No matter how much evidence and fact you present, someone who refuses to hear will not listen. I enjoyed the analysis. This is not some matter of, ‘According to your faith, let it be done unto you. Amen.’
BLUE SILENCE ARCHIVE · NO.001
An Analysis of the Korean Real Estate Market
English translation of the Korean original, written on December 14, 2010.
Translation note. This is an English translation of a historical text written in 2010. Statements, forecasts and evaluations are preserved as the author's views at that time. They are not presented as current factual assessments. Later verification and retrospective annotations will be kept separate from the translated original.
I. Original Essay — English Translation
Not everything in the world can be interpreted solely through economic logic.
A mother's love for her child, the devotion between lovers, friendship, concern and service for neighbors in need, religious dedication, and the cultivation of one's inner life—viewed only from an economic perspective, such human efforts would surely appear to be uneconomic behavior.
Marshall, often called a father of economics, develops his economic logic on the assumption of rational self-interest. The idea is that when people cast aside false hypocrisy toward others and society and rationally pursue their own economic interests, society as a whole can become an ideal community.
When it comes to understanding the world, I think Marshall's logic is more accurate. But when it comes to shaping the world, I do not think Marshall's logic alone is sufficient.
Debate is an exchange of sword and shield. It is neither one-sided following nor one-sided denunciation.
Let me begin with my conclusion.
In my judgment, the recent rise in jeonse prices will eventually push up the prices of smaller apartments near subway stations that are driven mainly by genuine residential demand. Jeonse demand contains neither speculative demand nor a speculative element; it consists only of actual demand. Ultimately, I believe this can only be explained through the functions of supply and demand.
There has been no verified case in the Korean economy in which rising jeonse prices were a precursor to falling home-sale prices. To prevent home-sale prices or jeonse prices from rising, either demand must be reduced or supply must be expanded.
A decline in demand caused by population decrease is a medium-term development, not an immediate issue. Moreover, the concentration of population in the Seoul metropolitan area and the growth of single-person households require closer observation and statistics.
On the supply side, I am not arguing for more new towns or for spreading high-priced, unsold apartments throughout provincial areas and the capital region. If practical and affordable rental apartments were supplied in the amount and at the time demanded by the market, both jeonse and sale prices could be restrained. But this, too, is not something that can be accomplished immediately in practice.
Nouriel Roubini of New York University has repeatedly argued that the United States could fall into a double-dip recession. The European sovereign-debt crisis, often described at the time by the acronym PIGS, is also moving toward a higher level of risk. China is raising reserve requirements and pursuing tightening policies in an effort to block a real-estate bubble. Japan is now in a liquidity trap.
No matter how far Japan cuts interest rates, capital does not turn toward economic growth but instead flows abroad as investment. The foreign-exchange trading of individuals described by the expression “Mrs. Watanabe” is of course not large enough to determine the Japanese economy, but it is interesting that individuals' preferred means of managing wealth has shifted from real estate toward foreign-exchange trading.
Looking at the collapse of Japanese real estate, many people say Korea will follow Japan's path. They say that because Japan is more advanced than Korea, Korea will retrace the road Japan has taken. That may happen. Korean real estate cannot be the creator of an invincible myth forever.
I agree with the argument that Korea's household-debt ratio has reached a dangerous level. Project financing also carries substantial risk. If PF problems are mishandled, the resulting bad debt could strike the banking sector and, if deposit withdrawals followed, shake the Korean economy.
These are, in broad outline, some of the issues recently discussed regarding the world economy and the Korean economy.
Looking briefly at the American prescription for the global economic crisis, the Federal Reserve is using quantitative easing to raise stock prices, improve financial-market conditions, lift asset prices, and thereby increase effective demand. Economics calls this the wealth effect.
In other words, the QE policy adopted by the Federal Reserve in response to the U.S. housing-market problem is an inflationary policy that could allow not only homeowners but Americans more broadly to experience a wealth effect. Going a step further, dollars released by the Fed flow into emerging industrial economies and may likewise create a wealth effect there.
From the perspective of emerging economies, the concern is that bubbles may collapse if this hot money suddenly exits. They neither reject nor can easily reject foreign capital pouring in. Korea's composite stock index rising above 2,000 was also, in my view, driven by foreign capital.
The number 2,000 itself is not what matters. The index may rise further or it may fall. At the end of 2008, when the Korean stock market collapsed, the index fell to around 890. What matters is that almost no one expected the Korean stock index to recover this much in only two years. Kia Motors shares rose nearly tenfold over that period. One hundred million won invested then would have become almost one billion won. This is the power of liquidity.
The U.S. and Korean stock markets are currently liquidity-driven markets. This liquidity will raise the prices not only of stocks but also of commodities, real estate and other real assets.
Bernanke is an academic who studied Japan's slump. He has viewed Japan as having fallen into a liquidity trap because, in the early stage of deflation, it failed to adopt fiscal measures bold enough to exceed market expectations. As the Japanese economy moved toward deflation, its early response relied mainly on monetary policy, repeatedly raising and lowering interest rates.
In what has been called a once-in-a-century global economic crisis, Bernanke chose aggressive, preemptive liquidity expansion intended to seize the market's attention. There are, of course, risks. Who will bear the accumulating fiscal deficits? Every economic policy has light and shadow, supporters and opponents.
The U.S. Republican Party opposes the policies associated with Bernanke and Obama, but I believe Bernanke's policy is right because there are few other options. The Great Depression was ultimately overcome only in the context of the enormous demand generated by World War II. In a global economic crisis comparable to the Great Depression, there are few other cards capable of expanding aggregate demand on a scale comparable to that war.
When the U.S.-originated financial crisis struck the world, the deflationary danger emanating from the United States in 2008 was serious enough to raise fears of consequences on the scale of another world war. Korea, comparatively speaking, navigated that vortex well, helped substantially by China's economic growth.
Japan today shows how dangerous deflation can be. Accordingly, governments around the world are trying to avoid deflation and are willing instead to tolerate some degree of inflation. Both deflation and inflation are poisons for market participants, but these are not normal circumstances; this is the greatest crisis since the Great Depression.
America's asset-price policy, accompanied by inflationary pressure, also affects Korea. If the United States maintains low interest rates, Korea cannot simply pursue high interest rates on its own. Raising Korean rates could attract even more foreign hot money and risk making the situation difficult to control. Interest rates cannot be raised solely to lower Korean real-estate prices. That would be like burning down the house to kill a bedbug.
We should move beyond analyzing the economy solely from the standpoint that Korean real-estate prices must rise or must fall. We need to observe the Korean economy as a whole, intertwined with the global economy, and then examine real estate as one part of the Korean market.
In Korea's present economic circumstances, high interest rates would be damaging. Even if rates rise, they will have to rise gradually, while the overall stance remains relatively low-rate. A sharp fall in Korean real-estate prices will therefore be difficult, while a sharp rise could itself become a bubble. A gradual rise roughly in line with inflation may place less strain on the Korean economy. The objective should be a soft landing rather than a hard landing. I think such a policy avoids forcing all the sacrifice onto one side of the market.
Many people seem to want real-estate prices to fall. Many others, of course, want them to rise. People sometimes denounce one another, but what matters is not the denunciation; it is the grounds for their arguments. Those grounds must be examined.
Arguments pointing to the danger of household debt remain meaningful regardless of whether Korean real-estate prices later rise or fall. They are worth listening to. All market participants should examine the reasoning and think about how such problems can be addressed.
At the end of 2008, the U.S. subprime-mortgage crisis caused both the Korean stock market and Korean real estate to plunge. The exchange rate surged, while interest rates remained low in line with global trends. Subsequently, China's growth and strong performance by Korean exporters produced current-account surpluses, and liquidity began to overflow in Korea as well. In addition, foreign hot money has been flowing into Korea under the Federal Reserve's QE policy.
If QE2 and QE3 continue, the sheer force of liquidity will push real-asset prices in the United States and Korea somewhat higher. The Korean government is also pursuing fiscal measures such as the Four Rivers project and tax cuts for higher-income groups in an effort to create effective demand. The economic rationale for tax cuts during a downturn is to stimulate effective demand. That is the economic background, as I see it, to tax-cut policies pursued by the Obama administration in the United States and the Lee Myung-bak government in Korea.
Japan experienced the limits of simply distributing cash directly to lower-income households as a response to deflation: rather than generating consumption, much of the money was absorbed into bank savings. China, meanwhile, is also struggling with hot money. Of the roughly $100 billion increase in China's foreign-exchange reserves in September 2010, more than 60 percent was analyzed at the time as hot money. China's prices are also continuing to rise.
China is therefore attempting tighter monetary policy in response to hot money and inflation. But China's tightening is defensive and reactive rather than aggressively contractionary. China is still posting economic growth strong enough for policymakers to judge parts of the market overheated. Korea's economy is currently closely linked to this Chinese growth.
In Korea's 2010 housing market, rising jeonse prices are painful for tenants but may create a wealth effect for landlords. Landlords may use the increase in jeonse deposits either to repay debt or to increase effective consumption, which could have a positive macroeconomic effect.
