There’s hope and then there’s stupidity, Robert Gottliebsen.

On the Longwaves List Thursday 4 September 1997 19:58:01 +1000  Bryan Kavanagh wrote:

I was taken by a chart published on page 18 the Australian Financial Review today. The article accompanying it explained how traditional methods of analysing business cycles were developed at the National Bureau of Economic Research in the US in the 1930s and 1940s.

“Classical cycles”, it said, “are fluctuations in the level of economic activity, while ‘growth cycles’ are fluctuations around the trend in economic activity.” So, you’re actually looking for quarters of negative growth to define a classical recession. However, when ACTUAL growth dips below the TREND growth line, you’re in a growth recession, even if growth itself is positive.

I noted from the chart that Australia has dipped below the trend line since December 1995, and we have been in a ‘growth recession’ since. But the thing that really struck a chord with this particular K-wave enthusiast was that the trend line, which had trended UP since WWII to the beginning of the ’70s, had trended DOWN ever since. Is this not the very Kondratieff Wave that has gathered us all at this place?

The trend of the trend did not rate a comment in the article entitled “Faster growth on the way”. In Oz we’ve been told ‘faster growth on the way’ since the 1991 recession, so I’ll believe that when I see the TREND turn up sharply, NOT just the ACTUAL growth line. And I would have thought that we can’t get that until we have the resolution of unsustainable debtloads which have classically defined the K-wave trough?

I think that George Ure put this extremely well. He just posted:-

” I (and others like me) believe that we haven’t had the necessary depression yet. By necessary, I mean one that will wring the excesses out of the credit system. One of the functions of a classic long wave unraveling into a depression is that it unravels the debt monster. This is characterized by people losing things purchased on credit. The minimal amounts of home repo’s, car repo’s, and bankruptcies is, in my view, not what is necessary to
wipe off the debt slate and start over.”

We bears may be wrong. It could be that people and governments around the world may have got together to do something really clever to curtail the necessity of having to go through such a depressionary trough – ever again. If so, I am very keen to learn just what that something really clever was.

Unless I’ve missed something, seems to me we’re still wallowing in our ignorance and making the same old mistakes. We have expertise in a many areas, but not in understanding the K-wave, nor in ameliorating its peaks and troughs.

– Bryan Kavanagh

____________________________________________________________________________

Rent

You may tinker with the tariff and make some simple gains,
You may put on tolls or take ’em off, inducing party pains;
You may monkey with the money, but the lack of it remains,
For the Mother of monopoly is laughing as she reigns.

“Rent! rent! who is it pays the rent? ”
A dozen days in every month the worker’s back is bent;
Figure it in dollar bills or work it by percent,
But with his dozen days he pays just rent, rent, rent.

You may “minimum” the wages, you may let the women vote,
You may regulate the railroads with a legal antidote,
You may jail some Rockefeller, or may get a Morgan’s goat,
But the Mother of Monopoly is laughing in her throat.

“Rent! rent! who is it pays the rent? ”
A hundred days in every year a business profit’s spent;
Figure it in “overhead,” or state it by percent,
But all your hundred days are gone for rent, rent, rent.

You may institute foundations, you may educate the dubs,
You may libralize the bread line, and establish Slumy Clubs;
You may ostracize the Demon-Rum and eugenize the cubs,
But the Mother of Monopoly is smiling at your snubs.

“Rent! rent! who is it pays the rent?”
A score of years in life you spent to get one document;
From your cradle to your coffin you must bow to its assent,
And that’s your little, old receipt for rent, rent, rent.

I look across the rented world and idle land I see,
Whose owner doesn’t work it, for he’s working you and me,
And on the first of every month all tenants bow the knee,
And pay the rent of vacant land, in great or small degree

The worker’s hands are busy and the business back is bent;
The idle lands advance in price and every single cent,
Of that advance is paid by us in rent, rent, rent.

UNCIVILISED

An ancient ape, once upon a time
Disliked exceedingly to climb
And so he picked him out a tree
And said “Now this belongs to me.
I have a hunch that monks are mutts,
And I can make them gather nuts
And bring the bulk of them to me,
By claiming title to this tree .”

