The Land of Rising Prices and Stagnant Incomes

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…Cathedral’s going by to the right, so that means they are, what? two blocks away from the Bund. A Yangtze River Patrol gunboat is tied up there, waiting for the stuff they’ve got in the back of this truck. The only real problem is that those particular two blocks are inhabited by about five million Chinese people.

Here you’ve got the Hong Kong and Shanghai Bank of course, City Bank, Chase Manhattan, the Bank of America, and BBME and the Agricultural Bank of China and any number of crappy little provincial banks, and several of those banks have contracts with what’s left of the Chinese Government to print currency. It must be a cutthroat business because they slash costs by printing it on old newspapers, and if you k now how to read Chinese, you can see last year’s news stories and polo scores peeking through the colored numbers and pictures that transform these pieces of paper into legal tender.

As every chicken-peddler and rickshaw operator in Shanghai knows, the money-printing contracts stipulate that all of the bills these banks print have to be backed by such-and-such an amount of silver; i.e., anyone should be able to walk into one of those banks at the end of Kiukiang Road and slap down a pile of bills and (provided that those bills were printed by that same bank) receive actual metallic silver in exchange.

Now if China weren’t right in the middle of getting systematically drawn and quartered by the Empire of Nippon, it would probably send official bean counters around to keep tabs on how much silver was actually present in these banks’ vaults, and it would all be quiet and orderly. But as it stands, the only thing keeping these banks honest is the other banks.

Here’s how they do it: during the normal course of business, lots of paper money will pass over the counters of (say) Chase Manhattan Bank. They’ll take it into a back room and sort it, throwing into money boxes (a couple of feet square and a yard deep, with ropes on the four corners) all of the bills that were printed by (say) Bank of America in one, all of the City Bank bills into another. Then, on Friday afternoon they will bring in coolies. Each coolie, or pair of coolies, will of course have his great big long bamboo pole with him–a coolie without his pole is like a China Marine without his nickel-plated bayonet–and will poke their pole through the ropes on the corners of the box. Then one coolie will get underneath each end of the pole, hoisting the box into the air. They have to move in unison or else the box begins flailing around and everything gets out of whack. So as they head towards their destination–whatever bank whose name is printed on the bills in their box–they sing to each other, and plant their feet on the pavement in time to the music. The pole’s pretty long, so they are that far apart, and they have to sing loud to hear each other, and of course each pair of coolies in the street is singing their own particular song, trying to drown out all of the others so that they don’t get out of step.

So ten minutes before closing time on Friday afternoon, the doors of many banks burst open and numerous pairs of coolies march in singing, like the curtain-raiser on a f*&@ing Broadway musical, slam their huge boxes of tattered currency down, and demand silver in exchange. All of the banks do this to each other. Sometimes, they’ll all do it on the same Friday, particularly at times like 28 November 1941, when even a grunt like Bobby Shaftoe can understand that it’s better to be holding silver than piles of old cut-up newspaper. And that is why, once the normal pedestrians and food-cart operators and furious Sikh cops have scurried out of the way, and plastered themselves up against the clubs and shops and bordellos on Kiukiang Road, Bobby Shaftoe and the other Marines on the truck still cannot even see the gunboat that is their destination, because of this horizontal forest of mighty bamboo poles. They cannot even hear the honking of their own truck horn because of the wild throbbing pentatonic cacophony of coolies singing. This ain’t just your regular Friday P.M. Shanghai bank-district money-rush. This is an ultimate settling of accounts before the whole Eastern Hemisphere catches fire. The millions of promises printed on those slips of bumwad will all be kept or broken in the next ten minutes; actual pieces of silver and gold will move, or they won’t. It is some kind of fiduciary Judgment Day.

Cryptonomicon by Neal Stephenson

What happened on the 28th of November, 1941? Japanese troops entered Shanghai’s international zone. Shanghai was occupied until the end of the war.

But you don’t need an invasion to turn scraps of paper into bumwad. And when it happens, you’ll want to have silver…or gold, rather than pulp products. Don’t believe us? Stay tuned…

And more thoughts…

We’re staying at the Peace Hotel in Shanghai. It’s a beautiful art-deco building right on the Bund. We left the hotel last night and had dinner a few blocks north of here. When we saw Shanghai’s skyline, across the river…it took our breath away.