The underlying economic purpose of the widespread credit-card expansion during the Kim Dae-jung administration was the creation of effective demand. Together with the growth of the IT industry, this shifted the effective-demand curve to the right and became one component of economic growth during the post-IMF-crisis period.
Likewise, rising jeonse prices in Korea's 2010 housing market will, in my view, push up home-sale prices. This will transfer into a wealth effect for homeowners and shift the aggregate-demand curve itself to the right. The government will therefore adopt policies that support jeonse financing, such as bank loans, rather than policies that simply suppress jeonse prices. As during the Kim Dae-jung administration, aggregate-demand expansion would thus unfold partly on top of hardship borne by ordinary households.
It is painful in the short run. But just as the credit-card problem was to be resolved over time through economic growth, higher household income and increased savings, policymakers will try to guide Korea's household-debt problem in a similar direction.
In an inflationary era, households without homes—the “rent poor”—may be hit harder than indebted homeowners, or the “house poor.” Inflation means a decline in the value of money; it does not necessarily mean an increase in real asset value. Nominal income rises while real income may fall.
Talk of hyperinflation seems unlikely to me. The extreme historical cases require circumstances far more severe than those Korea faces. For Korea to reach that point, war on the Korean Peninsula and catastrophic destruction of the economy would likely be required. In hyperinflation, the prices of all real assets—not merely flour or apartments—would rise dramatically. If a sack of flour cost 100 million won, an apartment might cost 100 billion won. Such an extreme scenario has little practical probability, so I will set it aside.
In principle, inflation harms creditors and benefits debtors. Bank loans have grace periods and contractual maturities, so banks cannot simply demand principal repayment whenever they wish. As the nominal value of assets rises during inflation, the relative burden of debt falls and debt ratios decline.
Policymakers may raise interest rates to restrain inflation, but they will determine the size of those increases in light of the Korean economy as a whole. They will not deliberately raise rates to a level that leaves the entire economy irreparably damaged.
Variables determining real-estate prices include not only household disposable income and debt ratios, but also interest rates, exchange rates, commodity prices, economic growth, global fiscal and monetary policies, Korean fiscal and monetary policy, real-estate policy, and market psychology. All of these variables should be included. Only then can forecasts become more accurate.
We should insert each variable and derive real-estate price functions over time. We should also examine the specific characteristics of each locality.
Someone here mentioned Pangyo apartments, so I will use Pangyo as a concrete example. For a roughly 34-pyeong apartment, the original sale price was about 380 million won. A quick internet search shows that jeonse deposits that began around 170 million won are now about 310 million won. A site visit or a call to local real-estate agencies could quickly confirm whether those figures are accurate.
Local brokers or coordinated dealing cannot conceal the entire supply-and-demand function of a district. For apartments in the 30-pyeong range in Pangyo, resale restrictions are scheduled to be lifted around June next year, but capital-gains-tax considerations will make a sudden surge in listings difficult.
When the Shinbundang Line opens the following September and convenience facilities and high-tech industries arrive, Pangyo New Town will take its first step from the introductory stage toward maturity. With Pangyo Station only about twelve minutes from Gangnam Station by train, Pangyo has, in my view, a strong possibility of becoming a highly desirable city when all of these factors are considered.
Once Pangyo's urban infrastructure is fully established, jeonse and sale prices may rise further from current levels. The fact that Pangyo fell sharply during the U.S. subprime-mortgage crisis, just as other areas did, does not mean that all of Pangyo's local characteristics can be ignored and every later rise in jeonse and sale prices dismissed as a bubble. If an area is outperforming within the broader trend, that ultimately indicates that solid demand is supporting it.
The U.S. economy is forecast to grow in the low-to-mid 2 percent range in 2011. If China grows by 8 to 9 percent, export-oriented Korea is also likely to continue recovering. Whether Korea grows by 3.5 percent or somewhere in the 4 percent range, its economic conditions should improve compared with the period when the U.S.-originated financial crisis threatened negative growth.
Of course, if the government's response to household debt is fragmented or merely temporary, greater risks could emerge. Nevertheless, only rising household income and consumption generated by sustained economic growth can reduce the household-debt ratio in relative terms. Korea's economy must grow further to resolve this problem, and I believe it will continue to grow.
Written by Kim Kichan
December 14, 2010
This article was originally posted on the Kim Kwang-soo Economic Research Institute forum under my pen name “Baek Gaeul.”
II. Comment Debate 1 — English Archival Translation
Translation complete. This page preserves the recovered comment sequence in English. Version 28 contains all 186 recovered records. Nicknames are romanized or rendered in English for the English edition; dates, times, reply markers, argument order, and historical claims are preserved. Claims are not silently corrected from a present-day perspective.
Deleted comment.
Deleted comment.
Deleted comment.
Deleted comment.
Deleted comment.
‘Gwireogeori’ → ‘gwimeogeori.’ Before mocking someone else, you might want to study your own Korean first.
Thank you. I would not go so far as to call it a good analysis. I simply wrote down what came to mind. I do not think everything I wrote is correct, either. I believe there are many parts of my reasoning that should be criticized and revised. I hope to study and debate more here while examining the arguments on all sides.
The economics part looks like it was cobbled together from somewhere, and the real-estate part reads just like a tabloid handout. There is not much substance here, so why did you write it at such length?
Where did you learn to speak to people like that?
From a tabloid handout.
???? What exactly do you mean by ‘cobbled together,’ and what do you mean by ‘tabloid handout’? If you criticize my writing as overly subjective, I will accept that. I wrote down what was already in my head very quickly, without going around looking up data, figures, and charts, so I think it is not sufficiently refined or concrete. I therefore think my writing is highly general, not painstaking enough, and not sufficiently meticulous, but....
‘There has been no verified case in the Korean economy in which rising jeonse prices were a precursor to falling sale prices.’ → It may not be a precursor, but if you look up Deputy Director Seon Dae-in’s writings, there is a section explaining changes in home prices and jeonse prices with a chart. Home prices and jeonse prices—more precisely, the jeonse-to-price ratio—move inversely. You mentioned many things in a long post, but the conclusion comes down to one question: ‘Is that economic phenomenon sustainable?’ If the answer is yes, that is enough. At present, home prices are far, far too high relative to income. Therefore, for home prices to reach an appropriate(?) level, either incomes must rise or home prices must fall.
For Seoul to approach the home-price levels of advanced countries or the OECD average, Seoul residents’ incomes would have to double. I do not think incomes can rise that much in a short period. So the conclusion would have to be that home prices will fall. Finally, many other factors may move home prices, but as I wrote above, when viewed from the question ‘Is it sustainable?’, what ultimately remains is income. Then the important question is what will happen to income going forward. Can people continue living merely by covering interest payments without any adjustment to the excessive debt that has accumulated? I do not think so. Therefore, I believe real incomes cannot increase for a considerable period while debts are being repaid.
People in this forum argue that rising jeonse prices are a precursor to falling sale prices, but my point was that this is only a theory and that I have not seen such a case in practice. I cannot say about large units, where jeonse represents a smaller share of the sale price, but for smaller units driven by actual demand, I was referring to cases in which a rising jeonse share ultimately pushes sale prices upward.
In any case, these are all predictions and conjectures, and we still cannot know anything for certain. In my view, the apartment market is ultimately a market among people who already own at least one apartment, so I wonder whether people with no home at all will be willing to jump in and pay such high prices out of pocket. I therefore expect prices to hold at some level for a while and then gradually decline. As one might expect, unless younger people become obsessed with apartments, that market will become a relic of an earlier era.
I am sorry. The comment I had written was completely erased. [crying emoticon]. Can any of us predict the future with 100 percent certainty? Did we not come to this forum to study the underlying currents behind the phenomena unfolding before us?
A question. 1. ‘The QE policy adopted by the FRB to address the U.S. housing-market problem is an inflationary policy and may create a wealth effect not only for homeowners but for Americans as a whole.’ → On what basis? Unemployment keeps rising, new-home sales remain weak, and foreclosures are also increasing. What is the specific basis for this claim?
2. ‘When deflation was unfolding in Japan, the country fell into a liquidity trap because it failed at the outset to pursue a bold fiscal policy that exceeded market expectations.’ → After the bubble collapsed, Japan poured in as much as 75 trillion yen over three rounds. If that was not a bold fiscal policy, how much more was it supposed to spend? I do not know whether this is meant to defend U.S. fiscal policy, but the United States can pour in hundreds of billions of dollars because the dollar is the key reserve currency. In Japan’s case, there has instead been criticism that the money spent after the bubble collapsed on unnecessary construction—roads, bridges, public buildings, and so on—was wasted without producing any effect. Yet we are following that example, are we not?
3. ‘Because bank loans have grace periods and contractual maturities, banks cannot simply demand repayment of principal whenever they wish.’ → Principal repayment has already been deferred for three years. Nobody is even talking about banks arbitrarily calling in principal. The problem now is that ‘more than 79 percent of borrowers are households that do not have the ability to repay interest and principal according to the contractual schedule.’
