Pop Quiz - Subject: China

Let's test to see if everyone's been paying attention. Let's say a country has been been pumping money and credit into their economy in order to build infrastructure and fuel a growing economy. What is most likely to happen?
a) The economy will continue to grow as long as the government continues to supply credit
b) The economy will reach peak efficiency and maintain GDP levels regardless of how much credit the government supplies
c) The economy will go into a recession because the previous growth was based on malinvestments fueled by the government that do not reflect the populations needs and desires which will subsequently need to be liquidated.

Maybe some of you remember Man Cow's game show "The Answer is Always C", in which he would ask contestants a multiple choice question in which the answer was, in fact, always "C".

China's economy is DEFINITELY headed for a meltdown:

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/09/01/cnwfc101.xml

My favorite part of this article is this phrase right here:

"While the Communist Party is likely to keep injecting public money to keep headline growth rates rising respectably, the slowdown of demand for office and residential space shows that the Chinese miracle may not be sustainable indefinitely."

Number 1 - the injection of public money caused the bubble, which the recession will necessarily have to correct for.
Number 2 - there is a reason these booms are considered "miraculous", becuase they defy the conventions of economics and human action. They are, in fact, too good to be true.

What I love about this article is that the author touches on all of the critical pieces of information regarding a business cycle, but fails to put them all together in a coherent manner. Perhaps the author is simply being coy, and doesn't want to tip his hat to an economic theory that is regarded by manner as crackpottery.

For further reading on this, you might want to skim this article regarding the "Skyscraper Index". Apparently, skyscrapers are harbingers of economic doom. The only way you can build them is with easy credit. So the conditions that are a pre-requisite for a building a skyscraper are the same conditions that necessitate a recession:

http://mises.org/story/3038