Legoland bond crisis threatens South Korea's economy
foreignpolicy.com
foreignpolicy.com
I know this happens occasionally and I may just be seeing a pattern that’s not there, but it seems like a noticeable uptick in leaders who don’t understand why people they just fucked over won’t trust their IOUs anymore
The belief that you can wish debt away is rooted in the Keynesianism/Reaganomics of the past five decades. MMT basically just accepts the realpolitik that the enormous handouts to the financial industry will never be stopped, and says that we might as well use some of the new money deliberately. From my economically conservative Austrian perspective, at least MMT appears intellectually honest. MMT also corrects/shortens the feedback path from monetary creation to price inflation, rather than relying on the roundabout feedback path that has created this ever-growing asset bubble.
I advocate replacing slow burning inflation with negative interest on cash. When that is done, debts can be repaid.
MMT is attractive to essentially all politicians. It says you can spend without consequences. You don't have to spend that on a welfare state although many MMT advocates take this line. You could just as easy spend it on the military or surveillance.
Really? I thought it said that money exists because a government prints it, so a government cannot default on a debt denominated in its currency unless it chooses to, and that inflation is a second order effect resulting from the money supply increasing faster than the pool of goods and services it's chasing.
The name implies that it is mainstream modern economics, but it isn’t.
So the entirety of that statement is toothless.
The second order effects that limit money creation are highly fluid but the fact that governments with their own currency cannot default is set in stone.
Well, inflation is currently sky-fucking high, so right now is when MMT would say you do have to worry about deficits and debt.
Big economic/political/tech shifts leave people mistrusting old institutions that naturally aren’t well equipped to handle the new situation. The institutions screw up, electors lose trust, and new folks take over. The new folks (being new, and sometimes being the less-competent rejects) tend to misunderstand the institution, and change things that aren’t necessary; they overreact.
What you’re seeing is just the overreactions: they’re knocking out walls, and sometimes they hit the wrong wall.
But you also don’t see the benefits because effective bureaucratic adaptation is boring.
The thing I wonder about is if the seeming endless screw ups are because we have more change today, more morons, or we just see it all more.
We're using the wrong language, the wrong source control, the wrong methodologies, the wrong libraries, and so on.
If the flavor of the month is say BoringSSL we should be working to switch all our code from OpenSSL and so on.
Usualy it takes a bit of effort to bring them up to speed. There are positives and negatives to all choices. Usually I assign them the task of coming up with 5 downsides to their suggestions.
Articulating the downsides helps to show you understand the whole impact of an idea, and thus aren't making a "buying the koolaid" decision simply based on popular opinion.
When they win, they are bad at their jobs.
Was really glad that this article mentioned Liz Truss at the end, because I think the dynamics are absolutely the same. It was painfully obvious (indeed, the current PM made it clear in the summer) that cutting taxes, and having no way to pay for them, in the midst of rampant inflation is an idiotic idea. I read elsewhere that it's almost as if Truss and Kwarteng formed a pact in college saying, "if we ever make it to the top of government, we'll prove that supply side ideology works!", and then completely disregarded the current economic climate.
I just see it more and more over the past decade or so that things that you know are not going to end well (see also crypto deposits paying 10% interest) somehow snowball because it's easier to surround yourself with "ideological cultism".
Let's see what happens here in the U.S. :-/
I can definitely understand arguments and debates around the proper level of taxation. But while it may be acceptable and even a good idea to substantially lower taxes and raise the deficit during periods of low inflation, it is the height of idiocy to do that during a period of high inflation.
“CBO estimates that Public Law 117-169 will result in a net decrease in the unified deficit totaling $58.1 billion over the 2022-2031 period. That decrease in the deficit is estimated to result from an increase in direct spending of $50.6 billion and an increase in revenues of $108.7 billion.”
Money needs to be taken out of circulation, not added.
... and who has a large balance of historical debt?
A similar reversal of roles can be seen in Germany, where the greens economics minister surprised the business community with effective solution oriented "realpolitik" and the free Liberal (a pro business/free market party) finance minister is blocking decisions for purely ideological reasons often against the recommendations of large portions of the business community.
https://www.spectator.co.uk/article/liz-truss-hasn-t-underst...
This is just statist feudalism exposed.
Modern technology is also amplifying populism, which is who the word 'Truss' ends up in all of this, because however much one may agree or disagree with the contents or orientation of the mini-budget, it was woefully misrepresented in the press (almost universally) in an excessively populist manner.
https://qz.com/1274875/how-argentina-went-from-selling-100-y...