Now that I have started writing, there is no end to it, so I will give up here. And seeing someone who cannot hear calling normal people ‘deaf’—while even using the wrong Korean word for it—makes me think there is little point in writing anything here. I will say just one last thing. As someone else wrote below, with debt there are only two choices: repay it or go bankrupt. It is dressed up under the name of expanding liquidity, but in the end every country is throwing a party with borrowed money—government finances. Does none of this have to be repaid? In one form or another, someone has to pay it back. If not, you end up like Ireland. I do not understand how anyone can look at the same phenomenon and reach such a deceptive conclusion—or what to make of someone applauding it.
This is my answer to the first question. The real reason the FRB embarked on a second round of quantitative easing is to raise housing prices. With housing prices down roughly 30 percent from their peak, U.S. consumers feel burdened by the decline in their assets and are reluctant to open their wallets. In response, the Fed is releasing dollars and trying to generate inflation in order to raise asset values. The specific effects are, first, that inflation raises housing prices; and second, that it reduces the burden of principal and interest payments for people who bought homes with mortgages. Consumers whose asset-related burdens have eased will eventually spend.
Conditions in the United States are still poor, but U.S. manufacturing and distribution are recovering. That means the Fed’s inflationary policy is having an effect. If this carries over into the housing market, the policy will have achieved its objective. If manufacturing and housing—the engines of the U.S. economy—recover, that is what it means for everyone to benefit from a wealth effect.
berklygo, I do not know whether you are Baek Gaeul, the author of the original post, but your answer contradicts itself. You say the real purpose is to raise housing prices, yet a rise in U.S. housing prices is still nowhere in sight. The number of foreclosed homes, which had been declining, is rising again. This year the combined inventory of pending and visible homes has returned to 6.3 million units, the level seen during the 2008 crisis. In short, quantitative easing has had no effect in reducing housing inventory. You also cite the rise in the ISM Manufacturing Index as evidence that manufacturing is recovering, but what raised the ISM index was prices, while actual consumer inventories are falling. In short, prices are rising and consumers are cutting spending.
Once an economy falls into a liquidity trap, neither monetary nor fiscal policy has any effect. It refers to the range in which even pouring in 75 trillion yen fails to produce results. That is why the initial response is important. Bernanke in the United States is pursuing quantitative easing to send market participants a clear signal at an early stage, because interest-rate cuts alone could allow the United States to fall into a liquidity trap as well. The signal is that if QE2 does not solve the problem, liquidity will be expanded again and again through QE3 and beyond, and this is producing positive effects in the U.S. market to some extent.
U.S. housing prices (Monthly Median Sales Price of New Houses Sold) fell further in 2010 and returned to 2004 levels. They have not rebounded at all through last year and this year, despite quantitative easing. The decline in U.S. mortgage debt was not mostly because people repaid their debts, but because of bankruptcies. Moreover, mortgage rates have actually been rising lately. No one wants to buy the bonds issued for quantitative easing, so the Fed is buying them all, and U.S. Treasury yields have risen as a result.
Baek Gaeul, it looks as though you are replying now, so please show us the 'positive effects' you are claiming. At a minimum, shouldn't those 'positive effects' include: 1. a decline in unemployment; 2. a decline in foreclosures; 3. an increase in new-home sales; 4. an increase in the sale prices of existing or new homes; 5. an increase in disposable income; and 6. signals of economic recovery? Do not insert an 'if' into history by claiming, 'Japan failed because it did not pour in enough money at the beginning.' If that were true, the United States should have poured in something like six trillion dollars, not merely six hundred billion, until unmistakable economic signals appeared. Why can't it do that? Even now, with QE1 and QE2, it is following a path no different from Japan's.
I do not think you and I need to become spokespeople for Roubini and Paul Krugman over the U.S. market. Those two camps are still engaged in fierce debate, armed with statistics far more numerous and detailed than the indicators you mentioned above. Their debate will probably never end. Watching the dispute between the two camps feels like watching the endless conflict between Keynesians and monetarists. As you say, Paul Krugman is calling for even more aggressive quantitative easing by the Federal Reserve. In fact, he warns that the Fed's hesitant, piecemeal quantitative easing creates a substantial risk that the world economy could fall into crisis again.
I do not think we need to parrot their arguments. U.S. economic growth has turned from negative to positive, and the Dow, which plunged to 6,470, has recovered to around 11,400; for the moment, the U.S. stock market is responding to the Fed's policy. The U.S. automobile industry, which collapsed in the worst economic crisis of 2008, is reviving, and the net profits of banks that survived restructuring are increasing. U.S. manufacturing profits in the third quarter were the highest in the past three years. Of course, you will deny even these minimal positive signs, saying that they cannot be regarded as signs of a genuine economic recovery.
This is the greatest global economic crisis since the Great Depression. I do not expect every indicator suddenly to improve at once. You appear to believe that things will collapse further, to reject any artificial government intervention in the market, and to argue that everything should be left solely to the market's autonomous function. But the debate over the intensity and scope of government intervention is a perennial question in economics that cannot be resolved in a single argument.
By your logic, when Korea's Composite Stock Price Index plunged to around 890 during the 2008 crisis, the National Pension Service should not have absorbed the flood of Korean shares being sold. Had everything been left to the market's autonomous function, the index might have fallen to around 300, as it did during the IMF crisis.
I believe the National Pension Service intervened not only on the basis of economic judgment but also because political and policy judgments by the government operated in the background. In the end, I think the current level of the Composite Stock Price Index shows that this judgment was correct.
When Korea's Composite Stock Price Index was around 300 during the IMF crisis, Korean stocks ended up largely in foreign hands. Korea's national wealth passed into foreign hands.
You may ask why I am suddenly talking about the stock market, but I think the same principle applies to real estate. Whether it is the U.S. government or the Korean government, my point is that during a market crisis of unprecedented scale, the government should intervene actively and deliberately. The damage may be too great simply to wait for the market to recover on its own. Korean household debt is a serious problem. If so, sound government policy should intervene and devise measures that minimize the social cost. Wanting the government to respond emotionally along the lines of, 'It is the households' responsibility, so let them suffer once,' seems far too emotional a response.
Wow... this is absurd. The rise in the Dow and the increase in bank profits were not the market 'responding' to quantitative easing. The money released through quantitative easing could not flow into household lending, productive facilities, or investment, so there was nowhere for it to go except to cover banks' bad debts, finance bonus parties, and enter the stock market. If U.S. manufacturing profits are at a three-year high, why is unemployment not improving and why do full-time jobs keep declining? Companies are not translating profits into hiring and are instead repairing their balance sheets precisely because the companies themselves believe the economy will worsen. Let's stop here. I cannot believe such an unreasonable conclusion can come from looking at the same situation: a money party without improvement in the real economy.
This is my reply to Byeol. Which part do you mean is contradictory? At present there are many homes that have been foreclosed on by banks and put on the market. I assume your negative view comes from thinking that, despite all the money being released, the housing market has remained the same or has become even worse.
It seems you did not understand the point, so I will explain it again. The core objective of the Federal Reserve is consumers' psychological confidence. If people believe their wealth has increased, they open their wallets; if they believe it has decreased, they close them. The Fed is trying to restore consumer sentiment, which has been depressed by falling housing prices—the wealth effect in reverse—to its previous state.
The housing market itself does not account for a very large share of the U.S. economy. The reason it nevertheless has such a large influence is that when housing values, which make up a large share of consumer assets, fall sharply, consumers close their wallets. That leads to a shortage of aggregate demand and harms the economy. Housing prices are down now, but the expectation is that they will rise as inflation gradually works its way through the broader economy.
berklygo, since you appear to be a different person from Baek Gaeul, I will answer your view before I leave. At first you said the objective was 'to raise housing prices,' and now you say it is consumers' psychological confidence. Fine. It does not matter. Let us look at that consumer confidence. U.S. consumer credit increased by $3.4 billion in October. Was that because consumers became more confident? U.S. consumer credit is divided into revolving and non-revolving credit. The former fell by $5.6 billion, marking its 26th consecutive monthly decline. The latter rose by $9.0 billion, producing the overall $3.4 billion increase. And what was behind the latter? The government took on $31.9 billion in student loans.
On the surface, consumer credit spending appears to have increased—as you know, Americans conduct much of their consumption through credit cards—but if government spending is excluded, the consumers' psychological confidence you mentioned has been declining for 26 straight months. Even while the Dow surges every day on quantitative easing and banks hold bonus parties, ordinary people are steadily reducing consumption. So which of the Federal Reserve's objectives for quantitative easing has actually been achieved? The housing market has not recovered, consumer sentiment has not recovered, unemployment shows no sign of improvement, and apart from the Dow and banks' profit party, what is there?
The endless debate between Byeol~~ and me over how the U.S. economy should recover will remain parallel lines forever. World-famous economists are still arguing with one another over this very issue. What I want to say is that the Federal Reserve chose the card of expanding liquidity as its method for overcoming the U.S. economic crisis. That policy is still in progress. It is too early to determine success or failure. I give it a somewhat positive assessment simply because the U.S. economy has changed direction from negative growth. What alternative for economic recovery is being proposed by those who oppose liquidity expansion? Criticism that offers no alternative is little different from powerless denunciation.
