Xie’s side-observations are sometimes as interesting as his main themes. I didn’t know, for instance, that both Russia and India were experiencing double-digit inflation well in excess of nominal growth rates. His next-decade economic forecast for the U.S. and the Eurozone is summed up in one word: “terrible.” Yet the most eye-catching takeaway from his first two pieces at Caing.com – “Trapped Inside a Property Bubble” and “Pumped with Cash – And Ready to Crash?” – is his designation of 2012 as a target year for the Chinese bubble to burst amidst another global financial crisis:

2012 is building up to be another crisis year. Governments and central banks did not handle the last crisis well. They did not reform a global financial system plagued by incentive misalignment and wild speculation. All the money governments and central banks released is turning into global inflation. And they resorted to bailing out speculators, laying the foundation for another crisis.

The focus of the Chinese problem, in Xie’s view, is property speculation, the same property bubble that has made for those striking videos of empty, never-occupied skyscrapers and never-alive ghost towns, but which, more important, is also pricing China’s large, but proportionally small middle class out of the housing market, and spreading inflationary pressures on wages while also turning potentially productive citizens into compulsive speculators.

It’s mere coincidence if Xie seems to be reading from a Mayan calendar. He bases his prediction on rough but reasonable calculations derived from historical precedents and real-time observations, not on ancient prophecy. As Xie explains, the conditions that made China’s decade-long growth spurt possible have disappeared, and are unlikely to return. Even as China has lost its status as “lowest of the low-cost producers,” the country remains heavily export-dependent, yet prospects for a worldwide resurgence in export markets are dim at best. Like other economists, Xie expects near-zero growth in the Eurozone and Japan, and low growth in the U.S., with no prospect for other countries to take up the slack, especially since many of them are almost as export-dependent as China, if not more so.

China seems, however, to be far from having adjusted psychologically or politically to this new reality. Rather than undertake a re-adjustment of expectations, and face attendant political strains, China has been taking a path of least social and political resistance, in a manner that will strike some familiar chords for Americans:

The biggest risk to China’s economy is the desire to maintain past economic growth rates by maximizing investments in property – an unproductive asset. It supports short-term growth by sacrificing long-term growth as capital’s average productivity declines over time.

Local government performance in China is measured according to GDP and fiscal revenue. Property development can achieve high numbers for both quickly. This is why property’s share in China’s capital allocation is rapidly rising as prices appreciate and volumes increase. This is a politically driven bubble — and it’s already massive. Unless the trend is reversed by reforming incentives for local governments, China’s property bubble could mushroom in two years from what’s now a dangerous level.

Xie is building on his own past work here – he is one of the world’s proven experts on economic bubbles, especially of the Asian variety – but you don’t need to be an economist or China expert to follow him: The inflation of the Chinese property bubble amounts to “mal-investment” on as gigantic a scale as you would expect from the non-transparent, un-free, deeply corrupt public administration of an economy encompassing the lives and fortunes of over 1 billion people. The supposed advantages of authoritariansm, so impressive to New York Times columnists and some American presidents, can come at an unimaginably steep price.

Observers of the world scene – including JE Dyer in recent posts at the Optimistic Conservative’s Blog and elsewhere, or people like the international diplomats cited in Sunday’s Washington Post – have good reason to view China as a great power on the rise, a potential peer competitor to the U.S. It’s tempting to look at the financial crisis that Xie sketches, or at China’s well-documented and widely discussed demographic and resource issues, and assume that the challenge to American status is taking care of itself, but it would be imprudent to assume that a bad decade for China will permanently simplify our strategic lives. Indeed, the prospect of China’s weakness may turn out to be more dangerous than the prospect of Chinese ascendancy – even before we begin to consider the direct effects of a Chinese implosion on our own immediate interests.

The stridency of Chinese diplomats reacting to U.S.-Taiwan arms deals may reflect new self-confidence – or it may foreshadow a more bellicose, even desperate reaction to increasing pressures at home, amidst historically new, decisively frustrated expectations. Countries quietly confident that their hour is coming can afford to be patient. Countries sensing that their hour is passing – Germany 1914, Japan 1941, to note two of the more famous examples – often become more aggressive.

Last seen being driven into the loving arms of Japan amidst mutual overriding needs, China is also exploring cooperation and/or collusion, rather than competition, with another (former?) major rival.  Here it seems partly a consequence of Global Warming summitry, partly a predictable consequence of post-Bush American foreign policy.

The draft [climate change proposal], which was originally prepared by China, was finalized after some changes during a 7-hour long meeting of BASIC countries-Brazil, South Africa, India and China besides Sudan as the chair of G-77.

