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U.S. companies are making record profits, say the papers.

At first glance, that looks like a fact that does not fit our theory. Our theory, remember, is that the U.S. economic recovery since the recession of '01-'02 is a charade. It is based neither on savings nor earnings, but debt. Since all debt must be repaid - by someone, sometime, somehow - whatever boom it caused must be followed by a bust of exactly the same scale. A slump is equal and opposite the fraud that preceded it, we like to say.

Of course, that doesn't mean that every time you borrow money you ought to face a terrible bust. If you borrowed money to increase your own earnings by learning a new skill - if you are an individual - or to add to capacity - if you are a new business - then you can pay the money back out of your new, plumped-up earnings. But a consumer boom, funded with credit, is something else because the money is not invested - it's consumed. And when it needs to be paid back, there is nothing to pay it back with other than the old pre-boom income.

Real earnings of most households in America have not increased during this last five-year period. This, too, helps explain why corporate profits are so high; businesses have not had to pay more to their employees. When consumers spend from their borrowings, rather than from their earnings, businesses get to sell more without having to pay anyone more. Income gets logged onto the revenues side of the ledger, but no extra wages are recorded on the expense side. Result: profit.

But if workers are not earning more, how are they going to keep up with the extra debt? They can only borrow more, or cut spending to pre-boom levels. So far, they've been borrowing more. They've borrowed against the increased prices of their own homes. It's too bad, but even if their houses were worth five times what they were five years ago, it wouldn't help them pay off their debt - unless they were to die or leave the country. If they're still alive they will have to live somewhere. So, they can't very well sell their houses.

Oh, of course, a few people could. They could sell their expensive houses in Miami or San Diego and go live in a trailer in the Ozarks. They'd be fixed for life. But if many people chose to do that, prices for houses in Miami and San Diego would collapse.

Already, we're getting anecdotal evidence that housing prices are weaker than the figures tell us. A friend from Florida passed through Paris last week:

"You remember that house next to mine? It's right across the road from the beach. Nice 1920's-style cottage. I wanted to buy it for a long time.

Well, I finally did. The guy wanted $2.5 million for it. He was sure he would get it if he waited long enough. But the longer he waited the more it looked like prices were headed the other way. I had offered him $1.9 million and he refused it. But prices are really getting mushy. I just bought it last week for $1.35 million."

"More housing weakness..." adds a headline from CBS Marketwatch.

As housing weakens, so does the U.S. economy. It is not apparent in the corporate profit figures - yet. The CEOs there are still enjoying additional sales revenues without additional wage expense. But those profit figures are history, not future. Wait until the consumer finally figures out that he can't continue borrowing to pay his way in life...wait until he finally figures out that he must cut back on his spending...wait until he figures out that he's been had.

The CEOs might become history, too.

Wait until our theory is proven correct!

Meanwhile, as always, more news...

--------------

Justice Litle, reporting from Reno, Nevada:

"Short-term anxieties are creating opportunities for long-term investors, including the long-term investors that run some of the world's largest natural resource companies."

For the rest of this story, and for more market insights, see today's issue of The Rude Awakening:

Explosive Opportunities

--------------

And more random thoughts, opinions...

*** Businesses may be more profitable than ever, but investors are not impressed. The Dow fell 121 points on Wednesday and another 166 yesterday.

Why are stocks going down now? Who knows? It could be nothing, or it could be the beginning of a trend. The Dow still trades at 20 times earnings. It is lower than it was at the height of the bubble in 1999. But it is still very high, with a long way to go before it finally comes to rest at the bottom. When will that be? 2010? 2015? How low will it keep going down - to 5,000? To 3,000? We can't say. But at the last bottom, you could buy the entire Dow for one ounce of gold. Even at today's gold price, it still takes 17 ounces to buy the Dow.

