“Data raise fears over faltering economy,” says this morning’s Financial Times.

What a surprise! What happened to the recovery?

The Dow fell another 41 points. Gold got hammered for a $39 loss.

Why would gold go down so much? Because people are finally realizing that deflation is the real risk, not inflation. Gold could continue to slip and slide for a long time now… It’s hard to say. It can rise in a deflation. But it depends on how volatile and uncertain the markets appear. In a stable, Japanese-style slump, gold could go down and stay down for many years.

But you know our thoughts on the subject. We’ll see all kinds of ‘flation’ before this crisis is over. Deflation. Inflation. Stagflation. Hyperinflation. You name it!

The latest news tells us that jobs are down. Treasury bonds are trading at their highest point in 14 months. A 10-year Treasury note yields just 2.93%.

As dear readers know, the feds can’t really make bad debt go away. All they can do is move it around. The parties to the transaction – creditors and debtors – usually decide among themselves who bears the losses. Typically, if the debtor can’t pay, the creditor loses his money. But when the feds step in almost anything can happen. But nothing good.

The general government plan is to collectivize losses – either by moving them onto the taxpayers or by moving them onto the general public. When the government borrows money to fund its bailouts and boondoggles, for example, it is taking losses away from the people who deserve them and sticking them on the taxpayer.

If they can manage to boil up a little consumer price inflation that is even better. Then losses seem to disappear into the air…like noxious fumes. The entire public breathes them in and gets a little lightheaded. It doesn’t know what to think or who to blame.

In the present case, some economists favor sticking taxpayers with the losses. Others are squarely against it, preferring to force the losses on the general public by means of inflation.

The trouble is, these cockamamie plans tend to have unanticipated consequences.

The Japanese feds really pulled a fast one, in this regard. They borrowed from their own people in order to fund a 20-year bailout/boondoggle program. The idea was to provide “counter-cyclical stimulus.”

Naturally, the stimulus never seemed to stimulate anything but more stimulus. The program went on for two decades…and, as far as we know, the Japanese economy is still limping along.

The effect economists did not anticipate was that the economy did not take off. Instead, there followed two decades of on-again, off-again slump. Which is why it would have been better to let the creditor and debtors work out their problems on their on…let them take their losses back in 1990…and be done with it!

Another unanticipated result has not yet been fully realized. The government took savings from Japanese households and spent it. Now, a whole generation of Japanese old people looks to government bonds as the source of its retirement wealth. Trouble is, there is no wealth there. The feds took credits and turned them into debits. They took the surplus wealth of an entire generation and squandered it. Now, instead of looking to stored-up wealth for their retirements, the Japanese have to hope that the next generation will be kind enough – and able – to keep up with the debts laid upon them.

Trouble is, the next generation has too much debt to carry. Government bonds outstanding equal nearly 200% of GDP. At zero interest rate, it’s not too hard to keep up with the interest payments. But even the Prime Minister is beginning to wonder how those debts will ever be repaid. And interest rates will not stay low forever.

Imagine that inflation rose…and that investors got nervous. Imagine that the carrying cost of that debt rose in Japan as it did in the ’70s in the US. At 10% interest, the cost would be one fifth of GDP – or about as much as the entire government budget.

Obviously, the system will fall apart first…leaving Japanese retirees with a lot less money than they thought they had.

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