I do not think a country becomes advanced simply because housing prices rise. The reason everyone is so sensitive about housing prices is probably that housing is ultimately a basic necessity of life. When cabbage prices surged recently, I thought the argument that distributors had manipulated the market had some persuasive force. Apartments, too, ultimately began with structural problems in the distribution system. The argument is to correct those problems, not to push prices below intrinsic value and disrupt the market.
Of course a country does not become advanced merely because housing prices rise. Certainly not. The cabbage-price shock may partly have been caused by manipulation by distributors, but there must also have been causes on the supply-and-demand side.
I read your post with interest... Thank you.
Thank you.
'In Korea's 2010 housing market, rising jeonse prices are painful for tenants, but they are highly likely to create a wealth effect for landlords. To the extent that jeonse deposits rise, landlords will either repay their debts or increase effective consumption, and this may also have a positive effect on the Korean macroeconomy.'
What happens to the reduction in effective consumption that inevitably occurs on the tenant side? And according to the theory of the 'marginal propensity to consume,' total consumption would have to fall even further in this situation. How, then, can this help the macroeconomy?
Once money has been injected into the market, the money-multiplier effect and the velocity of money cause it to become larger in effective volume than the original amount injected and to exert a correspondingly greater effect.
It looks as though you put a great deal of care into writing this. I read it well.
Thank you.
As I understand the writer's point, Korea has few options to choose from under current global economic conditions, and it would be difficult to pursue policies that run against this broader current merely because of the real-estate problem, which is only one part of it... With the United States releasing money on that scale, how many countries can truly maintain an independent fiscal policy and policies for ordinary people? One line in the middle of the article leaves a bitter taste: 'a policy of expanding aggregate demand on top of the suffering of ordinary people'... The reality that we must accept, that we have no choice but to accept, is indeed...
I am sorry. What I meant was to point out that the economic policies being pursued have that characteristic. Even without the Four Rivers Project, an aggregate-demand expansion policy could be pursued through other projects that benefit society as a whole, and I believe effective demand can be expanded without sacrificing a minimum level of welfare. I intended to point out the character of tax cuts for the wealthy; I did not mean to suggest that shifting the tax burden from the wealthy onto ordinary people is right.
People cannot see beyond what they are capable of seeing.
That is true. Is that not why we try to study a little more?
I think this writer is far more learned than you are. If you have enough ability to sneer at the post, then please compress your own thinking and write something of this caliber. I am simply astonished that you would criticize someone else’s writing in such an absurd manner.
From a positive perspective, I also find much in the post above that I can agree with. With the development of the electronics and IT industries, it seems that if our economy lets its guard down even for a moment, foreign capital could rob us blind before our eyes.
Yes, I read it well. A few people are being aggressive simply because the opinion differs from their own, and it is not a particularly pleasant sight. In my own case, I actually had to raise the jeonse deposit by a great deal, and it is also true that a house I bought when it was cheap has risen in value. Whether real estate rises or falls, people are not going to buy a house merely on someone else's say-so, so I hope everyone makes a wise choice. If the flow of the economy moved while taking the circumstances of ordinary people into account, perhaps we could reform it, but most of the time it does not. It is also true that trying to change that flow can be overwhelming. I found that adapting to the flow instead made things easier for my family and for me.
I do not regard buying a home for the purpose of securing a home of one’s own as a bad decision.
It seems that you excerpted economic material from various places and added a great deal of your own subjective thinking. The conclusion of this very long piece seems to be that because the United States is tolerating inflation through quantitative easing, people who hold tangible assets will inevitably enjoy a wealth effect. In simple terms, that is correct. But have you considered why countries grouped as PIGS are in a state of fiscal insolvency, why China is worried about inflation, and why warnings are being issued about the danger of asset bubbles in Hong Kong and Australia? It is all because of debt. A wealth effect based on the simple principle that assets equal liabilities plus equity ultimately creates problems. I think you need to consider the lessons offered by the advanced economies. You say Korea is all right?
Why did advanced countries and European countries reach fiscal insolvency and apply for IMF bailouts? In the end, it was because they kept rolling over debt to deal with debt. By your logic, Ireland could have prevented the bubble from bursting by releasing enormous amounts of money, tolerating inflation, and inflating asset prices. Inflation has both sides, of course. Inflation that is not accompanied by economic growth and wage increases ultimately reduces disposable income, making it impossible to sustain asset-price inflation. In other words, purchasing power falls. Eventually the real-estate bubble bursts. Again, inflation without accompanying growth eventually explodes. Growth should also be gradual and steady; abrupt growth like China's can only become poisonous.
Take a look at your household's disposable income right now, and look at the people around you. Is everyone overflowing with spare money? Is everyone constantly dining out and traveling? If so, there would be no reason for self-employed businesses to fail. Ha ha. This is what inflation looks like today. So the effects are already appearing. The danger of savings-bank failures and the United States' continued quantitative easing demonstrate that fact. If the economy is recovering, why does quantitative easing keep continuing? How long will public funds continue to be injected to deal with failures of savings banks and parts of the financial sector? How large is the government's debt? Ha ha. Fundamentally, Japan is a country that has produced Nobel laureates in economics. It is fundamentally a people more intelligent than Koreans...
Do not forget that point... You are taking debt far too lightly. I recommend the book 'The Attack of Debt.' Read it once. You will come to recognize that the course of the world economy is not something one predicts; it simply unfolds. We now live in a global age. Remember that rising oil prices will inevitably force interest rates upward. And this article mostly discusses general principles and does not consider the issue from enough different angles. You made an effort, but the supporting data and substance seem insufficient to make the argument convincing.
The substance of your comment seems good, but you slip badly at a strange point. Since when has a Nobel Prize in economics proved the superiority of an ethnic group? Do you know that economics was not among the original Nobel Prizes? And if they are such a superior people, why did they steal so many cultural properties and old books from another country? If they are inherently superior, why distort history?
As you said, I am not denying the danger of debt. I also think that increasing household debt is not a good phenomenon. Greece, Ireland, and the other countries facing problems are bound within the euro area and cannot adjust exchange rates through their own currencies. They cannot secure export competitiveness through currency depreciation, and they cannot properly conduct independent monetary policy. Their policy options are limited. Some scholars even analyze that, in the worst case, they could leave the euro area.
I also agree that a Nobel Prize in economics certainly does not prove the superiority of an ethnic group. Still, I think you should be aware that the economics prize was added in 1969. And Baek Gaeul, thank you very much for your long analysis. I read it with great appreciation.
My biggest question is this: compared with the growth of borrowing, I understand that the household saving rate still remains below 5 percent. I wonder how that will affect things going forward. In fact, I think the real-estate rally of the 2000s was helped greatly by the saving rates of nearly 20 to 30 percent achieved by our parents' generation, who spent less, bought fewer clothes, and saved carefully. When I consider today's enormous increase in debt together with a saving rate that is barely visible, I cannot help worrying. The saying that no market can withstand overwhelming volume applies to increases in the money supply, but in the reverse direction it is also not unrelated to household savings.
I believe the government needs to maintain realistic and sustained attention to, and responses to, the growth of household debt. The household-debt problem cannot be solved all at once. During the Kim Dae-jung administration, the credit-card problem was a serious social issue. As the Korean economy continues to grow steadily, household income and savings will need to increase.
This is the kind of post that could help bring some balance to the forum's discussion, which had been leaning heavily in one direction. Rather than dismissing a long analysis that consistently follows its own logic simply because it differs from one's own view, I hope people will rebut, point by point, what they think is wrong and continue a heated but useful debate.
I tried to rebut point by point what I thought was wrong, but there were so many points that I gave up. ;_;
I think this is a place for learning. Like Manun, I also hope for a vigorous and useful debate.
Thank you. I do not deny the problems you have mentioned. I hope the government will respond more wisely. Smashing the whole board and starting over would require paying an even greater social cost. Neither a sharp plunge nor a sharp surge in real-estate prices is desirable. I only hope the problem can be resolved gradually in step with the growth of the Korean economy. And I, too, oppose emptying ordinary people's pockets to fill the pockets of the chaebol. The fruits of economic growth must be returned to ordinary people. That remains institutionally and politically possible even now.
You must have worked hard cutting bits and pieces from all over. It sounds exactly like what the woman at the neighborhood real-estate office says. Apart from dropping Bernanke's name, it is all more or less the same.
Just stay quiet. ^^
But what exactly did I supposedly cut and paste? I simply poured out, in a flash, what was already in my head.
I am leaving having encountered a new argument: that rising jeonse prices can create effective demand.
If economic conditions deteriorate, it can also be seen as having the disadvantage of increasing landlords' debt.
1. QE2 carried out by the U.S. Federal Reserve has created global dollar liquidity, and commodity prices—agricultural products and crude oil—have surged or risen sharply. This leads to higher prices. How far can the government prevent interest-rate increases and allow inflation to continue? China's case shows that it cannot prevent this indefinitely.
I think exchange rates, interest rates, inflation, and so on can be adjusted to some extent. If the best option is unavailable, one chooses the second-best—rather like the turnpike theory....