He took a green leaf and a reed
And wrote himself a title-deed,
Proclaiming pompously and slow:
“All monkeys by these presents know.”
Next morning when the monkeys came
To gather nuts, he made his claim:
“All monkeys climbing on this tree
Must bring their gathered nuts to me,
Cracking the same on equal shares;
The meats are mine, the shells are theirs .”

“But by what right?” they cried, amazed,
Thinking the ape was surely crazed.
“By this,” he answered; “ if you’ll read
You’ll find it is a title-deed,
Made in precise and formal shape
And sworn before a fellow ape,
Exactly on the legal plan
Used by that wondrous creature, man,
In London, Tokyo, New York,
Glengarry, Kalamazoo and Cork.
Unless my deed is recognized,
It proves you quite uncivilized.”

“But”, said one monkey, “you’ll agree
It was not you who made this tree.”
“Nor”, said the ape, serene and bland,
“Does any owner make his land.
Yet all of its hereditaments
Are his and figure in his rents.”

The puzzled monkeys sat about;
They could not make the question out.
Plainly, by precedent and law,
The ape’s procedure shows no flaw;
And yet, no matter what he said,
The stomach still denied the head.

Up spoke one sprightly monkey then;
“Monkeys are monkeys, men are men;
The ape should try his legal capers
On men who may respect his papers.
We don’t know deeds; we do know nuts,
And spite of  ‘ifs’ and ‘ands’ and ‘buts’,
We know who gathers and un-meats ’em,
By monkey practice also eats ’em.
So tell the ape and all his flunkeys
No man-tricks can be played on monkeys.”

Thus, apes still climb to get their food,
Since monkeys’ minds are crass and crude,
And monkeys, all so ill-advised,
Still eat their nuts, uncivilized.

– Edmund Vance Cooke

Michael Hudson had this excellent piece on economic rent in Global Research’s series “The Insider’s Economic Dictionary: The Antidote to Euphemism” yesterday.

Yes, maybe American banks being more willing to support asset bubbles than the real economy might also help explain Detroit’s bankruptcy?

Go, Michael!

With Ben Bernanke about to expound today on how his plans to save the American economy are proceeding, I thought it might be the appropriate time to resurrect an excellent analytical piece written by Al Date in 1998.  It’s a clear exposition about Japanese banks’ changing their emphasis from supporting the real economy to inflating real estate bubbles …. and how the Japanese people have paid the penalty for the last twenty-three years.

As he wrote the piece, I wonder whether Al Date realised the US had begun to inflate the greatest real estate bubble in its history?

Anyways, listen up, Chairman Ben. There are lessons in this for you.

___________________________

WHAT HAPPENED TO JAPAN

Al Date (1998)

During the 1980s, Japan was seen as a veritable, and venerable economic miracle. Many Americans were convinced that we had been permanently overtaken by Japan, competitively, and they sought to emulate Japanese success by instituting MITI-style govt-business collusion.

Fortunately, most of these efforts were rebuffed, and America has done fairly well with comparatively free trade, despite unexciting growth rates. There is no denying that the US Dollar has become the pre-eminent currency of the global economy. Meanwhile, Japan has gotten in big trouble.

As it turns out, Japan was the “front domino” of the Asian economies; the first to fall. While other Asian nations continued to grow at double-digit rates well into the 1990’s, Japan suffered a stock market collapse, zero growth, and a prolonged recession which has even resisted the stimulus of lending rates pegged at ~0%! Imagine free money! And still no capital spending boom!

Rather than being pulled out of this recession by its local trading partners, the Japanese Plague has spread. It has spread to free-wheeling Thailand, which was the most “laissez faire” of the group. It has spread to Indonesia, which was the most corrupt and centrally-planned. It has spread to South Korea, which was somewhere “in between.”

The Japanese Plague is not a function of central-planning vs. laissez faire govt. It IS a function of incredibly over-valued land, land driven up by banks (mostly govt-supported) eager to lend billions of bhat, yen and dollars to real estate speculators.

It is common knowledge that when the Japanese economy was at its peak, the value of Tokyo land exceeded that of the entire United States. This is an impressive statistic, but consider the consequences. Since land is needed by the productive economy, stratospheric land prices make local economic expansion impossible to afford… not to mention what it does to the average working person, whose family is crammed into living quarters not much larger than the space allotted for convicts.

