When a nation prints money to pay its bills, it’s on the path to the poorhouse. Weimar Germany took that road in the 1920s. One postage stamp cost 1 billion marks. Food and commodities doubled in price every two days. It took 1 trillion German marks to buy one U.S. dollar.

Today, however, Germany is seen as the safe investment and the U.S. dollar is looking like the next Weimar currency.

The world is going through an economic power shift not experienced since America defeated the ussr in the Cold War to become the globe’s only superpower. Only this time, America is on the losing end. Fareed Zakaria, writing for Newsweek, called this power shift the “Rise of the Rest.” In biblical terminology, it is called “the times of the Gentiles.”

The evidence is becoming apparent in many areas. For example:

But perhaps the most compelling evidence is the deterioration of the U.S. government’s credit rating.

“On the basis of credit default swaps, which are used to speculate on a government’s ability to repay debt, the 10-year note reached a record high of 16 basis points on March 12,” reportsDaily Reckoning economist Bill Bonner. “German bonds traded at 15 basis points, also a record” (emphasis mine throughout). What that means is that the market thinks there is greater risk of America defaulting on its bonds than Germany.

What does it tell you about America’s financial condition when the cost to insure its debt is pricier than insuring Germany’s—a nation about a quarter of the size of the U.S. that has instigated and lost two world wars and has resorted to indiscriminately printing money to pay its creditors in the past?

It means that America is in far worse economic condition than is generally perceived—and that is quite significant considering the well-publicized housing market bust and banking turmoil.

Perhaps investors are beginning to see the writing on the wall concerning America’s ability to pay its obligations, or perhaps, with the rise of China and the European Union, there are now viable alternatives to the U.S. economic system.

Already some municipalities are buckling. In May, the California city council of Vallejo unanimously voted to file for bankruptcy over a $16 million funding gap. Although the bankruptcy is so far an isolated affair, it could be just the beginning of bad news from troubled cities.

California is infamous for its municipal defaults and bankruptcies. However, previous failures could be tiny compared to what is coming. When Desert Hot Springs went bust in 2001 and Orange County sought bankruptcy protection seven years earlier, it was because of a lost lawsuit and because city money managers made very risky investments. The difference this time—and what makes its occurrence possibly pervasive—is that what ails Vallejo’s budget is the same thing that is trashing municipal and state budgets across much of America: a deflating housing bubble and a slowing economy.

When home prices were rising, cities raked in piles of cash as property taxes soared. But now, according to the Globe and Mail, “With housing values plummeting—down 19 percent in January, year over year—so are tax assessments, and thus, revenues.” But even though revenues are falling, the expanded programs and the borrowing initiated during the housing boom years still need to be paid for. Coupled with lost construction, lending, and real-estate jobs, and rising wage pressures, councils are feeling the pinch. And for many states, this is really only year one of the housing bust.

Over the next couple of years, many cities could easily face default. Large centers such as Detroit and Cleveland, where half of all subprime mortgages are ending in foreclosure, could also come under pressure to drastically cut services and jobs to balance budgets in the years ahead.

State budgets are being punished too. California has already declared a state of fiscal emergency due to an expected deficit of around $20 billion over the next 12 to 15 months. And on the East Coast, Rhode Island is experiencing its worst budget crisis in years. Rhode Island is terminating welfare benefits to families of 3,400 children; it has released nonviolent criminals out of prison early; it has slashed health care benefits for state employees—and next year’s budget deficit is projected to be more than twice as severe.

Other housing bubble epicenters like Florida, and Arizona could be next. Unfortunately, they may not be alone. Twenty-four other states are facing budget shortfalls for the 2009 fiscal year, according to the Center on Budget and Policy Priorities, a liberal research group in Washington.

Viewing all this from behind computer screens, the question for investors becomes: Will America be able to pay its bills? If so, will it have to resort to creating whatever money is needed?

Actually, America has already started down the one-way road to hyperinflation. The U.S. dollar supply is currently being expanded more than 17 percent per year as measured by M3. That is the highest level since M3 was collected back in 1959. Unless global demand for dollar reserves is also increasing by 17 percent, inflation may be about to tear another chunk out of the dollar’s value. Why else is gold, which is considered an inflation hedge by many investors, over $900 an ounce?

“[F]or the first time in modern history there are grave doubts about the very viability of our money,” says economic analyst Richard Russel. “Even during the Great Depression, nobody doubted the value of a dollar. The dollar was ‘as good as gold.’ The only problem was—nobody had dollars.”

“Today it’s a different story,” he says. “Today there are too many dollars around—but the world is questioning the viability of the U.S. dollar. … The wonder is that the dollar is viable at all.”

And the announcement that the Federal Reserve Bank injected another $200 billion into the banking system on March 11 is not providing the confidence that it was intended to either. Yes, the whole world gets the point that the Federal Reserve will inject as much money as needed to help the big banks from collapsing; the Fed has made that very clear. But the question of where the Fed gets all its rescue money from brings up disturbing similarities to Weimer Germany. In case you’ve forgotten, this $200 billion injection matches the $200 billion the Fed set free on March 7—that makes $400 billion in just five days. No wonder investors are questioning the viability of the U.S. economy.

Keep throwing around $200 billion here, $200 billion there, juicing the money supply another 17 percent—and pretty soon $200 billion isn’t as much as it used to be. Maybe the Fed will go with $300 billion next time. But why stop there? Why not just print up million-dollar bills to make each person a millionaire? That would really stimulate the economy!

That kind of thinking is just how Weimar Germany, Turkey, Argentina, Soviet Russia and every other failed economy started their roads to inflation Armageddon. Then, the next $200 billion injection could be just enough to get you a roll of toilet paper—just like in Zimbabwe today.

The road to inflation nation ends in food riots, wheelbarrows of paper notes, and billion-dollar postage stamps. Unfortunately, that’s the road America is choosing to travel.