But my point is more that investors haven't blacklisted them forever, just because of prior defaults.
I don't know whether the interest on this particular bond is still being paid at the quoted rate, or if it was "restructured", since they did default again in 2020:
https://www.dw.com/en/argentina-in-default-for-second-time-t...
If the current high-inflation, high interest rate environment sticks around, a whole lot of things are going to end up very different, because the bond investors won't be so desperate for yield and so there will be a penalty for disrespecting the bond market. If it doesn't stick around (which seems to be the current aggregated guess of the bond market) then this will be a brief blip. Trillions of dollars rest on the answer to that question.
If you want an example of now vs then go try to buy some cybersecurity insurance for data breaches or flood insurance.. in those circumstances things have legitimately changed!
Unless a politician fucks up so badly that they completely ruin their party's reputation, people will keep voting for whichever candidate their favorite party endorses.
Parties have gotten clever, too. They'll quickly throw a troublemaker overboard than risk ruining the whole party's reputation. The conservatives in UK quickly got rid of Liz Truss. Few members of the People Power Party in South Korea are even trying to defend Kim Jin-tae now. Likewise, the party has more or less abandoned the head of Yongsan-gu district who is currently taking a lot of heat for October's Itaewon disaster. The party leaders are probably too busy arguing who to endorse in the readily foreseeable by-election.
Institutionalist right wing politicians understood the value of trust, the new right all over the world is generally not institutionalist anymore, so they break things and then wonder why everyone is freaking out. When the useful idiots start to actually win elections we learn what idiots they are.
Ignoring norms and escalating worked for Johnson, it worked for Trump, it worked for Putin, and the wealthy individuals and orgs who back them love them for it.
In France, you cannot escape expensive white elephants: the population might even vote for one, like that Airport in the middle of nowhere they wanted to revitalize the dead region. These issues become political eventually with both sides veering to the irrational to defend, or attack, the expensive project. Since we can all vote, we end up balancing left and right, project and no project, cancelling stuff half built, starting others.
In dictatorship, the absurdity is different: sometimes, no matter how silly the white elephant (the HK Macau Zuhai bridge is a good exemple: no car can ever get 3 license plates, three driving permits and three driving insurance, so no car can ever drive on it), the politicians will stubbornely see it to completion, gloat in intense glory whatever the cost overrun when it's done, and move on with the project standing there unused.
I dont know what the best model is, I only know there cannot be perfection: we cannot always take good public decisions, always stick to them, always be right about the future. We can only fail in absurd waste sometimes.
I think, some countries are broken by design, others, because of technical progress, have to change their borders and/or internal structure, but not many lucky enough to do this in time.
The current clear demonstrations in the world, on both the global and domestic stage, are endless.
But unfortunately, in real world, exists deficit of good leaders, and it is much worse on local govt level, because this is like second league (supreme league are govt of country, country parliament, top scientific organizations, military tops, and tops of top corporations).
Direct, mean, ALL decisions will be made by referendum, using latest technologies - blockchain, crypto, distributed document editing, govt in smartphone, etc, so everybody will have opportunity to affect decisions.
I think, this is more question of right geography, so will not work https://en.wikipedia.org/wiki/Gerrymandering
The Kingdom of Scotland attempts to build a colony in modern day Panama, goes bankrupt, looks to the English for support, leading to the creation of modern day Britain as well know it.
https://en.wikipedia.org/wiki/Darien_scheme
The Soviets being scared by Reagan's far out orbital SDI promises ("the Star Wars program"), causing them to overspend on defense and eventually go bust.
https://en.wikipedia.org/wiki/Strategic_Defense_Initiative
Not saying anything this drastic will necessarily happen to South Korea, but it's not the first time in history that a ridiculous boondoggle led to problems for an entire nation's finances.
I heard this in school, but it felt like post-Cold war propaganda. Is this considered a true rendition of events? By all accounts, both sides just kept ramping up spending, it was just that Russia's line of credit ended sooner.
Another thing usually missed in the "West" is that Soviet Union pretty much never stopped being in crash industrialization mode due to how poor its starting position was.
It's one of those history is fantastical examples where an odd factoid is part of a greater trend. Like how American entry into World War I is partly because of the Zimmerman Telegram- the publicizing of German diplomatic efforts to entice Mexico into an invasion of the United States.
Wonder if Legoland Korea will end up as one of those factoids.
This is what differs democracy, that it have powerful and reliable closed loop tie with reality, by definition.
Do you really think, existed any tiny chance, US would not enter World War?
