As predicted in this space, the November payrolls were down a lot more than expected. Economists thought there would be 350,000 layoffs. Instead, the actual number was 200,000 more.

But U.S. investors shrugged off the employment news. The rally continued…it has gone on for a month. The Dow rose again yesterday; this time it was up 298 points to 8,934. If the rally retraces 50% of the losses, it will make it all the way to 11,000. So, this trend probably has a way to go.

Oil rose too - back up to $43. And gold shot up $17 to $769.

Commodities, stocks, precious metals - almost everything was up yesterday.

One important exception: Treasury bonds. The yield on ten-year T-notes rose to 2.76%…leading Bloomberg to report:

"Treasuries fall as US to sell more securities than expected."

Watch those Treasury yields. Along with the dollar, they are going to tell the tale of the NEXT big bubble - the LAST big bubble of the whole Bubble Epoque - a bubble in public debt.

All over the world, the feds are desperately trying to inflate their currencies. People want money. People need money. And they need to spend money.

From the United States this morning comes news that a record one in ten homeowners is either in arrears on his mortgage or already in foreclosure. And everyday brings more dudes without paychecks. With no savings…and no jobs…people are squeezed hard. They can't spend; they can't even keep up with their mortgage payments.

So, the simpleton feds are giving people more cash and credit.

As everyone knows, what got them in trouble in the boom years was spending and borrowing. So what do the Feds do? They borrow and spend more! Altogether, they're putting up more than $10 trillion to try to reflate the world economy.

Where do they get that kind of money? First, they borrow it. Then, they print it. So far, borrowing has been easy. Because, while asset prices are falling, investors lend to government in order to protect their money. And with consumers not spending, prices fall - so there is no consumer price inflation to worry about.

In fact, food and energy - key components of consumer prices, though not of the core CPI - are actually falling. And when prices fall, consumers have an incentive NOT to spend, because they will be able to get what they want at lower prices in the future. That's when a recession gets to be serious; it's what happened in Japan. And there's not much the feds can do about it, because they can't push their lending rates below zero. So, the feds are sweating deflation - not inflation. They want to avoid it in the worst possible way.

What's the worst possible way to avoid deflation? Print money. 'Governments can always avoid deflation,' says Ben Bernanke - but only if they're reckless enough to risk runaway inflation. 'And you can really make a mess of things,' Gideon Gono might add, if he had any idea of what he was doing to Zimbabwe.

And it can happen suddenly. There are huge piles of cash - in T-bills, in money-market funds, in foreign central vaults waiting out the crisis. At present, the owners of this cash are more worried about deflation than inflation. But at some point - maybe in 2009…probably in 2010 - that will change. Borrowing and lending money will prove ineffective. Real inflation - otherwise known as the kind of money that comes from trees - will be the only option left. Eventually, the feds will get the hang of it…inflation will soar…investors will dump dollars and T-bonds…and the last bubble, in government debt, will blow up.

*** "The great inflation continues," says Strategic Short Report's Dan Amoss.

"By inflation, I'm not referring to rising prices. I mean the creation of new fiat money and government credit amid this environment of fear and money hoarding. Lately, banks have hoarded excess reserves at the Fed, so this new money and credit is a long way from influencing consumer prices. But this condition is not likely to last much longer, and may be a function of banks wanting to report the cleanest possible balance sheets at year-end."

"The latest inflation initiative was leaked earlier this week from the Treasury Dept. Treasury clearly wants lower mortgage rates and will work in concert with the Fed to force them lower. It has not been officially announced, but sources hint that Treasury might use Fannie and Freddie to bring down 30-year fixed mortgage rates to the 4.5% range.

"Many commentators note that government-imposed price floors for mortgage securities are no way to solve a problem rooted in a debt bubble. I agree, but I expect it to happen anyway, with the consequence of extreme dollar debasement.

"So despite their current lack of popularity, I expect inflation hedges, including gold and oil, to rebound strongly in the coming months."

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