Japan’s banking system created the greatest real estate boom of the 20^th Century, probably acting on the advise of influential western economists who equate high land prices to “capital accumulation.” Japan’s banks are now holding trillions of yen of bad loans on land-value which has simply disappeared.

Yet Japanese land is still overvalued, threatening to undermine even MORE loans. That is why the Japanese Govt has done everything in its power to stabilize land prices, even at high levels–and in spite of the cost of ongoing economic malaise. They figure that malaise is better than collapse. And that is the Hobson’s Choice which they have become stuck with. But it was not always thus.

During the 1970’s, the Japanese invested heavily in plant and equipment, and perfected production processes using the Statistical Quality Control taught by Deming. This success-formula was used in many industries, from automobiles to semiconductors, and it forced the rest of the world to follow suit–while making Japan an economic powerhouse. But this hard-earned prosperity and economic power was not enough for some.

Within the ranks of the financiers and govt officials there was a push for financial deregulation which would allow high-priced real estate (land) to serve as collateral for loans. World-class manufacturing–which requires a lot of hard work amidst brutal competition, and which is a true engine of wealth–was taken for granted. Many sought a get-rich-quicker scheme which, it was said, would spin-off even more money for “investment.”

Once this bubble got rolling, very little of this money went into the productive economy. Instead, it went into driving real estate prices to the sky. But the only way you can drive real estate to the sky, is to pour your wealth into the ground. And that is literally what Japanese “investors” did. This created the illusion of phenomenal wealth, as Japanese real estate magnates rapidly became the wealthiest individuals in the world–on paper. But this kind of wealth does not trickle down. It dries up.

“Location” is a passive element; it does not produce anything without some expenditure of labor and capital. Driving up the price of Japanese locations meant that there was less and less money left over for investment in jobs and equipment. And when the real estate bubble burst, and the banks began to implode, there was no money for ANY kind of new investment. Accordingly, the latest predictions are that the Japanese economy will actually
shrink during 1998.

SOME ASIAN TIGERS FOLLOW JAPAN

Parts of Asia have followed in Japan’s footsteps, except that their real estate bubbles have been primarily financed by foreign money as opposed to internally (by Japan’s high savings-rate).

Throughout Asia, foreign money has been pouring in over the last decade to take advantage of high growth rates. The press dubbed these nations the “Asian Tigers,” and billions of investment dollars poured in. Some of this money was invested in plant and equipment, which created many real jobs, a rising middle class, and prosperity in Eastern Asia. But eventually, it became more difficult to invest the money wisely, greed set in, and money managers began “pouring it in the ground,” financing speculative real estate ventures. Thus, their fate was sealed.

Thailand was the first to collapse, triggered by currency speculators. Needless to say, the fundamentals have to be pretty weak if currency speculators can cause a 50% decline in a currency and touch off a depression. At the time (Summer of 1997) some western pundits blamed it on Thailand’s “laissez faire” investment policies, and pointed with some pride to the “continued stability” of Indonesia and South Korea, which were more “centrally-planned” by their governments. (These laughable articles can still be found on the internet by searching for ASIAN CRISIS.)

Of course, within months, South Korea and Indonesia went down the same rat-hole as Thailand, in spite of all their govt intervention in the economy. The press called it the spread of “bhat-ulism,” but it is simply the consequence of an implosion of excessive land-values, repeating like the echo of an avalanche in Japan.

As this goes to press, the debate revolves around the conditions that the IMF should put on a nation with corrupt leadership when it gives it billions of dollars to prevent the inevitable collapse of land values.

But Hong Kong and Taiwan have survived relatively unscathed.

WHY ARE HONG KONG AND TAIWAN EXEMPT?

Hong Kong and Taiwan have endured assaults on their currencies, and panics in their stock markets, but their economies are intact, even showing good growth in Q1 1998. How can this be?

The answer is quite simple. Taiwan and Hong Kong tax land values fairly strongly, thus discouraging investment in real estate that is not warranted by actual economic conditions, conservatively measured. As a result, they have a very stable source of public revenue, plenty of reserves to defend their currencies or to provide infrastructure–and the ongoing production incentives of low taxation on labor and capital.