This joint front forged on Saturday is a major political initiative — the first major India-China accord on international affairs–that is likely to impact not just the dimension of the talks on climate change but international diplomacy as a whole. The move comes after recent discussions on climate change held with Indian and Chinese leaders by US president Barack Obama, who appears to have made little impact on them.

“Copenhagen conference: India, China plan joint exit” – The Times of India

2.  “We are no longer in a golden age. We are in trouble.”

This from a nicely depressing economic (as well as economical) summary from another set of bearish financial analysts (linked recently at Zero Hedge as a “must read”).

60 years ago after ten years of depression; five years of a world war; and another five years of recovery, which included a mild post-war recession, the United States was primed to enter a golden age of long-term growth and prosperity, when a confluence of major economic, social, and demographic factors reinforced each other in a virtuous upward spiral to produce a nearly continuous period of growth and prosperity. The major factors were:

• pent-up savings and consumer demand
• careful consumer spending and cautious use of credit
• the baby boom, which itself fostered the greatest increase in consumption ever
• cheap and abundant domestic energy sources
• women entering the labor force in large numbers, now accounting for half of all
• workers
• burgeoning international trade surplus
• low interest rates in the 50s and 60s, and especially since 2001
• steadily increasing easy credit until last year
• the primacy of the U.S. dollar during most of this period.

Over the past 60 years, and especially since about 1996, we have shifted to an economy in which major negative conditions have been pushing the United States along with the rest of the world into a self-reinforcing downward spiral. These factors include the following:

• extensive wealth destruction
• high and rising unemployment and underemployment of nearly 18% in the U.S.
• a record decline in housing prices, likely beginning another leg down, along with collapsing commercial real estate valuations
• over-leveraged consumers now increasingly squeezed by job losses, falling home prices, and heavy debt payments – with rising food and energy prices further limiting discretionary spending
• a continuing decline in credit, with consumer borrowing having collapsed into negative territory
• a declining U.S. dollar with an increasing shift to other currencies for international trade.

We are no longer in a golden age. We are in trouble.

Scroll to page 5 of the embed (hint:  switch to full screen mode and zoom) for rather jaw-dropping charts on household borrowing and bank lending.  Also don’t miss this rosy equity outlook:

On balance, as our readers have probably deduced by now, we think that the unknowns are looking pretty grim, which bolsters our caution and reluctance to jump into what looks to us like a short-lived echo bubble. An additional reason for caution lies in the fact that so many bearish investment managers have been forced into equities. This anomalous situation of fully invested bears has created the real possibility that some negative event or even a modest pullback in securities prices can precipitate a rout like the 1987 crash, as everyone heads for the exit at the same time.

Balestra Bulletin November 2009

The article, by financial analyst Marvin Clark, counts down a 10-point case that we’re merely in the rally/reaction phase of a new depression. His last, most ambitious argument is the most speculative one (in both senses of the term, since he’s also justifying his portfolio allocations).  It’s also the argument least likely to be resolved by anyone who hasn’t been given the curse/gift of prophecy:

Every champion, eventually, must retire from the ring. The US is no different. And that is the primary reason most professionals have gotten some portion of the last three years wrong. Any data set from the 20th century is obsolete without significant adjustments. Linear extrapolation of historical patterns of growth, revenue, and consumption, without correctly modifying credit, demand and demographics, plus the impact of technology, domestic tariffs and regulations, and Realpolitik, is like placing a compass inside a magnetic field. Good luck.

No one can take away the fact that America owned the 20th century. However, in the 21st century, cheap land, cheap labor and a younger demographic profile, suggests that in 20 years, the reins of power will be in the adolescent hands of a rapidly growing Asia. So, we invest in their currency (CYB, ICN, and BZF), finance their growth (DRF), and sell them the raw materials (DBN) that they will need to build tomorrow.

For now, besides military weaponry, our number one export is entertainment (DIS).

As far as Clark’s “Asian century” argument goes: Maybe. Maybe not. However, to buttress Clark’s argument, I will observe that my favorite economist, bubble expert Andy Xie, is unusually excited in his most recent op-ed column about a proposal that I’ll refer to (I doubt he ever would) as “Greater East Asian Co-Prosperity Sphere II.”

Observing that a new East Asian economic community is already under discussion, Xie focuses on the China-Japan relationship, which he has seen as critical since at least 2004. He believes the key measure would and should be a Free Trade Agreement (FTA) between the two countries:

An FTA between China and Japan would significantly accelerate their trade, resulting in an efficiency gain of more than US$ 1 trillion. Japan’s aging population lends urgency to increasing the investment returns. On the other hand, as China prepares to make a numerical commitment to limiting greenhouse gas emissions at the upcoming Copenhagen summit on global warming, heavy investment and rapid restructuring are needed for its economy. Japanese technology could come in quite handy.

