These are the times that try our souls...

..well, maybe not our souls...but at least our convictions.

But look at gold this morning!

Yesterday, we got word that the PPI rose 1.7% in August. Let's see, if producer prices are rising...consumer prices follow, right? Well...usually...

..but these are strange times...

We also got word that retail sales were up...that's UP...2.7% last month - the biggest increase in three years.

Now hold on. We've been saying that retail sales were going down. Not up. Our view of the big picture has a consumer in the center of it. And it's a consumer who is NOT increasing his spending. Instead, he's reluctant to buy anything.

There's a reason for that. He's a guy who didn't save anything over the last 10 years. Now, he's 10 years older...facing retirement with insufficient funds...and scared to death that he'll run out of money before he runs out of time.

The US consumer was counting on rising house prices to pay for his retirement. Now, he's disappointed...and worried. What can he do? He has to cut back. He has no choice. He can't depend on his house. He can't expect pay increases. Having neglected his savings during the fat years...he has to tighten up in the lean ones. He has to save at the worst possible time - in a downturn!

We don't see any way around this situation. We don't see any shortcut. We don't see any way to make it disappear or ignore it. THE CREDIT CYCLE HAS TURNED...from expansion to contraction.

Meanwhile, the feds are muddying the waters. They're trying to fool the consumer...to trick him...to make him think that up is down and down is up. They want him to believe that the fat years are coming back...that he doesn't have to save. In fact, they want to cause inflation...to encourage him to get rid of his money as soon as possible. That's why that PPI figure is important. If they can successfully inflate consumer prices (not just producer prices) the whole picture might change. Then, we'd have an inflationary depression rather than a deflationary one.

Our commodities man, Alan Knuckman, was on Bloomberg Television yesterday, talking about this very phenomenon.

"What do you make of the PPI numbers?" the host asked him. "They did come in higher than expected. Is inflation going to be a concern for the market?"

"That is always a question," answered Alan. "The fed was trying to spark inflation and get money moving again. There is a delicate balance there, but we're coming off record lows and inflation numbers from last month. That is to be expected. I am not that concerned, but I think you are touching on something very important as far as the market momentum. If the market momentum is so strong right now - the one disconnect is crude oil. It is failing to make the highs, even though the market is. That is something to really pay close attention to I think."

For now, it appears to us that retail prices are still going down. And we doubt that the feds can cause a genuine recovery - simply by throwing money into the economy. You can boost spending when you're in a credit expansion...but not when you're in a credit contraction.

That's why we're suspicious of that retail-spending figure. How much of that is just spending funded and coaxed out by the feds? 60%? 80%? 100%?

David Rosenberg says it's 100%. He's probably right. And what would the economy look like without the phony demand ginned up by the feds? It would be shrinking at a 6% rate. And what will happen when the feds stop goosing it up? It will fall back.

But can't the feds continue stimulating the economy indefinitely? Maybe. Even so, the lesson we learned from the Japanese is that even with huge inputs from the government (the Japanese passed 11 separate stimulus measures totaling some $30 trillion yen) the real economy won't budge. Over nearly 20 years, the Japanese economy went from on- again, off-again recession to on-again, off-again deflation. The government muddied the waters. Still, consumers saw clearly what they needed to do. They had lost money in the crash of '90. Their Bubble Era stocks went down first. Then, their property went down too. They needed to save money for their retirements. This they did, resisting all of the government's efforts to get them to save.

Will the situation be any different in the United States?

Probably not.

Without extra earnings, the only way the consumer can increase his spending is by going further into debt. He is unwilling and unable to do that himself. The banks won't lend him money and he wouldn't take it if they would (at least, that's our view). So what's happening? The feds are borrowing big time - IN HIS NAME. They're running up federal debt - that he'll have to pay, one way or another. This money is then funneled to him in various devious and mostly ineffective ways...resulting in enough activity to make it look like something is happening in the economy.

It's a fake. It's a fraud. It's fundamentally counterproductive. But it's all it takes for people such as Ben Bernanke to believe the economy is recovering. Today's headline news:

"Bernanke says recession 'very likely' has ended."

And so, our convictions are put to the test. Everything seems to be improving. The numbers - many of them - show an increase in business and retail activity (New York's manufacturing index is at a 2-year high...).

The commentators, economists, and analysts all say things are getting better (except for those who know what they are talking about)...

And the stock market is still going up. The Dow finished up 56 points yesterday. Gold closed at $1006 yesterday. This morning, it's up to $1017. And oil is just under $71.

So, who's right? Who's wrong? Us? Or them? We say there is no real recovery going on...and there won't be one. They say the recovery is already here.

Stay tuned.

Jim is visiting from Virginia. He is a real estate agent of some renown in Charlottesville, VA, dealing only with large farms and estates. His customers are on the golden side of the light spectrum; they tend to pay cash.

"Yes, these are not people who need to mortgage property. But the story is not very different. They still have their lives...and their problems.

"What's happening now is that there aren't many buyers and those who are buying expect to get very good deals. So, you can still sell a nice property, but only if you're willing to heavily discount it.

"Prices are down, say, 20-30% from where they were a few years ago. But the buyer wants another 30% discount. Not many sellers are willing to give up that much, so in my area there aren't many sales that go through.

"I'm lucky because I've been at it a long time. People know me. So when they want to move a property...or to buy one...they contact me. But I have to tell them what's going on. And I tell them that if they're not willing to sell at a big discount, it will be hard to sell at all.

"As I said, most people just sit tight. But a few get into situations where they don't have a choice. One poor woman has gotten sick. She is going into a nursing home and apparently the children need the money to pay her medical expenses...so they're forced to sell. Sometimes there's a divorce that forces a couple to sell a place. Otherwise, not much activity.

"And I feel sorry for all those real estate agents who came into the market over the last ten years. What do they do? There aren't enough transactions to keep them in business. But what else can they do? They're not a lot of jobs open in other areas either.

"My guess is that they are all treading water...hoping for a change...living off savings...until they have to make a big change."

We wonder how much of the economy is treading water...hoping for a lifeline...hoping that all this talk of 'recovery' is going to make it possible to avoid any unpleasant changes... hoping that things go back to the old normal...that somehow, everything will be all right again...

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