From geography, it is obvious, US is on the middle between EU and South America. In such position, you should become active subject, or you will be used by anybody as object, for just transit or as base for one side (borderland).
As example, Ukraine hundreds years was borderland, and this costs ocean of Ukrainian blood.
Now running to EU and NATO, because isolation costs too much, concessions don't give security.
And for US, entanglement in world policy is matter of existence, because of how Union born. If federal govt will not protect allies, federation will fall, because states will get out and do all themselves.
Imagine, Scottish, or Irish, or Italian people, ignoring what happen in their motherland - this is impossible. and if feds will entangle in ANY european activity, they will in short time have to deal with all most powerful currents.
South America different, because nearly all countries have mostly native people, or totally cosmopolitan, so for them european currents are just performance, nothing more.
It's super jarring to see a reference to the EU as a reason for pretty much anything WWI related. I know this presumably means Europe, and maybe being used to "EU" referring to the European Union and not Europe in a general geographic sense, but I'm not used to seeing that abbreviation used for anything historically for around another half a century.
- If you know history, in 1910s, edge lies not on continent borders, but on totally different matters.
No, that’s not obvious and highly debatable. The same ocean that you cross to get from Europe to the US can take you straight to South America without touching US soil.
If you know geography and history and little sailing or (sail)planes - from Europe it is much-much easier to reach US than South America, because exists line of islands, approx from England to Canada, directly, which even have built infrastructure of airfields and ports from 1940s, and sure, there is civilization, govt and civil services.
For South America, none comparable exists, even more, on the way you will meet extremely unfriendly zone of equatorial weather, and no services.
It became untenable for a relatively small economy like the USSR to compete with the US, and Regan 'turning up the heat' may have had some impact, but it was likely negligable.
The Cold War was lost because Soviet-style economic management failed vs. US Style economic management.
What may have been a somewhat equal fight in 1950 was a joke by 1988.
[0] https://cepr.org/sites/default/files/styles/flexible_wysiwyg...
Russia on other side, constantly looking for superweapon, which will give military advantage without prohibitively large spending's. This even got name - asymmetrical approach.
Examples of asymmetrical approach, are German U-boats, later soviet submarines with ICBMs, ICBMs, railway based ICBMs and auto based, "Poseidon" nuclear powered torpedo.
BTW, many examples of asymmetrical approach, are considered non-ethical in Western world.
The star wars gap would have just meant that it couldn't maintain parity with the US on yet another battlefront, but nothing external was going to stop it from continuing on it's course. It would have had to reign in it's imperial ambitions some, but that is completely survivable for an industrialized nation.
What killed the USSR was Gorbachev prioritizing butter over guns, and having a shred of humanity in him, by choosing to not respond to political problems with violence. He was the real hero of the crisis, not for the things he did, but for the things he didn't do.
> As the Company of Scotland was backed by approximately 20% of all the money circulating in Scotland, its failure left the entire Scottish Lowlands in financial ruin. This was an important factor in weakening their resistance to the Act of Union (completed in 1707)
EDIT: Especially since "To prevent the credit market from seizing up completely, the South Korean government stepped in by providing a liquidity facility of more than 50 trillion won (about $35 billion). The Bank of Korea also injected 42.5 trillion won (about $31 billion) to stabilize the short-term bond market, and South Korea’s five largest banks also pledged to provide up to 95 trillion won (about $67 billion) in liquidity."
Wouldn't it have been easier to retract the policy of the local government, sack the local leaders, etc., to rollback the loss of trust?
Especially since S.K. is a unitary country and not federated so local governments have no sovereignty.
Moves like this are supposed to be reassuring to the broader market. Punishment is something done after an error but does not guarantee that someone else also didn’t do this, and punishment doesn’t go back in time and undo actions.
If you are not decisive enough the markets can quickly spiral into contagion, however rational that may be. (See: the prolonged cascading during the Euro crisis)
The important thing to signal is that investments are safe, even if other investments might fall prey to the same issue. Doing just the former means that everyone is suspicious of everything they currently hold, and will be too spooked to invest even in new perfectly good ones until they get clarity on everything, causing the market to seize up.
Justice and auditing takes time, but the need to refinance bonds is pretty much constant.
> Wouldn't it have been easier to retract the policy of the local government, sack the local leaders, etc., to rollback the loss of trust?
That would help the situation, but the only solution here would be the systematic guarantee to punish such politicians but we don't have any hope for a foreseeable future since the governor is from the ruling party and was a prosecutor. South Korean prosecutors are the worst for this job, they're corrupted to the root and is a highly political entity but without being elected. I don't see any possibility of prosecuting the governor for abuse of power.
