The Dow stood up on its hind legs yesterday – up 208 points. Gold rose $1.

The dollar continues to fall.

What to make of it?

Well, it could be we’re wrong about this market. There seems to be a lot of money eager to get into stocks. It’s mostly fund managers and institutions. They can’t risk missing out on a stock market rally – even a small one. If they fail to get in, what will they tell investors at the end of the quarter?

And what kind of bonuses will they take home?

Wall Street does not encourage people to take the long view. Instead, it focuses on quarterly results. Over the last ten years, even solid, blue chip companies have gone nowhere. Investors have waited…and waited… If there’s an important rally now, they won’t want to miss it!

But what if it’s a trap?

Ah, there’s the rub.

After many years of trial and error, we now accept the fact that God may have other plans for the world than those He’s disclosed to us. Still, when we look out at the US economy and the world in which it sits, we wonder how a rally at this point could be real and enduring. Are not consumers shedding debt? Are not 40 million on food stamps? Are not there more people out of work than at any time in history? And does not the US economy face the greatest competition ever…at a time when it is hobbled by its greatest burden of debt?

Maybe, as we said, the stock market rally is just another trap. We’ll find out…in the fullness of time.

Meanwhile, we mentioned St. Louis Fed governor James Bullard yesterday. He seems to understand better than the others what is going on.

The US economy, he says, risks being “enmeshed in a Japanese-style deflationary outcome within the next several years.”

We’re not sure what being ‘enmeshed in…a deflationary outcome’ means exactly. Outcome sounds like something you get after being enmeshed. But we think we get the sense of it. “Japanese-style” and “deflationary” sound like what we’ve been expecting too.

Mr. Bullard is viewed as an inflation hawk, which means he usually is worried about rising prices. But now is not the time to worry about inflation and Mr. Bullard knows it. The problem with inflation now, at least from the Fed’s point of view, is that there isn’t any. So Mr. Bullard is going to worry about something else.

And he’s not the only one. Another Fed governor – Mr. Rosengren of the Boston branch office – said, “While I am not anticipating we will be in a deflationary period, it’s a risk that I do take seriously, and we should continue to monitor what’s happening with prices.”

What’s happening with prices is hard to tell. The official tally puts consumer price inflation at less than one-third the level it was at when Ben Bernanke told us he had it under control. Targeting 2%…the CPI now measures 0.5%…which means either Mr. Bernanke missed the target by 300% or he can’t really control inflation after all.

We’re told that there are two kinds of falling prices. There are the good kind and the bad kind. The good kind are the kind you find at Wal-Mart and Best Buy. They’re the kind you find at the gas station when you see the price of gasoline is less than it was the day before. And they’re the kind you read about in the paper when someone else’s house is now much more affordable than it was a year ago.

The bad kind of falling prices, on the other hand, are the kind that keep economists up at night worrying. They’re the kind of falling prices that put Japan into a 20-year on-again, off-again slump. They’re the kind of falling prices that lower the value of your own house below what you paid for it and that cut your retirement portfolio in half.

But here at The Daily Reckoning, we see it differently. No prices are bad prices – unless they are crooked and dishonest. An honest price is just information. It tells producers what to produce, consumers what to consume, and investors where to put their money.

In a healthy economy, prices often fall…because businesses get better at making things. At least, this was true in the 19th century. Industrialization improved output rapidly and incomes and consumption increased. Prices held steady…or fell.

But this was before the Fed got control of the nation’s money. The dollar was worth about the same thing in 1910 as it had been in 1810. But here we are in 2010, after nearly 100 years of Fed control. What’s the dollar worth today? About 5% of a 1910 dollar. Maybe less.

Maybe that is what stock market investors are really thinking: stocks may not go up…but at least they won’t lose 95% of their value as Bullard, Bernanke et al desperately try to fight deflation…

Stay tuned…

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