The latest news tells us that the economy really is softening – as predicted. Unemployment is now up to 5%. Nothing to get too worried about, but heading in the wrong direction.

“Unemployment sounds warning on the economy,” says a New York Times headline.

It’s the “latest omen of recession,” adds the LA Times .

The New Year has been uncorked. We take a sniff. Pretty much what we expected...a slight odor of rot. Hey wait. There’s a faint smell of rice wine...yes...it’s Sushi Funk...the vintage produced in Japan between ’90 and ’07!

Hold on, we’ll explain.

In America, 2008 is beginning as a year of $100 oil, $850 gold, falling stock prices, 5% unemployment, and a dollar worth barely one and a half euros (EUR).

The little countries of Malta and Cyprus chose to go with the euro. Investors all over the world, drug dealers, and central bankers seem to be making the same choice.

And did we mention? Stocks fell 256 points on the Dow on Friday. The index is now below 13,000.

What do we make of this?

First, we’d say that it appears that the economy is headed towards the dreaded synthesis of inflation and deflation known as ‘stagflation.’ Commodity prices are rising . Gold is rising. Oil has already risen. Up, up, up, and yet, the economy can barely get out of bed in the morning. Consumers are running out of money to spend. And financial assets, the kind of assets people like to see go up in price, are going down instead.

Second, we’d point out that this is not the first time the United States has suffered stagflation. The first time was in the ’70s. Inflation rose while the economy slumped. Realizing that looser monetary policies would merely cause more inflation, big Paul Volcker was called in. He raised reserve requirements, drove short-term lending rates to 20%, and stopped inflation.

That was then. This is now. Back then, the United States had much less debt that it does today. And now, it is not inflation that the feds fear – it is deflation. They’ve had the Japan example to watch for the last 18 years. The last thing they want to see is a Japan-style deflationary slump. America’s high debt, current account deficit, consumer credit economy couldn’t bear it. So they’re doing all they can to avoid it. When it comes to stagflation, they don’t mind the ‘flation’ part; it’s the stag that worries them.

And so, third, you can probably expect more efforts on the part of the feds to weaken the dollar, which will almost certainly have the effect of driving up oil, commodity, gold, and consumer prices. This is not the path followed by Volcker. Instead, it is the path followed by, are you ready for this, the Japanese!

Yes, dear reader, in our unrelenting efforts to keep you ahead of the news, we have pulled out a chicken, looked at its entrails, and what we see is a slimy mess. The one thing the feds fear most is a Japan-like slump. But it is the policies of the Bank of Japan and the Japanese Treasury that they are following, not the policies of the Volcker Fed in the late ’70s and early ’80s. Instead of crushing inflation, they are pumping it up. Instead of bringing on recession, they are trying to hold it off. Instead of protecting the dollar, they are trying to destroy it.

If they sow as the Japanese sowed, what harvest will they reap?

We don’t know, but we can barely wait to find out.

*** “The boom in soybeans has changed Argentina,” said Francisco, the gaucho who manages our ranch. “I mean changed it physically. The good land used to be used for beef. That’s why Argentine beef is the best in the world. We didn’t even have feedlots. The cattle just fattened themselves up on grass. But then the price of soy, and other grains too, shot up so high farmers couldn’t ignore it. They sold the beef cattle, planted soy, and got rich. That’s why you see so much money in Argentina today. And it’s why land prices are twice what they were a couple of years ago. And people are still buying. Because, even at $5,000 a hectare, land is still cheaper here than in other parts of the world. And when you figure in lower labor costs – and even lower fuel costs – we’re the world’s low-cost producer for a lot of things. Well, usually Brazil does better. But Argentine land is flat and rich. And farmers are coming from America, New Zealand, Australia and Europe. They’re buying it up. And at today’s grain prices, they can pay for the land in just three years.

“Of course, farm prices go down too. And then they’ll be sorry they didn’t stick to beef. The price of beef has doubled too. We’re getting nearly twice what we got two years ago.

“But it’s a whole lot easier to switch from beef to grains than it is to switch back. We say that ‘they plant soybeans in Buenos Aires’ – meaning that you can live in the city and operate a grain farm. You just make a couple of decisions per year. Some farmers never even see their land. They just call the foreman or call the contractor and tell them they want to plant.

“But when you run a cattle farm, you’ve got to see the cattle. Check on them. Touch them. Brand them. Vaccinate them. Take care of them when they’re sick. Make sure they get enough food and water. Especially up here, where there isn’t much food or much water.

“We’ve got another saying: ‘It’s the eye of the owner that makes cattle get fat.’ It’s true. You really have to work at it. And pay attention. And select your animals well. And when you want to switch from grains to cattle, it’s going to take you a few years to build up a herd. That’s why I think we’re going to see high grain prices for only a short time, but high cattle prices for much longer.”

Francisco is not an economist. His mind is clear of claptrap and mumbo jumbo. Plus out on the high plains, he has time to think.

But he probably has not thought about the difference between nominal prices and real ones. With so many people planting so much wheat and soybeans, we would expect prices to go down. But at the same time, the world’s central bankers are planting every possible acre in new money! It is very possible that the nominal price of grains could go up while real prices (adjusted for inflation in other prices) could go down.

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