If you can, I would appreciate it if you deleted the post above without hesitation. When too many things are wrapped up together, it often becomes impossible to tell what is true. In the end, it is the same logic being spouted by Man-su and his people, who are worse than the unemployed, with a mixture of cajoling and slapping people around. And the argument for the Four Rivers Project and tax cuts for the rich in order to create effective demand during a recession is truly absurd. Obama's tax cuts and Lee Myung-bak's tax cuts for the rich are fundamentally different. The Four Rivers Project ultimately funnels everything to the rich—in other words, it is a policy that plunders ordinary people. Tax cuts for the rich not only widen the gap between rich and poor; they also reduce what you call, in difficult language, effective demand. In the end, the missing tax revenue is made up through indirect taxes and increases in other public charges, making it a predatory policy toward ordinary people.
I was trying, as objectively as possible, to point out the underlying logic of the Four Rivers Project and the tax-cut policy for the rich; I was not endorsing them.
This post distorts the situation with shallow knowledge. It is long, empty, and not worth reading. To say there is no precedent showing rising jeonse prices as a precursor to falling sale prices—you would not say that if you had even briefly checked the real-estate market of the 1990s. And the claim that effective demand expands through tax cuts for the rich is absurd. The United States and Germany adopted policies entirely opposite to tax cuts for the rich when trying to escape the Great Depression. Hitler used expansion of construction and the arms industry; Roosevelt used guarantees of basic labor rights and income support for low-income groups, and especially the wartime arms industry during World War II. Tax cuts for the rich do nothing to expand effective demand and instead are a representative anti-market policy that only makes matters worse.
I only wanted to discuss the economic background behind the policy of tax cuts for the rich. Socially beneficial outcomes can certainly be created through other policies that take ordinary people into consideration. I also believe that such consideration and judgment are necessary.
Baek Gaeul, please reply to all those comments hanging from your post. If there are no replies, I will regard it as a loss by decision. And I respectfully recommend that a post that has lost by decision be taken down.
As far as possible, I will reply to comments that seem capable of developing into a debate. But I think it will take time. I cannot spend the entire day staring at the computer....
Ordinary people are all much the same. They see only what they want to see and hear only what they want to hear, then rationalize that their own thinking is correct. You are probably not especially at fault. We have been conditioned that way by the mass media, and up to now the market may indeed appear to have moved that way. But those of us who think a little differently are saying that, when we look at the various facts, the future will be different. I hope you will also take some time to listen to the other side and consider whether there is truly nothing to learn from it. People who think differently become wealthy. It would be strange to live exactly like everyone else while expecting a different result.
Thank you. I will try to become someone who examines both this side and the opposing side.
For the grounds showing why tax cuts for the rich, far from expanding effective demand, are a harmful policy, look at the teachings of Thomas Malthus, a leading British classical economist, and those of Cambridge professor Ha-Joon Chang, author of Bad Samaritans. The point is that they are bad Samaritans—in other words, bad people. Take a look at the book. The Ministry of National Defense once designated it as a subversive book, but the Constitutional Court later ruled in its favor.
It is a book I would like to read.
I do not know much about economics. But if there is plenty of space available while the number of people who would occupy it keeps shrinking, what happens to that space? Would it not end up with nothing but trash rolling around in it? That is how I see it.
That is a valid point. But I think it may be an issue for a little later rather than an immediate problem.
Thank you for seeing it that way.
I think it can also be a form of study to read opposing views and then make one’s own judgment. Thank you. ^^
I hope to remain a person who keeps studying. I will keep trying as well.
In the midst of the threat of deflation, an inflationary policy through liquidity provision is an unavoidable choice. Within that, real estate faces risks such as household debt, but at least it will not decline... So in the end, although this is not the best option, we are pursuing the second-best one... and doing a reasonably good job of it... Is that your conclusion?
Inflation is not an unavoidable choice. It is an unavoidable result of the rise in China’s exchange rate.
I remember hearing that person named Kendo suddenly trying to prove his level, and I also remember my own sarcasm... But before talking about economics, as far as I know, buildings deteriorate and eventually have to be torn down, and Korea does not have many buildings as solid as those in Europe. Except for a few locations with special advantages, I am one person who believes there is indeed a bubble. Compared with economic conditions, the physical factor may seem small right now—
—but we will see how long that speculative way of thinking can last.
I was talking about your level because you were using informal speech toward people in the comments simply because this is the internet.
And you should not misrepresent a difference in viewpoint as speculation. Did I say real estate prices would rise? Did I tell people to buy homes? Are you putting on ideological glasses and hunting for “Reds”? Haha. Listen carefully to other opinions too. Try sincerely to hear what the other person is actually saying.
Ha!... Is that so?... I did not use informal speech from the beginning, and I quoted what you wrote. Was it not you, Kendo, who started talking about my “level”?... And you think it was right to talk down about someone’s level just because this is the internet?...
Your own rebuttal is legitimate, but someone else’s rebuttal is nitpicking and below standard?... For someone supposedly so high-level, your conduct is rather shabby... haha.
Haha. Now you say you did not do that; I have nothing more to say. Please do not do it again, and do not casually insult someone’s character.
This is what they call the pot calling the kettle black... Look, in your original post you said “speculators,” so I responded by calling them speculators, and then in the comments you changed the term to “ordinary people.” You are the one who changed the story. Deleting the original post and then changing what you say is even shabbier behavior. Back and forth... Are you a chameleon?
Character assassination?... And the way you lumped together and attacked an unspecified group of people—is that not an insult to their character?
If you hear only what you want to hear and bury yourself in your own thoughts, you will neither hear nor see anything else. Did you come here to criticize others, or to follow something blindly? We come here to listen, learn, and see more.
Before replying, think about whether it is not also a personal insult—and a simple-minded one at that—to start talking about someone’s ‘level’ in response to a quotation from your own original post. You are quite the expert at changing your story.
You may act lofty all by yourself, but you should realize that I was not the only one who failed to sympathize with what you wrote.... You say you understand so well what it means to learn, yet you were quick to leave sarcastic replies even to people who offered you advice, and then you wiped them all away.... As for me, even when someone acts lofty like you do, I get an allergic reaction when I see someone so two-faced.
I know you may be criticized for it, but thank you for offering a different opinion. I do not think an opinion like this is wrong. You have given both areas of partial agreement and differences in perspective, and that alone is enough. Thank you for the effort.
Thank you. I, too, hope to learn a great deal from this forum.
We are passing through the tunnel of the greatest economic crisis since the Great Depression of the 1930s... and we do not even know whether we are at the entrance, in the middle, or near the end... Yet we are discussing the economy on the basis of barely six months of jeonse prices. A crisis is an opportunity. For 90 percent it is a crisis... and for 10 percent it is an opportunity.... Is it really wise to accept a crisis for 90 percent in order to create an opportunity for 10 percent?
Wow~~ that really is a memorable line. I think it may be one of the wisest things I have heard recently. I agree 100 percent.
Could it be that the current crisis, caused by the mistakes of 90 percent of the public, is giving opportunities to the other 10 percent?
Everyone is an expert ~ Thank you.
I hope to learn a great deal from your comment. In fact, I have often seen people—including myself, people in this forum, and even Korean economists—showing off what they know despite having knowledge or experience that is not remotely expert. After reading just a few meager lines, people often talk as if they were all experts. I will take your comment as a reminder to study the world and life with greater humility. Thank you.
I do not read this as a post urging people to buy more houses. I think it would be good if you read it again.
This seems to be a piece written after thinking and agonizing over the recent economic situation as a whole. It discusses current risks such as inflation and household debt. I think the rise in jeonse prices is a failure of government policy. Recently, instead of focusing only on selling Bogeumjari housing in the Seoul metropolitan area and driving attention toward it, the government should have supplied many small rental units for jeonse. I enjoyed the good article. Thank you.
Yes, I also think the supply of rental apartments is urgently needed. The reason jeonse prices for small apartments are rising not only in Seoul but elsewhere as well seems to be the shortage of small jeonse units that actual occupants can find. It is also the response of the conservative real-estate market. So I think there is an urgent need to supply inexpensive rental apartments for genuine jeonse tenants who do not have much money.
Thank you. I also think that one solution for preventing increases in both jeonse prices and sale prices is the supply of practical and affordable rental apartments.
You are talking around the point, but what you most want to say is this: recent rises in jeonse prices will push home prices up, and current home prices in the Seoul metropolitan area are not a bubble. Right? But that analysis is ------> wrong.
One of the conclusions in my analysis is: ‘The recent rise in housing jeonse prices will ultimately push up the prices of small apartments near transit stations, where demand is centered on actual occupants.’
All right, let us wrap this up and go to sleep.... The conclusion was in the news. 1. Global investment bank Morgan Stanley is leaving Korea. Reason: its real-estate investment failed. It sees no hope.... 2. The government has also recognized the risk of household debt: ‘introduction of a total household lending limit.’ In short, it is a policy of setting an appropriate level of household debt according to the economic growth rate and lending within that limit.... This means the ammunition for unlimited lending is disappearing. The government that relaxed the DTI restrictions in August has reversed itself by 180 degrees only four months later.. haha. They say the introduction of this total lending limit was the starting point of Japan’s real-estate collapse.... All right... now stop worrying about it and everyone go to sleep....
