As near as we can make out, Tim Geithner's trip to Beijing was, at best, a draw. He told his soothing lies. China listened. The markets reacted favorably.

Stocks fell...with the Dow down 99 points. Gold was down too - $18. And oil lost $2, to close at $66.

But the dollar went up - to $1.41 per euro.

His goal was to bluff and bamboozle the world's investors - notably China - into believing that the US had its finances under control. Once we're out of this mess, he told China's top man, we're going straight. No more binges of EZ credit and wild government spending. We just need a little more of that old time medicine...just one more time...to get us through this dark night of economic downturn. But once the sun comes up and the economy is back on the road to recovery, trust me on this, America is going to balance its budget, foreswear Quantitative Easing forever, and join AA. No kidding. Cross your heart and hope to die.

But some habits are hard to break. The habit of getting something for nothing is one of them. Spending money someone else earned is like eating a big slice of Black Forest cake and watching someone across the table get fat. You're likely to ask for seconds.

Americans are in the habit of spending huge amounts of money...with no intention of ever paying it back. Consumers did it in the '09s and '00s. Now the feds are doing it. The federal deficit for this year alone is four times last year's record. The official US debt is exploding. Bill Gross says it will be 100% of US GDP within 5 years. Our guess is that it will reach that level even sooner.

At 100% of GDP...even mainstream economists believe the situation will be irreversible...interest payments will be more than the US can afford. At that point, forced to borrow more and more just to keep up with the interest, the system will go into a Ponzi-scheme endgame.

"Our expectation is the government won't be able to exit" from its deficit spending positions, said Gross in an interview on Bloomberg Radio. The programs "will be semi-permanent positions on their balance sheets."

Once you go down that road, it's hard - maybe impossible - to come back. The US won't be able to pay off its debt...and it won't be able to unload GM. Nor will the Federal Reserve be able to sell its holding of bonds onto the open market - without causing yields to rise.

Even Ben Bernanke says that "long-term deficits threaten the financial stability" of the nation.

As we've pointed out many times, the problem is more political than financial. The bums in Washington could still straighten up - if they wanted to. We've already told them how they could bring the deficits...and the economic downturn...under control. But they're not about to take our suggestions. Instead, they're "gonna have fun, fun, fun until Daddy takes the T-bird away..."

Daddy China, that is. The Middle Kingdom. The Red Menace. Now, the leader of the bond vigilantes.

Remember the bond vigilantes? They are supposed to keep a lookout for inflation. And when they see it increasing, they come riding into town guns ablazing...they sell bonds and force up yields, thus bringing inflation back under control.

Inflation rates and bond yields have generally been going downhill for the last 26 years...so the old vigilantes have retired. But now China seems to be strapping on its six guns.

According to the press reports of the showdown in Beijing, it sounds as though Geithner diverted attention from the main issue - at least for a while. There's some blah blah about China paying a bigger role in the IMF, for example, and more blah blah about cooperation between the US and China on financial matters.

Someone actually asked the Treasury Secretary why he was talking about involving China in the IMF. His answer: "I just see it as the necessary evolution." We won't stop to wonder what a 'necessary evolution' is. Because the whole IMF discussion was irrelevant and pointless blah blah.

The real story is the last thing Geithner wanted to talk about. Partly because he doesn't understand it. And partly because he can't say anything about it that would help. China has a lot of money with pictures of dead US presidents on it. It's worried that those green presidents may soon by not only dead, but worthless.

"If the US can find a way to protect China's assets," said Yu Yongding, going right to the bottom line, "America's standing here will increase."

If not...well...that's what we're going to find out.

Bill Bonner
for The Daily Reckoning Australia

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• Government Debt Bubble is What Directly Precedes Inflation

"You cannot imagine the rapidity with which the whole thing happened. The shelves in the grocery store were empty. There was nothing you could buy with your paper money."

In 1993, Friedrich Kessler, law professor at Harvard, described an event from his past - Weimar Republic's hyperinflation. He might have been describing the future too.

All over the world, the inflation pumps are running hot. In Australia, the government recently announced a stimulus program. Checks of $1,000 per child will be sent to deserving parents. Senior citizens will get $1,400.

