look like geniuses. Instead, they look like the yahoos they always were. Suddenly, many of the biggest players on Wall Street and in Greenwich don’t look so smart. And the Europeans pat themselves on the back – “See...Americans are morons,” they tell each other. “Just like we thought.”

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