I view it positively that the government, too, has recognized the risk of household debt. I hope the government’s response to the household-debt problem will be serious and comprehensive rather than an improvised stopgap. If the household-debt problem erupts, the social cost that ultimately has to be paid will be enormous.
The point is that even the advanced European countries now at risk of bankruptcy know what is happening but cannot do much about it.... Personally, rather than dragging this out because of concerns about side effects, I hope this opportunity is used to treat the problem at its roots once and for all....
You are greatly underestimating Korea's economic growth. From our perspective, it may look as though everything in Korea is a complete mess and that the G20 and all the rest are nothing but a ridiculous show, but I do not believe Korea's underlying economic strength is inferior to that of Ireland or Greece.
It feels refreshing to read a good article after such a long time. Thank you for the good piece. I enjoyed reading it!
Thank you.
I cannot shake the feeling that this somehow defends the current government. My knowledge is limited, and I think parts of the discussion—such as the tax cuts for the wealthy and the real-estate argument—are reasonable in the course of the article, but the conclusion feels distorted. If taxes are cut for the wealthy, are they really more likely to increase spending for ordinary people? Or, being better informed than ordinary people, are they more likely to invest in cash or gold? I think the wealthy will enjoy fine dinners with the money they receive through tax cuts while, anticipating a bleak future, spending more of it to increase their own assets. They are, after all, just human beings.
During a recession, someone has to spend money for consumption and investment to circulate positively throughout society. Of course, this does not mean I am arguing that benefits should be given to the wealthy while pain is imposed on ordinary people. I was referring not to the political background of tax cuts for the wealthy, but to their economic rationale. To create a virtuous cycle of consumption and investment, I believe political and economic consideration for ordinary people and the broader community can also take many forms—for example, devising new industrial paradigms and creating jobs. That is also what must be done to prevent polarization, and I believe a healthy society requires reducing polarization, even if only somewhat.
Isn't the claim that tax cuts for the wealthy are effective itself derived from armchair economic theory? Taking the United States as an example, after tax cuts were implemented the gap between rich and poor accelerated, while they seem to have had little connection with an economic boom. In the case of the famous New Deal, funding was secured through tax increases, and those increases produced an unprecedented leveling of overall wealth alongside prosperity. To me, the phrase 'a virtuous cycle of consumption and investment' sounds like an empty slogan no different from propaganda under a socialist system. You used the term 'new industrial paradigm,' but I wonder what, within the current industrial structure, could dramatically create jobs....
You seem to be entertaining the dangerous idea of tolerating inflation. There is no need even to invoke hyperinflation; the current high rate of price increases alone has already reached a dangerous level. I simply cannot understand the claim that rising jeonse prices create effective demand. There is one group that has to pour more money into jeonse deposits, and another group that uses those deposits to repay debt or take gains. It seems to me to be nothing more or less than rolling over debt and shifting the burden of debt onto others.
This is frustrating. So, in the end... because there is no way to make ordinary people spend money, taxes are cut so that the wealthy will spend?? Is the proposed solution to the problem of making someone spend money to cut taxes for the wealthy and then make up the fiscal shortfall with taxes paid by everyone, including ordinary people?? I cannot believe that the amount saved through tax cuts for the wealthy will ever flow to ordinary people; it will only deepen polarization. Right now, I think both the wealthy and ordinary people are like black holes. I am one person who hopes policies that make ordinary people shed tears of blood will finally stop.
That is why I strongly agree with Seon Dae-in's criticism of Seoul Mayor Oh Se-hoon's position on the elementary-school meal issue. Policy consideration for ordinary people does not run counter to measures for stimulating aggregate demand at all. A new industrial paradigm cannot emerge in an instant. It is an area that requires a social foundation and active government support over a long period. One example would be the Kim Dae-jung administration's fostering of the IT industry and venture businesses. Of course that bubble burst, but my point is that we must keep trying to develop new fields of that kind. The Four Major Rivers project is a measure for stimulating aggregate demand, but the return is not very large compared with the cost poured into it. Nor was social consensus achieved. I think the government is spending taxpayers' hard-earned money far too casually.
I think one of the most conspicuous phenomena under the Lee Myung-bak administration has been the exchange rate. The value of the won was lowered to increase exports, and large corporations—which account for most exports—saw their profits rise sharply. The result? Did they invest that money in ordinary people or in increasing employment? They did not even pay subcontractors reasonable supply prices. Large corporations are currently holding enormous amounts of cash. I do not know what they are holding it for... -_-^ At first, the justification was increased exports and the resulting job creation, but the outcome was completely different. Meanwhile, inflation worsened because import prices rose, making it even harder for ordinary people to make ends meet. With these results plainly before us, are we really saying that if taxes are cut for the wealthy, they will release that money to ordinary people?
Wealthy people such as Warren Buffett argue that people like themselves should be taxed more heavily. I think that position is more realistic. I regard things like tax cuts for the wealthy as a clever maneuver by the privileged classes to protect even a little more of their own wealth under a plausible-sounding justification.
Isn't Warren Buffett one of the biggest beneficiaries of quantitative easing?
He would certainly be one of the substantial beneficiaries. At the same time, it is also true that he argues that wealthy people like himself should pay more taxes. As for the relationship between the two...... hmm... ^^;
Grow the pie first and then distribute it? If so, why have economic growth and our lives since the IMF crisis moved toward greater polarization? The theory that we should grow the pie first and then distribute it has already failed. Do you really think simply cutting taxes for the wealthy will revive domestic demand? Have any of you lived abroad? Do you think rich people will spend their money and enjoy themselves in Korea? The wealthy are extremely calculating about how they spend their money. If they do not see value worth paying for, they do not consume. Would they go to a neighborhood DVD room to watch a movie? Or would they watch one in a luxurious private theater with top-class service? Even if you transfuse blood, that blood does not reach the toes. This is wrong. If you were rich, would you buy goods from street stalls?
How can this be so identical to what Bernanke said while carrying out QE1 and QE2? You are quite good at cobbling things together. ^^
Cobbling things together? What exactly is that supposed to mean? It sounds as though you mean copying bits and pieces from here and there... Well... people can certainly influence one another's thinking, but is there really anyone who simply puts other people's thoughts into his own head without thinking for himself?
I say this because the main article is no different at all from the analyses of Bernanke and mainstream analysts in Korea and abroad that I have seen so far. If there is a part that reflects Baek Gaeul's own analysis and thinking, could you tell me which part it is? No matter how I look at it, I cannot find one.
Everything I wrote above is my own analysis and thinking. Since I have no way of knowing Angae-ui Hwansang's own analysis and thoughts, rather than leaving comments like this, I would be very grateful if you would post a lengthy analysis of your own sometime....
This balanced, high-quality article was very helpful. Thank you. ^^
You're really trying hard. LOL. I don't know about other homes, but I'll bet 100 won that your place is going to crash spectacularly. And I'll pray every single day, with all my heart, that it does.
Thank you for seeing it that way.
Baek Gaeul's perspective—looking at today's complex phenomena from a somewhat higher vantage point—has been very helpful to me.
I hope we can always remain people who keep studying. I will keep trying as well.
I enjoyed reading this. You have recast Bernanke's line of reasoning to fit Korea's circumstances. ^^; It is fascinating to witness the efforts, prescriptions, and side effects of economists and government officials trying to navigate capitalism through its greatest crisis. In the end, the key questions seem to narrow down to: 1. Will quantitative easing create a wealth effect? 2. How long can banks postpone repayment of principal and interest? 3. Will there be no external shock before the current situation can be overcome through moderate inflation? Personally, I have a vague sense that some kind of external shock may occur because of the side effects of a worldwide expansion of liquidity on a scale capitalism has never experienced before. In any case, thank you for the good article.
I too am anxiously hoping that no external shock strikes under the present circumstances. If an external shock occurs, the Korean economy could become genuinely dangerous.
It seems that what you are saying, in the end, is that growth is the answer. What is bitter is this: if everyone shared in the price paid for that growth, what would be the problem? You must know that under a winner-takes-all structure, a small group takes the gains from growth while most people remain far removed from its benefits. That is bitter.
I believe the Korean economy must continue to grow if it is to resolve the many problems that have piled up. And I also believe that, as a consequence of economic growth, liquidity must no longer be allowed to pour into real estate. Otherwise the real-estate bubble will eventually burst, and if that happens ordinary people will have to walk an even more painful path of thorns. A society in which only part of the wealthy class takes the fruits of economic growth and polarization deepens is never desirable. A social discourse on distribution and welfare needs to take shape.
I disagree with Baek Gaeul's argument, but I believe a logically written argument deserves to be heard. This forum is a place for debate, not agitation. Baek Gaeul seems to have considerable knowledge of the world economy, particularly from a macro perspective. But real estate is only one alternative destination for liquidity. In Japan, real estate ultimately collapsed, and even in the United States, where money is now being released, real estate alone is being left out. So can money flow into real estate only in Korea? The wealth effect does not last forever. Current U.S. policy itself is highly experimental. The space for comments is limited, so I cannot say everything I would like to say, but Baek Gaeul's reasoning is excessively macro-level.
