Whatever Happened to Japan!?|
During the 1980s, Japan was seen as a veritable economic miracle. Many Americans were convinced that our economy had been permanently overtaken by Japan -- and they sought to emulate Japanese success by instituting MITI-style government-business collusion. Fortunately, most of these efforts were rebuffed, and America has done fairly well with comparatively free trade, despite unexciting "Clinton-growth rates." But there is no denying that the US Dollar has become the pre-eminent currency of the global economy, and the US stock market the safe-house of global capital. Meanwhile, Japan has fallen on hard times.
As it turns out, Japan was the "front domino" of the Asian economies; the first to fall. While other Asian nations continued to grow at double-digit rates well into the 1990s, Japan suffered a stock market collapse, zero growth, and a prolonged recession which has even resisted the stimulus of lending rates pegged at very close to 0%! Imagine! Free money -- and still no capital-spending boom!
Rather than being pulled out of this recession by its local trading partners, the Japanese plague has spread outward. It has spread to free-wheeling Thailand, which was the most "laissez faire" of the group. It has spread to Indonesia, which was the most corrupt and centrally-planned. It has spread to South Korea, which was somewhere in between. What do these nations have in common?
The Japanese Plague is not a function of central-planning vs. laissez faire government. It is a function of a real- estate bubble -- blown up, mostly, by government-supported banks eager to lend billions of yen, bhat and dollars to real estate speculators.
When the Japanese economy was at its peak, the value of land in Tokyo alone exceeded that of the entire United States. This is an impressive statistic, but consider the consequences. Since land is needed by the productive economy, stratospheric land prices make local economic expansion impossible to afford -- not to mention what it does to the average working person, whose family is crammed into living quarters not much larger than the space allotted for convicts. (And, in the 1980s boom years, families were signing on to 100-year mortgages to get those spaces!)
Japan's banking system created the greatest real estate boom of the 20th Century, probably acting on the advice of influential western economists who equate high land prices to "capital accumulation." Japan's banks are now holding trillions of yen of bad loans on land-value which has simply disappeared. Yet Japanese land is still overvalued, relative to its productive use-value, threatening to undermine even more loans.
Hence, the Japanese Government has done everything in its power to stabilize land prices, even at high levels -- and in spite of the cost of ongoing economic malaise. I'm sure they figure that malaise is better than collapse. That is the Hobson's Choice they face. But it was not always so.
During the 1970s, the Japanese invested heavily in plant and equipment, and perfected production processes using the Statistical Quality Control taught by Deming. This success- formula was used in many industries, from automobiles to semiconductors, and it forced the rest of the world to follow suit -- while making Japan an economic powerhouse. But this hard- earned prosperity and economic power was not enough for some, who were jealous of the entrepreneurial fortunes of Sony, Honda and Fujitsu.
Within the ranks of the financiers and government officials there was a push for financial deregulation which would allow high- priced real estate to serve as collateral for loans. World-class manufacturing -- which requires a lot of hard work amidst brutal competition, and which is a true engine of wealth -- was taken for granted, or even mocked. Many sought a get-rich-quicker scheme which, it was said, would spin-off even more money for "investment," taking Japan to the "next level" of financial success.
Once these loans started flowing, very little went into the productive economy. Instead, it went into creating a real estate bubble, borrowing and re-borrowing on inflated values. But the only way you can drive real estate to the sky is to pour your wealth into the ground -- and that is just what Japanese investors did. This created the illusion of phenomenal wealth, as Japanese real estate magnates rapidly became the wealthiest individuals in the world -- on paper. But this kind of "wealth" does not trickle down. It dries up.
Location is a passive element; it does not produce anything without some expenditure of labor and capital. Driving up the price of Japanese locations meant that there was less and less money left over for investment in jobs and equipment. And when the real estate bubble burst, and the banks began to implode, there was no money for any kind of new investment. Accordingly, the latest predictions are that the Japanese economy will actually shrink during 1998.