Our Trade of the Decade, announced back in 2000, was simple: sell the Dow, buy gold. Since then, gold has more than doubled, while the Dow has eased off. It took more than 40 ounces of gold to buy the Dow then. We will stick with our trade until it runs its course.

[Ed. Note: Stocks have been going down...retail sales are faltering...but things continue to look up for precious metals - and one in particular should soar even faster and farther than gold, on a percentage basis, over the next year. Get all the details here:

Better Than Gold!

*** Hic domus, haec patria est. This is my home; this is my country. We had the motto inscribed over the front door to our house in Maryland.

But yesterday, we came back to what is now home. Ouzilly is a big, old country house in the Poitou area of France. Built of stone over many centuries, it is the place we keep our old bicycles, family photos, and unread books.

We arrived at Ouzilly by train yesterday. The place had been closed up for nearly six months. Cobwebs were running through the library and there was a musty smell in many of the rooms, so we opened the windows and pushed back the shutters.

Then, we drove into the nearby village for the annual "Fete Champetre."

Arriving late, practically the whole town had already sat down to eat.

There were long tables stretched out - about a dozen of them, each maybe 50 feet long - in front of the soccer field. We paid for our dinners and worked our way through the serving line. It was a simple meal: lamb and pork cooked over an open fire with beans and vegetables scooped up out of a huge pot. Then, we picked up a bottle of red wine and took our places at the tables, saluting a few friends along the way.

It has been more than 10 years since we moved to Ouzilly. We have gotten to know quite a few of the local people. Many have worked on the house; some we know through friends, others through church. We are a part of the community, and completely separated from it. As foreigners, we occupy a special status...with cordial relationships, even some very warm ones, among the local people, but not really local people ourselves.

We ate, enjoying the smells and conversations.

"Are you Anglophone?" Elizabeth suddenly posed the question to a couple sitting alone at the end of the table. She must have overheard them talking.

"No, we're Anglophobe. We're Scottish."

We're not the only non-local people in the area. But this is the first time we found any other English speakers at the Fete Champetre. It is a very "populaire" event - meaning that it is a celebration of the local people, by the local people, and for the local people. Even the gentry of the area, who often live in Paris and come back for the vacations, do not feel welcome. There were none there last night.

The Scots had bought a house in the village two years ago. They only come for vacations, but seem to enjoy themselves.

"Well, we'd go just about anywhere to get out of London," they said.

"Why not go back to Scotland?" we wanted to know.

"No, we don't think there is anything there for us," they continued. "The weather is awful. It's expensive. For us, that would be going back...not forward."

We're never sure whether we're going backwards or forwards. But we keep moving.

After we had begun our second bottle of wine, the fireworks began. It is a tiny town, so you cannot expect the kind of show you might get at the Washington Monument, but still, it was superb. They had connected the fireworks display to a soundtrack of very moody Russian music. We had never seen fireworks done in such an elegant, artistic way.

After the rockets and the red glare had burned out, the music started up again. This time it came from a band, playing the kind of hick vernacular that Parisians sneer at. "La Musette," it is called. La Musette is dominated by the accordion and sounds a lot like what you might hear in Cajun country, in Louisiana - a musical patois similar to Zydeco.

La Musette is very nice music for dancing. You can do almost any step you choose, though it is best to do a form of waltz or polka. Your editor's feet began to twitch. Soon he was out on the dance floor with everyone else...shambling around under the influence of the soft night, the bright music and strong drink...until it was time to go to bed.

"It is good to be home," he thought to himself, as he drifted off to sleep.

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The Daily Reckoning PRESENTS: The Sage of the Plains recently decided to help improve the world with his vast fortune - and while that is commendable on many levels, Bill Bonner wonders is Mr. Buffett really understands the way our world works...

POOR LITTLE RICH BOYS

by Bill Bonner

What's Warren Buffett to do?

He is too old to rock and roll. And too rich to dissipate his fortune before he dies.

And yet, said Andrew Carnegie, "a man who dies wealthy, dies disgraced."

