Oh what a tangled web we weave when first we practice to deceive.

One lie leads to another. Before you know it, you are so wrapped up in them you can't find your way out.

We might be referring to any number of things in today's news. But we will begin with the financial stories. Profits are up, we are told. And because profits are up, everything is hunky dory. Of course, stock prices are high
- profits are rising! And why shouldn't America borrow, it has so much more productive assets to borrow against. The trade deficit, housing bubble, consumer and federal debt - every blemish on America's financial face is creamed over with profits. The result is such a beautiful glow; who can resist?

Just don't look at her without makeup!

And don't look carefully at the grease either. These are not the same profits your mother knew.

We have wondered whence cometh such "healthy" profits in an economy that is so obviously ailing. Richard Benson has helped enlighten us. Making money is easy, he points out, when the fed funds rate is low and the yield curve is steep. "Finance" operations become very profitable. All you have to do is borrow at low rates for the short term and lend at higher rates for a longer period. That's why "finance" as a percentage of U.S. profits has soared.

It also helps when the low rates have caused a housing bubble.

"The housing bubble has created economic growth and job gains through the building of new homes, the hiring of mortgage bankers, and the issuance of 400,000 more real estate brokerage licenses (America now has over 1.2 million real estate agents who make over $60 billion in commissions a year)," he adds.

Today's press elaborates:

"Californians gamble on careers in real estate," begins an article from Reuters. One of 50 adults in the state is a licensed real estate agent, the report explains, with the agent population growing 13 times as fast as the growth in home sales. And small wonder. The typical house now sells for more than $500,000. An agent only has to sell a few houses every year in order to enjoy a modest income.

And if he is not selling his house, the Californian is dismembering it. In 2004 alone Americans "took out" $600 billion from their houses. Normally, when consumers earn extra money it comes from the businesses they work for. It is a cost to the business, reducing profits. But this new revenue comes to corporate America (when it is spent in America) without offsetting labor costs. U.S. businesses didn't have to pay anyone a salary in order to increase consumer spending. Instead, the money came as though from heaven, and fell directly into profit margins.

Thus, like so many other things in modern America, corporate profits depend on people selling houses to one another at higher and higher prices, encouraged, aided and abetted by "emergency" low rates from the Fed.

What was the emergency?

Ah, we suspect that that was a little fib, too. But we won't dwell on it. We merely note that when the "taking out" of equity comes to an end, so do the profits. Then, U.S. businesses will have to earn their money.

"As McMansions go, so goes job growth," says the New York Times. In the meantime, we pass along another small item from Barron's. Inflation, as we all know, is as healthy as profits, and the economy in general. But here, too, by the time the Bureau of Labor Statistics has worked them over a few times, the numbers come out looking like prisoners in an Iraqi jail. Health insurance premiums have been rising at an annual rate of 10% for a number of years. But in the CPI figures, the medical component is up only 4.4% in the year ending in September. And while health care accounts for roughly 15% of GDP, it is given less than half that importance in the inflation index.

Similarly, a confession is beaten out of the housing numbers, another major component of the inflation measure. We all know the price of houses has been going up at a double-digit rate for the last five years or so. But instead of measuring what people actually pay to buy a house, the torturers at the U.S. Labor Department pretend that we rent our houses from ourselves. As more and more people have been lured into homeownership by low rates, the pool of renters has declined - actually softening rental rates.

There you have it, dear reader: Profits are up; inflation is down. Both are subject to change without notice.

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