How wonderful it would be if simply releasing a great deal of liquidity automatically produced growth—while inflation remained at an appropriate level. After all, liquidity can be created simply by printing money. In fact, Bernanke's approach to responding to the financial crisis since 2008 has been among the most controversial in the Fed's history. One thing is clear: releasing liquidity is only a way to prevent deflation (fiscal deficits + deliberately induced inflation); it is difficult for it to generate fundamental growth in the real economy. What is the wealth effect? Does an excessive wealth effect not eventually become a bubble? The policy the United States is using now cannot continue indefinitely. It will eventually reach its limit, as Japan did....
This is the greatest global economic crisis since the Great Depression. For now, I want to give a positive assessment to liquidity-expansion policy simply for preventing deflation. I understand that many scholars are warning that even liquidity expansion may fail and that the world economy could fall into another double dip. Of course, how good would it be if the U.S. Federal Reserve's liquidity expansion could also bring about fundamental growth in the real economy? Everyone knows that these are temporary measures taken in a crisis. Everyone also knows that after taking temporary measures, the aim must be to create momentum for fundamental economic growth.
Everyone knows that without fundamental growth in manufacturing and without a genuine increase in national income, no measure can be a fundamental cure. Even knowing that, countries are in a situation where they have no choice but to use drastic medicine; and because they know that if even this fails the world economy will fall into a still deeper abyss, are they not struggling desperately? I agree with your argument that Korea should prevent liquidity from flowing into real estate so that the real-estate bubble does not grow any further. That is because I believe trying to solve the problem through the drastic method of bursting the real-estate bubble would impose even greater social costs.
Europe and the United States are responding differently to the same crisis, but their roles and weights are also different. Strictly speaking, the problems did not erupt simultaneously across all of Europe, including Germany and France; they arose in the countries referred to as the PIGS. The United States as one country and Greece as one country carry different weights in the world economy. Likewise, the United States and Ireland play different roles in the world economy. That is why I think their countermeasures differ. I believe the euro area can cope with Greece, Ireland, and Portugal, but if the crisis spreads to Spain, there is a possibility that even the euro area will not be able to handle it.
I asked those who say America's money party creates a virtuous wealth effect what concrete effects quantitative easing has actually produced, but apparently there is nothing beyond the stock-market money party—a liquidity feast—and the banks' bonus party. I understand that deflation is what U.S. policymakers fear most, and I also understand why they are struggling so desperately to escape it. But as Tiburon wrote above, wealth may mean having a lot of money, yet simply printing a lot of money does not make a society wealthy. In real life, can someone with no particular income repeatedly borrow from one bank and spend lavishly, then, when repayment comes due, borrow an even larger amount from another bank and keep living that way? Please think carefully about it.
I would like to ask what 'alternative' is offered by those who oppose the U.S. Federal Reserve's policy of using liquidity expansion. Criticism without an alternative is powerless condemnation. I give the policy a positive assessment even if only because it is trying to prevent a slide into deflation. And I know that, quite apart from Byeol~~, world-renowned scholars are warning that even liquidity expansion may fail. Who does not know that simply printing a lot of money does not make people wealthy? Are these emergency measures not being taken precisely because the world economy is in such a desperate crisis? Is that not why the global debate over them is still continuing? This is not a debate that Byeol~~ and I can resolve here.
If criticism without an alternative is disparaged as powerless condemnation, does that justify applying an alternative that is itself powerless and ineffective? Rather than overusing antibiotics to escape immediate pain and eventually dying from a superbug, it may be better to endure the illness without antibiotics. From my perspective, deflation is already under way. Housing prices—the largest component of personal wealth—are shrinking; if that is not deflation, what is? Expanding liquidity merely acts as a screen that hides deflation by inflating other things. It does not solve the problem, and it increases the burden that must be repaid later. I am saying it is the worst possible policy.
In the end, Byeol~~ has no 'alternative' to offer for overcoming the global economic crisis.
There is something President Lee Myung-bak often hears: 'Please, just don't do anything.' That is because foolish acts are carried out in the name of an 'alternative.' There is no wonderful 'alternative' that can pull future debt forward, spend it now, and then make it disappear without any pain. That would be like a perpetual-motion machine, which cannot exist. The 'alternative' you are talking about means that those who pulled debt forward and spent it shift the pain they ought to bear evenly onto innocent members of the public. That is not called an 'alternative.' It is called a foolish act. I also recommend that you read Won Seong-cheol's post below this one.
So doing nothing is Byeol~~'s 'alternative'....
What do you mean, do nothing? There is plenty to do. We should put the people who encouraged others to run up debt behind bars, make those who do not repay their debts repay them, clean up those who cannot repay and have become insolvent, and encourage people who save rather than borrow. There is plenty to do. What I am saying is that, instead of doing those things, they are indirectly making even people who are not in debt take on debt and giving those who caused the borrowing a chance to escape. Do not distort what I said. :) I told you to read Won Seong-cheol's post.
‘In real life, can someone with no particular income repeatedly borrow from a bank, spend lavishly, and then, when repayment comes due, borrow an even larger amount from another bank and keep living that way?’ That is exactly what happened in Japan. Of course, it eventually collapsed completely in one blow....
As Byeol~~ suggested, I read Won Seong-cheol's post below and left a comment....
And I was very grateful for the debate with Byeol~~. At first, I thought you were simply someone full of complaints. But among the criticisms you raised, there are many points that deserve careful thought. We are not fortune-tellers, so if we speak only of whether real-estate prices will rise or fall, one might say the probability is fifty-fifty. Yet several of the issues raised in the course of our debate are quite significant. I look forward to more good discussions in the future.
This is not a matter of right and wrong. It is war—war between those who speculated and those who did not. What we who did not, or could not, speculate want is not the preservation of the entire system, but to witness the complete ruin of those who speculated and those who may speculate in the future. That alone is truth, the answer, and hope for us. When did we ever ask for the preservation of the entire system? Deflation? Depression? Hyperinflation? It is all bullshit. What we want is only one thing—the ruin of speculators, and the extinction of the kind of people who think only of speculation in the future. Speculation mocks human labor, divides people, and damages the human spirit. This is war now.
In war, you have to concentrate on the battle and dream of victory. Talk about the ‘whole system’ is in fact meaningless to us. It is nothing more than another dirty trick intended to divide us. It is wordplay by powerful interests and nothing more than a sinister scheme; it has nothing to do with us and is none of our concern. We who did not speculate, or could not speculate, want only the ruin of those who did. Even if the system itself runs into difficulty, that presents no problem for us. It would be less painful than helplessly watching speculators swagger around and boast of their wealth.
Jongisae, can you guarantee that you will never buy a home in your lifetime? Many of the people suffering now from falling home prices are people who, frightened by rising prices, borrowed money just to manage to buy one modest home. Only through sound debate and knowledge can we encourage proper economic policy and prevent speculation and bubbles. I am anti-Lee Myung-bak, a huge fan of the Kim Kwang-soo Economic Research Institute, and someone who believes home prices should fall, but comments below a basic standard are genuinely irritating. If you want to wage war without distinguishing right from wrong in order to live well, go to Africa.
I am sorry to hear that you are irritated, Tiburon. But if you look closely, perhaps the cause of that irritation lies less with me than with your excessively elevated level. Could it be that you are irritated because something that had been at the bottom of yourself has been exposed? From my lowly level, the main post above and most of the comments amount to nothing more than wordplay. Even if their intention has meaning, they are still wordplay—because they have no practical effect whatsoever. Since I cannot find any practical meaning in them, they look like nothing but wordplay to me. People seem to imagine themselves occupying some grand position as arbiters. Let us live a little more plainly and modestly, doing our own part.
And—‘Only through sound debate and knowledge can we encourage proper economic policy and prevent speculation and bubbles.’—do you really mean that??? You do not actually believe that, do you? Do you think we ended up in this situation because we lacked sound debate and knowledge? Ha. If we keep thinking about sound debate and knowledge, will Lee Myung-bak change his mind and come around too?????? Haha. You keep looking for the cause in the wrong place, which is why I call it wordplay.
And you mentioned people suffering because home prices are falling. Haha. People should have at least some conscience. Whose efforts do you think have kept real estate from collapsing?????? Do you really not know??????? Is it not because people like us who reject speculation are still taking the losses that those people can eat three meals a day and sleep warmly at night? They printed an unimaginable number of 50,000-won notes and removed every regulation they could—and are not people without homes bearing those costs intact? By principle, would it not be normal for a riot to break out immediately? Please have some conscience. And even if, by some chance, real estate rises, please stay quiet about it. Do not do things that tear the hearts out of people without homes.
I apologize for using a tone that may have sounded scolding. But I hope you will understand what I meant. I am an ordinary citizen living on a jeonse lease, and I have never wished for real estate prices to rise, so there is nothing at the bottom of me waiting to be exposed. Jongisae, you seem to say that all the blame lies with the government's misguided policies and the speculators who rode along with them. In fact, if government policy were sound, it would be difficult to profit even by speculating, and conflicts like this would not arise. But governments are not always right. When policy is wrong, when it sides only with those who have wealth, how are we supposed to correct it? According to what you are saying, should we hope for a riot to break out?