Some Asian Tigers Follow Japan
Parts of Asia have followed in Japan's footsteps, except that their real estate bubbles have been primarily financed by foreign money -- they lacked Japan's high savings rate.
Throughout Asia, foreign money has been pouring in over the last decade to take advantage of high growth rates. The press dubbed these nations the "Asian Tigers," and billions of investment dollars poured in. Some of this money was invested in plant and equipment, which created many real jobs, a rising middle class, and prosperity in Eastern Asia. But eventually, it became more difficult to invest the money wisely, and money managers began "pouring it in the ground," financing speculative real estate ventures. Thus, their fate was sealed.
Thailand was the first to collapse, triggered by currency speculators. Now, if currency speculators can cause a 50% decline in a currency and touch off a depression, the fundamentals must have been pretty weak. At the time (Summer of 1997) some western pundits blamed it on Thailand's "laissez faire" investment policies, and pointed with some pride to the "continued stability" of Indonesia and South Korea, which were more "centrally-planned" by their governments. But, within months, South Korea and Indonesia went down the same rat-hole as Thailand.
The press called it the spread of "bhat-ulism," but it is simply the consequence of an implosion of excessive land values, destabilizing the banks and hence the currency -- repeating the catastrophic avalanche of Japan. (This was, actually, reported in many of the press accounts of the ongoing debacle -- but in a shadowy way. If you listened closely, you almost always heard "overvalued assets" and "real estate" in the same sentence.)
As this goes to press, the debate revolves around the conditions that the IMF should impose on a nation such as Indonesia -- a nation which will undoubtedly squander any western money by bailing out the Suharto family members who were worst-burned by their speculations. It is a long-shot that IMF funds will actually turn these economies around. Most will probably emulate Japan, and fail to take the radical actions necessary, preferring instead to subsidize failure by Big Players.
But Hong Kong and Taiwan have survived this crisis relatively unscathed.
Why are Hong Kong and Taiwan Exempt?
Hong Kong and Taiwan have endured assaults on their currencies, and panics in their stock markets, but their economies are intact, even showing good growth in the first quarter of 1998. How can this be?
The answer is quite simple. Taiwan and Hong Kong both tax land values fairly strongly, thus discouraging investment in real estate that is not warranted by actual economic conditions, conservatively measured. As a result, they have a very stable source of public revenue, plenty of reserves to defend their currencies or to provide infrastructure -- and the ongoing production-incentives of low taxation on labor and capital. Their banks are stable, because their loans are not based on over-valuation of land.
And, of course, they have free trade working for them -- but so do all the Asian Kittens, in greater or lesser degrees.
Rising land prices (commonly thought of as "home appreciation" in the USA) are seen as a sign of prosperity, but they gradually sow the seeds of economic reversal. Every recession in the USA has been preceded by a "land-boom," and accompanied by a "land- bust," as documented by Prof. Mason Gaffney.
This bone-crunching volatility is not a necessary part of the free market! The way to achieve stable growth is to keep land available to the productive market economy, by keeping it from being witheld for private speculative purposes.
Land value taxation, or the community collection of land rent, has the effect of removing the speculative premiums from land- locations. Land simply "rents" for its current use-value, as determined by market forces. This allows the un-taxing of the rest of the economy, such as wages, sales and income, which has the effect of incentivizing everyone to make money by working and investing in plant and equipment.
The solution to the Asian Crisis is not the funneling of billions of IMF dollars to support the sagging fortunes of corrupt officials which are tied up in speculative real estate deals. What is needed is a permanent tax-shift off of the Asian workers and capitalists, and onto the politically-connected Asian land-holders. Once this tax shift strips away the speculative premiums from land, the land-holders will be forced to swim in the new economically competitive environment -- or sell out to someone who can.
-- Al Date, April 2, 1998
Here's what folks have been saying:
Land, land, land, all you people ever talk about. I read
that there was a bubble in asset values, these include
stocks and securities too. Maybe the Asian crisis is just
about emerging markets that don't have the bugs worked out
yet. And Japan will be back, you watch.