More importantly, a China-Japan FTA would lay a foundation for an East Asian free trade bloc. The region has a population of 2.1 billion and a GDP of US $13 trillion, rivaling the European Union and United States. Blessed with a low base, plenty of capital, sound technology and a huge market, the region’s GDP could easily double in a decade.

Trade and technology are twin engines of growth and prosperity. No boom is sustained without one or the other. And when they come together, the boom can be massive. Prosperity seen over the past decade, for example, is due to information technology along with the opening up of China and other former planned economies. But these factors have been absorbed, forcing the world to find another engine. An integration of East Asian economies would be significant enough to play this role.

Xie doesn’t address the potential political ramifications of such a development. Left unspoken in his article is that the last time Japan and China were “united” under a regionally hegemonic structure, though admittedly in far different circumstances, both Russia (then the Soviet Union) and the United States found the prospect intolerable.

Like the idea of a German-dominated Mitteleuropa, greater Asian co-prosperity under Japanese tutelage may be an idea whose time always seems on the verge of coming, only to pass as soon as it’s realized. Then again, it may be an historical inevitability, merely awaiting the right circumstances.

Night photos are usually most impressive – if sometimes a little Blade Runner-y (say that three times fast!).

…or how about this one (Wuhan)?

Ever wonder what happens inside those buildings – during working hours? I don’t know who the guy narrating the next video is, and he’s a little hard to understand in spots, but it looks like what goes on inside some of those awesome edifices is… nothing… or as reasonable a facsimile as you’ll ever find on Earth.

I guess, if you’re a China Bull, this is just anecdotal evidence……still, those are some mighty big – 70-floor, never-occupied – anecdotes.

A few years ago, such tourists wouldn’t have gotten out of China with their espionage footage, if at all – so I guess there’s been some real progress after all!

On a similar theme, this video depicts the new “world’s largest mall” – bigger even than the Mall of America. Unfortunately, it has only 12 tenants. It’s a section of a PBS documentary – you may want to skim it to get the flavor (unless you’ve got more spare time than I do).

h/t Zero Hedge commenters – under a post, “Mother of All Bubbles,” that describes how lending in China, during a season when historically the credit floodgates open, has hit a new low for the year…

UPDATE: Here’s the podcast – JED comes on at around 18:00:

If central banks continue refusing to raise interest rates during these weak economic times, oil prices may double from their current levels. So I think central banks, especially the Fed, will begin raising interest rates early next year or even late this year. I don’t think it would raise rates willingly but wants to cool inflation expectations by showing an interest in inflation. Hence, the Fed will raise interest rates slowly, deliberately behind the curve. As a consequence, inflation could rise faster than interest rates, which is what the indebted U.S. household sector needs.

This fool-the-market strategy may work temporarily. Its effectiveness must be reflected in oil prices; the Fed needs to target oil prices in its interest rate policy. If oil prices run from current levels, it means the market doesn’t believe the Fed. That would force the Fed to raise interest rates quickly which, unfortunately, would trigger another deep recession.

Instead of a V-shaped recovery, we may instead get a W curve. A dip next year, although perhaps not statistically deep, could deliver a profound psychological shock. Financial markets are buoyant now because they believe in the government. The second dip would demonstrate the limits of government power. The second dip could send asset prices down — and keep them down for a long time.

Andy Xie:  “New Bubble Threatens a V-Shaped Rebound”

No wonder Beijing won’t join Kyoto.  There’s probably some way for a squad of the Terminally Sanctimonious to assemble in The Hague and sue China over this.

Hey, Grasshopper.  We can give you a great deal on a whole bunch of used CFLs…

Hint: this makes Madoff look like an Eagle scout.

Muslim theocracies have always suppressed Communism. Communist states have always persecuted their Muslim minorities. The fact that they do so shows that they share a belief in a society that does not allow freedom of speech or freedom of belief. They may persecute each other, but they do so as part of a united front against societies that allow liberty.

And of course, Iran, Venezuela, and North Korea hate and fear Israel. They are entirely unaware that they do not share a boundary with Israel. They have no idea that they have no tangible disagreements with Israel. They don’t even care about the Palestinians, except for the fact that supporting Palestinians is a way of opposing Israel. Iran, in particluar, opposes Sunnis and does not like Arabs. The Marxist-Islamic Alliance makes no sense. However, senseless movements are typically more dangerous than logical ones.