An even bigger question is this: how do you know that a policy is wrong? Honest knowledge must be produced and the public must be able to recognize it; only then can people gain the ability to identify sound political leaders, and ultimately the country's policies can be put on the right course. Sound debate and the sharing of knowledge are essential. For a long time, our country did not have even one proper economic research institute. Even now, the Kim Kwang-soo Economic Research Institute is almost the only one. This forum, therefore, should be a place to share and debate honest knowledge, not a place to divide people into camps and agitate as though conducting a class struggle. What Baek Gaeul and I exchanged is not wordplay at all; it concerns real economic phenomena. In fact, today is the first time I have even posted replies like this.
Contrary to what you said, I am not operating at some excessively high level. I am simply in the position of learning by reading reports from the Kim Kwang-soo Economic Research Institute. I have never even dared to post an article of my own. The people at the institute are dedicated and patriotic, and above all they demonstrate some of the highest expertise in this country. Knowledge matters. If economic policy is wrong, home prices can surge even without vicious speculators. And if a country's political leaders are to be prevented from taking the wrong path through clever arguments, the proportion of citizens with sound judgment must be that much larger. I believe that is why we come to this forum to debate.
The debate over inflation versus deflation—which comes first.... But more than that, can household debt hold up? It has increased without a single adjustment. People cannot keep paying interest forever.... I think the destructive force of a bubble bursting under the weight of household loans and PF loans may be greater than expected....
You are not looking for an emotional solution along the lines of, ‘Fine, let the people in debt get what is coming to them,’ are you? A solution like that would inflict enormous pain on every part of society. The destructive force of household debt would deal a severe blow to the Korean economy. As I understand it, the Kim Kwang-soo Economic Research Institute has continually raised this issue. I hope the government responds comprehensively and wisely. In that sense, I view positively the government's recently announced ceiling on total household lending.
You ask whether I want an emotional solution along the lines of, ‘Fine, let the people in debt get what is coming to them.’ I do want that kind of solution—though rationally, not emotionally. For a people with a mentality that would even slaughter a cow if it could be bought on credit, there may be no method better than shock therapy. The household-lending ceiling has finally begun to make a peep. I do not think the ‘rat’ is ignorant of Japan's lost decade; I think he studied it very thoroughly. In Japan too, there were people who made astronomical gains immediately before the collapse and then got out with astonishing timing. This ‘rat’ even has policy in his hands, so he is in a position to make a real killing. The national interest? I doubt that is even on his mind. It may be better for things to burst sooner, before the rat gnaws everything away.
Today the government came out with a ceiling on total household lending.... Baek Gaeul's expectation missed the mark.... Is the government wavering back and forth after all? Haha... That is how it looks to me. ^^ When I see you insist that tax cuts for the wealthy were also an unavoidable choice... haha;; I expect Pangyo to take about ten years before normal infrastructure is fully established.... Songdo, Cheongna... and even Gwangmyeong New Town.... More gloomy still, if we consider the risks from a chain reaction of reconstruction projects in the first-generation new towns, might Pangyo also face a bleak future? Haha. And where did all that overflowing liquidity go? It went into real estate and stocks and has not come back out.... Inflation? Deflation?.... Haha. Right now those words sound like meaningless echoes to me....
I have long believed that the government needs to take active and serious measures on household debt. I am glad that the government has become aware of the household-debt problem. If the household-debt bomb explodes, there is a strong possibility that the entire Korean economy will fall into severe distress. Household debt does not mean housing loans alone. Are jeonse loans not household debt? Are unsecured personal loans not household debt? This is a time when a comprehensive response to household debt is needed. A housing-loan bomb alone could hit the entire banking sector and shake the Korean economy. Whether one owns a home or not, I hope people recognize that it could create far more unemployment than we have now, with the damage ultimately borne by the entire public.
Thank you for the good article, Baek Gaeul. Please post good articles often. ^^
But replying to all these comments is no small task.... My fingers hurt.... Muhak asked me to respond to all the comments hanging one after another, so I am doing it, but this is quite a job.... haha
Haha... Baek Gaeul... Are you working this hard to reply because Muhak asked you to answer the comments? ^^ There may be various objections to the main post, but you are showing us a higher level of comment culture. *^^*
For citizens who cannot act, elections may be the last remaining hope. That is why we have no hope. It is obvious, in my view, that the current ruling party will win the general election the year after next. By then, fear of a hard landing in real estate will be inflated almost without limit. Because of that, most people who own homes, whether by choice or not, will have little choice but to support the ruling party. They will once again have no choice but to place their hopes in New Town projects. They will be deceived even while knowing it. They themselves know this well, but they have no other alternative. All of it is a natural flow. The most unfortunate people, however, are those without homes—the people here who are hoping for a crash. Those people poli— [Source text breaks off here.]
—They should form a political association and show united action to protect their legitimate rights, interests, and property, yet instead they are talking about completely irrelevant things. If we look back one or two years, we can see how foolish we were. Even then, we reacted exactly as we do now. There were no legitimate demands or actions to protect our rights and property. People merely offered predictions about powerful interests and predictions about the market, arguing back and forth that their own forecast would prove correct. I do not call that debate; I call it wordplay. We are not here to test the conscience of those in power and the powerful interests.
We are not testing a cat in an unattended fish shop. We are not testing whether that cat has a conscience or how generous it might be. In markets, I think what matters is not prediction but the ability to carry one's will through. For those with power, will can bring them more profit than prediction. But when we fail to express our own will actively through action and remain content with mere prediction, their power grows stronger. We should not expect much from the result.
I read it with interest. There are many opposing views, but there is no single correct answer when it comes to forecasts; there are only probabilities. I learned a great deal here.
I hope this becomes a forum where we continue studying together.
The level of the people here is so high that I hardly dare even to comment and have simply been learning.... Still, I think Baek Gaeul's article has helped produce a productive debate. Thank you in that respect.
That is far too much praise. I simply hope this can be productive study and debate.
Thank you for the writings of Baek Gaeul and Tiburon. They show a clear-eyed analysis of the situation. The question is that, even if this is how we understand the broad trend, what position should an individual take? Whether to sell or buy a home ultimately depends on inflation, the rate of increase in home prices, interest rates, and so on. I wonder whether your judgment is that, even with debt, holding a home may be somewhat advantageous. I too have recently been weighing whether to sell, but if I end up holding cash, I have no answer to what I should do with it in an inflationary environment. At best, perhaps I would buy some yuan. It would not be easy for you to give an opinion on specific individual cases, would it?
That seems like too much to ask. I do not think buying or selling is something Baek Gaeul can decide for you. Having a view about what may happen is one thing, but the result of what actually happens belongs to the individual. Many people here are shouting that people should sell their homes, but that is not a sound answer. The circumstances and timing differ by region and by proximity to transit. It is an abstract theory that cannot be applied uniformly. Because each person's position and circumstances are different, the decision ultimately belongs to the individual....
This is a logical and useful article grounded in extensive knowledge. Although it is long, I read it very well without becoming bored. Reading a piece like this is always worthwhile. I also thank some of the commenters whose remarks were genuinely impressive. Please continue to post good writing. Although I am disappointed by the many posts that are not even worth reading to the end, I still cannot leave this cafe because I look forward to the occasional pleasure of encountering a gem like this. Your restrained attitude in debate is excellent as well. I have only one small regret: although you are consistently modest in other respects, in most first-person references you use the more direct forms meaning 'I' rather than the more deferential forms. Raising others is also a way of raising oneself. ^^
I am sorry. I had not thought that far. That is a good point. Thank you.
Thank you for the good article. I learned a great deal.
I hope we can always remain people who keep studying. Thank you. I hope this becomes a forum where we study together. Written by Baek Gaeul. December 14–21, 2010. This article was originally posted on the Kim Kwang-soo Economic Research Institute forum under my pen name ‘Baek Gaeul.’
Translation progress: 186 / 186 records completed (100%).
III. Retrospective Verification & Notes
To be added separately so that later knowledge does not alter the historical text.
Policy Decision Review · Reviewing National Policy Decisions
This layer does not prescribe a political conclusion. It is a framework for reviewing a past policy judgment from the perspective of national decision-making while keeping the historical source and later evaluation separate.
1. Define the problem
Which problem was primary in 2010: financial crisis, deflation, housing prices, rent pressure, or household debt? How should conflicting objectives be prioritized?
2. Evidence & uncertainty
Which claims were observable facts, forecasts, or hypotheses? What additional evidence would a decision-maker have needed?
3. Stakeholders
How were costs and benefits distributed among renters, homeowners, financial institutions, firms, government, and future generations?
4. Policy alternatives
Compare interest rates, liquidity provision, fiscal policy, rental housing supply, credit controls, and debt restructuring by objectives and side effects.
5. Second-order effects
How could one intervention affect asset prices, inflation, employment, financial stability, distribution, and public finances?
6. Retrospective verification
Which 2010 forecasts can later data test? Evaluate decisions using information available at the time as well as subsequent outcomes.