THE LIFE AND DEATH OF GREAT CITIES

By Bill Bonner

"Funny how time changes...rearranges everything."
- The Supremes

"You can't go wrong with property in Central London," is an expression you
hear often on the banks of the Thames. "You can't go wrong with property
in central Detroit" has the same number of syllables. Eight out of nine
words are exactly the same. The final one, though, makes a big difference.
It changes the meaning, from delusional faith to desperate comedy.

Detroit was once one of the world's great English-speaking cities. But
then, Kaifeng, China, was once a great city too. A thousand years ago, it
was the world's most important city. While London had only 15,000 soggy
inhabitants...Kaifeng was the capital of the Song Dynasty, with more than
a million people. At the time, Detroit didn't even exist.

Today, London is a great city...Kaifeng is a now a small, grimy, poor
city...not even a provincial capital...without an airport. But look at
Detroit:

A friend reports:

"Detroit is a contrarian utopia - needles, drug baggies, gangs on street
corners, boarded up businesses, empty office buildings, vacant mansions.
For Sale signs everywhere. It is a hellhole. Wayne County, Michigan, home
to Detroit, lost more people from the beginning of 2005 to the end of 2006
than any U.S. county except the four counties in Louisiana and Mississippi
devastated by Hurricane Katrina, according to Census figures released in
March. Since 2001, Michigan lost more jobs than any other state in the
Union.

"Away from downtown, things are not much better. Lots of homes in the
burbs have been on the market for 2, 3, and 4 years with NO offers, and
not even so much as a low ball offer. Larger existing homes in Macomb
County can be purchased for about 40% less than replacement cost. "

There was a time, of course, on the chilly shores of Lake Michigan, when
you could say "you can't go wrong buying property in central Detroit" with
a straight face. In the early 20th century, Detroit was on top of the
world, the capital of the auto age. The internal combustion engine was
developed at first for boats and the Great Lake region was a natural place
for an industry manufacturing boat engines to emerge. There was already a
thriving carriage-making center, too. From those beginnings, Detroit soon
became the Motor City, home to the biggest new industry since the
invention of the mechanical loom. Even during wartime, the assembly lines
didn't slack off - instead, they sped up, working around the clock to
provide trucks, jeeps, tanks, to armies all over the world. War or peace,
everyone seemed to want more and more vehicles. How could you go wrong
buying property in the city that made them?

There were once dozens of automakers in Coventry, England, too. Now, there
are only a handful in the whole country and every one of them is
foreign-owned. America's automakers consolidated sooner in Detroit. They
are still operating and still in American hands, but probably not for
long.

We remember, in our own lifetimes, when the first funny-looking cars came
into the U.S. market from Germany and Japan. Cheap and stingy on fuel
consumption, the little autos gained a beachhead in the United States
during the oil crisis and inflation of the '70s. I bought a Honda Accord
in 1975. My father, a Pearl Harbor veteran, saw the thing and was
appalled. "Those people tried to kill me for three years," he said.

Congress wanted to protect the U.S. automakers in the worst possible way -
by placing a per-car tariff on imports. Both the Japanese and the Germans
responded by moving up-market so as to make more profit per car sold.
Soon, the foreign automakers were going head-to-head with America's big
luxury models too - and winning. And now, the motor city is sputtering
and threatening to conk out completely.

But investors are an arrogant and opportunistic lot. Some speculators look
upon Detroit and think they see an overturned liquor truck; they imagine
they should help themselves before the cops come. After all, cities have
good times and bad times. Detroit might be suffering nothing more than a
cyclical setback in the life of a great city. People thought Harley
Davidson was finished too...and look how it's come back. Now, it's worth
more than GM.

Let the U.S. auto industry go broke, say the optimists, as soon as
possible. Then, new, more vigorous entrepreneurs, without all GM's and
Ford's baggage, can climb into the drivers seat. And Mo'town will rock and
roll again.

If you believe that, you should get on a plane to Detroit now. Whole
skyscrapers change hands for less than the price of a 3-bedroom apartment
in Mayfair. The 65-story David Stott building, for example, is on the
market for $3.5 million. For less than a million you can buy a 12,000
square foot Italian renaissance-style mansion, complete with an intricate,
hand-carved walnut main staircase and imported wood paneling throughout.

"That may seem like a bargain," says a CNBC reporter, "considering the
1915 limestone house sits on over 2 acres and is just 3 miles from the
city center. But then again, this is Detroit, Michigan."

Speculators hope that Murder City might once again become Motor City. But
they should ask instead why it is that last year, as rental rates across
the United States rose an average of more than 6%, in Detroit, rents
couldn't even climb 1%.

Investors might do better to look at Liuzhou, China, where GM is producing
its new Wuling Sunshine mini-van. In 2002, China made a million cars and
trucks. By 2020, it's expected to produce 15 million units, more than the
United States. How can Detroit stage a comeback with that kind of
competition?

Instead, maybe, the city will join the ranks of the dead, along with
Ctesiphon, Mesa Verde, Persepolis, Kish, Harappa, Babylon, Sodom, and
Gomorrah. Soon, its apartments and mansions may sell for no more than
places in Mapungubwe, Tiahuanaco, Tyre, Nineveh, Troy, Golconda and
hundreds of other defunct metropolises.

Meanwhile, back in modern world, financial services is where the money is.
And London and New York is where the financial service industries are.
Is there any better game to be in? And is there a better place to be than
in the capital cities of this new, new money-shuffling commerce? Not in
2007. Business is booming. All over the world, companies are getting set
up, financed, bought out, refinanced, IPO'ed, taken private, merged,
acquired, re-IPOed and leveraged in more ways than you can count. It will
be a cold day in Hell when the Chinese can compete in this industry.

London and New York are on top of the world - just like Detroit once was.
Just like Kaifeng once was. Prices can only go up, right?

Bill Bonner
The Daily Reckoning