It also does not help that historically it was one of the worse managed Asian Tiger economies. During the 1998 crisis it was the only East Asian economy to need an IMF bailout, and it has a very well publicized revolving door of pardons for chaebol CEOs convicted of things like bribery and fraud.
Yeah I don't think it would work, even in principle. Being an idiot is not a crime, and you can't prosecute politicians for being grossly incompetent, unless they break the law. Besides, as you already pointed out, any such system would be abused by politicians and their supporters to "get back at" their opponents. I'm pretty sure many who voted for Yoon specifically did it to watch his predecessor Moon going to prison. (I guess they will have to keep waiting - you can like or hate Moon, but nobody made a convincing case of corruption.)
Depends what you’re doing. Here in the UK, it is a crime to be an idiot if you’re a member of senior management in bank (there 10 or so “prescribed roles” that can only be held by a single individual at a time that are considered senior management).
Laws exists because wilful ignorance and deliberate idiocy was a large component of why no banker went to jail after 2008.
Criminal negligence is a thing [0]. It's just not applied to politicians yet (probably because they write the laws).
Where, in Asia, is something like this not a problem?
That's what I thought too. Central government coming in to make it clear that local governments have to honor their word without exception.
This is the heart of the problem.
I know the current South Korean president owes his victory in part to popular resentment in the face of the Moon administration's inability to stem the explosive growth of housing costs in Seoul.
Could it be that the target demographic for this Legoland just doesn't have enough disposable income or free time to make the asset profitable? It sure seems like it. Other Legolands around the world don't struggle with profitability. Distance isn't an issue for car owners. But cars are more expensive than ever. And shelter costs in SK are too high in proportion to household incomes.
Housing speculators and NIMBYs are going to kill capitalism.
The heart of the problem was the completely unnecessary default which seems to have been done for petty and self-defeating political reasons.
Yeah, and this is even worse since Gangwon-do is an extremely rural and aging area without any hope of future growth. It only contributes 2% of the total GDP in South Korea and is rapidly shrinking. No sane private entity would go there without government supports since none of significant development there would make financial feasibility. It's where a government is supposed to intervene.
The current governor (who was a prosecutor like Yoon anyway) seems to consider this as a really good chance to put their political opponents into jail and they need to access confidential information to make the case. The default is a necessary part for the grand scheme and he probably was willing to make that sacrifice. He was just not competent enough to understand its implication.
Builders bulldozing over irreplaceable ancient sites are not exactly unique to Korea, after all. (At least this one got excavated.)
No arguments with the sentiment, but keep in mind that South Korea is roughly the size of Indiana (the 12th-smallest state) and over two-thirds of what land they have is mountainous, populated by over 50 million people. It's hard not to have relatively expensive housing in that country, just based on the sheer lack of availability of land.
Of course, it doesn't help that half the country lives in the Seoul Capital Area.
Like, would you pay $2500/mo to help you make $25000/mo?
"Pricey" is subjective; and is only one number. You need another number to get the Ratio. Then we can see if Price > Gains; making $THING is expensive.
I'm sure, but you recommended it to someone who just wanted to be more informed about financial news. For that person, it is extremely pricey.
Elon, you listening bro?
Your best bet is to find things like HN or commentators you like; remember, most of this is entertainment for you unless you're actively involved.
Unfortunately, this, i believe, is not feasible for the average pleb who has no insider connection/information.
They're both quite funny. Both have a very dry wit, though Boyle moreso.
[1] https://www.bloomberg.com/authors/ARbTQlRLRjE/matthew-s-levi...
So he acts on gut instinct alone, without listening to expert advisors, and uses propaganda and fake news tactics to win supporters. Sounds a lot like several major ousted dictators.
Reap what you sow, SK. I hope you see through this BS quickly.
> So he acts on gut instinct alone, without listening to expert advisors
This statement is not supported in your quote, or in the article. One can listen and disagree.
A good reminder how we take for granted systems that are stable. When often time they are only stable because of vigilance.
But it became unstable because it suddenly made government bonds suspect. Like, if the US Treasury announced it was just not going to pay back a $1MM bond issue, the US and world markets would tank. Size is irrelevant.
As an example. The US debt ceiling thing, it really should be the reverse. It should take a 'super majority' of congress voting against raising that ceiling to limit it, even if it's an agenda item automatically included in each session's docket.