It takes talent to make money. It takes a certain kind of talent to get rid of it, too. Rarely do you find both talents together. A man who has little money, knows how to spend it. He buys trifles and gets some pleasure out of it. A man like Buffett, on the other hand, has spent so much time making money that he lacks the time and temperament to part with it. Instead, he pays vast sums to lawyers to protect his stash for as long as possible. And then, he starts a foundation and gives it all away, anyway.

The Sage of the Plains has opined many times that he does not want to contribute to the "lucky sperm club' of people who are born rich. He forgets that the day he was born, he had already squirmed into an equally lucky club of America's power elite. His father was a member of Congress, and one of the very few of that class, apparently, with any sense or honor. But rather than thank his own lucky stars for that bit of fortune, Warren now seeks to darken the heavens for everyone, insisting on the need for inheritance taxes so that we can all start out with our share of the national debt and little else. A "meritocracy" he calls this.

A meritocracy is a dreadfully practical system. In a free market, at least theoretically, the people who merit fortunes are those who most give other people what they want. A man who offers a computer software program that doesn't work, for example, is not likely to merit much profit. Microsoft products do work....at least, most of the time. And at least long enough for them to get onto your desk. And Gates has done a spectacular job of getting them onto your desk. On the other hand, an investor who buys shares recklessly does the world no favor. He puts his capital in the wrong places. He throws his seed on barren rock, where it is wasted. He merits no reward.

But we will ask the question right out loud: why is it better to have money concentrated in the hands of a few plucky meritocrats, rather than in the hands of the many lucky children they leave behind? Buffett will say that the meritocrats earn it and know what to do with it. We wonder then what it he is thinking when he gives his money away; every penny will go to people who never earned it.

June 2006 will go down in the history books as a propitious one for world improvement. Bill Gates announced his retirement from Microsoft; he will devote himself full time to doing good, he said. Then, the second richest man in the world, Buffett, said he was giving $31 billion to the project.

And how could anyone carp? The papers were united in their praise of the two. After all, they offered to ease the suffering of the poor...to cure diseases...to bring technology to bear on the problems of poverty and disease - with their own money! Here were rich men headed for heaven, said the press reports.

But what would actually become of Buffett's money? Would it not end up going to the poorest people in the world...people who have no idea of how to make money or what to do with it, if they make it? What kind of meritocracy is this?

Then, on Wednesday, July 12, 2006, came a full-page ad in the Financial Times, with photos. There was Bill Clinton, looking little different than he did in his high school yearbook. And there were Laura Bush, Jacques Chirac, Rupert Murdoch, Tony Blair, and of course, Buffett and Gates. All of them had pledged to "identify immediate, practical solutions to the world's most challenging issues." But if these people could come up with such solutions so easily, why have they been holding out on us? Couldn't they have spared a day or two for such important work last year...or the day before?

Whenever we hear about so many of the world's great ones gathering in one place - in this case the Clinton Global Initiative, a confab organized by the William J. Clinton Foundation - we shudder. What if a giant meteor should strike that very spot? Would all these visionary solutions disappear like wooly mammoths? Would humankind have to endure another millennium in the mud?

Elsewhere in the Financial Times we discovered that "Gates and Clinton link on African health." And here we paused to draw breath. The two are traveling around the Dark Continent, figuring out how to spend Buffett's money brightening the place up with health and development programs. They might as well be Thomas Aquinas and Mahatma Gandhi setting up a fireworks display; smart men, but not likely to know what they're doing.

So, what will come of all of it? We don't know. But we shake our head. If only Buffett had not made so much! A lesser fortune might have been squandered in the usual way: effortlessly. Women, houses, boats, art. Yes, art. Buffett might have acquired the most expensive collection of contemporary art in the world. Think of all the contemporary artists whose hearts he would have gladdened. He could have afforded as many sliced cows, pickled sheep, unmade beds, and splatter-paintings as he wanted.

