The news last week followed the sun. It began with doubts about Ireland’s solvency…then moved to fears that California would default…and ended on Friday with doubts about China. Word on the street was that the Middle Kingdom wanted to dampen down inflation. They were going to raise rates and tighten credit.

The Chinese blame Ben Bernanke for increasing the supply of dollars and causing inflation in emerging markets and commodities. Bernanke points his finger at the Chinese. Replying to charges of reckless endangerment, “they made me do it,” he says. The Chinese wouldn’t raise the yuan…so he has to lower the dollar.

That’s what’s nice about paper currencies – you can manipulate them. Which is exactly what the US is doing…trying to manipulate its dollar downward…while simultaneously charging China with being a “currency manipulator.”

Which just goes to show how little honor there is among central bankers.

Maybe it was the China story. Maybe not. But for one reason or another there was no bullish follow-through on Friday. The Dow barely ended the day in positive territory. Gold stood stock still.

So, what is going on in China? We decided to get to the bottom of it.

Friday, we had a Chinese businessman in our office. He had come to see us about starting up a venture together in China.

“Nobody…nobody…knows for sure what it going on,” said he. “On the one hand, there are plenty of excesses and bad investments in China. There must be. We’ve been growing so fast. And there must be a lot of bad debt hidden in the banking system, for example.

“But on the other hand, China is booming. There have never, ever been so many people working so hard to make money. It’s a bit like the US probably was a hundred years ago. Only bigger. Faster. And with more government involvement.

“There might be plenty of problems…business failures…bankruptcies…and financial blow-ups. But I doubt that the China story will end any time soon.”

We don’t think the story will end. We think it will become more and more fascinating…and more exciting. You can’t grow at such a breakneck speed without breaking someone’s neck. And any time the government is heavily involved in planning an economy, you can be sure the plans will be bad ones. They will control too much…and then they will lose control.

Our friend Dylan Grice, analyst at Société Générale, has more on this story:

Is it possible they’ve…(sharp intake of breath) already lost control? And if so, who’s to say what will happen if the asset inflation goes into reverse? Maybe when the authorities engineer the slowdown they desire and tell investors it’s safe to buy again, those investors won’t want to buy. In which case a hard landing shouldn’t be beyond the realms of imagination.

Forget US de-leveraging, this represents the largest deflationary risk to the world economy

So long as China’s credit growth continues at its current pace, aided by the liquidity the Fed is flooding world markets with, and encouraged by artificially low interest rates, the primary risk Ems (Emerging Markets) face today remains that of a bubble.

This might sound a very bullish note on which to end. It isn’t. And let me be crystal clear about why: a bubble is not a bullish scenario. It’s not bullish for the EM economies themselves, their citizens or for the world as a whole. The fact is all bubbles end in tears.

Tears. Did you hear that, dear reader? Tears. Let’s be sure they’re not our own.

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