1. The author makes it seem like South Korea's credit problems are due to LegoLand announcement, rather than the global crisis of high inflation forcing governments to raise interest rates, causing projects to go bust all over. It's not clear how much of this was caused by Legoland and how much Legoland is just an example of bond market troubles after an unprecedented period of low rates that created unrealistic investor expectations of risk, and the subsequent repricing when rates start to go up. E.g. municipal debt should never be priced the same as federal government debt, because the Federal government is a currency issuer with a central bank, whereas the municipal government is a currency user, and there is nothing wrong with a project backed by a local government from declaring bankruptcy -- investors should not price that at zero risk.
2. The author (who is a lawyer, not an economist) believes that a reduction of new housing causes real estate values to fall, rather than increase.
3. The belief that high interest rates are designed to reduce "liquidity" and that therefore emergency liquidity measures somehow contradict a policy of rate hikes.
Here I will rant a bit. Use of "liquidity" in financial journalism is usually a red flag as most reporters don't understand it. They think it means "money". They view the market as a big bag in which the government dumps money when it lowers rates, or removes money from the bag when rates go up.
You see similar reporting on the stock market, which they also view as a big bag in which investors pour money in or remove money out -- forgetting that in a stock exchange, for every buyer there is a seller.
Bottom line, money going into or out of a bag is generally the only mental model available in financial journalism. There are exceptions, but you see it everywhere and it drives me crazy. This is why the author believes it's a contradiction and irony that the South Korean government would announce emergency lending facilities even as it raises rates.
But what liquidity refers to is how quickly/efficiently can you convert something into cash. For example, a liquidity crisis in the bond market means that you can't use the bond as collateral for cash loans. Bonds becoming discounted more is not a reduction in liquidity, it just means the bonds are worth less because interest rates are higher. But as long as you can use them for collateral according to their expected value, then the bond market remains "liquid" regardless of the interest rate.
When liquidity is threatened, the central bank steps in and says "We will accept these bonds as collateral for cash loans". Note that the central bank is still applying the policy discount rate, which may be high. In this article, several large banks banded together to make this announcement as well - that they would accept bonds as collateral for loans. Such a step has nothing to do with rate hikes, and does not undermine the rate hike program, it only undermines the bag-of-liquidity metaphor.
No government raises interest rates to reduce liquidity or lowers rates to increase liquidity, rate hikes are done to manage inflation and/or foreign exchange rates, whereas the tools to manage liquidity are discount windows, swap lines, and emergency lending facilities. They are separate tools with separate macroeconomic targets.
This is actually a good point that I wasn't considering. Reading the article again I can't find the author making any substantial link between the Legoland incident and the broader effects. Seems likelier to be correlation than causation.
It is pretty clear. Almost every single report on the bond market attributes this incident as a direct cause of the turmoil. Sentiments drive the market and this is a signal strong enough to spread FUD among the market. If you cannot trust government-issued bonds, then what else you can trust?
Of course, this is not the sole reason. Your question is more of a counterfactual reasoning, like "would it happen if the market is in a better situation". It might be better, but you are not supposed to throw embers when oil's leaking.
Can someone explain this part? While the knock-on effect on other municipal bonds makes sense, I would have expected this to make corporate bonds more attractive since the demand would have shifted?
Actually, I think the reason that the Gangwon government is not going to honor outstanding debts, here, is because the value of the collateral[1] has fallen below the outstanding cost of the debt. In such a situation, any rational economic actor would at least contemplate defaulting.
[1] In this case, the collateral was land (which has plummeted in value, and the creditors are welcome to), and his government assurances (to which Kim Jin-tae seems to assign a value of ~zero.[2])
[2] Which is the real scandal, and his constituents should be looking into hemp and lamp-posts. He, in his stewardship of the region burnt down an asset of significant value for a pittance of a budget line item. Burning the furniture to stay warm, and all that.
The US faced similar issues previously before the federal government stepped in and outlawed states defaulting. https://en.wikipedia.org/wiki/State_defaults_in_the_United_S...
Just because a deal goes badly for you, rarely do you get to kick over the table and walk away.
Honestly whats happening to this world.
What laws of physics prevent people from reneging on financial agreements? It happens a million times a day. It's one of the most believable human interactions. What part of it doesn't feel possible to you?
If a US state governor OTOH tried such a move, I'd expect litigation.
Goofy American: Why don't they just print more money?
But Truss wasn't elected (by the voters of UK).
Edit: Apparently I was wrong. Lego sold the themeparks during a downturn 20 years ago, but actually bought them back a few years ago, and now consider them a strategic part of the brand.