The Dow rose 47 points yesterday...and is up around 180 points this morning. Not too much...but the rally is still on. More or less. But don't trust it...keep moving up those stops.

The state of the economy can be summed up this way, according to our friend Barry Ritholtz, author of The Big Picture blog and the forthcoming book Bailout Nation.

"Imagine you jump from a airplane - for a while, you are free falling - accelerating downwards at increasing speeds," he begins.

"After a few thousand feet, you pull the rip cord and your parachute opens up. In terms of direction, you are still heading down; In terms of speed, however, even though you are falling, you are falling at a much slower rate."

"As the parachute deploys, you are decelerating - the rate of your fall is slowing," Barry concludes.

In other words, no matter the speed of the fall, the law of gravity still applies. The economy still must eventually hit the ground...and it will.

Though in Los Angeles, where we just came from, the economy seems to still be floating along, unfazed. It turns out that the worst financial crisis since the '30s wasn't affecting the City of Angels...or so it seems.

The restaurants were full. In the streets, people ambled around, apparently buying things. The freeways were clogged with expensive autos.

What has changed?

Nothing we could see.

But California recently joined the 10% Club - states with greater than 10% unemployment. Maybe they are mostly outside LA's old neighborhoods.

And, the rate is probably much higher than 1 in 10.

This from MSN Money:

"The official US jobless rate, now 8.5%, excludes millions of people - among them those who have given up on finding work and those forced into working fewer hours than they'd like.

"An 8.5% unemployment rate is unmistakably bad. It's the highest rate since 1983 - a year that saw double-digit unemployment, nearly 30 commercial bank failures and more than 15% of Americans living below the poverty line.

"But the real national unemployment rate is far worse than the U.S. Department of Labor's March figure, announced today, shows. That's because the official rate doesn't include the 3.7 million-plus people who are reluctantly working only part time because of the poor labor market. And it doesn't include the workers who have given up scouring want ads for seemingly nonexistent jobs.

"When those folks are added to the numbers, the unemployment rate rises to 15.6%. In March 2008, that number was 9.3%. The Bureau of Labor Statistics began tracking this alternative measure in 1995."

People who have no jobs, or fear losing their jobs, are poor consumers. They hesitate. They procrastinate. They make do.

That's why retail shop vacancies are at a 10-year high. If people aren't buying, you don't need space to store merchandise that you won't sell them.

And you don't need shop clerks either. Which causes unemployment to increase further. And it causes prices to fall.

In our book, Financial Reckoning Day, which we wrote with Addison Wiggin, we argued that the United States was following Japan into a long, on-again, off-again slump. We wrote the book in the early 2000s and were proven wrong almost immediately. Instead of a long, Japan- like slump, the U.S. economy took off and soon turned itself into the biggest bubble the world had ever seen.

Now, that bubble has burst. Everything is beginning to turn Japanese. The financial crisis is straightening our hair. It's taking inches off our height. And it's causing us to like raw fish!

Japan never got out of its slump. Instead, asset prices in Japan are lower than ever. And the Japanese economy is contracting faster than any economy did during the Great Depression. And to make matters worse, deflation is back. Consumer prices are now falling...again.

The difference between this bout of deflation, and other periods of deflation in Japanese economic history over the last 18 years, is that now they no longer alone. Switzerland is already in deflation too. And so is China. China has lost 20 million jobs since the beginning of the crisis. Asset prices have collapsed. And now, consumer prices are going down too.

Like Japan, China and Switzerland are exporters. When Americans don't buy, China, Switzerland and Japan don't sell. And soon, their factories go quiet...and their workforce is idled.

Will the United States soon have falling consumer prices too? Will it finally follow Japan into a long slump?

Yes...and maybe no.

There is a big difference between the United States on one side and Japan and China on the other. The United States is not an exporter; it's an importer. Nor is it a creditor; it's a debtor.

When the Japanese economy fell off the truck in the early '90s, its people had savings. They could wait out the correction. They didn't have to cut spending and increase savings; they were saving enough already. In fact, when consumer prices fell, Japan's savers got richer; they could buy more things with less money.

But the United States can't wait out a correction in comfort. Its people have debts, not savings. Deflation doesn't make them richer; it makes them poorer. And in order to pay their bills, they have to cut spending and increase saving. This puts further downward pressure on the economy and creates a very uncomfortable situation for Americans. The more they save to pay their debts, the more the economy contracts. The more it contracts, the less revenue they have available to save.

Oh, wicked world!

But wait. Isn't there a way out? Isn't there some magic the Fed can perform...some abracadabra, perhaps, from Tim Geithner? What if we get a lot of smart people together in a room, as Thomas Friedman suggests? Won't they be able to figure something out?

We don't know...but we wouldn't bet on it.

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