“This must be a city of the future,” said Jules. “You kind of expect a flying car to appear – like on The Jetsons.”

Everything is lit up – including the boats going up and down the river.

In comparison, Paris is dull and predictable. New York is boring and worn-out. The view along the river reminded us most of London. It lights up its buildings. You get the same sort of view across the river. And London has some strikingly new and exciting buildings too.

But compared to Shanghai, London is small…and slow-moving. It is in the ‘old world.’ This seems like the new world.

Shanghai is not cheap. Dinner for a group of six, at a not-too-fancy joint on the Bund set us back $900. The hotel room is about $300 a night. And property? We’ve heard conflicting reports. It was recently the hottest city in the hottest economy in the world. The government has tried to calm the property market in China – with some success. Sales fell some 70% from the beginning of 2010 to the end of it. Prices dropped 30%.

And now?

“That’s the thing about China,” said a Dear Reader who joined us for a drink on Saturday night. “When you live in the US or in the UK you might think you know what is going on…but when you live here in China, you realize that you have no idea.”

So, let’s turn our attention back to the USA, where we have no idea either…but lots of opinions.

The Dow fell 100 points on Friday. Gold under $1,500. Oil under $100.

We’ve tried to get in the spirit of the ‘recovery.’ We just can’t do it.

The recovery story was always phony. So then, what’s the real story?

As near as we can tell, there are several stories running at once.

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.

There are probably a few more we forgot to mention. Each one on its own might be fairly easy to decipher and predict. But they work together…and at cross-purposes. It’s hard to figure out what is really going on…or what is causing it.

For example, the correction tends to depress prices. But the big expansion in the developing world tends to increase them.

And there’s one more major pressure on prices – the feds. The US controls the world’s reserve currency. And the US is working hard to inflate the world’s supply of dollars. That too should increase prices, eventually.

The trouble with inflation today is that it is the worst kind of inflation. It makes prices go up…but not incomes, at least not in the US. Incomes are rising in Asia. So, people can buy more cars and more meat – and push up prices. Then, Americans pay higher prices…while their incomes don’t rise.

Why don’t their incomes rise too? Because the US is in a Great Correction. It spent too much and borrowed too much in the boom/bubble years. Now, it’s paying the price. That’s why so few houses are being built; we built today’s houses yesterday. And it’s why so little money is being borrowed and spent today; we already spent it.

The Fed seems to have no idea what is really going on – probably intentionally. So, it tries to combat the correction by issuing more credit and printing more dollars – as if we didn’t have enough already. This extra money further pushes up prices, adding to Americans’ misery.

*** No man ever added so much to the US defense industry’s profits…or to the nation’s losses. You’d think he’d get more respect. Maybe at least a memorial plaque at Blackwater’s training ground in North Carolina. The company has made hundreds of millions on the War on Terror; you’d think they’d show some gratitude to the man who supposedly caused it.

But now, we discover that he not only helped bring down two empires – the Soviet Union and the US (a prediction, not a fact)…he liked to look at dirty pictures, too. The kill team found a stash of porn in Osama bin Laden’s house. Hmmm.

And this just in…the head of the IMF has been arrested in New York on sex charges. Hmmm. Seems he violently attacked a hotel maid. Hmmm. He was considered a front-runner to oppose Sarkozy in the next election. Hmmm.

Hmmm…

For all we know, both stories are absolutely true.

Regards,

Bill Bonner
For Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
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3 Comments on "The Land of Rising Prices and Stagnant Incomes"

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gutfeeling
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Quick, look over there! Look at that! The bogeyman is over there, look at him! Meanwhile Americans, and the rest of the world, are being scammed by those in control which includes the Fed Reserve. People will wake up eventually, I guess. Maybe our system of “democracy” needs to change to something like what Iceland? has, where the people get to vote on any issue of importance, instead of leaving it up to their “elected representatives” (who don’t seem to do much representing for their electors at all). The Icelandic people voted against bailing out the banks, as would have… Read more »
Ross
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I wonder if Bill ever stayed at the Peace Hotel in the old days when choice wasn’t an option? I’m remembering trying to reach my correspondent there each week for a year there on the phone with my lousy language skills. Tall red headed single American he was, we were trying to be discrete in those days…..

nv
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Stagnant Incomes and Inflation in Asia = jasmine tea anyone?

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