Quick recommendation -- if you're not receiving John Mauldin's "Thoughts From the Frontline" dispatches, you're missing reading some pretty engaging stuff. In this week's issue, a large European money manager called the recent actions by the Federal Reserve and the resultant fall in bond values a rival with the stock market bubble as the largest destructor of wealth in the history of mankind.

Didn't catch that on the news, did you? In one part of the market, we're focusing on whether Caterpillar (NYSE:CAT) beats by a penny, while in another part of the market, they're going through the equivalent of financial Armageddon?! Could we be fiddling while Rome burns?

Earlier this year, Alan Greenspan had stated that the Federal Reserve was being vigilant on keeping the American economy from falling into deflation, and let it be known that the Fed would consider any and all options to defend the economy from doing so, including taking the unusual (but not unprecedented) step of buying the longer-term Treasury Bonds, effectively keeping the price up, and the yield low. When folks in the bond market caught wind that the Federal Reserve would consider supporting government bonds, they flooded in.

Imagine their surprise, then, when Greenspan stated in his most recent testimony that the Fed was not so afraid of deflation and more concerned with inflation. Treasury Bond yields are now at an eight-month high, which puts pressure on markets like the mortgage industry to follow suit and raise their rates. It also means that the folks who counted on the Fed supporting T-Bonds just got the king-sized version of a bait and switch. And where are many of these folks? Overseas, including foreign governments. They cannot be happy at the sudden change in tune, or the rapid decline in principal value of their U.S. bond holdings.

What's going on here is that the Federal Reserve is still trying to target a healthy level of inflation and growth. Greenspan has pointed to increased borrowing and speculation by the American public as being a positive for the economy from a liquidity standpoint. This is true, and all these low interest rates are in fact tools to encourage people to borrow more. But the amount of debt held by American households is still massive on a historical basis, and savings rates nonexistent. We're running out of magic bullets in the form of untapped home equity, with hundreds of billions having been removed in the last three years, encouraged by the low, low rates. This means that, whatever the outcome, the U.S. economy is fast approaching a scenario in which it faces an enormous level of risk, while the largest holders of U.S. debt are decidedly displeased with those who drive our credit market bus.

What happens next? Well, I know that it ain't nothing. Spiraling debt costs combined with low levels of home equity offers us a key area to watch.