Then, he could have thrown the whole thing open to the public, who would have admired him, thanked him, and had a hearty guffaw behind his back.

But at least the people in whose pockets his money ended up could have decided for themselves what to do with it. For it is thus, with real income, honestly earned by sweat and saving, that people are lifted out of poverty. Acts of grand benevolence, on the other hand, whatever good they do in the short term (and we don't deny that they do great good in the short term) usually make things worse in the long term. Instead of getting to choose what they want, people get what the givers choose to give them, not as customers, but as charity cases. Of course, acts of personal charity are enjoined on us. And we hope we take pleasure in doing them.

But when the scale is large enough, charity begins to smack more of a public spectacle than a private virtue...more of a government program than of an unalloyed act of generosity. Along with hope and help, it carries with it, ever so faintly, the acrid whiff of humbug.

We do not fault Buffett and Gates. What can these poor rich men do? They have too much money to spend...even far too much to give away wisely.

Buffett says he wants to avoid passing on the corrupting influence of unearned money. He will give his children "enough so they can do anything, but not enough so they can do nothing." Is this wisdom or breathtaking naïveté for a moneyman? We know some people who do nothing with almost no money. Others inherit fortunes and do quite a lot with them. Britain's great houses, its great gardens, and many of its great achievements in every field, from lepidoptery to Egyptology to applied mechanics and astro-physics, were made by people who inherited enough money to not need merit.

In America, according to Buffett and the levelers, the only game that matters is making money. And you can only be a winner if you make a lot of it. But Britain's hereditary aristocracies were born successful on an entirely different scale. They didn't have to prove anything by making money; their social status was secure at birth. So, instead of grubbing for money, they could poke around the ruins of Carthage or study fossils from the Cambrian era.

What surprises us is how little the two greatest capitalists of all time seem to understand of how the world of money actually works. Let us imagine that they build a brand new foundation, for example. And let us set aside our normal cynicism and further imagine that the project is not undone by corruption or incompetence. All the members of staff are saints.

All the contractors are archangels. All the clients listen to National Public Radio and recycle. And yet, how does the dynamic duo know that the project is worth doing? In the absence of independent customers and freely set prices, how can they tell?

If the two had merely distributed their money, chances are the recipients would have done many and varied things with it. Most would have eaten it up or frittered it away. A few might have used it to start businesses that might have added to the prosperity of the whole society. Others could have bought themselves education...skills...or tools that would have allowed them to earn more money in the future. But thanks to Buffett's magnanimity, they will all now get what Gates and his army of experts, functionaries, consultants, flunkies, and hangers-on want them to have.

That is why it is better to give than to receive. The receiver gets neither what he merits nor what he wants...but what the giver puts to him.

So, now the world's poor will have aid and have it more abundantly. They will get what some rich white guy - probably long dead - wants them to have. And they will have it not for just a day or a week...but for generations...or as long as the money lasts. A well-run, well-endowed foundation can last for centuries. Foundation apparatchiks will keep it alive like a government program, bleeding out benefits to themselves, but not so much as to kill their host if they can avoid it.

How is it any different from any other project ever dreamed up by world improvers...communists...central planners...meddlers...and equalizers, except that Buffett and Gates are so rich that they don't have to steal the money to do it?

We don't know, but we will publish the time and place of the Clinton reunion when we get them...just in case the gods want to take aim.

Regards,

Bill Bonner

The Daily Reckoning

Editor's Note: Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of The Wall Street Journal best seller Financial Reckoning Day: Surviving the Soft Depression of the 21st Century (John Wiley & Sons).

In Bonner and Wiggin's follow-up book, Empire of Debt: The Rise of an Epic Financial Crisis, they wield their sardonic brand of humor to expose the nation for what it really is - an empire built on delusions. Daily Reckoning readers can buy their copy of Empire of Debt at a discount - just click on the link below:

The Most Feared Book in Washington!