What if the Chinese take the lead in innovation? - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 17 May 2011
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Paris, France

Last night...

We're racing to the airport at Pudong. We don't know why we are racing; there is plenty of time. But the driver seems to want to set a new land speed record for a taxi cab.

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He's rocketing along at 100 mph. The cab weaves flawlessly through the traffic.

But what's this? The cab driver has taken both hands off the wheel. He is putting in a CD. Moments later...what da...?

"Country road, take me home, to the place, I belong...
West Virginia, mountain mamma, take me home..."

This is no country road. It is about the most modern highway we have ever been on. Flyways...flyovers...bridges...elevated highways...we have just gone over the river on a bridge that looks like it was built yesterday. Now, we are cruising along through the smog in 8 lanes of traffic.

Over on the left, a ghost city is barely visible through the gray haze. It must have dozens...no hundreds...of office and apartment towers. There is a huge parking lot on the left...and then, in the distance...another city. We see only the shapes. But it is a city as big as Bethesda...no, as big as Baltimore....

We continue our Taxi Cab 500...passing cars on the left....then on the right...and then, right through the middle... slipping through a narrow space with cars and trucks on both sides.

Again on the left is another of these spectral cities... Is it Cleveland? Is it San Diego? In size, it could be either. We left downtown Shanghai a half an hour ago. But we are still passing through towns...industrial parks...and building projects. There must be a dozen cities the size of Baltimore between the center of Shanghai and the airport.

The airport, of course, is new...like everything else...and colossal. It is Dulles in style. But bigger, many times bigger.

Can there be any doubt that China is destined to become the world's economic super-power? It has the size...the energy...the know-how. And it has the money.

One of our Dear Readers in Shanghai enlightened us:

"I came here 20 years ago. Then, we foreigners had so much more power and money...and technology. We could call the shots.

"Our company still does about half its manufacturing in the US. The local companies here in China can beat us on price every time. And the contracts are huge, so we can make a lot of money here...even with low-cost, relatively low-margin products. But the top quality stuff still comes from the US. The Chinese have not quite caught up - partly because the market here doesn't want too much quality.

"There's such a fast turnover. People don't want to pay for products that will last too long. Things are changing too fast.

"So for now, the quality here on many items still isn't up to US standards. It's just a matter of time, though. I'm going to retire in 5 years. I figure that's about as long as we're going to be able to do these deals. After that, it's all over. They won't need us. They have the money. They have the skills and technology. We won't have anything to offer."

Generally, the more you do something the better you get at it. The Chinese are making more cars...more highways...more trains... more office buildings and more of everything than anyone else. It is no wonder that they are doing these things well - maybe better than anyone else too.

A new train service between Shanghai and Beijing begins next month. Trains will travel between the two cities at up to 300 kilometers per hour. Already, a high speed mag-lev train takes you from the airport to the city so fast that you arrive before you find a seat.

But so what? You're probably wondering. So are we. So what if the Chinese take the lead in wealth and innovation?

*** Dow down on Monday. Oil below $100. Gold below $1,500. Everything seems to be correcting. How far will it go? Heaven only knows...and heaven ain't talkin'!

*** You remember those 5 big trends we mentioned yesterday? You don't? Well, we'll repeat them:

  1. The Great Correction - in many of the advanced economies, but centered in America...

  2. The continued rise of the developing economies...not just in Asia, but in Latin America and Africa, too.

  3. The increasing scarcity of cheap energy, land, water and raw materials.

  4. The decline (suicide might better describe it) of the American Empire

  5. The approaching end of the dollar-based world financial system
The interesting, and frustrating, thing about these trends is that they all intersect in various ways at various times...setting up collisions that are as unpredictable as they are hazardous.

You'll notice, too, that the China story runs right through the middle of them, like a tanker truck through a pizza parlor. It is the central story to the rise of Asia and the developing economies. It is a large part of the reason low-priced commodities and natural resources are disappearing. The Chinese currency is almost sure to rise as the dollar-based world financial system comes apart. And China is also the likely successor to the US Empire.

We have neglected this theme for years - ever since we published (with Addison Wiggin) our opus on the subject, "Empire of Debt." But the killing of Osama bin Laden reawakened our interest.

One of the few things we don't wonder about is why the feds killed Mr. bin Laden. It would have been far too messy and uncomfortable for them to put him on trial. After all, before he was America's greatest enemy, he was its one of her greatest friends.

Yes, dear reader. Mr. bin Laden rendered much service to the US Empire, specifically to the US defense establishment. First, he set up Al Qaeda, with CIA help, to harass the flank of America's most powerful enemy - the Soviet Union. Then, when the Soviet Union fell, the defense industry was despondent. There was no longer any need to invest such a huge part of America's treasure on 'defense' when there was nothing to defend against.

With no plausible threat, the defense budget would have been easy prey for the budget hawks. But then, in their hour of need, like the Argentine generals coming to the aid of Maggie Thatcher's approval ratings, Osama bin Laden came to the rescue. At least, so it appears. We would have been very curious to find out more about his role in the 9/11 attack; unfortunately, the trial of Osama bin Laden was cut short by two bullets fired at close range.

Not that we're criticizing. If we were in a position of power, we probably would have wanted him to disappear too. The last thing anyone in the CIA would want to see would be Osama shooting his mouth off in front of the whole world.

According to the Atlantic magazine, bin Laden triggered $3 trillion of spending by the US. How much of that ended up in the pockets of defense contractors? One percent? Five percent? We have no idea, but even 1% would be a $30 billion windfall, probably about equal to the annual profits of all the world's automobile companies combined.

But now what? Osama is Davey Jones' locker. And the US is headed to bankruptcy. Will the Pentagon and its suppliers go gently into that good night - of budget cuts and shrinking profits? Or will they rage...and find a replacement for Mr. bin Laden? China, perhaps?

Stay tuned.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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