THE LESSON

Rising land prices (commonly thought of as “home-appreciation” in the USA) are seen as a sign of prosperity, but they gradually sow the seeds of economic reversal. Every recession in the USA has been preceded by a “land-boom,” and accompanied by a “land-bust,” as documented by Mason Gaffney, PhD.

This bone-crunching volatility is NOT a necessary part of the free market! The way to achieve stable growth is to KEEP LAND AVAILABLE TO THE PRODUCTIVE MARKET ECONOMY, by keeping it from being used for speculative purposes.

Land value taxation, or the community collection of land rent, has the effect of removing the speculative premiums from land-locations. Land simply “rents” for its current use-value, as determined by market forces. This allows the un-taxing of the rest of the economy, such as wages, sales and income, which has the effect of incentivizing everyone to make money by working and investing in plant and equipment.

The solution to the Asian Crisis is not the funneling of billions of IMF dollars in to support the fortunes of corrupt officials which are tied up in speculative land-values.

What is needed is a permanent tax-shift OFF of the workers and capitalists, and onto the land-holders.

–          Al Date

In MacroBusiness today David Collyer shows we’re being misinformed.

You say we need more funds to tackle poverty, homelessness, health, the environment, education and infrastructure? I say instituting the Henry Tax Review is a BIG step towards solving those problems.

I see in the near future a crisis approaching that unnerves me and causes
me to tremble for the safety of my country . . . . corporations have been
enthroned and an era of corruption in high places will follow, and the
money power* of the country will endeavor to prolong its reign by working
upon the prejudices of the people until all wealth is aggregated in a few
hands and the Republic is destroyed.

President Abraham Lincoln, Nov. 21, 1864, letter to Col. William F. Elkins
The Lincoln Encyclopedia, Archer H. Shaw (Macmillan, 1950, NY)

____________________________

*Money Power = The Federal Reserve/Ben Bernanke?

We Georgists are sometimes deemed to be “arrogant bastards” because we don’t apologise for having a panacea for the vast array of problems confronting the modern world.

[BTW, I say modern world, because a feudal form of Georgism was widespread in the 15^th century and first part of the 16^th, when the humble English labourer with a family of five still retained almost two-thirds of his wages after providing food, clothing and shelter for his family. Those were indeed the days of “Merrie England” which Wikipedia unfortunately now appears to believe were mythical.]

People who consider we are arrogant, or bastards, or both, need to explain how we were able to forecast this depression. Is not the ability to forecast accurately, having reconciled theory with practice, the very proof of any scientific explanation?

So, they ought to try getting to grips with our arguments instead of dropping epithets upon us.

Maybe dropping antagonistic labels on Georgists is a necessary reaction from purportedly intelligent people who, on coming into contact with the Georgist case, find a gaping hole in their education?  And that’s such a shock to the nervous system it sometimes elicits derision or abuse?

There are comparisons can be made with abolishing the slave trade or the Corn Laws: both were once considered normal, too. To acknowledge such reforms requires a 180 degree change in mindset.

As I was completing my real estate valuations course at Royal Melbourne Institute of Technology in the early 1970s, I came across a small shop in Hardware Lane which had in its windows booklets proclaiming the benefits of land taxes. “What would this little outfit, the Henry George League, know about land tax?” thought the presumptuous near-graduate. I’d been told about Karl Marx ….. but who’s this Henry George?

An introduction to George either induces derision or humility. After forty years’ inquiry into the question, I’ve been led to conclude that this little outfit knew much more than my alma mater had been prepared to pass on to me. It has been my greatest eye-opener. It lets me see where libertarians have merely taken the first steps, where Marxists have never got their heads around “surplus value,” and where those who look to reforming money or credit need first to distinguish between on what it is expended: productivity or asset bubbles?

It all comes down to what economists often speak about, but rarely understand: rent-seeking. Increased rent-seeking generates economic depressions and social collapse.

Evidence? Europe, MENA countries, the USA.

China and Australia will also pay a heavy penalty for having promoted rent-seeking to an art form.