PRESTOPUNDIT

THE CHINA BUBBLE -- READY TO BURST? (via the Mises Blog.)

The problem? This unsustainable cycle:

Quotable:

The Chinese bubble is part and parcel of the bubble in global property. It's the offshoot of the US Federal Reserve Board pushing the Fed Funds rate down to 1% in an effort to stave off deflation when the Internet/Tech bubble popped. Consider it a five-year cycle of speculative juices running amok thanks to the central bank's magical wand of liquidity. Low interest rates send the signal to entrepreneurs that both resources and future demand will be available to support new projects. Artificially low rates - the suppression of the "natural rate" of interest - is what leads to over-investment, excess capacity, and competition for scarce goods, driving up prices. China's annualized consumer price index rose to 5.2% in September; but it's 10% at the wholesale level. What we have witnessed in China is not about efficient markets, rational investors, or bell curves of the fairy tale land of financial theory. It's about rank speculation on the part of the crowd, with the People's Bank of China and the US Federal Reserve acting in key supporting roles as accomplices.

See also this. And then contemplate Stein's Law: "Unsustainable trends tend not to be sustained." Posted by Greg Ransom