Like Japan did in the 1990s to get itself out of its own economic morass, China is splurging on massive public infrastructure programs. China’s banks are lending like crazy to fund these projects. In the first six months of this year, they loaned Rmb7.4 trillion (just over $1 trillion). That’s over three times the amount loaned out in 2008 and the biggest six-month lending surge on record.

Is China’s spending spree setting the global economy up for another leg down? China’s surging investment accounted for an unprecedented 88% of Chinese GDP growth in the first half of 2009.If that’s not a dangerous bubble in the making, we don’t know what is.

What we do know is that the quality of Chinese bank lending will suffer. And as Stephen Roach recently pointed out in the Financial Times, this is a trend that “could sow the seeds for a new wave of non-performing bank loans.”

We’re not economists, dear reader. And nor do we want to be. But that doesn’t mean we can’t spot a bubble in the making. This week, investors paid 40 times earnings for China State Construction Engineering Corporation. As Will’s father, Bill, points out in the Daily Reckoning , these investors have learned nothing from the crash of 2007-08.

As Bill says, it’s a secret of the underground that this kind of hyped investing rarely works out.

The rest of the world seems unaware of how the investment markets work…and they think credit is Miracle-Gro for the economy.But markets are not mathematical… nor mechanical; they’re moral. Their purpose is not to make people wealthy, but to make them wise. And then… only for a while.

It they were mathematical you might make people richer by adding zeros. But it’s not that simple. Zimbabwe tried it; it doesn’t work. A Dear Reader gave us a $10 TRILLION dollar bill – real money printed by the Zimbabwean Treasury. That – and about $5 US dollars – will buy you a cup of coffee in Harare… if they have any.

If they were purely mathematical, you might be able to anticipate price movements with computers and PhDs in math. Many have tried it. As far as we know, none has ever really succeeded.

It’s not a mechanical system either. When prices go down, there are no screws you can tighten…no levers you can pull… Nor can you add more fuel or slather on more grease. It’s not that simple.

What Bill understands better than most is that you’ve got to learn to take your lumps if you want to make money in the markets. And no matter how hard government tries to avoid what’s coming… the market will eventually give us what we deserve…

Instead, markets are complex natural systems. Like mistresses, they can be jiggled and jived… but they can never really be controlled or predicted. That’s what makes them so interesting, of course.

The markets are always teaching us… always correcting us… always giving us a kick in the pants. These are moral lessons…in the broad sense. That is, if you do the wrong thing you get punished for it. Step on a rake; it hits you in the face.

The purpose of a bear market is to correct the errors of the preceding boom. Most prominent among those errors is to think you can make money by speculating in the stock market. When this idea takes hold, good sense goes out the window. People will buy dotcoms with no business plans…and house builders at 40 times earnings!

But that’s how we’ll know when the correction is over – when people give up on the stock market… when they want nothing more to do with it. Judging by today’s news… we’re still a long way from there.