The economy is going back to hell, but stock markets are surging. Nothing new. We’ve been there before. It always ends in tears. But this time, the Fed’s money-printing strategy will make things only worse. Today’s horrid numbers show us why.

Red-hot inflation in August. CPI is up 3.8% from a year ago and .4% from July. For the last three months, it’s running over 5% on an annualized basis. But wait: That’s inflation in goods and services. Stuff we spend money on. Not wages!

Wages dropped 1.8% from a year ago and .6% for the month on an inflation-adjusted basis, continuing their inexorable 12-year trajectory, having peaked in 1999. Since then, they have dropped 8% or so, depending on who’s doing the counting (the Census Bureau yesterday announced a drop of 7.1% from 1999 to 2010, not including the decline since).

The combo of rising inflation and declining real wages is the formula the Fed has chosen. And it has been vocal about it. It causes the creeping impoverishment of the middle class. Just yesterday, the Census Bureau reported that 46.2 million Americans live in poverty, more than ever. So, don’t expect that middle-class consumer to rev up the economy.

Corporations have offshored production and investments, particularly to China. Consequence: job creation in these countries and job destruction in the U.S. Today, we got another ugly detail, weekly jobless claims, which jumped to 428,000. Offshoring is also responsible for our gigantic trade deficit: $433 billion through July. Government deficit spending, a “stimulus” of sorts, has been used to fill the holes for the last ten years, but now, the economy is addicted to it, and even a $1.5 trillion deficit—10% of GDP!—isn’t enough anymore to keep it growing. So, this is the end game. In its infinite wisdom, and as an election ploy, the White House has called for even more deficit spending in its jobs bill. I mean come on. Do the dang math.

Fed Surveys are deep in the negative. New York Fed’s Manufacturing Survey is depressing. General business conditions dropped to -8.8, new orders stayed at -8.0, shipments plummeted 16 points to -12.9, prices climbed (inflation heating up), and employment fell (whole report). The Philadelphia Fed’s Business Outlook Survey came in at -17.5, an improvement over the collapse last month, but still deeply in negative territory (whole report).

Another kick at the housing market: Foreclosure activity spiked in August. Homes that received an initial default notice jumped 33% nationwide and 55% in California, according to RealtyTrac. Banks are finally grappling with their huge overhang of mortgages that have been in default for months or even years, while people live there for free. Bank of America’s default notices jumped 200%. Eventually, these homes will end up in foreclosure sales. Watch for downward pressure on home values.

And this, though mortgage rates are at the lowest since 1951. Freddy Mac, one of the infamous Government Sponsored Enterprises (GSE) that are still getting bailed out at your and my expense quarter after quarter, announced that 30-year rates have dropped to 4.09%. The combination of low mortgage rates, high default rates, and high inflation rates guarantees big losses down the road for whoever owns these mortgages. Oh, wait… that’s you and me again—since the government owns them through the GSEs. Dang.

Now this: The U.S. Misery Index hits 28-year high. The index is a combination of inflation and unemployment. Given the current trend in both, it will skyrocket (chart at Zero Hedge). And don’t expect the Fed to bring it up. Nor the White House. They even hate the name, though in its unvarnished manner, it should be front and center of the discussion.

But stock markets surge. Not just here but also in Europe. The tottering French banks soared up to 15% today. All on a mix of rumors, announcements, and hopes that central banks will print even more money than they’re already printing. And this time, a lot more needs to be bailed out, including entire countries, like Greece and Italy. That’s the consequence of desperately trying to patch up and then re-inflate the credit bubble, rather than letting it blow up between 2007 and 2009. The damage would have been minor compared to what’s coming our way. Now, risks and losses have been systematically shifted from financial institutions, big corporations, and even hedge funds to you and me, and we’ll  pay for it through inflation and lower wages, and eventually, through higher taxes.

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