The Japanese have a 5 trillion yen program, while Europeans are in for $1.8 trillion. But it in the United States the pumps are practically burning up. The Americans have put up $8.5 trillion, including $120 billion to bail out a group of foreign countries, as well as the homeland. A trillion here...a trillion there...pretty soon you're broke. But who's worrying?

"I am confident that the Fed would take whatever means necessary to prevent significant deflation in the United States," Ben Bernanke assured Congress, adding that "a determined government can always generate higher spending and hence positive inflation."

So determined was the U.S. Fed since 1970 that the dollar lost more than 3/4s of its purchasing power. But now, all over the world, prices are falling. Inflation is no longer a sure thing. For the first time since the 1930s America, and many other nations, run the risk that inflation rates will turn negative.

Ben Bernanke has been wrong about many things; but as to the Fed's ability and determination to destroy the dollar, he is almost certainly right. The burden of today's column is that we share his confidence. Having inflated so many bubbles - including the monster in private debt that has just blown up - the Fed chief should have little trouble inflating another one in public debt.

History will record that the Bubble Epoque began soon after the Plaza Accords in 1985. The immediate problem confronting the finance ministers and central bankers at the Plaza Hotel in New York was what to do about the dollar. After having gone down in the late '70s, it went up so much in the early '80s that there seemed no stopping it. The strong dollar had its advantages of course. American tourists visiting London in the early '80s could leave their calculators at home. A dollar was a pound. A pound was a dollar. But the strong dollar was a threat to America's commercial interests. Japanese imports, in particular, were undermining America's competitive position.

So the assembled economists came up with a solution. It was decided that the yen should be revalued, upwards, so as to tilt the playing field a little more in the Yankees' advantage. With a higher yen and a lower dollar, products from Japan would have to roll uphill if they were to reach U.S. markets.

Since Richard Nixon had closed the gold window at the U.S. Treasury, in 1971 dollar, not gold, was the bedrock of the new financial system. But the dollar was hardly granite. It was more like gas. Foreign nations bought dollars from their local merchants and exporters, and paid for them with their own currencies. The more greenbacks America emitted, the more money of all shades and colors expanded all over the planet. If central banks failed to keep up with rising supplies of dollars, their local currencies would rise against the greenback, hurting sales to everyone's favorite customer, the USA. The banks also used dollars as reserves; as their capital increased, so did their lending.

The system was absurd; but it wasn't unpopular. The more Americans spent, the more money foreigners had available to lend them

Readers should be grateful; if this column were not so short we would give you more of the details. But there is no need. The facts are not in dispute. The Plaza Accords was followed by the first major bubble of the bubble era - in Japan. The Nikkei Dow, rose from 12,000 in 1985 to over 39,000 in 1990. Property prices in Tokyo soared.

The Japanese bubble found its pin in January of 1990. It brought about a bust that has lasted longer than marriages and refrigerators. The Bubble Epoque was only beginning. A few years later came bubbles in Asia, Russia, and an oft-rehearsed one in LongTerm Capital Management. LTCM was the blow-up not heard around the world. Investors should have listened more carefully. The fund had two Nobel prize winners on its payroll. Their theories of risk management and mark-to-model pricing were clearly wrong. Pity no one noticed.

Instead, the authorities learned exactly the wrong lessons. When one bubble blew up...the feds pumped in more hot air - inflating a new bubble somewhere else. When the dot.com bubble exploded, they pumped overtime. Pretty soon, they had inflated huge bubbles - in emerging markets, housing, consumer credit, the financial industry, commodities, food, and even art. Private debt - used to fund the asset bubbles - was the biggest bubble of all. And now, with all those bubbles flattening, along comes another one. A bubble in public debt.

It's inflation they want. And inflation they shall have. Of course, Mr. Bernanke is as keen to avoid the "hyper" modifier. "Just a little bit" would be plenty, he says to himself. He aims for 2%...maybe 5%. And if inflation rises to 10%...20%...or more...he won't be the first central banker to miss the mark.

Bill Bonner
for The Daily Reckoning Australia

• A Dollar Crash Will Have Disastrous Implications for Global Financial Markets
• Investors Think Things Will Return to the Way They Were in the Bubble Epoque
• The Bubble Deniers Deny that Their Own Stimulus Caused it
• Now in Post-bubble Era as Financial Industry Bombs Out
• Inflation: Enemy Number Two